Filed by First State Bancorporation Pursuant to
Rule 425 of the Securities Act of 1933
Subject Company: First Community Industrial Bank, a subsidiary of
Washington Mutual, Inc.
Commission File No. 001-14667
The following presentation was made at an audio-video conference call held on
May 24, 2002, 10:00 A.M. Mountain Daylight Time, by H. Patrick Dee, First State
Bancorporation's Executive Vice President and Chief Operating Officer, and Brian
C. Reinhardt, First State Bancorporation's Executive Vice President and Chief
Financial Officer, in connection with the announcement of the proposed
acquisition by First State Bancorporation of First Community Industrial Bank, a
subsidiary of Washington Mutual, Inc.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 1
FIRST STATE BANCORPORATION
May 24, 2002
11:00 a.m. CDT
Coordinator Good afternoon. Thank you for holding. All
participants will be on a listen only mode until the
question and answer segment of today's call. Also,
this call is being recorded at the request of First
State Bancorporation. If anyone has any objections,
you may disconnect at this time. I would now like to
turn the call over to one of your speakers for today,
Miss Valerie Pagliaro. Thank you, ma'am. You may
begin.
V. Pagliaro Welcome to First State Bancorporation's conference
call. First State Bancorporation will provide an
on-line simulcast of this conference call on
www.fsbnm.com. An on-line replay will file following
immediately, continuing for ten days. There will also
be a replay of this conference call for ten days
after the conference call at 800-839-2160.
Your host and conference leaders for this conference
call are H. Patrick Dee, Executive Vice-President and
Chief Operating Officer; and Brian C.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 2
Reinhardt, Executive Vice-President and Chief
Financial Officer of First State Bancorporation.
B. Reinhardt What we'll do now is we have some forward-looking
information. We welcome you all to the presentation.
I've got to read something here that discusses
forward-looking information. Once I've done that,
we'll go through the agenda, followed by our
presentation. Then at the end, we'll have a question
and answer period.
The presentation contains forward-looking statements
with respect to the financial condition results of
operations and business at First State Bancorporation
and First Community Industrial Bank. Assuming the
consumption of the transaction, it combined First
State Bank and First Community Industrial Bank. This
presentation includes the statements relating to
revenue enhancements and accretion to reported gap in
cash earnings that may be realized from the merger,
the restructuring charges expected to be incurred in
connection with the merger.
These forward-looking statements involve certain
risks and uncertainties. Factors that may cause
actual results to differ material from those
contemplated by such forward-looking statements
include, among other
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 3
things, the following possibilities: revenues
following the merger are lower than expected;
competitive pressures among depository institutions;
increased significantly the integration of the
businesses of First State and First Community cost
more, take longer, or less successful than expected;
the cost of additional capital is more than expected;
changes in interest rate environment reduces interest
margins; general economic conditions, either
nationally or in states in which the combined company
will be doing business, are less favorable than
expected; legislation or regulatory requirement or
changes adversely affect the business in which the
combined company will be engaged; changes may occur
in the securities market, either First State
Bancorporation or First Community Industrial Bank,
assuming the obligation to update the forward-looking
statements.
I want to welcome you all again. Thank you for your
participation this morning.
We'll follow the following outline summary which, for
those of you following along on the Web, begins on
Page 2. I will provide a transaction summary. Pat Dee
will go through the transaction rationale. Pat will
also go through an overview of First Community. I
will be discussing the financial projections and the
pro forma information. I'll
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 4
also be going through the transaction review. Once
we've completed that part of the presentation, then
we'll open it up for analyst questions.
Transaction Summary -- for those of you following
along on the slide presentation, this is Slide 5.
What we are doing is we are requiring First Community
Industrial Bank -- First Community is an industrial
bank with offices in the Colorado and Utah markets.
It is currently a subsidiary of Washington Mutual.
The merger will be accomplished through a stock
purchase. We will actually pay cash to Washington
Mutual to purchase the stock of First Community
Industrial Bank. It will be followed immediately by
us merging First Community into First State
Bancorporation.
