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As the community bank of choice in Albuquerque, New
Mexico, First State Bancorporation is looking to duplicate its small-to-middle market
business focused banking model along Colorados Front Range
Analyst Interview Covering:
First State Bancorporation (FSNM-Nasdaq)
9700 Jefferson N.E.
Albuquerque, NM 87109
Peyton N. Green
Financial Institutions Group
FTN Midwest Research Securities Corp.
Interview conducted by:
Lynn Fosse, Senior Editor
February 10, 2005
Peyton N. Green
Mr. Green is a graduate of The University of the South where he received a B.S. in Natural
Resources in 1993. 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.
Most recently, Mr. Green joined FTN Midwest Researchs Nashville, Tennessee office
where he has been responsible for building the firms coverage of small and mid cap
financial institutions since August 27, 2001. His current coverage universe includes 29
companies with market capitalizations of $100 million to $2.6 billion and is
geographically focused in the Southeast and Midwest with some exposure in the Northeast.
Previously, Mr. Green was responsible for bank and thrift and insurance research at an
employee owned broker-dealer headquartered in Birmingham, Alabama. 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
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 Journals Best on the Street survey for his
stock picks in 2002.
CEOCFOinterviews: Mr. Green, what is your focus?
Mr. Green: "We cover about 160 small-cap, mid-cap and
large-cap banks across the Untied States; so we hit market cap sizes across the board and
cover the entire industry."
long have you been covering First State and where does that fit in with the group?
Mr. Green: "I have been covering First State
Bancorporation since the late 2001. What attracted us to the story is that they were a
very effective grower in Albuquerque MSA (Metropolitan Statistical Area), which went
through a fair amount of M&A activity in the 90's like very many metropolitan areas
did. They saw huge turnover in the local commercial banking franchises as they were
swallowed up by other out-of-state consolidators that were ultimately swallowed up by
Wells Fargo & Company (NYSE: WFC). First Security is a good example of this. Several
mergers gave First State the opportunity to insert themselves as the commercial bank of
choice on a local basis in Albuquerque and more recently in Santa Fe."
have gone beyond that into Colorado and Utah, how have they handled that?
Mr. Green: "It is interesting. Anytime you go into a
state that has better demographics than your own, and one that historically has had as
good a demographic trends as Colorado has had, you usually have to pay what we would refer
to as a poll tax to get in the state. At First State, their basis is that they are a very
commercially oriented bank in that they focus on small and middle market businesses. They
bought an enterprise that was basically an industrial chartered thrift, which is almost an
anomaly in the banking industry in that, by definition, they were not allowed to take
non-interest bearing checking accounts, which represent 22%-plus of First States
deposit base historically. They knew they were going to have to retool First Community
Bank when they bought it. In fact, that was one of the rationales for buying it; they were
able to pay a lower price to get into the state compared to other acquisitions that had
occurred. It also gave them the opportunity to build it their own way. What they hoped
would happen is that the earning stream from First Community would hold up long enough for
them to retool it and reposition it in a commercial banking light. In reality it ended up
taking a little longer and the earnings stream didnt quite hold up as they thought.
We think the companys earnings stream from Colorado bottomed in the second quarter
and improved in the back half of 2004."
happened with regard to the retooling period for First Community Bank?
Mr. Green: "I think what ended up happening is instead
of it being a quick 12-24 month turnaround in terms of getting the franchise repositioned
in Colorado, it ended up taking closer to two years to really get all the changes worked
into the system. They ended up having to relocate all the branches. They expected to
renovate all the branches, but at the end of the day it was going to be just as expensive
to renovate them as it would be to relocate them onto better corners in parts of town
where they would prefer the branches located. That issue probably cost them about six to
nine months from a focus perspective and a fair amount of money in terms of getting the
footprint reoriented. Also, the personnel side started to come together probably a little
later than they expected but they are starting to get really good traction on that right
now. We would look at the situation and say all acquisitions take some amount of time to
work into the culture of the acquiring company. They are starting 2005 with a pretty big
head of steam in those markets. They still have a lot of hard work to do to build, but
they have very little to no market share in their core markets in Colorado (less than 1%
deposit share), which includes Colorado Springs and Denver. The initial efforts to grow
non-interest bearing deposits have resulted in them improving the non-interest bearing
deposit base from zero percent at the time of the acquisition to about eleven percent of
the Colorado franchise deposit base. They are making progress but they had a lot of work
to do in terms of repositioning the First Community acquisition into a bank that looks
more like them on the New Mexico side."
are the strengths of management that has allowed them to adapt as needed?
