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Bancorporations strong net interest margin is an indication they are doing something
better in terms of customer service than the other banks
Analyst Interview Covering:
First State Bancorporation (FSNM-NASDAQ)
9700 Jefferson N.E.
Albuquerque, NM 87109
Senior Vice President in the
Equity Research Department
Keefe, Bruyette & Woods, Inc.
Interview conducted by:
Lynn Fosse, Senior Editor
June 15, 2006
BIO: Bain Slack is a
Senior Vice President in the Equity Research Department at Keefe, Bruyette, & Woods,
Inc., a New York-based investment-banking and brokerage firm that specializes in banking
and financial institutions. He is responsible for research coverage of regional banks in
the Southwest and Southeast of the U.S., including Puerto Rico. Prior to joining KBW in
2001, Mr. Slack was an associate for the bank research team at CIBC World Markets. Before
changing careers in late 1999, he was the International Technology Manager at Vinson &
Elkins, a Houston-based law firm. He received a Post-Graduate Diploma in Business from
Lancaster University in the United Kingdom and a B.S. in Applied Mathematics from the
College of Engineering at University of Colorado.
CEOCFO: Mr. Slack, please tell us about the industry that you
Mr. Slack: In general, I focus on banks in the
Southeast and Southwest area of the United States, including Puerto Rico. Typically it is
the small and mid-cap banks within that geography.
CEOCFO: How long have you been covering First State
Bancorporation and what attracted you?
Mr. Slack: Ive been covering First State
Bancorporation since late 2002 and what attracted me was that it was within my region of
the United States, being the Southwest. When you consider the state of New Mexico, it was
at that time and I believe is today, the only publicly traded bank of any value in the
state. There were some other publicly traded companies, but they were very small and did
not trade much. First State Bancorp was the only name in that state that would have any
attraction to me.
CEOCFO: What are the highlight points for you now on First
Mr. Slack: I think the highlight is that the company
has just completed two acquisitions and I think probably the biggest focus for me in the
market is to see how the integration goes. This is a bank that typically has grown via de
novo in the past, in other words, building new branches rather than acquisitions.
Therefore, it is a little bit of a new strategy and it is their third acquisition overall.
It also enables them to begin to grow in the state of Arizona, which is a new market for
them. After the integrations, the second focus is seeing the company capitalizing on its
home market in New Mexico. It has been a very fast growing state and there has been lots
of good economic data coming out of the state and good growth. Further, despite their
history in the state, there is still a lot of opportunity for market share takeaway from
the larger out of state banks, since they dont have to compete against other local
CEOCFO: What do you see as the strengths of the company and
the management that will allow them to be successful in doing that?
Mr. Slack: I think the strengths of the company,
specifically in New Mexico, is really their localness and their history with the small
business community. They are falling into an area that is usually very profitable for a
lot of banks and especially when it is in a high growth state, without a lot of local
competition. What I mean by that is you can provide more hands on customer service than
the larger out of state banks can. However, at the same time, being several billion
dollars in assets as they are, they have the ability to lend a larger amount of money if
necessary, to middle size clients and larger clients who need that credit. Also, given
their larger size than some smaller community banks, they typically can offer better
services in terms of cash management. Therefore, it really puts them in a nice niche
position to be able to take advantage of that in the markets that they are in; particular
in Colorado, New Mexico and Arizona, where you dont really see a lot of local
CEOCFO: Could you tell us a little more about the potential
in the states than New Mexico?
Mr. Slack: The second most important state for them
right now is probably Colorado, which has a very similar market to New Mexico, both in
terms of the types of businesses that are operating there, especially the types of
businesses that First State Bancorporation is catering to and the landscape is also very
similar. There are not a lot of other local banks to compete against; probably the one
notable one in Colorado would be CoBiz, but again, the state is large enough that even
with that one local competitor, there is enough room for First State to still continue to
takeaway market share from the larger out-of-state banks. If you look at Colorado as a
whole you still have the large non-Colorado banks dominating the market, having anywhere
from 50 to 60% of the market share. Therefore, it gives them a lot of room to continue to
move market share. In the third market, Arizona, which they recently entered into with
this latest acquisition, I would not expect to see a huge emphasis in the near term, as
they concentrate on the integration. They have also recently announced that they hired a
local president in that market and they are going to give him time to build a team. I
would probably see more Arizona growth in 2007, but not so much in 2006.
CEOCFO: Do you see the upcoming year as a year of integration
or will other events factor in?
Mr. Slack: I think that it is going to be a
combination, but definitely the integration will be the key, at least over the next one or
two quarters. This is because there are some cost saving opportunities and some
efficiencies that can be garnered out of these acquisitions. I think is important because
the efficiency ratio is running a bit high, relative to the peer group, and I think that
they want to get those efficiencies before really concentrating on trying to grow these
new markets such as Arizona, which will be the second priority.
CEOCFO: The FSNM motto is Not your typical banker, not
your typical bank; what does that mean for you as you are covering them and can you
compare them with others?