Now, the transaction price is $67 million in cash
that we will be paying to Washington Mutual. Prior to
the closing, Washington Mutual will take a dividend
of approximately $37.5 million out of First
Community. First Community is extremely well
capitalized. This process of us paying them $67
million in cash, and they're taking a dividend of
$37.5 million beforehand. It allows us both to
achieve our pricing objectives and leaves us with
what we think is a very good, earning stream, going
forward, that's going to be able to help us in our
expansion in those markets, which we think are both
very attractive.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 5
The financing will be an issuance of both common
securities and trust preferred securities. In this
presentation, a mixture of those is currently about
$50 million in common stock and $20 million in trust
preferred securities. The relative percentages there
will be influenced by market when we actually go and
price both of those items.
In terms of synergies, because First Community is a
subsidiary of Washington Mutual, and based on the way
they have run their business, it is a very, very
effective, efficient operation. Our model and the
assumptions included here do not include any cost
savings at all. In fact, when we come back to the
financial presentation, you'll see that we discuss,
actually, our adding some costs. We anticipate adding
some cost going forward to actually make an
investment in First Community. So again, this is not
predicated on large cost savings.
Largely because of purchase accounting and because of
the effective manner in which First Community has
been run, we think the restructuring charge will be
something around half a million dollars and hopefully
possibly less.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 6
The approval process that we need from this is we
will need approvals of the Federal Reserve, New
Mexico, Colorado, and Utah state banking authorities.
We expect the transaction to close in October of
2002.
In terms of the transaction summary, the transaction
size -- I've moved now to Slide #6. Again,
transaction size: $67 million. That gives us a price
to 2001 earnings of about 10 times and a price to,
more importantly, 2002 estimate of what First
Community's earnings will be of about 11.5 times. It
is extremely important to note here that that
earnings estimate number is based on pro forma
numbers after the dividend of excess capital of $37.5
million to Washington Mutual. You can also see the
price-to-book value at announcement, about 2.4 times
in the price-to-estimated, with prior close at about
2.2 times.
What I would like to do now is turn it over to Pat to
discuss some of the transaction rationale.
P. Dee Thank you, Brian. We'll start with the transaction
rationale that really begins on Slide #8. The
interesting thing about this transaction is that it
allows a very good jumping off point to get into what
we think are two very strong markets.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 7
The First Community organization has six branches in
Colorado, another three branches in the Salt Lake
City area. The Colorado branches are up and down the
Front Range in communities that have their own fairly
strong growth and opportunity characteristics for us.
These are much larger markets than what we are
currently in here in New Mexico. We think the
potential for future growth is tremendous.
One of the key factors that we will do is to collapse
the charter of First Community Bank into our charter
so that they will be able to allow our normal mix of
core deposits, primarily checking accounts, that
they're not able to offer currently.
Our commercial loan expertise is something that we
will also be introducing to the First Community
franchise. Their loan portfolio, as we'll see here in
a minute, is largely residential lending-based. We
think there are some tremendous opportunities to do
some commercial lending in both the Colorado and Utah
markets.
The transaction should be accretive to both gap and
cash earnings per share with some very modest growth
assumptions. As Brian mentioned, there are no cost
save numbers assumed in that conclusion.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 8
This transaction will put us well over the billion
dollar mark in assets, just short of $1.3 billion,
and will give us a market cap of about $165 million,
a total of 30 branches. Again, we'll have a very nice
footprint in what we consider to be three high growth
inter-mountain metropolitan cities.
The execution risk here, we think, is relatively low.
The First Community franchise is a fairly stable one
with some good earnings. We will have plenty of time
to introduce our business model, with some minor
variations, but one that has been extremely
successful in the New Mexico market and that we think
we can deploy in these contiguous states.