Mr. Green: "I think that the key that they look at is
growing over a three to five-year period, not necessarily a three to five quarter one. So
over a long period of time, you have to have that focus if you are going to achieve 12-15%
earnings growth and 15-17% ROE and an ROA of 1.00-1.25% or better, which represent their
targets over the long-term. They would be pretty darn close to those levels on the New
Mexico side of the ledger; it is just that the Colorado acquisition went from being at
those levels to close to break-even, at the absolute bottom. It started to ramp back up,
but it is something that for the near-term is going to drag the results a bit. When we
look at management teams of commercial banks that are growing as the local bank of choice,
we like to see managements that have a longer-term perspective, but also have a focus on
improving their profitability in the future. I think a key that First State is focusing on
in 2005 and 2006, is that if they generate double-digit balance sheet growth, they are
trying to limit the expense growth to half that growth rate. That is something that was
not necessarily a realistic expectation when they were building their branch network in
Albuquerque and Santa Fe, New Mexico. Now that they have the New Mexico operation pretty
much assembled and the Colorado piece reoriented, they just have to focus on growing
Colorado. It is going to be easier for them to manage that going forward."
are the challenges that you see ahead for First State, and how they seem ready for them?
Mr. Green: "I think you always worry about credit
quality when you cover a commercial bank. Certainly, First State has managed to
consolidate the credit functions from First Community into their own methodology and they
pulled off good results in terms of re-underwriting that portfolio and moving out problem
credits. So you always worry about problem credits, but we have not seen anything lately,
in fact their charge-off-rate has been much lower over the last couple years than it has
been historically when they were growing into Mexico. Their charge-off-rate has declined
to bout 20 basis points compared to 40 basis points, more normally in an expanding economy
back in the nineties for example. We dont see any signs of credit issues, but that
is always something to worry about."
CEOCFOinterviews: How do
you look at First State compared to other banks you follow?
Mr. Green: "We try to assess the ultimate earning power
potential of the franchise 2-3 years down the road if everything worked out as planned.
Sometimes results are weaker than expected and other times it is better, but that focus
keeps us focused on what returns a company should and could produce in the future rather
than what they have done in the past. We do that for every bank that we cover. In our
assessment, once rates move up a bit more and the company grows the Colorado balance sheet
to the levels that can support the infrastructures that they have put in place, we would
tend to agree with managements long-term assessment that they can get to an ROA of
1.00-1.25% and an ROE of 15-17%. On the upside, we believe they can post 12-15%
sustainable EPS growth over the long-term. Our modeling looks a good bit better than that
over 2005 and 2006 as we think that they will come off the bottom in profitability in
Colorado and that New Mexico will continue to make solid progress, benefiting from the
rising rate environment. Our 2005E EPS represents $2.40, or 22% higher than the $1.97
posted in 2004, while our 2006E EPS of $2.80, would be 17% better than our 2005
is your current rating?
Mr. Green: "We have a BUY rating on the company, our
one-year target is $42, or 15x our 2006E EPS of $2.80. At FTN Midwest, BUY rated stocks
need to have improving fundamentals and identifiable catalysts in place to drive future
results ahead of expectations. The key catalysts, in our opinion, revolve around a
"V" shaped recovery for FSNMs Colorado operation and an emphasis by
management on bottom-line results, too, without sacrificing solid top-line growth."
you comment on the stock price valuation now and do you see that changing in the near
Mr. Green: "When we look at the current market price for
most banks, it is hard to see a whole lot of upside given the average small-cap bank is
trading basically at the high end of its five to six year PE range. However, First State
is trading for a 1-2 multiple gap between what we expect they will earn and where other
similar small cap banks are trading. In other words, the P/E multiple is 1-2 multiples
cheap compared to the much improved growth rate we foresee. To us, that is a particularly
good combination to generate a positive return over the next couple of years in small-cap
bank stock investing."
