Credit kept worsening at First State Bancorp. in Albuquerque last quarter — leaving the company undercapitalized and its bank unit only adequately capitalized.

H. Patrick Dee, the $2.9 billion-asset company's chief operating officer, said Tuesday that the bank unit needs to boost its capital by as much as $70 million — more than five times the company's market capitalization that morning.

"We are looking at a whole variety of options with KBW," First State's investment bank, he said. "We could either do some type of capital raise or a merger with another bank that would provide some additional capital strength for us."

In the meantime, Dee said, First State will continue working to cut expenses. "It is a challenging environment, no doubt. We are going to manage the things we can control the best we can and hopefully come up with a better solution."

First State reported Monday that its net loss had widened to $51.5 million in the third quarter, from $1.8 million a year earlier. Last quarter's loss was largely related to credit provisioning as nonperforming residential construction and land development loans mushroomed. The ratio of nonperformers to total assets rose 665 basis points, to 10.03%.

Bain Slack, an analyst at KBW's Keefe Bruyette & Woods Inc., wrote in a research note that he was surprised by how much capital had eroded at First State.

"We thought [First State] would be able to maintain its 'well capitalized' status at the bank level after the completion of the Colorado sale last summer and additional delevering," he wrote. "However, credit continues to be a headwind."

Dee pointed to some signs of improvement, however. For example, potential problem loans fell 20% from the previous quarter, to $205 million. "That's the first time in a couple years where you see that decrease," he said.

On Sept. 30, First State's bank had a total risk-based capital ratio of 9.21% and a leverage ratio of 5.75%. (Regulators usually deem a bank well capitalized if it has a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%.)

The parent company's total risk-based capital ratio was 8.75%, and its leverage ratio was 3.18%.

The company's tangible common equity ratio fell to 2.5%, from 4.1% in the second quarter. Analysts generally consider anything below 5% to be worrisome.

First State has maneuvered to boost its capital ratios in recent quarters. The company sold its Colorado branch network in June for a gain of $23.3 million, which returned its bank to well capitalized status under the usual standard.

It fell short, however, of satisfying an informal agreement with regulators requiring it to have a total risk-based capital ratio of 12% and a Tier 1 leverage ratio of 9%. But in July, that agreement was replaced with a formal one that had no capital requirement. The new agreement, based on findings in exams that regulators did in the first quarter, required the company to assess its management and staffing, craft a plan to strengthen lending and credit-risk management and improve its delinquency ratio.

Dee said First State is still shooting for the capital ratio targets in the original, informal agreement.

"We aren't under any requirement to raise that amount of capital," he said. "But that is the benchmark a lot of folks would relate to at this point."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.