N.M.’s Biggest Bank Is Short on Time, Options

First State Bancorp. has spent 16 months trying to convince buyers that its deposit franchise outshines its flaws, but its time to strike a deal might be dwindling.

The $2.3 billion-asset Albuquerque company is among the walking wounded. It was critically undercapitalized at Sept. 30 and it has given no indication of complying with an August prompt corrective action directive from the Federal Reserve requiring it to boost capital by the end of October.

In August of last year First State hired an investment bank. Experts have long touted the franchise’s attractiveness, but it has yet to find a buyer willing to take on its troubles. Though recapitalization is an option, experts said buzzards are likely starting to circle the biggest bank still based in the Land of Enchantment, hoping for a possible deal brokered by the Federal Deposit Insurance Corp.

“For the right buyer, it could be a really good opportunity to acquire a good franchise across the markets of New Mexico,” said John Blaylock, an associate director of Sheshunoff & Co., an investment banking firm in Austin, Texas.

“The question of ‘who’ runs the list of everyone from who is there, who is nearby, and who wants to start a franchise in the West,” Blaylock said.

First State is one of many struggling multibillion-asset community banks that have made good-faith efforts to survive by shrinking assets. First State bought itself some time, but deteriorating asset quality has remained an issue. As capital vanishes, its options seem to be running out.

“They continue to live and they have done enough to continue to exist,” said Jeff Davis, an analyst at Guggenheim Securities LLC. “The question is what kind of existence they have and for how long?”

First State did not return calls for comment. During the height of the last decade, First State was a consolidator, making three acquisitions and increasing its assets by 65% from 2006 to 2009.

Last year it sold 20 Colorado branches, including $444 million in loans, to Great Western Bank in Watertown, S.D. First State has continued to shed assets. At Sept. 30 its assets totaled $2.3 billion, down 16% from the end of 2009.

Shrinking the balance sheet has provided some relief, but losses largely tied to construction loans continue to erode capital. At Sept. 30 the company’s First Community Bank was critically undercapitalized, with a tangible equity to total assets of 1.86%. Its leverage ratio was 1.73% and its total risk-based capital ratio was 4.01%.

In August 2009 the company hired KBW Inc.’sKeefe, Bruyette & Woods Inc. to review strategic options, including a possible sale.

In September of this year First State issued a statement indicating that it had held talks for a possible recapitalization. In its third-quarter filing, it expressed doubt in an ability to continue as a going concern. “There can be no assurance that the bank will be successful in raising capital,” the filing said.

Analysts said would-be investors have likely been struggling to get comfortable with the portfolio. At Sept. 30 nonperforming assets were $335.5 million, up 16% from a year earlier.

“Someone should have stepped in by now,” Davis said.

Blaylock said it is premature to rule out a recapitalization. “Getting everyone on the same page can take months,” he said.

Observers said there should be ample interest, given the attractiveness of the company’s 7.6% deposit share in New Mexico at June 30, which is the third largest in the state, according to data from the Federal Deposit Insurance Corp.

(Wells Fargo & Co. of San Francisco is the state’s biggest bank, with a 24.2% share.)

“They are very well regarded as a depository institution,” said Wesley Brown, managing director of St. Charles Capital LLC, a Denver investment bank that has worked with First State in the past. “They have an important market share in several of the state’s cities.”

That hasn’t been lost on potential buyers. Several investment bankers and possible candidates declined to comment due to interest in the bank. That’s not surprising, said Lorraine Buerger, a lawyer at Schiff Hardin in Chicago.

“Buyers want something that is going to take them somewhere competitively when they get it,” said Buerger, who is not familiar with First State specifically.