2005 - Analyst Interview covering:
First State Bancorporation (FSNM)
Interview with: Peyton N. Green, Senior Analyst, Financial Institutions Group
FTN Midwest Research Securities Corp.
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their community focused banks in New Mexico, Colorado and Utah markets.

Cover Story

CEOCFO Interview Index

CEOCFO Current Issue

Cover Story Archives

Future Features

Analyst Interviews

Corporate Financials

Archived Interviews
 
About CEOCFOinterviews.com

Contact & Ordering

This is a printer friendly page!

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 Colorado’s Front Range

Financial
Regional Banks

Analyst Interview Covering:
First State Bancorporation (FSNM-Nasdaq)
9700 Jefferson N.E.
Albuquerque, NM 87109
Phone: 505-241-7500

Peyton N. Green
Senior Analyst
Financial Institutions Group
FTN Midwest Research Securities Corp.

Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
February 10, 2005

Biography
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 Research’s Nashville, Tennessee office where he has been responsible for building the firm’s 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 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.

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."

CEOCFOinterviews: How 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."

CEOCFOinterviews: They 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 State’s 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 didn’t quite hold up as they thought. We think the company’s earnings stream from Colorado bottomed in the second quarter and improved in the back half of 2004."

CEOCFOinterviews: What 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."

CEOCFOinterviews: What 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."

CEOCFOinterviews: What 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 don’t 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 management’s 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 projection."

CEOCFOinterviews: What 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 FSNM’s Colorado operation and an emphasis by management on bottom-line results, too, without sacrificing solid top-line growth."

CEOCFOinterviews: Will you comment on the stock price valuation now and do you see that changing in the near future?
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 watching for?
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 Committee’s 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 long-term investors."

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 State’s 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 ago."

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 report(s).


disclaimers

Any reproduction or further distribution of this article without the express written consent of CEOCFOinterviews.com is prohibited.

First State’s 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 ago." - Peyton N. 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." - Peyton N. Green

Newsflash!

To view Releases highlight & left click on the company name!