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First State
Bancorporation’s focus on bottom-line profitability should enable EPS to grow by 15
to 20% over the next couple of years, according to FTN Midwest Securities
Financial
Regional Banks
Analyst Interview Covering:
First State Bancorporation (FSNM-NASDAQ)
7900 Jefferson N.E.
Albuquerque, NM 87109
Phone: 505-241-7500
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)
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
Published – May 25, 2007
BIO:
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.
Important: All disclosures can be located on our website at
http://www.ftnmidwest.com/disclosures/index.asp
CEOCFO: Mr. Green, please tell us a bit
about what you follow in general and your interest in First State Bank Corp.
Mr. Green: “Our firm covers
approximately 150 banks and savings and loans across the US. First State Bancorporation
(FSNM-Nasdaq) is just one of 24 companies that I cover. My coverage list goes from the
intermountain west into the Midwest primarily between Green Bay, Chicago and Kansas City,
down into the southeast into Louisiana and Mississippi, and then into Florida and the
northeast into New York, New Jersey and Massachusetts as well. Basically, we have multiple
analysts across each geographical section of the nation, which is unusual compared to the
regional approach that most firms take.”
CEOCFO:
What makes you choose a bank to cover, in general, and why have you chosen First State
Bancorporation in particular?
Mr. Green: “We have tried to cover
banks that are currently or will be institutionally significant. Our research focus is
toward providing institutional investors with high quality research on financial
institutions. First State has been a bank that we thought, over the years, would post very
strong balance sheet and earnings growth, which would make it attractive to institutional
investors. That is why we added the Company our coverage about five years ago.”
CEOCFO:
What do you like about First State Bancorporation today?
Mr. Green: “Our outlook for the company
reflects that management should be able to grow the balance sheet by 12 to 15% over the
next 3 to 4 years, which seems likely to be a far more challenging banking environment
compared to the strong economic environment that has existed over the past 4 or 5 years.
We feel 10% balance sheet growth will look pretty good over the next couple of years,
maybe even 3 years. We believe that First State will do better than that given its
concentration in the inter-mountain West. Separately, management’s focus on improving
bottom-line profitability, should enable earnings per share (“EPS”) to grow 15
to 20% over the next couple of years; coupled with the pullback in the valuation over the
past six months, the opportunity for above average top-line and bottom-line revenue and
EPS growth makes the shares particularly interesting in our opinion. Again, we believe top
line balance sheet growth should be 10%-plus and bottom line growth should approach 15 to
20%.”
CEOCFO:
How is First State handling recent acquisitions; do you see that as a challenge?
Mr. Green: “Acquisitions are always
challenging for even the best acquirers. First State historically has not been very
acquisitive. In the last eighteen months they have done three acquisitions. To some
degree, the two acquisitions that they completed last year were in New Mexico and
represented more in-footprint type acquisitions. The acquisition of Front Range Capital in
Colorado is in-footprint in the context that they did have a Colorado operation, but will
take a fair amount of reengineering to benefit the bottom line. Importantly, the purchase
gives First State a more coherent focus and market share in the attractive Boulder County
area, which represented about 65% of Front Range’s overall Colorado franchise. The
two acquisitions First State completed last year should prepare management to deal with
the integration of Front Range in more efficient manner. All integrations have their own
challenges, but results were in line to actually slightly better than we expected in 1Q07,
which included one month of Front Range’s results. The real bottom-line benefit will
come once management gets the back office consolidated and the technology platforms
converted all onto First State’s system, which should happen in early July. We will
see the first signs of true and full progress in the third quarter rather than the second
quarter, however.”
CEOCFO:
What are they doing to drive the bottom line growth?
