West Bancorporation Inc (WTBA) 2008 Q1 法說會逐字稿

Hello, and welcome to the West Corporation first quarter earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) Please note this conference is being recorded. Now I would like to turn the conference over to Doug Gulling. Mr. Gulling?

Thank you and thank you for joining us this afternoon. With me is Tom Stanberry, our Chairman and CEO; and Brad Winterbottom, our Bank President. I'm going to begin by reading our Fair Disclosure statement.

Comments made during this conference call may cain 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, thank you for joining us and I'm going to begin and just give a brief overview of the first quarter and then Brad will discuss loan activity and credit quality and Tom will wrap up by talking about WB capital and the Bank and anything else would like to talk about.

Our first quarter results were very similar to last year. We were up $24,000 over a year ago. But the components of net interest -- or, of net income did have some more significant variations. Our net interest income was up about $565,000 over the first quarter of '07. Our provision for loan losses was double what it was a year ago. The noninterest income was just slightly lower. Most of that decline -- actually all of the decline can be attributable to returned check charges. We are finding that customers had modified their behavior and just aren't writing as many checks against nonsufficient funds. And then our expenses were up about 3.3%. Half of the increase, roughly half of the increase is in the compensation benefits area.

Starting last Fall we've added probably six to seven people in the Bank, primarily in customer contact and production areas and so that along with annual merit increases at the beginning of the year would account for the increase in compensation and benefits. And then the other area that has the largest increase over the first quarter of last year is the marketing and training area. We've spent a lot of time and money on training, primarily the sales force. And then we've spent more dollars on marketing here in the first quarter of this year with some new products that are rolling out.

In terms of the balance sheet, it also -- in terms of total assets hasn't changed significantly from the end of the first quarter last year. However, some of the components also have changed. Loans are up quite a bit, $61 million over last year. Our investment portfolio is $93 million lower and then we've got $20 million more in Fed funds. What's been happening this first quarter, we've had really good loan growth but as interest rates have been dropping a lot of our investments have been called. We've taken those funds and let wholesale deposits run off and it's actually had a positive impact on our margin which is up 14 basis points over the first quarter of '07. In addition to that impact of the bonds that have been called there was also some unamortized discounts that were associated with those bonds and so there was a little bit of income associated with that item. And then we entered into a couple of Federal Home Loan Bank borrowings during the first quarter that were at lower rates than some of our alternative cost of funds. Deposits are $40 million lower. But it's all in the wholesale area. And as I mentioned, those funds were replaced to some degree with the Federal Home Loan Bank borrowings.

I think at this time I'll turn it over to Brad and let him talk about loans.

Good afternoon. I have kind of a mixed bag for the first quarter of '08 in terms of we've had decent loan growth and nice activity for the first quarter. And then in the -- on the other side of the coin is we've had some fairly significant pay-offs. Maybe upwards to $15 million of investment real estate transactions that customers went to insurance companies and received lower and longer term rates than what we were willing to provide. So there's been a little bit of flight of credit that moved that way.

The real estate activity in Des Moines is pretty tenuous. We literally have not had, in the first quarter, we did not have a nice weakened for folks to go out and look at homes. And so that business has been struggling. We do have some home builders in our portfolio. They are optimistic. We are watching them. They are on borrowing basis. But there are a couple that have, certainly are stressed.

In terms of the nonaccrual and loans 90 days past due and still accruing, that number is about 5.8 million, $5.9 million. Probably 85% of that would be three credits, one being a developer where we have real estate at a margin collateral, the appraisal, and outstandings. A second one would be some farm ground. And a third one would be an investment property. And we are working through foreclosures on those. I think it's a little too early to tell if there's any loss there. On the positives, we've got about maybe half a dozen things on the plate that are of significant size to add some growth. So if we continue to work through those I would hope to see, I would hope to see the loan volumes continue to improve.

Thanks, Brad. Tom?

Let me talk about WB capital first and then go back to the bank and some of the activities that we've got going on at the bank. WB capital had a good first quarter. They continue to be able to reduce operating expenses since the merger of BNF Capital and Investors Management Group a little over a year ago. So that was a real positive as their year over year operating expenses and their operating expenses versus budget continued to reduce.

They had good revenue growth in the first quarter, roughly consistent with the first quarter of last year. There was a reduction in assets and consequently a reduction in revenue in the vintage mutual fund but almost a dollar for dollar corresponding increase, net increase in their separate account management areas which corresponded to strong increase in that line. So for the first quarter we were generally pleased with the performance of WB Capital. They are hiring additional sales and relationship managers that will be out in their primary channels working with clients and calling on new clients.