Mr. Slack: What it means for me is that they are
offering something that no one else is offering. In most cases, it is better customer
service. Typically, what I look at when a company says that they are offering better
service is the pricing. If you are offering better service, it usually means that you can
get paid for that better service. I think First State is a bank that is doing that. When
you look at their net interest margin in the 1st Quarter of 2006, it was 4.85% despite the
flat yield curve. Thats very high in the industry, which tells me that they are
doing something better in terms of customer service than the other banks. It is higher
because they are able to get the deposits at a lower cost and they are able to book loans
at a higher rate than their competitors. At the end of the day, First State is not
necessarily offering any different product than any other bank; it is just money. However,
if they are able to get better rates on it, they must be doing something different and
better in the background and I think that is customer service.
CEOCFO: What should potential investors be looking for and is
there anything that you think people miss about First State that they should realize?
Mr. Slack: I think in the 1st Quarter, the
company had a significant credit quality situation which concerned some investors. It
caused people to step back and ask if this good credit environment is over. I would say
that while we clearly need to monitor the situation, I think the reaction was a bit
overdone. The management explained very clearly that what had occurred in the 1st
Quarter was a one-off, due to a town home project in the Los Alamos, New Mexico area. If
they can prove credit is sound along with the other issues that I mentioned earlier; then
I think that we will see confidence come back into the company and stock as well.
CEOCFO: Are there any concerns about capital levels?
Mr. Slack: Another issue that some investors focus on
is the capital levels. After doing two deals that closed in the 1st Quarter of
2006; the tangible common equity ratio had fallen a little bit and was 5.6%, which is at
the low end of the range for them, especially given that they usually experience balance
sheet growth in the 15-20% range. There is probably some concern the company would need to
come to the market to raise capital. I personally think that with a 15% estimated growth
rate for the next year or two, they would be able to generate internally enough capital to
increase their tangible common equity ratio from current levels, and I would expect to see
it at a 6% level. However, if growth were to be much higher than 15%, then the company may
need to raise capital to support that growth, but they would probably start with an
issuance of trust preferred, rather than going to the market to raise common equity.
CEOCFO: What kind of
rating do you have on First State right now?
Mr. Slack: Right now we have a market perform rating
and a $25.00 price target.
CEOCFO: Could you comment on their stock price valuation and
do you see that changing in the near future?
Mr. Slack: The stock has been weak recently and I think
that is due to two factors; one is an industry situation. Obviously comments recently from
the Fed chairman that he is concerned about inflation and wanting to push rates higher is
not good for the industry as a whole, because you have already got a very flat yield
curve. That is a macro issue. In reality, the short end of the curve going up is good for
First State because their balance sheet is positioned to perform better at a higher rate
environment specifically at the short-end of the curve. I think that when we go into the
July earning season, I would expect to see the stock correct and move back towards the
$25.00 area, which is what our price target is. This is because I think the market will
see that these higher rates have helped the net interest margin, which should be stable
from the first quarter and possibly even higher than the 4.85% in the 1st
Quarter. The reason for that is because a very large percentage of their loans are
variable and every time the Fed raises rates, the loan rates have to reprice upwards. The
key is that as long as they can keep their deposit costs lagging that loan repricing, then
we should see a better net interest margin, which is better fundamentals overall for the
company. If theyve also proven that they can accomplish some key steps in the
integration, then I would expect that with the July earnings season, the market will react
FIRST STATE BANCORPORATION
(FSNM-$23.18, MARKET PERFORM)
I, Bain Slack, hereby
certify that the views expressed in this research report accurately reflect my personal
views about the subject company and its securities. I also certify that I have not been,
and will not be receiving direct or indirect compensation in exchange for expressing the
specific recommendation in this report.
This communication is not
an offer to sell or a solicitation to buy the securities mentioned. The information
relating to any company herein is derived from publicly available sources and Keefe,
Bruyette & Woods, Inc. makes no representation as to the accuracy or completeness of
Keefe, Bruyette &
Woods (KBW) Research Department provides three ratings as well as an Action List:
Outperform, Underperform and Market Perform. For purposes of New York Stock Exchange Rule
472 and NASD Rule 2711, Outperform is classified as a Buy, Underperform is classified as a
Sell and Market Perform is classified as a Hold. Stocks are now rated based on expected
performance relative to the Keefe Financial Index (KFI), a broad-based financial services
Outperform represents a
price performance at least equal to 10% greater than the KFI.
Underperform represents a
price performance at least equal to 10% less than the KFI.
Market Perform represents
a price performance in the range between an Outperform and Underperform rating.
Companies placed on the
KBW Action List are expected to generate a total rate of return (percentage price change
plus dividend yield) of 20% or more over the next 12 months. This amount represents an
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KBW's Suspended rating
indicates that the firm's investment rating and target price have been temporarily
suspended due to a lack of publicly available information and/or to comply with applicable
regulations and/or KBW policies.
Research analysts employ
widely used multiple valuation methodologies including, but not limited to, absolute,
relative and historical Price/Earnings (P/E) and Price/Cash Flow multiples, absolute,
relative and historical Price/Book Value multiples and Discounted Cash Flow Analysis.
All KBW research analysts
are compensated based on a number of factors, including overall profitability of the
company, which is based in part on KBWs overall investment banking revenues.
KBW either expects to
receive or intends to seek compensation for investment banking services from First State
Bancorporation: FSNM during the next three months.
KBW currently makes a
market in First State Bancorporation: FSNM.
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