Mr. Green: “I think the bottom line
will benefit from the solid economic environment across its footprint in New Mexico,
Colorado, and Arizona and in management’s focus on eliminating inefficiencies
throughout the company. Historically, the Company has been very capable at banking
commercial deposit and loan relationships. With over 50 branches, to the extent that they
can get some retail deposit growth, which has never been much of a focus, balance sheet
growth could positively surprise. Over the past nine months or so, their commercial
customers have been using more of their liquidity to support their own growth, making it
more difficult for First State to grow deposits. For the past 18 months, CEO Mike Stanford
has focused on looking at the entire company and saying, ‘Okay, we are a $3 billion
asset commercial bank and we are now operating in New Mexico, which is our strongest
market position, Colorado secondarily, which is a developing market, and our start-up
position in Arizona. What should we look like as a $3 billion regional bank?’ As a
result, they have gone through their entire organization and benchmarked themselves
against peers and tried to look at industry best practices and say, ‘These are the
ones that will work for us, let’s go back to implementing those into our management
process.’ In some respects they will actually manage the head count lower by
utilizing technology to streamline the back office; however, with respect to the front
line, management is in the process of moving all of their commercial bankers to a
quarterly incentive plan. In our opinion, the quarterly incentive will result in a more
focused front line corps of bankers and management team. Although we can’t quantify
it, we believe it is a great strategy to energize its existing workforce and, potentially,
a great tool to recruit additional bankers with. We believe the new program will enable
First State grow deposit and loan volumes at an above average rate. Also, it represents a
more thoughtful and intensive management process. They will definitely have a conversation
every ninety days with their bankers about what they are doing very well and what needs
work. It gives you four opportunities to have a heart-to-heart conversation in contrast to
the typical annual chat under the more common salary and annual bonus structure that a
good portion of the industry operates. We are excited about that. From a two or three year
perspective of keeping an above average growth rate for the balance sheet and improving
profitability, we believe it is the correct strategy.”
CEOCFO:
Please tell us about the management team.
Mr. Green: “The CEO, Michael R.
Stanford, along with COO, H. Patrick Dee, have been with the company since the early days.
What is most impressive is that they took a community bank with a strong position in Taos,
which is not a growth market, and have created the largest local bank in Albuquerque,
after starting basically from scratch. Back in 1994 when they moved into Albuquerque, they
had maybe 1% market share, which has blossomed into 14%, positioning First State as the
third largest bank in the MSA and the largest local bank. Over 80% of the growth was
organic. They went from a position of not even being known to one of being very visible in
New Mexico over the last 14 years. At the time, no one gave them much of a chance.
Certainly in much of the 1990’s, there was a ton of M&A activity in New Mexico
and First State benefited from being stable and in a growth mode. The consistency and
focus of management allowed them to grow into the third largest bank in Albuquerque and
the largest independent bank. We believe that management will be able to duplicate its
success in New Mexico in Colorado and Arizona, given the concentrated nature of the
deposit market share in each state. Coupled with the opportunity to expand its market
share from hardly noticeable levels in most of its Front Range markets and Phoenix, CEO
Stanford’s heightened focus on improving profitability should result in an
accelerating EPS growth outlook. I think they can pull it off because they understand
where they came from, where they are, and, I think they have a clear grasp of where they
would like to be a couple of years down the road.”
CEOCFO:
What should potential investors be looking at about First State?
Mr. Green: “A concern right now and one
that has caused some pressure on the stock is the fact that credit quality has
deteriorated. A large portion of the credit quality slip has resulted from the acquisition
of Front Range Capital. The slip was not unexpected, but perhaps the magnitude was.
However, we would note that management reclassifies all of an acquired bank’s loans
in-line with First State’s, which has been more rigorous. This happened after the
purchase of First Community Industrial Bank in 2002, too. At the time, a very pronounced
spike in past dues and NPLs was seen; however, First State’s management actively
managed credit and reduced NPLs and past dues significantly over the following 12 months,
with minimal charge-offs. We think that is going to happen in the case of Front Range
Capital, too. Still, it bears watching and represents a material potential risk to our
notion that management will be able to improve the profitability of First State’s
legacy operation and Front Range at the same time. The greatest opportunity stems from
management’s focus on small-to-middle market commercial segment of the economy, which
is the strongest segment currently. Given its focus on high touch service and community
involvement, First State should be very well positioned to siphon market share from the
Super-Regional banks that dominate the landscape in New Mexico, Colorado, and Arizona.
Their focus, along with their capital base, gives them the ability to bank just about any
commercial relationship that they want to bank, usually in a higher quality fashion than
the smaller community or larger mega banks can.”
CEOCFO:
They are in a good spot?
Mr. Green: “Should be.”
CEOCFO:
What is your current rating?
Mr. Green: “We have a ‘buy’
rating on First State Bancorporation, which means we think the stock can outperform other
bank stocks over the next twelve months.”
CEOCFO:
What are your final thoughts on First State?
Mr. Green: “Our impression is that if
they do not get the integration of Front Range Capital done as expected and do not get to
a solid operating level with respect to their own operations, that the management team
would be open to maximizing value through the sale of the company. That is not something
that they have ever managed the company for, but because they have managed to grow a very
good banking franchise, we think the result would be a premium to the common price if they
decided to go down that road. In the inter-mountain West there are very few multibillion
dollar bank franchises—placing a fair amount of scarcity value on First State. We do
not think that much of the scarcity value is reflected in the current share price.”
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