On Slide 9, it shows a map, giving our locations and
the First Community locations. You can see in the
Colorado franchise, in particular, that their
branches run from Fort Collins on the north to
Colorado Springs on the south, with three branches in
the Denver MSA and also Longmont on the north. So
we're very excited about the opportunity that this
affords us. The Salt Lake market, their offices are
in either the Salt Lake or Ogden areas. That market,
too, First Community has a fairly small presence. We
think there's some outstanding potential there.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 9
Slide #10 shows some of the other major players in
this market in the Colorado and Utah markets. It may
be a little difficult to read on the Web, but Wells
Fargo is right at the top of the list. They have
approximately 20% market share in the Denver MSA.
They have almost 30% in the Salt Lake City MSA.
Wells Fargo is one of our competitors here in New
Mexico. We're familiar with how they operate. We
believe that the opportunities in both the Colorado
and Utah markets will be similar to what they are
here and that we can provide better customer service,
a little lower fee structure in some cases, and
hopefully gather some good business over a period of
time.
First Community is a less than 1% market share in
both of those in terms of deposits. We think that
represents some of the potential for growth there
that we, given the vast size of those markets, should
have little trouble in increasing our market share
significantly there.
Slide #11 shows some of the overall market shares for
our existing organization, and also for First
Community. The highlights there are that, in the
state of New Mexico, First State Bancorporation has
roughly a 4% market
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 10
share overall, ranking 6th in the state. In the
Albuquerque area, which is by far the largest market,
we have an almost 7% deposit market share at this
point. Again, First Community is well below a 1%
market share in both the Colorado and Utah state
markets as well as the Denver MSA and Salt Lake City
MSAs. So that, I think, highlights some of the
potential that we see. Now we'll move to a quick
overview of First Community itself.
The first slide there that has information on it is
Slide #13. The locations for First Community are,
again, up and down the Front Range of Colorado and in
Utah. The largest office in terms of deposits is in
the Colorado Springs area, with several good offices
in the Denver metropolitan area as well as Fort
Collins and Longmont on the north.
The Salt Lake City and Ogden offices are relatively
small in terms of deposits. The one office in Salt
Lake City is only about $13 million. Again, we
believe that by being able to offer checking accounts
in particular, that there's a tremendous potential
here for some good deposit growth in all of those
offices.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 11
Moving on to the next slide, #14, this shows a brief
snapshot of First Community's balance sheet. These
figures are adjusted for the $37.5 million dividend
of excess capital that Brian referred to. Given that,
the pro forma total assets for First Community would
be about $379 million. The pertinent parts there are
that that includes a loan portfolio of $363 million.
They also currently have other real estate-owned of
$2.6 million. As part of the transaction, Washington
Mutual has agreed to buy that other real estate out
of First Community prior to our taking control. They
are also going to buy the non-performing loans in any
amount above $2 million so that we have controlled
very much our asset quality risk going into this
transaction.
They currently have about $242 million in total
deposits. Their balance sheet includes $100 million
of borrowings from the FHLD, which long-term, we will
replace with core deposits and ultimately will help
us, we believe, improve the profitability of the
company.
The income statement that is shown, again, is
adjusted as if the dividend of excess capital had
been taken out. First Community's earnings have been
relatively strong, historically. 2002 is going to be
a little bit lower than what they experienced in
2001. If you take out this excess capital, it
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 12
lowers them a little bit further. Our current
estimate of their annualized income would be about
$5.8 million for the year 2002, again adjusted for
the dividend of excess capital. It's that number
that's the basis for the multiples that Brian
referred to earlier.
The next page, Slide 15, includes some financial
highlights for First Community over the past several
years. We'll just hit a few high points there. Their
deposit growth from 2000 to 2001 was pretty strong,
going from $191 million to $237 million so that they
were able to reduce their reliance on borrowed money.
Their long growth has been pretty flat the last three
years. That's something that, in the type of lending
that they're doing right now, we do not anticipate
expanding that any further. What we will bring to it
is a component that will generate, we think, some
substantial amounts of commercial loans over a period
of time.