What we've really seen in the first quarter and for those of you in the investment business that is like preaching to the choir, a lot of people are very slow making decisions right now. People are slow in changing managers despite the fall off in performance by a number of managers both in the fixed income and equity area. These are people we've been talking to for sometime. They like the performance that we have in both fixed income and the equity styles. But have been very slow in making a change. At the same time people that we are talking to that would be new money customers to us currently are not working with other separate account managers, who are also very slow in making decisions.

So we have the biggest pipeline of prospects and new business that we've had for well over a year but the decision-making process has become very slow. And I think that's coupled with both the drop in consumer confidence over the last couple of quarters as well as just the general drop in investor confidence over the last, at least the last quarter if not the last two quarters. But WB Capital continues to perform.

Overall the Bank is performing real well. We were slightly ahead of this time last year at the Bank in terms of net income. As Doug indicated in noninterest income we've seen a consistent change in behavior among our checking account clients now for about the last 24 months as balances have gone up, fewer people write checks against nonsufficient funds and consequently that will fee income is down significantly over that period of time. This is nothing unique to assets going on across the entire industry in community banks. But because of the high percentage of our non-interest income that we've had historically in service charges on overdrawn checks it is having an impact on us in the noninterest income area.

Brad talked about loan quality. We are monitoring our watchlist on a very regular basis. We are working with a number of customers to put together either plans for restructuring to keep them moving forward and keep them earning. But we also know that we are going to end up with an OREO property or OREO numbers increasing and probably our charge-offs increasing. We have increased our provision. We feel very comfortable with the provision then is right now and we are monitoring the economy in the central Iowa and eastern Iowa markets on a regular basis.

The single-family housing market is soft, continues to look like it's going to remain soft for an extended period of time. The commercial market has been strong until recently. It's starting to soften in most sectors except the multi-family sector which continues to expand. And really firmed up in central Iowa last year. We think the office market, the strip mall markets, small commercial market will get softer as the year goes on. But I think, again I think we are adequately reserved and the position is at an adequate level right now. So while concern about what the future looks like we are not overly so. But the other aspects of the bank have been performing real well. Deposit gathering at both our retail branches as well as in commercial area continues to expand. All of our service indicators coming out of the mystery shops that we do on our retail branches continue to show improved service in all of the branches and we are now consistently in the top ten percentile in terms of providing service to our customers.

We introduced a couple of new products. One is a joint venture with another company called SmartyPig. SmartyPig is a combined Internet based saving vehicle that has a -- in addition to the interest on the savings, has a reward at the end of the savings and also is combined with a social networking program to allow people in addition to the owner of the account to make deposits in the account. We've been up and running on that now for a couple of weeks and the level of new accounts and the volume of dollars has exceeded our expectations.

We also introduced a new free high interest checking account called Reward Me Checking. That, too, has exceeded our expectations at this point and we anticipate it will be one of our, if not our strongest deposit gathering product going forward for the balance of the year. But I'd say performance as a bank and performance of an asset manager both were good in the first quarter, certainly were not great but continue to be fairly strong.

Let me just mention, a brief mention about stock performance. 2007 was a very poor year for us in the performance of our stock. But it was also a very poor year when you look at community banks in general. We were kind of in that, we were the baby thrown out with the bath water as the entire financial services industry dropped in stock value in 2007; primarily driven by the large multinational banks that were suffering not only investment losses but losses in the sub-prime mortgage business. We just followed the trend right down into the gutter with a lot of, a number of other banks on our stock performance and have turned that around in the first quarter. We are up slightly on a total return basis since the beginning of the year while at the same time the major indices, the major community bank performance are down slightly. So at this point in the year we are pleased with the performance of the Company and pleased with the performance of our stock. Always like to see it better or be better than it has been but I think in this market environment we will take what we've got.

Okay. Thanks, Tom. At this time, we would be glad to answer any questions that may be out there.

(OPERATOR INSTRUCTIONS) Our first question comes from Daniel Arnold of Sandler O'Neill.

Hey, guys, how is it going? Just a couple of questions for you guys. You mentioned a watchlist. I just wanted to see what you guys were seeing with respect to that? How are the volumes on that going? Are you moving a lot of credits on to the watchlist. How has it been doing recently?

I would say that we have added, we have added loans into the watchlist over maybe the last six months. Those numbers have trended upward. Most of those fall into the watch category as watch category as a regulator would look at it versus maybe a substandard.

What kind of loans, are those primarily in the commercial real estate that you were talking about or?

Yes, yes, and maybe some residential real estate developers.

