CEOCFOinterviews: Tell us a little more about the acquisition, how you funded that, and what your plans are.

Mr. Dee: “We completed the acquisition through a combination of a trust referred security offering of about 25 million dollars and a common stock offering of just over 50 million dollars. It was a cash purchase, which we funded through those vehicles. We purchased First Community from the Washington Mutual Organization. As an Industrial Bank, it was not able to offer checking accounts; we have taken those branches and merged them into our existing bank charter so that we are now able to offer full-service commercial banking, up and down the front range of Colorado and in the Salt Lake City, Utah area. We are very excited about the potential in those markets because they are much larger than our primary market here in the Albuquerque area, and we think there is outstanding potential for a well-run community focused bank to take a little market share from some of the larger banks in those markets.”

CEOCFOinterviews: What makes First State a well-run bank, and what is it that you do as an organization?

Mr. Dee: “Our key is hiring good people on the frontlines and then, within safe banking guidelines, giving them the ability to make the decisions that impact their customers. By doing that, they are able to provide very responsive customer service, especially in the loan area of being able to provide quick turn-around on loan decisions for most commercial customers. We think it is very important that the decision makers are in the communities where the decisions are made, as opposed to trying to make decisions that may impact some local customers from an out-of-state location. We think it is critical that they be allowed to do their job within safe banking guidelines.”

CEOCFOinterviews: Tell us whom you are focusing on in terms of customers and business, and is that changing for you?

Mr. Dee: “Our focus, maybe has changed a little bit over a period-of-time, but we primarily concentrate on small to medium commercial businesses and then the individuals that go along with those businesses, either the principals or the employees. I think as we have developed a little more of a branch structure, we have shifted to be more consumer oriented, but realistically where we do best is the small or medium commercial market.

We can provide service and products that are tailored more to our customers’ individual needs, and we do a lot to try to work with our commercial borrowers particularly, in structuring loan requests that meet their needs. We try very hard not to put them in a ‘box’ or make them fit a particular notion that we might have as to how they might best be served. We try to listen to them to determine what their needs are and come up with the best possible solution for them and for us, to maintain our safety as a bank, and obviously our profitability. What we find is that those customers don’t necessarily require that we be the cheapest bank in town; if we can provide a superior product or service to them, they don’t mind compensating us for that.”

CEOCFOinterviews: Can you give us a concrete example of what you might do that is outside the ‘box’, something that you might have structured?

Mr. Dee: “I think we look at the overall picture for a commercial business, probably better than some of the larger banks do, in terms of the strength of the individual borrowers that are involved with the businesses as well as the cash-flow. We gravitate heavily towards real estate as collateral; a major portion of our commercial loan portfolio is collateralized by real estate. For example, sometimes we will take several different properties in order to have adequate collateral coverage for a particular company, and then look very heavily at the principals and their credit history in order to support their credit. We try to not be too narrow in our focus in terms of what we will take as collateral. We try to be flexible in terms of packaging and the overall collateral and cash-flow situation that is sensible for us from an underwriting standpoint.”

CEOCFOinterviews: Which of the banking services and products that you offer provide the greatest revenue for you, and do you see a change there?

Mr. Dee: “Right now, there are probably two general areas that are most profitable for us. First, in terms of total dollar amounts, it is without a doubt our commercial loan portfolio. The rates that we grant those loans for are competitive in the market place. We try to control our costs in putting the loans together. The commercial real estate portfolio is probably one of our more profitable areas. The second one that we have done quite well with is single-family residential construction lending. The fees that are generated on that portfolio that has an average maturity of about eight months make that a very profitable business for us. We have a system that helps us control our costs in delivering that type of credit. With our underwriting standards, our losses have been minimal in those areas. Those two product lines are our most profitable. However, over time, I think we have shifted more towards the commercial lending portfolio.

Currently, with interest rates down our residential construction area is very active, but we see that starting to taper off and eventually as rates go back up whenever they go up, that activity will probably fall off a bit more. Therefore, at this point we are definitely starting to see a shift to where our commercial business is becoming more important to us than it was historically.”

CEOCFOinterviews: Are there any new products or services that you are going to be rolling out or are you pretty well set where you are?

Mr. Dee: “We are pretty well set, but we are constantly looking at ways to improve the cash management capabilities of our system, primarily for our commercial customers. We have a good product offering, and we are working with our software provider just to fine-tune some of the service charge routines such as commercial checking accounts to try to make us even more competitive than we have been. Right now the key for most commercial customers is to utilize their cash to where they are minimize their borrowing and if they are not a borrower, to maximize the earnings off of their excess cash. Therefore, that has been and will continue to be a definite focal point for us.”