Their return on average assets has been just a little
bit under 2% the last three years and has been fairly
consistent. Their net interest margin, also in the
last three years, has been either slightly above or
below 5%. Their efficiency ratio has been quite low
at generally less than 40%. That is a
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 13
factor that will change a little bit going forward,
as we implement their commercial lending expertise,
but the nice thing about this is it gives us a very
low base of expenses to start from. So we are not
looking at having to do any cost reductions there.
The next slide shows some pie charts with the First
Community loan and deposit portfolios highlighted.
The commercial real estate on the loan side is a
fairly small part of their overall loan mix, unlike
ours. Clearly, the bulk of their loans are in one to
four family, primarily first mortgages. Then there
also is a pretty good component of second mortgages
as well. They have a little bit of multi-family
lending, but clearly their major lending focus has
been in one to four family residential loans. Again,
we want to continue those activities, but build on it
with additional real estate loans.
Their deposit portfolio is predominantly small CDs.
Roughly 2/3's of their deposits are small CDs. They
do have a little over 20% in savings and money market
deposit accounts and then just over 10% in jumbo CDs.
So absent the checking accounts, it's a pretty good
mix of deposits, but again, one that we think we'll
change pretty substantially over time as we implement
a full service banking environment.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 14
With that, I'll turn it back over to Brian for the
projections and pro forma information.
B. Reinhardt Thank you. Beginning on Slide 18, we have the
financial projections and pro forma information.
These estimates are based on our current and the
current consensus estimates that are out there, those
being $1.80 for this year and $2.10 for 2003. The
earnings number there are our earnings, and then the
combined earnings, and also the earnings of First
Community Industrial Bank. You can see that for this
year, 2002, adjusted for, again, as we've discussed,
the effect of the dividend that we'll be taking out
of the company prior to the close. They'll do about
$5.8 million this year.
We are anticipating, with some modest growth in both
loans, and some modest growth in what we will be
putting in in demand deposits that we will be able to
move that number up in 2003 to about $6.4 million.
The projections that those are based off of are based
on our experience, largely of what we have been able
to do in terms of opening up basically new branches.
That is somewhat of the thought process that went
into what we're doing here. In these existing
branches that will now be able to issue checking NOW
accounts, repurchase agreement accounts, we believe
on what we think are some very conservative
assumptions, that we'll be able
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 15
to begin to bring in demand deposits, pretty quickly
replace home loan bank borrowings, and reduce their
overall cost of funding while bringing in some modest
loan growth to be able to achieve those 2003 numbers.
What we have next in here is the cost of the trust
preferred. That number, obviously, will be impacted
by the mix of what we have between trust preferred
and common securities that we will need to go out and
raise in order to be able to accomplish the
transaction. New costs, what we have put in here, is
an estimate of about $500,000 in new costs that we
will be adding in to the First Community franchise
next year for a variety of things, including a pretty
expanded marketing campaign and the addition of some
commercial lenders.
We're currently in the process of going through and
looking at all those branches, with some assistance
of an outside firm, deciding which ones of those will
make sense to be able to bring in the commercial
lending aspect of this, the most quickly. We will do
that not on a massive basis right away, but as we
begin to build and develop the franchise we'll
actually be able to go in and add commercial lenders
at the appropriate branches where we think that will
best fit and be able to do that over the next
probably two to five-year period.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 16
The amortization of intangible that we show there--an
interesting dynamic of this is based on the estimates
that we have done and our evaluations of their
deposit portfolio, because they don't have checking
and NOW accounts, the core deposit intangible and the
resulting amortization from that are not very large
numbers.
That gives us the pro forma earnings you see there
of, most importantly for 2003, just about $15.6
million. We believe that that's going to be a GAAP
accretion of close to 5% off our 2003 estimate, and
in the cash accretion basis, about 7%.
The next slide will just go through some pro forma
information quickly, about where the companies
currently are and where we think they will be at
12/31/02. We believe that will get us to about $1.3
billion, a loan portfolio of about $968 million, and
an allowance account of $12 million. We believe that
the total, intangible asset goodwill that's going to
be created in this is going to be about $38 million.
