During the past three years, First State Bancorp. in Albuquerque grew aggressively: It bought three banks, two in New Mexico and one in Colorado, and its asset size rose 70%, to $3.5 billion.
But it also bet heavily on construction and land development lending, which has become increasingly problematic. Noncurrent loans are on the rise, and it recently signed a pact with regulators agreeing to suspend dividends and payments on trust-preferred securities until it improves its capital position.
Now analysts say this longtime active buyer could be positioning itself to sell, and Michael R. Stanford, the company's president and chief executive officer, was not discouraging the notion in an interview last week.
He said that potential buyers often come calling and that he would consider a sale once his company works through its problem loans and the financial crisis subsides.
"It depends on how tired I am after this is all over with," Mr. Stanford, 55, said with a laugh. "Some days it is a 'yes,' and some days it is a 'no.' It would really depend on the opportunities in the overall market and whether we could pursue them better individually or by partnering up with somebody."
One thing is certain: First State's buying spree is over for now. It did six deals in six years, but the focus today is on downsizing, Mr. Stanford said.
Its plan to get back on track included closing two Utah branches it added with First Community Industrial Bank in 2002. It also plans to jettison the bulk of the $287.2 million of loans from those branches.
First State's loan troubles started in early 2007, not long after it bought Heritage Bank in Louisville, Colo. Mr. Stanford said it found several construction loans that did not meet First State's underwriting standards and the company either sold the loans or asked the borrowers to find another lender.
This set in motion a larger effort to assess its lending and ultimately led to First State's tightening down its underwriting standards, Mr. Stanford said.
"We went through the process of scrubbing down portfolios and looking at concentrations," he said.
Still, construction and land development credits make up 36% of its portfolio, or $1 billion, and the housing market collapse has taken its own toll.
The company reported a net loss of $118.3 million for the second quarter, after reserving $28.7 million for loan losses and writing off $127.4 million of goodwill on its acquisitions. It had earned $7.2 million in the year-earlier quarter.
Analysts said they anticipate credit quality could deteriorate further in the third quarter. But they also said First State is in a better position than many other banks with loan trouble because it started cleaning up its portfolio well before the real estate market cratered.
"We think they are ahead of the curve," said Peyton Green, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp. "They are still in a workout mode. But they are being proactive in trying to get paid back. And by starting earlier they should be in a good position to collect on the loans."
On Sept. 26, First State voluntarily agreed with the Federal Reserve Bank of Kansas City and the New Mexico Financial Institutions Division to maintain an adequate allowance for loan losses, not pay dividends, not distribute any payments on trust-preferred securities, and not repurchase stock.
James Schutz, an analyst at Sterne, Agee & Leach, said that, when First State "gets healthy again," it could be an attractive takeover target and "could fetch a pretty good price."
Its 62 branches are in states with growing populations — New Mexico, Colorado, and Arizona — and it has the third-largest deposit market share in Albuquerque.
Mr. Green speculated that regulatory pressure could force an early sale. Though First State qualified as "well capitalized" at the end of the second quarter, the informal agreement requires it to boost its capital ratios well above regulatory minimums. It is in the midst of carrying out a plan to get the Tier 1 leverage ratio to 9% and the total risk-based capital ratio to 12%. Those ratios were 7.1% and 10.4%, respectively, at the end of the second quarter.
Mr. Stanford said the company — whose stock price has plummeted 76% in the past 52 weeks — should reach the capital targets this quarter without having to raise money from investors.
"I see no reason to dilute shareholders as a desperate measure," he said. "We don't see anything inherently broken in the company that would force us to go raise capital and damage the existing shareholder base."
First State is planning to sell $200 million to $250 million of its loans in Utah, Mr. Stanford said. It already has a buyer it expects will close on the loans in the next 60 days. The price would be at least face value.
"We'd be happy to sell the whole $250 million, but even if we sell $200 million we will be well on our way to meeting our goal," he said.