CEOCFOinterviews: What should potential investors be
Mr. Green: "The key with the Colorado transformation is
seeing consistent progress. We would look for continued improvement. Certainly the margin
has responded nicely over the past two quarters to the Federal Open Market
Committees higher rate actions. I think higher short-term interest rates are
important for First State. The company was adversely affected by the lower rate
environment of the past three years as prime-floating loans decreased when short-term
interest rates headed lower, while it is more difficult for FSNM to improve their cost of
funds by the same margin considering that 20% of their deposit base is non-interest
bearing. They have had to endure a tighter spread on their deposit base for the last two
years while the fed has been trying to stimulate the economy. Now that they have taken
some of the slack out, it has benefited them nicely, and the margin is up about thirteen
basis points in the fourth quarter alone. At the end of the day, I think the key to look
at from a fundamental perspective is: are they getting that double-digit balance
sheet growth and limiting the expense growth to a number that approximates half
that? If they execute their plan, the stock should be a pretty good situation for
CEOCFOinterviews: So you
expect First State to meet projections?
Mr. Green: "Right! I think it is not something that they
could realistically focus on in the past, but now they can since they do have both of
their regions in-place. First States New Mexico franchise is pretty much built out.
It is probably 85% complete compared to the footprint they envision over the next thee to
five years. That is a lot different than being 30-40% built out like six or seven years
First State Bancorporation* (FSNM-$38, BUY)
*FTN Midwest Securities Corp. (MWRE) makes a market in this security.
Although this information has been obtained from sources which we
believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or
condensed. All herein listed securities subject to availability and change in price. FTN
Financial Group and FTN Financial Capital Markets are divisions of First Tennessee Bank
National Association. Equity research is provided by MWRE. FTN Financial Securities Corp.
(FFSC) and FTN Financial Capital Assets Corporation are wholly owned subsidiaries of First
Tennessee Bank National Association. MWRE is a member of the NASD and SIPC. FTN Financial
Group, through First Tennessee Bank or its affiliates, offers investment products and
services, including investment banking services. Additional information is available upon
request. Past performance is not indicative of future results. Changes in any assumptions
may have a material effect on projected results.
BUY: Improving fundamentals and identifiable catalysts in place
expected to drive results ahead of expectations. TRADING BUY or SELL: Identifiable
catalyst in next 90 days expected to move the stock; longer-term fundamentals not
compelling (no L-T catalyst). NEUTRAL: No catalysts to drive the stock higher or lower.
SELL: Deteriorating fundamentals and identifiable catalysts in place expected to drive
earnings below expectations.
An affiliate of MWRE received investment banking related compensation
from AutoZone (AZO), Bancorp Rhode Island, Inc. (BARI), Britton & Koontz Capital Corp
(BKBK), BankUnited Financial Corp. (BKUNA), Cathay General Bancorp, Inc. (CATY), Capitol
Bancorp Ltd. (CBC), Capital Bank Corp. (CBKN), Capital Corp of the West (CCOW), Corus
Bankshares, Inc. (CORS), Central Pacific Financial Corp. (CPF), East West Bancorp, Inc.
(EWBC), First Indiana Corporation (FINB), First National Bankshares of Florida (FLB),
First State Bancorporation (FSNM), Greater Bay Bancorp (GBBK), Glacier Bancorp, Inc.
(GBCI), Heartland Financial USA, Inc. (HTLF), Intervest Bancshares Corporation (IBCA),
Fidelity Southern Corporation (LION), Midsouth Bancorp, Inc. (MSL), Nara Bancorp, Inc.
(NARA), Oak Hill Financial, Inc. (OAKF), Southwest Bancorp, Inc. (OKSB), Provident
Bankshares Corp. (PBKS), Pacific Capital Bancorp (PCBC), Peoples Holding (PHC), Pinnacle
Financial Partners, Inc. (PNFP), Private Bancorp, Inc. (PVTB), Redwood Empire Bancorp
(REBC), Scottish Re (SCT), Sterling Financial (STSA), Southwest Bancorp of Texas (SWBT),
South Financial Group (TSFG), United Bankshares, Inc. (UBSI), West Coast Bancorp (WCBO),
and WesBanco, Inc (WSBC) in the previous 12 months.
MWRE received investment banking related compensation from Alabama
National Bancorporation (ALAB) in the previous twelve months.
MWRE or an affiliate expects to receive or intends to seek compensation
for investment banking services in the next three months.
Valuation and Risks
Our valuation method for price targets is based on a target P/E and
estimated earnings amount for either the current or out year. Various factors may impede
achievement of the price target. Price targets are not always determined for every stock.
For discussion of the risk factors please refer to the latest relevant research on these
stocks. Risks include the influence of general market conditions.
I, Peyton Green, certify that the views
expressed in the research report(s) accurately reflect my personal views about the subject
security. Further I certify that no part of my compensation was, is, or will be directly
or indirectly related to the specific recommendations or views contained in the research
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