It's the total deposits of just short of a billion
dollars. We will have in the numbers here an
additional $20 million in trust preferred securities.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 17
I'd like to just move next to the next slide which is
Pro Forma Analysis of where we think our asset
quality ratios will be, because it is making
assumptions about non-performing loans. We've used
that First State Bancorporation's March 31st numbers
in terms of non-performing loans. We only had about
$2 million worth and a $7 million allowance. An
allowance for loan losses to non-performing loans of
a little over 500%. We think in our New Mexico
franchise we have been not only diligent, but
extraordinarily successful in keeping those ratios
very high.
The way the transaction is structured to the
Washington Mutual is that we will have approximately
$2 million worth of non-performing loans coming in
and no other real estate-owned will be brought in as
a part of the transaction. That will put us at an
allowance for loan losses at the beginning, right at
$11.5 million; give us an allowance for loan losses
to total non-performing loans when the deal is
completed, closed, of about 342%. Total
non-performing assets to total asset ratio, then, is
just a little bit less than .35%.
The next slide, Id like to talk briefly about is just
somewhat of the mix of what First State's current
portfolio looks like and what the loan portfolio
would look like immediately after. As you can see,
and those of you who
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 18
have followed us know that we are very heavily into
real estate, what we call commercial real estate that
is mostly owner-occupied business kinds of real
estate. Traditionally, we've had very little one to
four family in any kind of fashion, very little
multi-family. True commercial, we've got about $81
million.
Pro forma for these numbers, we would have about $400
million in commercial real estate. One to four family
would jump to just a little less than 30%, and first
liens a little bit more than 10% in junior liens.
Current management of First Community has done over
an extended period of time a very good job of
maintaining a very profitable institution using those
types of loans. We think that that gives us a good
customer base probably to jump off with when we are
doing our demand deposit accounts that we would like
to raise. It gives us what we think is a very stable
earning asset base, going forward, to start our
expansion off in.
Probably over time, we think that one to four family
first lien numbers will be coming down as a
percentage of the total as we move out and do more
commercial lending. Give us gross loans and leases of
about $900 million when the transaction closes.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 19
The next slide, which would be Slide 22, just shows
some of the deposit pro forma. We have been
extraordinarily successful in the New Mexico market
in getting non-interest bearing and interest bearing,
demand accounts. Just about 40% of our deposit
accounts have been in those relatively--that's a
relatively large number and has allowed us to
maintain a high margin while doing our commercial and
real estate lending that we do in the New Mexico
market.
We believe--and that has been born out with our
discussions with the management at First
Community--that also their existing customer base, we
would be able to begin to pick up quickly
non-interest bearing and low interest bearing
checking deposits from their existing customer base.
Then as we send our model out into servicing those
small to medium-sized businesses, we believe we're
going to be able to grow that rather significantly
over time.
The pro forma, the deposit portfolio, we would have
about 30% of our total would be in the checking
accounts; in CDs, about 50%; money market savings,
about 13%; regular savings about 5%. Again, that is a
slightly different mix than we've had in the past,
but we think it really affords us a tremendous
opportunity to go out and gather demand deposits,
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 20
lower the cost of funding we have there as a platform
to take off into these markets.
What I'd like now is just really quickly to go
through that last slide, which is the Transaction
Review, Slide 24. Overall, we think this is an
excellent opportunity for us to go into both the
Denver and Salt Lake markets. We have been looking
for some time to expand into some markets. This
transaction really gives us an opportunity to enter
in not an insignificant way because we think it gives
us a good footprint in both of those markets to get
started with, but not a terribly expensive entry.
We believe that the transaction is going to have some
modest accretion to both gap and cash earnings. The
transaction is in no way dependent on having any cost
saves.