Is that any sort of geography in particular or more specifically within the commercial real estate? I know you said that multi-family was strong, were these office buildings, were these--?

It is. The ones that we have added primarily are in the home building business.

Okay. So it's construction projects? Construction projects?

Yes.

I mean I know residential construction had traditionally been I think it had seen probably the most deterioration? Now you think that's moving into commercial development as well, or that's what you're seeing at least?

Well, I wouldn't -- no, I wouldn't say that -- we have not done a lot of spec.

I'm talking industry-wide, I'm sorry.

Yes.

Then just on the NSF fees I just wanted to see, I know this is certainly an industry issue as well, what you guys thought the reason was that those are going down so significantly?

We are not recruiting bad customers. I think the primary reason you are seeing a nationwide change in behavior. People for a long time either because they were just sloppy or they saw NSF fees as an inexpensive way of borrowing from their bank, people were consistently overdrawing their accounts and we can look at the patterns that we have going back over several years and it's a number of the same people year in, year out are the consistent abusers of the system and that's changed. A lot of people have closed accounts. A lot of people have done a much better job of keeping positive balances in their account. They are watching the account balances more closely than they ever have and keeping it consistent with their spending habits. It is a true behavioral change among the people that were normally our biggest overdraft users.

Okay.

When we talk to other banks we hear the same story.

You certainly (inaudible) -- I was just curious -- it's interesting to hear a perspective on what's driving that. Then just lastly with respect to the margin do you think you guys will continue to see benefit as you get a full quarter in of the Fed rate cuts? Going forward into the second quarter I guess?

I think each time the Fed cuts, the immediate impact is a little negative for us because we have about half of our loan portfolio that is tied to prime and adjusts almost immediately and then it takes four or five months for us to have -- well, to have the combination of our overnight deposits and our CDs repriced to catch up with the same amount of volume. So whenever the Fed cuts in the short run we are going to see a little bit of a decline and then it will take a few months for that to catch back up. Now the exception to that has been in the first quarter where we have had such a large volume of bonds called and then we've been able to use those proceeds to just let some wholesale money run off. And there was actually a positive, well, a negative spread between the yield on those bonds and the cost of the wholesale deposits that ran off but I don't think there's a lot of opportunity for that going forward.

Another factor there, when the rates -- when prime is moving down as fast as it has we do have, it's a competitive environment out there and so it just makes our borrowers a little more aware. So those that have fixed rates, they are knocking on our door talking about refinancing. And in some we have prepayment penalties, some we negotiate new fees, others we can't. But that also can have an impact when rates are going down as fast as they have over the last few months.

Just out of curiosity on the funding side that Reward Me checking program, what kind of rates are you guys paying on that?

5%.

5%?

On balances 0 to 50, 50,000.

But the attributes of the account are such that if a person is rewarded with the 5% interest rate they have to do, well, a set number which in our case is 12 signature based debit card transactions which are a higher fee transaction for us. And so I think our projections indicate that kind of the net cost of these funds is going to be in the 2.5% range but time will kind of, it will take a little time to bear that out. We are not the first bank to jump into this product and those that have been in it now for awhile have found a couple of things. First, that when people open this type of account or convert an existing account in a bank to this type of account they usually pull in funds from other financial institutions. So whether they are pulling in from their broker-dealer or money market accounts or insurance company they are pulling in additional funds. Secondly the change in behavior to use your debit card effectively as a credit card but use it as a credit rather than debit card and the increased interchange fees off of the credit versus debit transactions plus the people that periodically will not meet the monthly criteria drives the cost of borrowing down to about half or slightly half of the maximum rate that you pay.

Well, thank you very much, guys. I appreciate it.

Thanks.

Our next question comes from Jason Werner of Howe Barnes.

Good afternoon, guys. First question, regarding the expense growth, obviously you outlined the reasons behind it, you had some from compensation, the rest marketing and training. I'm curious what the outlook is going forward, is the marketing, is that going to continue and training going to continue or does that ease back a little bit? Looking back to '07, obviously the first quarter was a high watermark for expenses and worked themselves back down a little bit, what can we expect going forward now?

Spending expenses taper off after the first quarter. A lot of the sales and marketing training that went on in the first quarter will now gradually taper off. The nontraining related marketing expenses were substantially related to the kick off of the Reward Me checking program. And, to a lesser extent, just general, an increase in general marketing. So a lot of those expenses on the Reward Me checking are front end loaded because of the production of creative expenses but we are going to have some ongoing expenses through the second and probably into the third quarter as we continue to market that product pretty heavily. You'll see them tail off a bit. I would have to go back and look at first quarter last year and see if I can give you a guess if they will trail off as much but I do know that the training is going to drop significantly after the first quarter.

