West Bancorporation Inc (WTBA) 2008 Q3 法說會逐字稿

Hello, and welcome to the West Bancorporation third quarter earnings conference call. All participants will be in 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 Mr. Doug Gulling. Mr. Gulling?

Thank you and thanks everyone for joining us today. I want to begin just by reading 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 thanks for joining us and to start off I'm going to turn it over to Tom Stanberry our Chairman and CEO.

Thanks, Doug. We are going to take a little different approach today in light of the extraordinary circumstances for this quarter. I want to give you an overview of earnings for the quarter, the make up of the earnings and what caused the loss for the quarter, and then Doug will jump back in and talk about specific detail on net charge-offs and nonperforming assets and discuss the provision. Brad is going to talk about loan and deposit activity at the bank and then I will wrap up with an overview of what's been going on at WB Capital in the last quarter and we'll open it up for Q&A.

As all of you who read the press release know, at this point, we reported a net loss of $360,000 for the quarter or $0.02 per share compared to earnings of $4.9 million for the third quarter last year or $0.28 per share. When you look at the components of the loss it breaks out down into approximately $182,000 at the bank, and I will give you a detail of how that was arrived in a second; and about $178,000 at WB Capital, I'll also talk about that.

As we described in our press release the loss was the result of three, primarily three extraordinary items. In the third quarter we had a customer who was the victim of massive fraud. This was not a fraud on the bank itself but rather was a fraud of the customer. As we have been working with him on liquidation of assets that will be used to pay back the loan, loans, plural, that he has with us, we have estimated our shortfall to be approximately $4 million and disclosed that in a September 18 8(K) filing. At approximately the same time in the third quarter we charged down the value of a Lehman Brothers holding senior unsecured bond that we owned and as a result of Lehman Brothers bankruptcy and charged it down by approximately $1.7 million. These are pretax numbers, $1.7 million. The remainder of the loss on a pretax basis comes from the loss of WB Capital which was also the result of an ownership of a Lehman Brothers security in the money market, one of the money market funds that WB Capital is the registered investment advisory for. We owned a Lehman Brothers holdings commercial paper piece which in order to avoid having that money market fund break the buck, WB Capital bought that security at its current fair market value out of the money market fund resulting in a loss to WB Capital of approximately $443,000.

The balance of the loss for the quarter was an increase in our provision in the third quarter for our allowance for loan losses so when you take those four events collectively we end up with a loss of about $360,000. If you exclude the customer fraud, the two Lehman Brothers securities, then we would have had what we think of as more normalized earnings for the quarter of about $3.4 million, and, while below third quarter last year, that $3.4 million is below third quarter last year as a result of additional provisions we made in the third quarter to our allowance because of increased continuing deterioration in the real estate market in Central and Eastern Iowa that's impacting some of our customers and their loans with us.

So that's an overview of the third quarter loss. Doug is now going to go into a little more detail and then as I said Brad will follow-up with a discussion of loan and deposit activity at the bank and anything else at the bank he'd like to share, then we'll finish with WB Capital. Doug?

I'll talk a little bit about charge-offs and nonperforming assets. During the third quarter we charged off $1.1 million. That was kind of spread out over several projects, probably the largest item was related to one of the Regency related projects that we moved into OREO. But which had been provided for in the first quarter. Then of course the provision as Tom mentioned was $7 million in the third quarter and over half of that related to the one loan where we had, where a customer had fraud committed against it. But as a result of that our allowance for loan losses as a percent of average loans was about 1.5% at the end of the third quarter.

Now our nonperforming assets were $23.9 million at June 30, and that's up from $14.2 million at June 30. And really all of that increase is attributable to the one loan that had the fraud committed against it. That loan -- well, there was actually two loans in that relationship but those two loans totaled $11.4 million so if you take the $14 million at, add $11.4 to it, we actually had a couple of projects move out in nonaccrual and into OREO. And so that's a rough reconciliation of how nonperforming assets moved during the quarter.