Merging First Community into First State, bringing in
the full service charter, will allow us to, over a
nine branch franchise, shortly after closing, go out
and begin to offer demand deposits, lowering the cost
of funds. The financing plan, because we've had
relatively little in the way of trust preferred in
the past, allows us to go out and both raise some
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 21
common and supplement that with trust preferred,
which will help us in our capital planning.
We think the acquisition pricing, because of the
structure of the dividend of the excess capital, is
attractive to both Washington Mutual and to us. We
believe that the execution risk in doing this
is--well, it's not without work. It's very similar to
what we have done in the past in terms of bringing in
new branches. These are bringing in new branches that
are giving us what we think is a very good jump-start
in those markets.
With that, we would like to open it up for questions.
So Lisa, if you will present us with the questions.
Coordinator Yes. Thank you. Our first question comes from
Dane Slapp. Thank you. You may ask your question.
D. Slapp Hi. I've got sort of a three-part question, but
they're pretty related. I was wondering if you could
describe for the economic mix of these new markets.
Do you think they're similar enough to the market
that you're currently in that you're going to be able
to achieve the type of long growth that you've seen
in New Mexico? I guess a third part is, after the
collapse
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 22
of the charter, how quickly, I guess, in terms of
time, do you think you'll actually be able to achieve
the rate of core deposit growth that you've had
historically?
P. Dee I think economically, these markets are somewhat
varied. Clearly, the Front Range in Colorado, there
are some common points, up and down, but the branches
are located in a good mixture, both commercial and
residential type areas, that is probably not too much
different than what we have here in New Mexico. The
New Mexico market is a little bit different, but
clearly, the dynamics in Colorado are on a much
larger scale to begin with, but similar in that there
are a lot of small- to medium-sized commercial
businesses which have been our forte here in New
Mexico and where we would expect a great deal of the
growth to come from in the Colorado markets.
The bank is not located, for example, in the downtown
Denver area. We don't have any intention of trying to
go in there and compete with the big banks for the
large commercial customers. We'll stick to more of
our bread and butter small- to medium-sized
commercial customers that we know well as well as the
residential areas that are contiguous to the
branches.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 23
Salt Lake City is probably a somewhat similar market
to Denver in some respects, but probably presents a
few different opportunities there. I think we'll
probably need to develop a slightly different
strategy for that market. We will, along the Front
Range of Colorado.
In terms of the core deposit growth, we would look at
it somewhat like we have our DeNoble branches here in
New Mexico, but probably the growth is going to be a
little bit slower than what we've experienced most
recently in the Albuquerque area with the turmoil of
the bank mergers. The markets there are probably a
little bit more stabilized. There haven't been any
major buyouts lately. So the 30% core deposit growth,
for example, that we experienced in 2001, we're not
even expecting to maintain that here in New Mexico,
and wouldn't expect those kinds of growth numbers in
the Colorado market or Utah, although starting from a
base of zero in terms of checking accounts, we think
we'll see a pretty good ramp up in the first couple
of years there.
Our marketing strategy to that is going to be key in
terms of how we go out and seek that business. We're
still developing some of that. The demographics that
exist in the markets there in Colorado and Utah are
pretty much similar to what we've seen here in New
Mexico in terms of a
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 24
mix of commercial and residential. We think we can
be successful with that.
The management team at First Community, I think, is
very excited about the possibility of being able to
offer a full range of banking products. They've been
thinking for some time their own strategies as to how
to capitalize on that. So although it's something
they haven't done before, these are experienced
bankers. They've been listening to their customers
for a long time and know what the customers are
looking for. I think they'll be instrumental in
helping us carry that out.
D. Slapp Great. Thanks.
Coordinator Our next question comes from Joe Muffort. Thank you.
You may ask your question.
B. Caan Hi. This is actually Brian Caan. Joe had to jump
off. Just two questions. The first one, can you
just give us a little more color on the management
team that's currently in place? Any information you
have on whether they have the skill set needed to
grow the commercial side of the business.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 25
Secondly, I was sort of surprised to see the margin
being as strong as it is, given its balance sheet mix
at First Community. Is there any other, additional
information you can give us on what the loan mix is
in regards to non-conforming type one to four
residential and the risk factors that go along with
that? Thanks.
