West Bancorporation Inc (WTBA) 2007 Q4 法說會逐字稿

Hello, and welcome to the West Bancorporation fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS). Please note this conference is being recorded.

Now, I would like to turn the conference over to Doug Gulling. Mr. Gulling, you may now begin.

Thank you, and thanks to everyone for joining us today. With me is Tom Stanberry, our Chairman and Chief Executive Officer, and Brad Winterbottom, our President of West Bank. I will begin with our fair disclosure statement.

Comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking information is based upon certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements. The Company undertakes no obligation to revise or update such statements to reflect current events or circumstances after this call or to reflect the occurrence of unanticipated events.

Again, now, welcome. Our fourth quarter was going along really well until we encountered an unanticipated charge-off in the amount of about $800,000. On an after-tax basis, that would be approximately $500,000. So until that hit, it looked like we were going to have a quarter that was similar to last year, last year's fourth quarter, and also year-to-date results that would have been very similar to last year. However, with that, our results ended up being about 2.5% lower than last year.

But during the fourth quarter, we did have a nice loan growth. Loans increased $42 million from September 30 to December 31. Our net interest margin for the quarter was 3.21%, which was a little lower, but it did reflect the fact that we in addition to having the actual charge-off we wrote off approximately $190,000 in accrued interest related to loans that were placed on a nonaccrual status. Without that write-off, the margin for the fourth quarter would have been about 3.28%.

That in a nutshell is the big factors that were affecting the fourth quarter. But at this time, I'm going to turn it over to Brad Winterbottom, who will just make some comments about credit quality and the loan growth during the fourth quarter.

Hello, everyone. Doug mentioned the one specific charge-off and it is a real estate developer. And we were undersecured on a note that we had with that company. And we decided to charge it off and we're going to pursue outside the balance sheet to collect on that. We think that there may be some recoverable assets there that we can collect on.

The real estate development picture in Des Moines is probably -- would be down by Midwest standards, not too bad by the coast standards. We have -- there's about four or five developers that have been very active in the Des Moines community. And we have a little bit of exposure to all of them that we're managing through the process. We think we have ARMS around that.

We are -- our charge-offs were for the quarter about $1.26 million. And for the year, it was about $2.3 million. That is before recoveries.

We're taking a little harder look at all of our assets in terms of getting them on our watch list and monitoring on a monthly basis or more. So that is the credit quality on the loan growth side. We have had some nice growth in the fourth quarter through projects that we've worked on. It just took a while for them to ramp up. A lot of that would be some construction loans with permanence in place or we have provided some sort of a mini-perm for them. We have a little bit of growth through the C&I business, and I would say our consumer debt is relatively flat.

I'm going to turn it over to Tom Stanberry just for general comments on the bank and WB Capital.

Thanks for joining us this afternoon. Let me talk about the bank first and then talk about WB Capital. If you look at the bank on a same-store sales basis, year-over-year, our earnings were approximately flat before the December charge-off and increased the amount to the provision for loan loss reserves.

We had good loan growth during the course of the year, a lot of it in the fourth quarter. We had respectable deposit growth during the course of the year and again a lot of it in the fourth quarter and contained our cost of funds well, I think.

The overall activity at the bank was not as strong as we had anticipated coming into 2007 and certainly did not anticipate quite as rapid a deterioration in the commercial real estate markets in the month of December as actually occurred. We saw it coming, didn't see it coming as rapidly or as deep as it turned out to be. Consequently, that charge-off and the increased provision in December was unanticipated.

WB Capital had a good year. Our overall earnings were up over 2006 largely due to the efficiencies that we brought into the system when we merged the two asset managers, two registered investment advisers that we own, together, which was effective at the beginning of the fourth quarter of '06. So they had one full year and a month. They started out the year as all of you know from our first-quarter report a little bit slow with a loss of assets both in the vintage family of mutual funds as well as one of our -- at that time -- largest separately-managed account.

They finished very strong with a net increase in separate accounts and containing the runoff from the vintage funds during the course of the year. So their income is up and we're feeling pretty comfortable with the direction that their business is heading. Each quarter progressed positively and they closed the year with very strong momentum and hopefully will carry that on throughout 2008.

So overall, while earnings were down, in part because of the economic situation, in part because of the charge-offs that we took in the fourth quarter and in part because of the higher provisions anticipating that there will be a continued deterioration in our commercial real estate in our two markets, central Iowa and eastern Iowa. Overall, we are disappointed that we didn't hit last year's level of earnings, but are still feeling okay with the progress that we made.

So I will leave it at that and turn it back to you, Doug. And I think we can answer questions.