What about the count, do you see adding more people or is that kind of--?

No, not at the level that we did. We added quite a few revenue producing bankers in the third and fourth quarter of 2007. We added some new branch managers in our existing branches during that same time period. So most of the big comp increases are already in the system. We do have some openings in our credit analysis area but those are not going to have nearly the impact on compensation that the ads that we made in commercial banking, retail banking and just some general areas in the bank did.

And we also added two mortgage originators in the middle of the quarter and so those expenses were probably incurred without much revenue but they are producing now.

Mid first quarter?

Yes.

I think you've seen the high watermark in compensation also. As I said we have a few adds but we are going to be adding people in the kind of will he to mid five figure range as opposed to the high five figure, low six figure range.

Okay. And what kind of impact did FDIC insurance premiums have? You saw an increase in expense or did you still have a credit left over?

Our credit is running out at the end of the first quarter here and going forward -- I don't have the exact number in front of me Jason. I think it's maybe in the $25,000 a month range.

Okay.

Our credit did run out at the end of March.

The increase is 25,000 a month?

Yes.

Okay. Just to kind of follow-up on the last question, the previous question about the margin. It sounds like a lot of the improvement you got in the quarter is not really, is not recurring in the sense that the bond portfolio that was called and paying down wholesale funds but I'm just wondering if there is a little bit more there in terms of easier pricing and maybe -- you kept quite a big chunk there in Fed funds and that's not earning you very much, maybe getting that reinvested somewhere else, do you have any opportunities there for margin improvement with that kind of stuff going forward?

Yes, on both of those areas that you talked about, the CDs continue to renew at lower prices than they are maturing and then we will be putting some of those Fed funds to work in investments.

We've already started. We've been back in the market on the investments pretty consistently for the last several weeks.

What kind of volume do you have in terms of CDs or pricing looking forward the next couple of quarters?

There probably is 30 million to $40 million a month on average.

Then is there much in the way of other wholesale deposits that you might let run off?

We were in the Cedars program as you may know. I think we mentioned that in the past. We've let a lot of that run off. We'll probably continue to let some of that run off because those prices just seem to be a little higher than alternatives right now which wasn't the case a year ago. And then public funds we always have public funds running off. Of course that would be in the CD number that I mentioned to you and we just look at the alternative cost of funds and decide at that time whether or not to bid on public funds.

Okay. So I'll consider, if we could see a little bit more margin expansion kind of in the second quarter assuming the Fed doesn't get too crazy?

Well, we were at, what, [338] for the quarter, a little bit, I'm not anticipating a lot of expansion from this point.

And going back to the reinvestment of those Fed funds what kind of things are you looking at to reinvest that stuff? Can you give me a little bit more color there?

It's going to be a combination of intermediate term agencies, callable agencies in the four to seven-year maturity range. Municipals, primarily GEOs and central purpose revenues from Iowa and a couple of the contiguous states. Longer term municipals but with fairly short calls and then some seasoned ARMs, some agency ARMs, not agencies but some seasoned agency ARMs, mostly 05171 ARMs.

What -- just give me an idea of what kind of yield you can get in that stuff?

The tax equivalent yields on the municipals are a target on all of them right now is a tax equivalent yield of at least 5.5%. We've generally been achieving that. The taxable yield on the agencies that we've purchased have ranged from mid 4s to low 5s. I don't think there's been anything over 5.25 or anything lower than about 4.40 and the ARMs, we haven't purchased any ARMs, we have quite a few in the review phase right now and the ARMs are a little bit higher, kind of toward the mid to the high-end of the agency as I just mentioned. But certainly longer maturity but shorter average life and on the current prepayment speeds much shorter return of principal in the ARMs than on the agencies.

Okay. Certainly anything you do there is going to be quite a bit above the Fed funds rate at this point.

Oh, yes, there would be a pick up to Fed funds. I think with the lowest yielding and shortest investment we have a pick up to Fed funds of close to 100 basis points. So very, consistent pick up to Fed funds, (inaudible) basis funds, yes.

Looking at the loan growth that had you in the quarter can you give me some color as to what types you were seeing? Was that mostly commercial real estate? Was there any construction in there?

There is some commercial construction projects that are going on and also there would be just some normal commercial transactions that have taken place.

The commercial construction stuff, is that just funding existing commitments or is that new production?

A little of both. And most of them would, almost all of them are owner occupied or it's been leased.

Okay. Then you said that you had half a dozen or so credits in the pipeline if things worked out good growth going forward.

Yes.

Same kind of stuff.

Yes.