P. Dee I'll respond to the first two parts of that and
let Brian handle the margin question. The management,
much of it has been in place for--I think some of the
longer term ones have been with that organization for
15 years. Quite frankly, we were very pleasantly
surprised with their knowledge of banking and their
general attitude about taking on what will be for
them a fairly major change. They're very optimistic
about that.
I think they don't have the commercial lending
expertise that we want to implement there. They
acknowledge that. I think we can take their
background in general banking and supplement that
with some commercial lenders. In fact, we have one of
our own regional people, an experienced commercial
lender, who has expressed an interest in relocating
to that area.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 26
So I think a combination of what is a very capable
existing management team, supplemented with a few
commercial lenders in key spots, will provide us the
management team to take that forward. So we're very,
very excited about that possibility. Again, their
management team is anxious to get started as well.
B. Reinhardt The question about the margin, a significant amount
of the portfolio are in adjustable one to four family
loans. Because of the bank's history and being the
industrial banks in Colorado, they have developed a
network and long term relationships with a lot of
sources for getting first real estate mortgages in
those markets. There are certain parts of the
portfolio that do have slightly different
characteristics than what I think you would think of
as typical, conforming loans that go out. We have
obviously spent time looking at that. We don't
believe that that is going to cause us any
significant, real exposure or risks, going forward.
They have, over the past probably 18 months or so to
two years, experienced a little bit more of a
delinquency problem than they had in the past. We
have reviewed that information.
We have also put in some things into the agreement
itself in terms of where non-performing assets will
be when we take the company. Their
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 27
actual loan losses as a result of the lending they
have done, based on the underwriting they have done
over time have been very good. We're very
comfortable that both management there truly
understands what they have done. They're continuing
to do, to some extent, in the agreement we have
protected ourselves going in, to make sure that we
get off to a good start.
B. Caan One last question. Brian, I guess, to follow up on
the margin question, what's this going to do to your
asset sensitivity, a combined organization? Do you
still believe that you'll be as asset-sensitive, or
do you think--
B. Reinhardt Actually, one of the interesting dynamics about doing
this is they have, at this point in time, been--they
are asset-sensitive, as we are. One of the
opportunities though is that they have a large
amount of federal home loan bank borrowing, as you
might imagine with a portfolio of one to four family
loans. That will re-price, actually, in May of next
year. That will give us a lot of flexibility,
actually, in being able to reduce our asset
sensitivity a little bit by shortening up some of
the maturities of what we would do in the short to
intermediate term with those federal home loan bank
borrowings.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 28
So when we model those numbers out, actually find out
that we could end up being--we plan on ending up
actually being a little bit less asset-sensitive than
we currently are.
Coordinator Our next question comes from Payton Greene. Thank
you. You may ask your question.
P. Greene Good morning. A couple, different questions. On the
interest rate sensitivity, I mean, if you all
modeled an upright environment for `03 and looking
at the effects that that might have on First
Community's earnings. Also, on the cost of the trust
preferred, is that an after tax number that you have
right referenced in here?
B. Reinhardt I'll answer that question first. Yes, that's an
after tax number there. On an upward tick on
interest rates, given how asset-sensitive they are,
would certainly help their earnings.
P. Greene Then on the new cost, what does that consist of in--
B. Reinhardt What we've modeled in the new costs are some
additional marketing costs. Those of you that are
familiar with us know that we have a very
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 29
aggressive marketing campaign that we have done in
New Mexico. While the characteristics of that in
those markets will definitely be different than what
we're doing here, it's something that has helped us
establish a brand identity here. We think it's been
important in our success. A certain amount of that
is for additional marketing costs. A certain amount
of it is also to begin the process of bringing in
some commercial lenders.
P. Greene How many commercial lenders would you ideally like to
bring in, in `03?