CEOCFOinterviews: Tell us about your one-on-one customer service and your use of technology as a tool.

Mr. Dee: “It seems as though a lot of the larger banks have tried to utilize technology to minimize the amount of time that their employees need to spend with a customer. However, our approach has been to provide our employees with excellent technology so that they can spend more time with customers in determining what their needs are and working with them in seeing how we can best meet those needs. Although our phone banking and on-line banking systems continue to see rapid growth in their usage, the real key for us is that we want to have people in our branches that are available to talk to customers and find out what their needs and desires are. That allows us to try to work with them to see if we can meet those needs. By providing good technology, it is our hope that our people will have more time to spend with the customers who need assistance.”

CEOCFOinterviews: Have you full assimilated your acquisition of First Community Industrial Bank and is it currently profitable?

Mr. Dee: “The beauty of our First Community acquisition is that it is profitable as it sits right now. This bank historically was a residential mortgage lender and most of their portfolio is floating rate. The nice thing about their operation right now is that their overhead is low, therefore it is very profitable and that gives us the luxury of having plenty of time to fully implement the full set of commercial banking services in those markets. We recently completed the conversion of their accounts to our data processing system, so that now they are able to offer all of the products that we have historically been able to provide.

We are gradually hiring commercial bankers in those areas to supplement the existing staff. It is important for us not to rush into that and to make sure that we have the right people.  We have to get them properly trained so that when we roll out these new products, we will be able to provide the top level of customer service that we expect to provide and that our customers deserve.

We have roughly a two-year plan to get that operation up to speed in terms of having commercial bankers throughout that system. Most of the deposit products are going to be in place within the next ninety days; we just completed the conversion a week ago and we are starting to roll out those deposit products. For us the key is in making sure we are providing a good service that the people on the frontlines are knowledgeable and able to take care of the customer’s needs. From that standpoint we can afford to do it right and not rush into it. We didn’t have to go in and carve out a lot of the non-interest expenses in order to make it profitable.  It was profitable as it stood and this allows us the time to fine tune the staffing as we go forward. In this case, we will end up adding to staff as opposed to making reductions across the board. We are very excited about the opportunity in those market places and the people there are also very excited about it.

It is a little unusual for an acquirer coming in to be regarded as a good guy in a white hat; quite often, it is the other way around. We have been able to bring to their staff additional training and much better technology than what they had. They see the opportunity to provide a much better range of services to their customers.  Many of those customers have been asking for those services for some time and the employees are excited about being able to offer some of those.”

CEOCFOinterviews: Do you see most of your growth coming from the new acquisition or is there new growth in New Mexico?

Mr. Dee: “Although the growth in New Mexico may be slowing down a little bit from the 25 or 30% that we’ve experienced, we think that we can sustain probably something in the range of 15% growth here in New Mexico. Having said that, we are obviously very excited about the potential for growth in Colorado and Utah because we are such a small part of a very large market place. It is difficult to predict what the percentage growth is going to be but we expect both the percentage and dollar amount growth in those markets to be quite substantial. Time will tell, but essentially this acquisition involved about $360 million in assets to go with the roughly $1 billion in assets we have here in New Mexico. Over time, we expect those two markets to grow in a way that will close the gap between the size of those states and what we have in New Mexico. We think it is a very good situation; we want to maintain our base here in New Mexico and continue to grow it and capitalize on the opportunities here. However, the best potential for us we believe, lies in those Colorado and Utah markets.”

CEOCFOinterviews: Do you see additional acquisitions and perhaps more branches in the near future?

Mr. Dee: “We definitely want to continue to add new branches. We have one new branch that will open in the Santa Fe market during the first quarter of next year. We are also looking for potential new locations in both the Colorado and Utah markets for new branches. Our acquisition involves six branches in Colorado that go from Fort Collins on the north to Colorado Springs on the south with three in the Denver metro area. In Utah, there are two branches in Salt Lake City and one in Ogden and we feel over time we would like to fill in some of the gaps in those markets with new branches. We don’t know yet how many or where they will be, but we are already looking at potential new sites.

From an overall geographic standpoint, we are now in three states: New Mexico, Colorado and Utah and the fourth piece of that, which would make sense to us would be the Arizona market. In terms of that market, there are some common factors between Arizona and New Mexico. We think that long-term we would like to explore the opportunities to get into the state of Arizona, but at this point we don’t have any definite plans, although we are starting to look at some of the demographics of different areas there to see how they might fit into our plan in the long run.”

CEOCFOinterviews: Does being further apart geographically from the acquisitions in the newer area, create a problem, or in this day in age is that meaningless?