The ratios at the end of the quarter then related to nonperforming loans and assets, nonperforming loans to total loans is 1.78% and that had been 1.28% at the end of the second quarter and nonperforming assets to total assets is 1.63% at September 30, and that's up from 1.03% at June 30. So we did have an uptick there in the nonperformings and, I don't know, Brad may comment a little bit more but I think at this point in time I've we've taken a hard look at the loan portfolio and been pretty aggressive in our classifications appropriately sold for these economic times.

I want to make a couple of comments about the margin. The margin for the third quarter was 3.37%, and that was down from 3.56% in the second quarter. We had a couple of rate declines in the second quarter and then the, in the short run our margin will contract when rates are declining because we are liability sensitive but then over the longer run it does work it's way out and that's somewhat evident by the fact that when you look at our margin for the first nine months of this year, it is about 14 basis points higher than the first nine months of last year. So once we get six, nine, 12 months into rate cuts, our liabilities have a chance to catch up in terms of repricing and with rates going down the margin typically will improve a little bit. We've done a real rough calculation with this 50 basis points cut yesterday. That's probably in the short run a 4 to 5 basis points hit to margin going forward. But again given a little more time that should work it's way back out. I think I'll stop there and turn it over to Brad.

Good afternoon. A couple things that I'll highlight. First, I'll start with our retail staff. During the quarter we moved one individual into leading our retail, our branch group, and he was sharing that responsibility previously. That individual is working with all of our retail staff in terms of improved sales skills and deposit gathering. We have them in a deposit gathering mode. We currently have a sales promotion going with that group and we are about 30 days into a, maybe a 70 day campaign here and we are seeing some nice new deposits as it comes from that campaign.

On the commercial side quarter we had nice loan growth and we are up maybe 13% year to date. I do not anticipate the growth in the fourth quarter to continue. In fact we might even see that shrink a little bit as we have some loans that are maturing that should pay off. These would be construction notes and right now I don't see a couple of those being replaced. We have spent a lot of time around here preparing for an FDIC exam that will occur towards the end of the quarter. We are spending a lot of time reviewing files, ensuring that our documentation is right on and correcting exceptions. So that's kind of, that's what we are going to be spending the next 60 days on. We will roll through the exam and then I think it will be back to prioritizing business development opportunities.

WB Capital had a third quarter that as I described earlier resulted in a loss for them. The new business development activity in WB Capital as you might imagine has slowed dramatically in the third quarter due to just the uncertainty in the marketplace which usually contributes to a mindset of not wanting to go change investment advisors. The performance in their equity funds, the performance in their fixed income funds and their fixed income investment styles is in line with their peers. The performance in the equity styles is keeping pace with the benchmarks except in the small cap area and the mid cap area in and both of those right now are lagging behind the benchmarks.

In the WB Capital money market fund which WB Capital is the advisor on, it owned a Lehman Brothers holdings commercial paper piece which is as I said earlier had it remained in the money market fund would have caused the net asset value to break through a dollar. In order to preserve the net asset value we bought that out of the fund into WB Capital in an arm's length transaction at market value and took a loss in WB Capital. So the NAV of the money market fund has been preserved at $1 and we would anticipate will continue to be based on the holdings in that fund now. So they recorded a loss for the quarter of about $178,000.

Going forward, kind of in line with what Brad described for the bank, their primary fourth quarter activity is working with existing customers and retention of assets. There will be bringing expenses in line with revenue in the fourth quarter in preparation for 2009. And we are continuing to improve the investment performance of those styles that I said were lagging behind their benchmarks.

We have done an analysis of the various TARP programs. We are going to participate in the TARP liquidity program which will provide FDIC insurance on an unlimited basis for noninterest bearing deposits and transaction accounts and are implementing that. We have seen good growth in our deposits primarily in time deposits as a result of our use of the Cedars program which I'm sure you've heard other banks discuss and you've heard us discuss. This is a program which uses a depository relationship between us and a number of other banks that allows us to provide FDIC insurance to approximately $50 million per customer. So we are able to provide more than the traditional $250,000 of insurance on an insured interest-bearing account. So between the liquidity program, the use of Cedars and the $250,000 FDIC insurance on interest bearing accounts we have seen good deposit growth.