All right. On the credit side, obviously you talked about having some concern for some of the builders. I think last call you kind of said that there was 4 or 5 of them you were kind of watching. Is that number increased? Is it getting softer? What can you tell me about what's going on there and maybe give me a dollar amount of what you are really concerned about in terms of what's already on the watchlist in that category?

I would say that the number 4 to 5 remains at 4 to 5 with, and I'll just without naming names we have one credit that add everything together it would be approaching $20 million of exposure on about six different projects. Four in the central Iowa and two in the eastern Iowa area to the same developer. And we are secured. We do advances with borrowing basis. We do advances tracking lien waivers. Some of those projects are just slow and in some case it hasn't really started yet. There has been some discussion of a refinance but that would be way too premature at this time to say that that's going to happen. So and in those developments all of those would be residential related. Single family homes or town homes or condo units. We have two central Iowa home builders that built a lot of spec homes. They are getting aged. They are a -- they're over a year in age. So those sit on the watchlist.

You say getting old. The houses are completed at this point and they aren't selling.

The houses are completed. They just have not sold.

Okay.

So those are a couple, maybe actually three fall in that category.

With the first one, that's a pretty sizeable credit.

Yes.

Obviously six projects so one of them kind of going bad doesn't necessarily bring the whole thing down but--?

That is correct but we kind of look at the whole project -- them as a whole. Two of those projects are performing fine. One hasn't, they haven't moved dirt. That creates an issue. One of the other ones has been very slow. But it's also probably the smallest exposure we have with them. And then the other two we are monitoring. We are monitoring all.

With one of them hasn't moved dirt. Obviously given the conditions is that necessarily a bad thing, if they don't do anything--?

Well, it is to the extent that it requires monthly interest payments on the amount borrowed.

Are they drawing down on the loan or is it?

Pardon me?

Are they drawing down on the commitment?

Well, it was a land purchase.

Okay. So obviously you have--?

And then there's been no other advances but they've got to pay the interest on the land.

Well, I guess my view and maybe I'm missing business, but my guess, you're still better off than if they started building lots and can't sell the lots and are putting more money into it. Sure they have a debt they have got to cover but at least it's not growing. You had said these are all secured. Just kind of curious maybe an aggregate loan to value type of a, where does that kind of stand.

Loan to value would be -- none of these would exceed 80%. I would say the vast majority of them are at the 75% range, 75 to 80.

Okay. And at this point that feels safe given what's happening with land values in Iowa?

Yes, I think so. I think so.

Okay.

It's -- you go and have, you have -- we have lots of conversations with these folks. But two builders, one that's doing fine and another one that's not doing so fine so you have your monthly or conversations with them and they tell you, you know that in Iowa in Des Moines from the first week before Thanksgiving until the end of February every weekend there was either an ice storm, a snowstorm, a rain storm or incredibly cold and just absolutely horrible weather and so those folks that are out looking at homes aren't doing it when the weather is bad and that really has not changed, that weather pattern was there until about the 1st of March. And the first weekend, and one of our volume home builders we had a nice weakened in the 1st of March and he picked up the phone and he called me and said, see, I told you. We sold 12 homes over the weekend. So weather does play an impact.

That certainly is encouraging, actually you've seen some transactions.

Yes, except it's still raining today.

Rain is better than snow.

Much better than snow. We agree.

So here we are in the middle of April and we think winter is gone but last week we had snow. And yesterday it was in the 70s. But it's also 40 today and raining. So it's still a little early to know if there is some demand, some pent up demand or what the conditions are out there.

Then just to kind of sum up these three credits probably you would say the ones you're most concerned about in this category?

Yes.

Okay. That I think is all that I have. Thank you.

Okay, thanks, Jason.

At this time there are no questions. (OPERATOR INSTRUCTIONS) We have another question from Mr. Jason Werner.

Just one. I was curious, I know that the total level NPAs didn't change a whole lot but I was curious what moved into nonaccrual? Obviously you had one loan move on to go to OREO, so what came in to replace that? What kind of credit was that?

Two credits. One was land, raw dirt, and that was around $3 million. And then second would be investment properties over in eastern Iowa, just under $2 million.

Okay. That just confuses me now. I was thinking it would be smaller things moving in. Because the Townhome that came out, wasn't that big. And if the numbers didn't change that much, how can $5 million come in and not move the needle?

The eastern Iowa project was in there at the end of the year.

Oh, okay.

Sorry.

So just the raw dirt was the new one?

Yes.

Okay. Thank you.

Sorry for the confusion.

At this time, we have no further questions.

Okay. Well, thank you for joining us. We will talk to you next quarter.