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 Company Profile:
First State Bancorporation (NASDAQ: FSNM) is a New Mexico based commercial
bank holding company that provides services to customers from a total of 62
branches located in New Mexico, Colorado, Utah and Arizona. Through its
wholly owned subsidiary First Community Bank, First State's strategy is to
provide a business culture that offers individualized customer service.
First State's flexible approach, which combines direct access to decision
makers, the latest in technology, a wide menu of product offerings, and
increasingly convenient branch locations, has allowed First State to
profitably capture market share made available because of customer
dissatisfaction caused by consolidation in the banking industry.
First Community Bank, which has been in operation since 1922, is a state
chartered, community focused bank providing a full range of commercial
banking services to small and medium size commercial businesses in New
Mexico, Colorado, Utah and Arizona. They offer a full range of financial
services to commercial and individual customers, including checking
accounts, short- and medium-term loans, revolving credit facilities,
inventory and accounts receivable financing, equipment financing,
residential and small commercial construction lending, residential mortgage
loans, various savings programs, installment and personal loans, safe
deposit services and credit cards.
BIO:
Peyton N. Green
Senior Analyst, Financial Institutions Group
FTN Midwest Securities Corp.
Mr. Green began his career in the brokerage industry in 1993 and
has been a research analyst since 1996. As an equity analyst he has focused
on the banking industry since 1998.
Mr. Green joined FTN Midwest Securities Corp.’s Nashville, Tennessee, office
on August 27, 2001. Since, he has been responsible for building the firm’s
coverage of small and mid cap financial institutions, which covers
approximately 150 banks and thrifts across the U.S. His current coverage
universe includes 24 banks and thrifts with market capitalizations of $400
million to $4.2 billion in the Southeast, Midwest, Inter-Mountain West, and
Northeast. He has been routinely quoted in newspapers, business journals,
and banking industry publications, both nationally and throughout the
Southeast, about both general industry and specific company issues.
For his stock picking in 2002, Mr. Green was recognized as a Top 10 Stock
Picker in the United States by NASDAQ-STARMINE 2002 Analyst Award Winner
survey. Also, he was listed as a Top 5 analyst for Stock Picking Among
Under-Covered Stocks in the NASDAQ-STARMINE survey. In May 2003, Mr. Green
was listed as the third best among 97 analysts that covered Banks and S&Ls
in The Wall Street Journal’s Best on the Street survey for his stock
picks in 2002.
About FTN Midwest Securities Corp:
FTN Midwest Securities
Corp (MWRE) is a wholly owned subsidiary of First Tennessee Bank National
Association which offers securities and investment products and services,
including investment banking services, through its subsidiaries and
affiliates. Additional information is available upon request. MWRE is a
member of the NASD and SIPC www.sipc.org.
Interview conducted by:
Lynn Fosse, Senior Editor,
CEOCFOinterviews.com,
Published – August 22, 2008
Important: All disclosures can be located on
our website at
http://www.ftnmidwest.com/disclosures/index.asp
CEOCFO: Mr.
Green, how has the
universe changed for you over the past year and what are the challenges in
covering this particular sector?
Mr. Green: “A year ago
we were certainly worried about the state of the economy and the housing
market specifically. The housing market has obviously declined over the past
year in terms of sales of existing and new homes in most markets. In
addition, prices have come down significantly compared to price pull backs
that we’ve seen in the past. For many of the community and regional banks
that we cover, a significant portion of their balance sheet growth over the
past five years was because of increased relationships to construction
companies and developers of residential property. Commercial property
development and construction has increased more recently, which might spell
trouble down the road if the economy further softens. So far, residential
construction and development has caused almost all of the credit issues. It
is a much more difficult world that we live in today compared to a 12 to 18
months ago when conditions were still benign. Going forward, given our
outlook that the overall economy will continue to slow, we have more
concerns about credit quality and the profitability of the banks and thrifts
we cover. As a result, balance sheet growth is out the window for most
companies over the next year to eighteen months.”
CEOCFO: Tell us about First State
Bancorporation today.
Mr. Green: “Looking at First State’s
credit quality metrics, management is dealing with their fair share of
problems. Like many of the banks we cover, their nonperforming loans are
related to residential construction and development projects. We believe
that management has tried to be aggressive (and early) in their
identification process of potential problems and to position the Company to
deal with the problems in the portfolio before it is too late. Often times,
in managing through a difficult economy, your best loss is your first loss;
however, bankers tend to be slow to recognize transitions in the cycle,
which magnifies losses in problem loans that are held too long in hopes that
the economy will improve sooner rather than later. The good news is that we
feel like their local markets, even though they may be slowing down, in New
Mexico and Colorado will remain much stronger than the United States as a
whole. Certainly, we believe that most of their markets in Colorado and New
Mexico will be much better than markets in California, Florida, Nevada or
Phoenix, where the conditions are down right nasty. At the end of the day,
we believe that the sting from the recognition of weaker credit quality is
more than adequately reflected in the stock price. If management can show
improvement in credit quality going forward, then the stock could be a
strong performer on an absolute basis and compared to other banks.”
CEOCFO: Would you tell us about some of
the things that they are doing to better their position?