We have also evaluated and the Board has approved our participation in the TARP capital purchase program. We have not made application yet and that's primarily because we do not have the authority under our articles of incorporation to issue preferred stock. We filed a proxy with the SEC on the 28th of October in preparation for a special Board meeting on December 10, at which time we will, a special shareholders meeting on December 10, at which time we will have a vote on granting us the authority to issue preferred stock which would be used in conjunction with the TARP program. We have not finalized the dollar amount at this time although we would be eligible using the 1% to 3% of risk adjusted assets, we would be eligible for approximately $12 million to $36 million, $12 million minimum at 1%, $36 million maximum at 3%. And so it's our intent to make the application by the 14th, subject to a positive shareholder vote on the 10th, and then take down the money as quickly as possible.

We don't need to raise additional capital at this point. We are well capitalized. Our total risk-based capital sits at 10.4% and our tier one risk-based and tier one capital are both over the well capitalized limits. So this is not out of any necessity or any urgency. It does appear to us to be cost effective capital and we think it's prudent to raise our capital ratios at this point notwithstanding the fact we are well capitalized. So that's the plan going forward with TARP.

Difficult quarter for all of us. This is not a usual position for any of us at WB Capital or West Bank or West Bancorporation to be in. The positive signs are when you strip out the extraordinary non-recurring event, recurring earnings or quarter earnings were strong and kind of in line with our expectations. So I think with that unless Doug or Brad have any additional comments we will open it up for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Jason Werner at Howe Barnes.

Good afternoon. First question was regarding your comments on net interest margin. You had said that the reason for the basis point cut could trim off 4 to 5 basis points to the margin. I'm just curious, does that take into account the earlier cut also or is that just the most recent one?

That would be just the one yesterday and the one previously a week or two ago it would be that similar amount. So those two combined would be in the short run pushing 10 basis points.

Okay. And then how long do you think until you make some of that back?

Within 90 days we start to make probably half of that back and it will take six, eight months to get it all back. Mainly based on the weighted-average maturity of our CD portfolio.

Okay. And what kind of impact did credit quality have on margin in the quarter? Obviously you would add the lost income and the related loan but I was curious what impact if any interest reversals have overall on credit quality?

Interest reversals were in the 70,000 range.

What about the fraud related loan, (inaudible) obviously that would have some kind of an impact.

I'm sorry, say that again.

The fraud related loan, the increase in nonperforming loans just having a higher balance.

Yes, well, let's see, the accrued interest we charged off would have been included in that $70,000 number but, Brad is punching the number here -- probably, maybe 225,000 to 250,000, probably. Would have been the gross number on that.

Okay. With that particular credit, obviously you're working with the borrower to get the additional collateral to make good on that loan, I guess what's your thought in terms of timing when you'll get possession of stuff and be able to liquidate it and get those proceeds back to work?

Well, he's transferring assets to us as quickly as he can. He transferred the first block of assets almost immediately after the loss and we liquidated it which leaves us at the $11.4 million balance. I met with him yesterday and we walked through the remaining list of assets he's in the process of transferring title to real estate, title to some rolling stock and stock portfolios -- stock and bond portfolios to us now just kind of as quickly as we can in an orderly fashion. We have the real estate listed for sale. We have other assets listed for sale. We are looking at the stock and bond portfolio now and trying to decide whether we want to liquidate it. Obviously it's as distressed as any stock portfolio would be, whether we want to liquidate it now and start earning on that, on that asset again or whether it makes more sense to ride this out for a little while. But my best expectations are we will have title to all of the assets that are being transferred by this time next week and just proceeding to liquidate on them as orderly as we possibly can.

Okay. And then also wanted to talk a little bit about loan growth. Just give more color as to where that loan growth is coming from. I don't know if you had the detail in the Q. I didn't get a chance to go through all that yet but in terms of what types of loans you are seeing growing and what markets?

Markets would be in both. We are about, our portfolio is about 80, 85% in Central Iowa and the balance would be Eastern Iowa. The growth probably two-thirds would be in the commercial real estate arena, a third would be C&I business. We picked up two really nice relationships in the C&I business in the last quarter.