Sure. Two numbers that I know some of you usually ask for are the amount of our average earning assets. And for the fourth quarter, our average earning assets were $1,214,961,000. And for the year, average earning assets were $1,212,680,000. So with that, we would entertain any questions you may have.

(OPERATOR INSTRUCTIONS). Jason Werner, Howe Barnes.

I guess to start with, Brad, could you repeat what you had said about where the loan growth was coming from? I missed part of what you said.

Sure. I'm going to guess maybe 60, 65% would be in some real estate development area where these would be projects that we have been working on for maybe 6 months and they just started to -- we started to fund on those. Typically we would have -- there would be a takeout in place or we would have committed a permanent five-year type of commitment after construction.

Rarely would we do a construction loan without knowing how we are going to get refinanced at the end. So that is probably 60%, 65%. The balance of that would probably be C&I-type commitments.

With the real estate development, the stuff that is being funded, is that commercial nature or residential nature?

Probably a little of both, more heavily on the commercial side.

Okay.

Typically not absolute, but typically it would be construction, not on a spec basis. There would be tenants. This would be built for tenants. We would be funding [however] tenant or landlord that has a specific tenant. We don't do a lot of development for spec basis.

Is that true of the residentials too?

There are some specs.

We would have some specs there, yes.

It is not a high percentage, but we do have some spec loans.

What in terms of just regular commercial real estate, was that kind of flat for the year then?

What was that? Was that flat for the year?

Yes, was commercial real estate, the non-development side of commercial real estate what kind of activity that has on the quarter?

That was -- that would be a good part of the development piece that increased in the fourth quarter.

What is your thoughts going forward because obviously this growth surprised me? Based on the last earnings release and conference call, it didn't sound like this kind of growth was coming down. Actually, first of all, why was it so strong when you guys didn't think it was going to be? And two, what is the outlook for next year?

I think we had decent growth in the first quarter. And then second and third quarter, it was fairly flat and that wasn't because we weren't out making calls. I think we anticipated some of that growth coming in the third quarter. There were just some delays and that maybe got pushed over and ended in the fourth quarter.

So we had a nice fourth quarter. I think that there were some things that could have happened to see some of that growth happen actually in the third quarter. We have -- we have some nice projects that we have made commitments to begin funding late first quarter. So we are optimistic that loan growth will continue into '08.

If you go back and look at our year-over-year loan growth, 2/07 growth was significantly slower than '06, '05, '04. So it has slowed down. We're anticipating that it will stay at or slightly better going into '08.

What about level of payoffs? I don't know -- it was part of the problem earlier in the year and midyear or second quarter, did those slow down?

No, we have had what we think is our fair share of payoffs and customers moving out of traditional bank financing and going more with life companies.

You didn't see that slowdown given the credit crunch that we had over the summer?

There's another example that maybe 6 months ago, we had anticipated a fairly large credit with us that was going to get refinanced out of the bank. Well, circumstances have changed, and we tweaked a few things and we were able to keep that piece in the bank. Some things like that happened as well.

Moving over to the other side of the balance sheet, very nice deposit growth. And not only is it a good balance, it looks like it was all non CD, so pretty good core deposit growth. I guess first, what did you guys do to generate that?

Unfortunately, I don't think we can point to a program or an advertising campaign or anything like that that triggered that. We did have nice growth, but it really came from existing customers. And some of it may have been a little bit from a seasonal standpoint. But it was not as a result of a new campaign or anything like that.

To the extent that some of it was seasonal, maybe you would see some of the balance kind of go away really into '08.

Not necessarily. We have no indication that that is going to happen. But there could be some seasonality effects.

Did [great] play into any part -- just refresh my memory. Do you have any kind of high rate savings accounts that would generate additional interest? Obviously that was the biggest growth of linked quarter basis.

We have a product that we call income checking, that we actually introduced in the third quarter of '06. But it seemed to get more attraction this year and it is a tiered account. And the rate is paid directly to the targeted fed funds rate. So when the fed moves, it goes up or down with the fed. But that is getting more attraction and is becoming a more popular product.

CDs were down a little bit. Was there any movement in there maybe in it for money or anything like that? Or is that just -- what can you say about that?

We have not been aggressive with public funds for really a year now. Those rates just seemed to be one of the higher cost of funds out there. So we have let some of our public unit run off. We do participate in the [CEDARS] program, which I'm not sure if you're familiar with that. That is a program where you can buy wholesale funds. But our level of participation in that was even down a little bit.

From a funding standpoint what was stronger this year was the funds that we obtained from our downstream correspondent banks. And because of stronger funding from those sources, we were able to cut back a little bit on some of the other wholesale sources of funds.

Okay. What is your sense looking at '08 for deposit growth?

