The tables have turned on Albuquerque's First State Bancorp.
The once-acquisitive company announced after the market closed Wednesday that it had hired the investment bank Keefe, Bruyette & Woods Inc. to review strategic alternatives, including a sale.
The company's $3.5 billion-asset First Community Bank is New Mexico's top in-state bank by deposits. Observers said that market heft, along with the bank's network of 36 branches in New Mexico and four in Arizona, might attract buyers — if they can figure out how to value First State's troublesome portfolio of construction loans. Losses on those credits have eroded capital, forcing the company to consider a sale.
H. Patrick Dee, First State's chief operating officer, said Thursday that the company has not settled on selling for sure but acknowledged it must do something. Raising capital in a way that would hurt existing shareholders is "not a likely outcome," he said.
In one sense, the pressure has eased. Last month, First State and its bank reached a formal agreement with the Federal Reserve Bank of Kansas City and the New Mexico Financial Institutions Division. Dee said the agreement superseded an informal agreement that the bank had been operating under. Though the formal agreement requires the bank to address asset quality, credit risk, capital levels and liquidity, it does not mandate specific capital ratios, as did the informal agreement.
Still, almost 20% of First State's construction loans are not performing. In the first half, the company's nonperforming asset ratio more than doubled to 8.05%. The construction and development portfolio makes up 37% of First State's total loans.
First State has more nonperforming assets ($240 million) than it does shareholders equity ($129 million) or provisions for loan losses ($79 million). "If they have to charge off some of those NPAs it will go against their loan loss reserve," said Dan Bass, the managing director in the Houston office of Carson Medlin Co. "Then if you need to get the loan loss reserve back to the level it was at, you have to run that through income statement through increased loan loss provisions. That directly impacts your capital."
On the plus side, First Community had 8% of New Mexico's deposits on June 30, 2008, the most recent date for which data is available. It ranked third, behind two out-of-state institutions.
"That deposit franchise is worth a lot," said said Curtis Carpenter, a managing director at Sheshunoff & Co. Investment Banking in Austin.
"As far as the discount to book value goes, it is simply going to be a valuation of those nonperforming assets. That is the hardest thing to evaluate."
Others said it is questionable if banks looking at First State would make the deal without federal assistance.
"My guess is most folks will wait for the FDIC to take it over and do the loss sharing," said Jim Gardner, the chairman of the investment bank Commerce Street Capital.
Among the potential suitors industry watchers said may take interest in First State are BBVA Compass, in Birmingham, Ala. and Bank of the West, a subsidiary of BNP Paribas Co.
John Stafford, a spokesman for Bank of the West, said it does not discuss specific deals. As a general matter, he said: "We have not closed the door on acquisitions … but we have pretty conservative standards for both price and strategic value and we have not found any properties." Any acquisition, he said, would have to be in Bank of the West's 19-state market (which includes New Mexico and Arizona).
Bass said First State would most likely sell at a discount to its tangible book value of $5.98 a share. On Thursday the stock closed at $1.30. "You would hope you could get tangible book, but they are in a vulnerable position," he said.
Bass, who worked for Compass before it was sold to BBVA, said the Alabama bank had talked to First State several times about a deal because it would fit very well with Compass' network. "They aren't that big in the New Mexico market. That would cement them there." Compass did not return a call seeking comment.
Since the beginning of 2006, First State has made three acquisitions: two in New Mexico and one in Colorado. Its assets swelled 65% during that time.
First State has worked to right itself in recent quarters. It shuttered branches in Utah and sold its Colorado branches in June, a step that returned the bank to well capitalized status under normal regulatory standards.