How did you get those?

Marketing. The folks that we have been chasing for a period of time that we convinced.

How much opportunity is there for picking up clients like that given what's going on in the industry with some banks kind of pulling back? Is there an opportunity to keep doing that?

There is. But you need to be careful. And I think everyone is being careful today. If they shift too much sign of moving you want to make sure that you're getting them for the right reasons not picking up somebody else's problems. So you want to really examine and ask the right questions and get enough detail that you're comfortable with that. But that is certainly going on here in Central Iowa. The rumor more mill and things that we've seen about some of our competitors would lead you to believe that the opportunities are there.

Okay. Now you were making some comments about the deposits and I didn't catch-all of it. What did you say about the deposit campaign? You had another 60 days under that?

We've started a campaign the 1st of October that runs through early December at a retail branch in terms of attracting new deposits.

What type of deposits is that attracting? Obviously your demands were way up in the quarter as were CDs but is the purposes of attracting demand?

It is. We've focused it on a couple of different accounts. If you recall, Jason, we initiated the new accounts, the Reward Me checking account in the second quarter which was the account that pays above average rate of interest if you have 12 nonpin based debit card transactions every month but then based on interchange fees pulls our costs back down. So that's the primary account that's in there. But we've also had the branches focusing on just straight DDA accounts as well as time deposits. The TARP liquidity program, the insurance on noninterest bearing transaction accounts I think will boost the DDA deposit gathering. Certainly our participation in the Cedars program has boosted CD deposit gathering.

Okay. That goes through early December, then?

Yes. I don't know, Brad, if you have the actual date,. I don't know the date but it's the first couple of weeks in December.

I guess you said you started October 1, so that's not really anything in terms of the strong loan growth you had in the third quarter then.

No. It's not reflected in the third quarter deposit growth. We had a campaign going on that ran over into the third quarter from the second quarter tied to the Reward Me checking account. I think just the follow-on to that campaign may have ended. That one ended like July, end of July. And then we took a rest for a couple of months.

I think that campaign produced some of the results in the second quarter -- third quarter, I'm sorry, in that Reward Me checking. A lot of the growth in the third quarter came from time deposits looking for security, just cash that wanted a safe haven and because we used Cedars effectively our time deposits grew.

Okay. And then I also wanted to get an update on where you stand with the Regency related credits. It looks like some of that stuff would get OREO, some of it was sold. What exactly I guess in terms of what you had before, what do you still have and what's in OREO?

We still have in OREO approximately 4 million, I was going to say high 3, Doug says 4 million in OREO. We have, literally we have an offer that is pending that for the sale of some lots that would take a decent dent in that $4 million. We have, everything we have left sits in OREO basically.

With the reserve--.

Two projects were taken over buy the other partners.

Yes. We really have, Brad is right, about $4 million, we just held an auction that ended on Friday, we have an offer on 47 lots. That will take out say round numbers 1.5 million then we have some multi-family property that we will continue to sell. We have some condominiums and town homes that we will continue. Very small number, I think one condominium, three town homes, and once that's sold we will be out of OREO. We have two projects. One that was taken over buy the non-Regency partners which is performing. And--.

And they have substantial assets behind them, so it's almost, it's almost like we don't think of that being Regency related.

As well, actually now that everything is done I think in my mind it's not Regency related. Regency partners were out these new partners were in and.

How much is that loan for?

3 million.

3 million. Is that, nonperforming status, is that included in nonaccrual?

It's in a performing status.

But we have still considered that an impaired loan but we will have to look at that going forward. But it is performing.

And you said there's two of them. What's the second one?

The second one is about a $5 million project in eastern Iowa. The, we are in the process of working on that one right now. The Regency partners are out, two new partners are in and we are working through whether or not that's going to be refinanced by us or another bank or maybe by us and another bank. And that will, that is still performing, though.

That continues to pay interest.

If I remember correctly some of these non-Regency partner loans I thought some of those things had pieces that had sales pending. Am I thinking that right? Did some of these loans get smaller?

Yes.

Okay. So that's already occurred?