Mr. Dee: “It certainly presents a few opportunities and challenges for us; it’s not quite as easy as having branches that are closer together, but certainly the technology allows us to overcome a lot of that. We have a high-speed computer connection right now between Albuquerque and the Denver area and that major connection there allows us to deliver the technology very quickly. Obviously, in this day of e-mails and voice communications, it is very easy to stay in touch. We, as a management team are going to spend a little bit more time traveling. Logistically in terms of flight time, it is basically just an hour from Albuquerque to Denver and just a little more than that from Albuquerque to Salt Lake City. In terms of big city commute times, that doesn’t seem like a big gap to bridge. It does present a few challenges, but they are very manageable.”

CEOCFOinterviews: What kind of effect has your recent acquisition had on the outlook of your company?

Mr. Dee: ”I think for our company now, it is a very exciting and critical time for us going forward. Obviously, this venture into these new markets represents a change from where we have been, but we truly believe building on to what we have here in New Mexico and adding these new markets, provide us the opportunity to continue to grow and to develop. For us the absolute key is having the right people in the right positions to help us carry that forward. We haven’t gotten where we are today through the magic of a few geniuses or key people, it has taken a lot of hard work by many talented people. We continue to look for those people who are going to be able to grow with us and help us take this forward. As we have grown, we have expanded our talent pool of our existing management and we believe that is ultimately the key to our success; given the right talent and people who want to put a lot of effort into helping us with this, that ultimately we’ll be quite successful.”

CEOCFOinterviews: Has the consolidation into bigger banks helped you in finding people?

Mr. Dee: “Absolutely! The vast majority of our people have actually come to us from the larger banks. We are large enough now to where we are starting to develop more talent internally. In the early years of our history as a public company, we relied almost totally on the talent coming from the larger banks, especially in the Albuquerque market, where we have been able to identify who some of those key people are. They have looked forward to the opportunity to get back to banking as they used to know it before the large banks acquired some of the banks in this market. They are able to duplicate what they used to be able to do and it helps us as a company. It provides what the customer is looking for in terms of service and response and I think we will continue to identify the talent in the large banks that are looking for a change as well as supplementing that now with developing some of our own people internally.”

CEOCFOinterviews: What is it that you do as an organization that sets you apart from the rest?

Mr. Dee: “The real key for us is providing responsive customer service quicker that most of our competition. We especially see that on the loan side with commercial loan approvals and our process being much more responsive to our customers’ needs and generally much quicker than the competition, so that is the one major distinguishing factor. We also try to be priced competitively in terms of fees and service charges so that we are not nickel and diming our customers like some of the larger banks, which seemed to have made a science out of that. Therefore, providing quick and responsive customer service and keeping our pricing reasonable seems to be the key. “

CEOCFOinterviews: Are there industry changes that you are concerned about?

Mr. Dee: “We are always very aware of general asset quality issues and what is generally a soft economy nationwide; we have continued to focus more attention on that. That is probably the biggest challenge facing the banking industry right now, along with some of the regulations that are coming into play. Primarily, asset quality is always the most important factor in terms of the bank’s profitability, and for that reason we continue to devote a lot of attention to that. We recently hired a chief credit officer that has very extensive banking background from larger organizations and we feel that adding someone like that is critical for us to maintain that asset quality going forward.”

CEOCFOinterviews: How do you keep that personal touch as you grow, often times as companies grow they lose that?

Mr. Dee: “There are two things we think are critical, number one; we need to hire the people from our frontline positions that are in tune with that and who are able to help us deliver that. The second thing is a key to our long-term strategy and that is that we want to avoid becoming over regulated by our own internal policies and procedures. As with any bank, we have a wide range of policies and procedures but we try to not have policies put in place just for the sake of exercising control. We believe it is more prudent to keep the management and decision-making process as streamlined as possible by allowing people the latitude to make some decisions within some general framework. We are doing a lot to try to keep that personal feel by the absence of un-necessary policies and procedures, and hiring the people that are comfortable with operating in that kind of environment, who want to maintain good personal touch with their customers.”

CEOCFOinterviews: In closing, what would you like to say to current shareholders and investors?

Mr. Dee: “I think most important for us is that we manage the company for long-term growth and profitability. Our original shareholders that invested in our IPO in November of 1993, received over time a compound annual rate of return, in excess of 18% and it is that long-term track record, that should make our current shareholders satisfied and perhaps encourage some people who don’t invest in our stock to consider it. We certainly had some ups and downs; our profitability hasn’t gone up by 18% each year and our stock does fluctuate from time-to-time but we feel that that kind of record over nine years is one that we are quite proud of. During that time, we have grown the organization substantially. The keys for us as management are to maintain both our growth and profitability and we are determined to do that. Further, we believe that we have the track record to show that we are capable of producing that.”

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