Mr. Green: “On July 7th they
announced that they are going to basically run-off their balance sheet in
Utah, which represented assets of $310 million, or 10% of FSNM’s total
assets. The Utah operation provided for strong loan growth over the past few
years, but deposit growth was negligible; specifically, loans represented
11% of FSNM’s loan balances, but deposits only represented 0.8% of total
deposits. Unlike Utah, their banking effort in New Mexico has always
provided for more deposit growth than the Company could lend. The
attractiveness of the Colorado market historically was that they could use
their “excess” deposits from New Mexico to fund “excess” loan growth in
Colorado, until deposit growth picked up, too. Historically, the bank has
done a great job of growing low-cost and non-interest bearing deposits in
New Mexico, due to their strong relationships with their commercial
customers. In the last 24 months they have shown fairly significant progress
on that front in Colorado, as the loan to deposit ratio improved to
approximately 110% versus 150% two years ago. Although loan growth in
Arizona has outstripped deposit growth over the past year, Arizona’s deposit
base funds its loan portfolio. In looking at the franchise from a
perspective that the availability of capital will be constrained, FSNM’s New
Mexico, Colorado, and Arizona banks could all stand on their own. Utah could
not, so it becomes the odd man out, given the strategic need to preserve
capital, increase capital ratios and returns, and reduce risk.”
CEOCFO: What is the management doing
that has allowed them to take these forward thinking steps?
Mr. Green: “After going down a growth
path for the past decade, which resulted in expansion of the footprint, it
is always a very difficult decision for any management team to pare back.
However, that is what the situation dictates. With the shares trading hands
for approximately 65% of tangible book value ($8.98 per share at June, 30,
2008), the market is not giving FSNM credit for being more clinical about
their underperforming situation. We believe this presents risk-tolerant
investors with an interesting opportunity to pick-up a solid commercial bank
at a bargain basement price. However, in fairness, management needs to
execute and the economy needs to hold up relatively well. If both occur, we
believe that valuation could improve to 1.5x to 2.0x tangible book value
over the next two years.”
CEOCFO: What is the financial picture
like for First State Bancorporation today?
Mr. Green: “Like many banks, First State
Bancorporation was focused on growth for the better part of the 1990’s and
certainly this decade. Over this time period, banks were able to raise
capital easily, either through offerings of common equity or trust preferred
securities (a form of debt that can be treated as equity capital from a
regulatory perspective). Over the past year, the trust-preferred market has
shutdown for all but the largest banks in the country. With FSNM’s current
valuation, an equity raise represents the least attractive alternative.
Therefore, they are going to have to improve earnings and shrink the balance
sheet to improve capital. With heightened operational and a tighter
geographical focus in their three core markets of New Mexico, Colorado and
Arizona, we believe their chances for success have improved.”
CEOCFO: Are their customers supportive?
Mr. Green: “I think so. They are a very
relationship oriented bank and it does not seem like they have a customer
service problem at all. In New Mexico, being the largest locally owned bank
is a very defendable position. With a well built out footprint in New Mexico
and an improved one in Colorado, we believe FSNM is better positioned than
they have been in the past.”
CEOCFO: What is your rating for First
State?
Mr. Green: “First State Bancorporation’s
shares are rated a buy. We feel that the underlying economy in New Mexico is
stronger than most people give credit. We think Colorado is certainly better
than the national average, too. Although FSNM has had their share of hiccups
in Colorado, we believe that the Company is better positioned than it has
ever been. Considering that its presence in New Mexico represents about 65%
of the franchise, improved performance would be magnified. Colorado, which
accounts for about 20% of the franchise, should continue to gradually
improve. In the Arizona market (5% of assets), management has taken a
cautious stance, focused growing its commercial customer base that would
look more like its non-development customers in New Mexico or Colorado.
Although overall balance sheet growth will be flat to negative, management
will remain focused on improving commercial (non-real estate) loan growth
and deposit growth, too. We think that this is the right approach and our
basic thought is that the recovery potential based on the current valuation
represents a double in the stock price over the next 12 to 18 months.”
CEOCFO: In closing, when might we see
M&A activity again?
Mr. Green: “Few acquisitions have
happened on a year-to-date basis; unfortunately, we are not optimistic over
the next year. Buyers remain very apprehensive about the credit quality of
others, especially considering that their own credit quality issues are
mounting. At some point, probably late in 2009 or 2010, we would expect that
M&A activity will pick-up once credit trends stabilize. Until then, the
market will remain skeptical about bank stocks, until bankers string
together a couple of solid quarters. If the New Mexico economy continues to
outperform and the Colorado economy holds up fairly well, FSNM has a
relatively solid outlook. No one is talking about this, but what if Arizona
starts to stabilize or improves? What would happen to FSNM? We believe FSNM
is well positioned to benefit from a vibrant Inter-Mountain West economy.
FSNM represents one of only a handful of sizable, publicly-traded bank
franchises in the region. If management does not show meaningful progress,
we would not be surprised to see FSNM end up in the “cross hairs” of a
would-be buyer.”
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********
Analyst
Interview Covering:
First State Bancorporation
(FSNM-NASDAQ)
\
Green Bankshares, Inc.
(GRNB-NASDAQ)
********
Financial
Regional – Southwest Banks
(FSNM-NASDAQ)
First State Bancorporation
7900 Jefferson NE
Albuquerque, NM 87109
Phone: 505-241-7500
********
Go to FSNM
COO Interview!
Peyton N. Green
Senior Analyst, Financial Institutions Group
FTN Midwest Securities Corp.
2525 West End Avenue, Suite 330
Nashville, TN 37203
(615) 734-6103 (W)
(615) 734-6028 (F)
(615) 275-9188 (C)
FSNM
- Analyst
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