Yes. We -- we had some, we had some OREO property that we moved into the third quarter and then actually closed and sold at the end of the third quarter and then actually real early fourth quarter. And those numbers would be in the--.

What are you talking about, Grand View? It was 2.9.

That was about $2.9 million. So a little over $3 million, maybe $3.5 million.

We also, the two performing loans that we just mentioned, both of those have had offers on property for sale. So they will reduce themselves, also.

And then the one project that was actually the condo project that was selling units, is that not OREO.

All gone. Sold it.

It's all gone.

OREO and then got sold soon thereafter.

All in the third quarter.

So the two that are still there, the 8 million that you had in the queue, the 8.1 million, that's these two we are talking about, the 3 and the 5, those are much stronger, may go away and then all you have left then is 4 million OREO?

Right.

That 4 million there is no more charge off associated with this loan, you may have write downs on OREO but there are no more charge-offs assuming these other two work themselves out fine.

That's correct.

Okay. And you said you had a little bit of write down on some of the stuff that moved over to OREO, some of the chargeoffs, as you were moving it over you charged some of that down a little bit?

Some of those had recent appraisals. We charged them down to appraised value, actually to a discounted appraised value.

So let's see just to recap, $4 million you have pending sales on $1.5 million, and then just I guess probably it takes a lot longer to get to zero but you are definitely making progress?

We are making progress. It will, based on the remaining components we have a couple of town homes, condominiums, those will just sell in the ordinary course of business and then we have some multi-family property that will take us a while to market and that will take us out of those projects and eliminate the OREO.

Do you have any more lots that are in that OREO?

I don't think so. It's multi-family, three town homes, and a condo.

It's five town homes.

Five town homes, one condo, a big, 28 acres of undeveloped, multi-family use property and after that 1.5 million sale takes place and that's it.

So the multi-family is not developed yet. That's just the land that's zoned multi-family.

Correct.

That may take longer obviously because it's--?

Yes.

That's why. Right.

It's pasture right now.

Is there any chance that could be rezoned to something else to make it more attractive or is that the best use?

It could be zoned down. I don't think in its location that the city it's in would zone it up for more dense commercial use. It could be zoned backwards to a single-family.

That would be a lot of, to make that work financially that would be a tremendous number of single-family lots though.

Okay.

You might be able to break it into pieces. We would like to sell it. We are not in the real estate development business so we would like to sell it and move on.

Yes, well certainly that has gone pretty smoothly when you consider the service in the beginning of the year, you are down to what you are down to.

Please don't jinx us.

Okay. That's all that I have at the moment. See if anybody else has any questions.

(OPERATOR INSTRUCTIONS) Our next question comes from [Kevin McLaughlin] at BDF Investments.

Hi, just want to do ask, I saw the article in the paper about the A&Z contract for Smarty Pig. I was wondering if you could give us any kind of an update there? The last time I talked to you I think you said you were opening maybe it was 15 accounts a day or something like that, but I just wondered if it was growing or if it had been negatively impacted by the crisis and everybody's concerns? Thank you. And I think did you a great job on the quarter and thank you for all your hard work.

Thanks Kevin. Actually Smarty Pig is picking up a little momentum right now with the additional publicity that you saw that article in the paper and that next day or within a couple of days after that they had their biggest day ever. And so it is still, it is, I guess I would say it's picking up a little bit from what it had been running.

Any specifics you can share or?

Well, we, in the 10(Q) we indicated that we had at September 30, we had $5.6 million in savings accounts and it's blown past $6 million just in the last couple of weeks and that's really kind of, that's kind of it in a nutshell. Do expect it to continue on. The founders of Smarty Pig would say this and I think we believe that the economy right now somewhat place into Smarty Pigs hands in that it's more prudent to save money for a future purchase than it is to put it on your credit card and pay debt or be in debt and pay interest.

Okay. Well, thank you very much and again thanks for all your hard work. It was a good quarter.

Thanks, Kevin.

(OPERATOR INSTRUCTIONS) Mr. Gulling, it seems we have no further questions.

Okay, well, we'll wrap it up and thank everybody for joining us today and we will talk to you in January. Thanks.