We have targeted fairly aggressive growth. I think the opportunity for us is good. Going to continue to be aggressive in rates, but not the top rate in either market or -- and not the highest cost provider in either market. But right now, our plan is to -- we need to run our CD specials as we have been, be fairly aggressive -- but I think there is a strong opportunity for deposit growth.

We have moved a couple of individuals. We have actually did one higher and then we had one other individual that is now dedicating a lot more time to the retail side. And they have put -- one, we have a sales campaign going on for them to attract deposits. And two, they're just spending a lot more time with the entire retail staff to help develop the deposit growth that Tom was just talking about, so maybe a little more emphasis on managing that process.

Now it seems to me that maybe the fact that you had this good core deposit growth might have softened the blow of the fed cuts a little bit on margin. Obviously with the pressure you had it, it looks like most of that was due to interest reversals. So maybe had you not had this deposit growth, it might have been a little worse than it was. Did you guys get that sense?

Yes, I think that's right. Our margin -- without these interest reversals, the margin was a little higher than I expected in the fourth quarter. But that was due to well, the deposit growth and the loan growth because we were able to change the mix of our earning assets a little bit and get a higher percentage into loans.

Moving on to credit quality, you had two sizable loans that came on this quarter really driving the increase. First of all, let's talk about the rental properties in eastern Iowa. What was the situation why that went delinquent?

Two couples that own this particular property and -- I would say one couple is -- oh how do you want to put it -- not paying as much attention and getting hold at -- we have no other credit exposure to them other than this transaction. They are getting shot at by many other banks.

The other couple that we've had the relationship with tried to keep it going and are trying to keep it going. It got to the point where we felt we need to move it to nonaccrual because maybe not all of the attention was being spent on our project that we felt that it should be.

Were they just not rented? Is that why there is interest weakness or--?

Yes.

What kind of -- what can you tell me in terms of loan to value here?

Loan to value, we are between 75% and 80% on the -- all the -- in that relationship.

How many homes is it?

I think it is 18 to 20 units.

Is it all single-family homes or is there condo units too (multiple speakers)?

I think one building is an eight plex and one building is a 12 plex.

So it is two buildings, okay. So it is more like an apartment, not a house type?

It was newly constructed about five years ago to actually be sold as condos when the sale -- and they sold a few off. And then when the activity -- the sale activity wasn't there, they converted them over to rental units, the non-sold ones. And they have had some degree of success, but not complete obviously, or else we wouldn't be talking about them in terms of rental. But they are still trying to sell them as condos as well.

What do you think resolution is, if you think you guys foreclosed on it?

I don't know if I can go that far.

On the other big one, the bigger one, the developer, the portion that nonaccrual, the [2 point minus 3] million, is that -- is it improved lots? What is (multiple speakers)?

What is raw dirt.

Raw dirt, so no improvements yet?

No improvements.

Was the intention of this guy to develop it or was he holding the real estate to sell it as raw dirt?

The intention was to develop.

So you ran (multiple speakers)?

Both pieces. It is really two pieces of dirt that make up that exposure. One of those tracks of ground is being developed all around it. We think it is very marketable dirt. He just has a lot of issues that are outside of maybe this specific asset. And then the other piece of dirt is relatively close to other development that is going on. We think there is -- we think there is buyers out there for that dirt ultimately and that's how we will get repaid.

His issues weren't really to cope with this property, it was other stuff.

Correct.

He couldn't support it anymore?

Correct.

Is this one of the four to five people you mentioned in the other comments?

Yes.

When you say four to five developers, I would say I would think there's more than four to five big developers in Des Moines. You're just talking about the ones you have exposure to?

There are more than four to five developers in Des Moines. We do business with a number of them. There seem to be four or five that are having some issues right now. We have a little bit of exposure to those guys.

So the other three or four, are we to expect that at some point in the near future we see more nonaccruals from their (multiple speakers)?

I wouldn't go that far because two of them we have worked -- we virtually worked out of all of our exposure to them not completely, but almost all of it. With the other one, we have financed specific projects and those seem to be performing.

I guess overall then, kind of some of the comments, it sounded like you expect more deterioration. I guess kind of maybe clarify what you mean by -- what the impact of that is to credit quality going forward. Obviously, you're at -- until this quarter -- a very low amount. Still, it looks very manageable. It only has one direction to go I suppose. What is your thoughts on that?

$1 is too much in my mind but that is obviously not the case. I don't know how to answer that question really.

I guess maybe to put it more directly, do you expect -- is your expectations that we will see that MPAs, the assets creep up as we go into '08?

I don't believe significantly. No.

I don't think we have talked about this management and with our Board. We don't think we have seen the bottom of the market yet in either of our markets, either from a commercial or single-family standpoint. But we think that we have our arms around the significant issues.