B. Reinhardt Over time, we would probably like to bring in six or
seven, more than that, probably, over time. The
immediate beginnings, we're probably not going to
bring in more than one, two, or three as we go out
and find the right spot to put them in. We want to
be very careful about adding cost. We want to make
sure that we're doing it in the places that will be
most effective. Frankly, a nice earnings rate that
these institutions have, plus their management's
demonstrated ability to continue to keep earnings up
allows us the luxury of being able to pick and
choose how quickly and exactly which parts of those
markets we bring commercial lenders into.
P. Greene Great. Thank you.
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 30
Coordinator Thank you, sir. That concludes the question and
answer session of today's call. Sir, you may proceed.
B. Reinhardt I guess what we'd like to do is hold on for a couple
minutes to see if there are any additional questions.
Coordinator Payton Greene, you may ask your question.
P. Greene Hi, Brian. One more follow-up on the interest rate
risk. So on the zero to 90-day timeframe, would you
all still be very, very asset-sensitive? I mean, is
there any particular timeframe that this will shift
it around more?
B. Reinhardt Currently, where they are, yes, in the zero to
90-days, we will still remain as we are now: very
asset-sensitive. As we actually come in and decide
how we structure those federal, home loan, bank
borrowings, going forward--I don't want to speculate
about what interest rates will be. I think we all
think that by the time we get a while down the road,
that interest rates are going to go up as opposed to
go down. Really, the structure of this will allow us
to shorten up in time, some of those home loan, bank
borrowings to better match that as rates go up--give
us a little
FIRST STATE BANCORPORATION
Moderator: Mr. Brian Reinhardt
May 24, 2002/11:00 a.m. CDT
Page 31
bit more protection. In the short-term buckets, we
would all be more asset-sensitive.
P. Greene Did you all assume a floating rate, trust preferred?
B. Reinhardt Yes. That's based on a floating rate, trust
preferred.
P. Greene Great. Thank you very much.
Coordinator Sir, I'm showing no further questions at this time.
B. Reinhardt All right. Well, we'd like to thank you all for
listening in. Again, this is a transaction that we're
very excited about, the possibilities that it holds
for us in the future. We appreciate your past and
future support on it. Thank you.
P. Dee Thank you.
IN CONNECTION WITH THE ISSUANCE OF EQUITY SECURITIES TO FINANCE THE
PROPOSED TRANSACTION, FIRST STATE WILL FILE A PROSPECTUS WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"). INVESTORS AND SECURITY
HOLDERS ARE ADVISED TO READ THE PROSPECTUS WHEN IT BECOMES AVAILABLE, BECAUSE IT
WILL CONTAIN IMPORTANT INFORMATION. INVESTORS AND SECURITY HOLDERS MAY OBTAIN A
FREE COPY OF THE PROSPECTUS (WHEN AVAILABLE) AND OTHER DOCUMENTS FILED BY FIRST
STATE WITH THE COMMISSION AT THE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV.
FREE COPIES OF FIRST STATE'S FILINGS MAY BE OBTAINED BY DIRECTING A REQUEST TO
FIRST STATE BANCORPORATION, ATTENTION-CHIEF FINANCIAL OFFICER, 7900 JEFFERSON,
NE, ALBUQUERQUE, NM 87109; (505) 241-7598.
This transcript includes forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The discussions regarding completion of the transaction
and future growth of the franchise include forward-looking statements. Other
forward-looking statements can be identified by the use of forward-looking words
such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "estimates," or "anticipates" or the
negative of those words or other comparable terminology. Forward-looking
statements involve inherent risks and uncertainties. A number of important
factors could cause actual results to differ materially from those in the
forward-looking statement. Some factors include fluctuations in interest rates,
inflation, government regulations, loss of key personnel, faster or slower than
anticipated growth, economic conditions, changes in the Company's ability to
raise capital in the equity and debt market, competition's responses to the
Company's marketing strategy, and competition in the geographic and business
areas in which we conduct our operations.
First State's news releases are available through the Investor
Relations section of First State's website at www.fsbnm.com.
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