So MPAs may creep up. They're not going to creep up as dramatically as they did from third quarter to fourth quarter. I can't sit here and tell you there will be no more charge-offs; there may be. There are others that may get in trouble if the fallout from single-family and commercial real estate development is prolonged. And there may be a peripheral effect if some of the subcontractors that work with those major developers -- they can't stay above water indefinitely.

But I think we have a good sense right now of who is on the fringe of becoming a problem and who might become a problem if this downturn lasts longer than anyone is anticipating.

At the end of the year, what percent of the portfolio is for land development? I know your construction portfolio overall is [achieved]. But what specifically land development where the bottle where is improving land and just trying to sell the lots?

Our total construction and land development loans are about $150 million at the end of the year out of our portfolio of nearly $1 billion now. So about 15% is in construction and land development. Then to further break that down, this is maybe just a guess, but out of that $150 million if you're just talking about --

Bare dirt.

-- bare dirt, I would guess that number is maybe one-third of that number. That is just a guess though.

And that is bare, unimproved dirt.

One-third of that number is raw land. Is there another -- the point of that is improved land where the roads are in or whatever utilities are in but no houses yet? They're just going to sell the lot to builders?

We do have some land that is improved infrastructures in. That is a very small component. I don't have the portfolio at my fingertips. But off the top of my head I can think of one in eastern Iowa and one in one or two projects in central Iowa. That is a real small number. And then, we have some that they're building houses.

The housing market in central Iowa and eastern Iowa has not come to an absolute standstill. It is down. We're meeting with our developer clients and in fact met with a developer client today. We're meeting with developer clients all the time. It is down. New home sales are down, but there are price points mostly below $250,000. There are price points where homes are selling at about the same pace as new homes are being listed. So there's some equilibrium in the low price point that should move up into the intermediate and higher areas. The homes are sitting on listings for a significant period of time.

What kind of overhang is out there right now for existing homes that are for sale in terms of months to sell?

I don't have it right at my fingertips.

With the charge-offs in the quarter and the provision, obviously you had enough provision there to covered the charge-offs, but not really anything in there to account for the loan growth. So your reserves are down a little bit. I am wondering if maybe some of that was because you provided for those loans when you committed to them and not necessarily need to do it again when these are defined. Is that the case or what is the situation with that?

The allowance percentage at the end of the year is 0.91%. A year ago, it was 0.94%, down 3 basis points but certainly within the range we have been in for quite some time. I think that slight decline is due to the loan growth in the fourth quarter, the new loans that went on that -- we didn't make any bad loans in the fourth quarter so it will take a little while to see.

We have never made a bad loan. It's just some of them having to go there.

The other thing I wanted to ask you about was the buybacks. You obviously got a little active in the month. I think you bought 74,000 shares. You continued that into the first couple weeks of January. Do you expect to pick that back up again since your quiet period is over?

It is just depends on where are stock prices and we just evaluate that from time to time. We have -- last April, the Board authorized up to $5 million for repurchases, which they have done for the last three or four years. And the last couple of years, we had not used it all.

When the stock got down a little low there towards the mid to late December, we decided to jump in and get some. That is just something we will evaluate from time to time.

For purposes of figuring out how many shares are outstanding, I can just take your balance last quarter and subtract out $74,000 -- $74,500?

For the end of the year?

Yes.

Yes.

That is all I have. Thank you, guys.

Kevin McLaughlin, BDF Investments.

These are probably -- I've only got two questions but they're probably best for Tom. You had two directors resign recently. I was wondering if there were any conflicts of interest relating to the charges that you have taken and if you expect any effect on deposits. Because I don't know about the one director, but there was one director who, if this company does business with your firm, it could be significant. Can you comment there?

There were no conflicts of interest relating to any of the charge-offs. And at this time -- at this point, we don't anticipate any significant change in deposits.

My next question, of course, and this may be something you can't comment on at all because of the uncertainties, but you talked at your last annual meeting about trying to expand in Arizona. It sounded like it was going to be a de novo branch banking business if you could find the right people. I was wondering if you had had any progress you could report on your search for the talent.

We haven't had any success yet. We have talked to a number of people and haven't found anybody that really fits the mold that we're trying to fill.

I see. I think that is all I can ask at this point. Thank you very much and good luck. I hope that you do -- continue to do as good of job managing your credit quality and the problems you have been facing as you have up to now. I'm still very happy. Thank you.

(OPERATOR INSTRUCTIONS). It seems we have no further questions.

We will conclude the call and thank everyone for joining us. Talk to you next quarter.

That does conclude today's conference. Thank you for attending. You may now disconnect.