West Bancorporation Inc (WTBA) 2008 Q4 法說會逐字稿

Hello, and welcome to the West Bancorporation quarterly earnings 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?

Yes, this is Doug Gulling.

And with me is Tom Stanberry, our Chairman, President and CEO and we'd like to welcome you to our call this afternoon. And I will begin just by reading a brief 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, welcome and we're going to begin with Tom talking a little bit about credit quality and impairment and then moving on from there.

So I will turn it it over to Tom Stanberry.

Thank you for joining us.

You should have all seen our press release, which we released this morning reflecting fourth quarter and 2008 fiscal year earnings. The press release went into significant amount of detail, and I'm not going to--I'm not going to go back into much of that, other than to highlight some significant events that occurred during the fourth quarter of the year. From a same-store sales business standpoint, we had a strong fourth quarter. Loans continued to grow, although at a much slower pace than we have seen in prior quarters and deposits grew significantly.

The loan growth was in higher credit quality loans than the average credit quality of some of the loans we have seen in the last several quarters. And the deposits came from a variety of sources. We are trying, as all banks are, to increase the amount of core deposits in the bank. And when we look at the volume of deposits that we were able to collect in the fourth quarter, a significant amount of that collected was in the core deposit area.

Some of the deposits that for call report purposes we must continue to treat as broker deposits, actually are deposits that were collected through the Cedars program, and we view them, while regulatorily, they have to be classified as broker deposits, we really view them more as core deposits because we are seeing a renewal rate on those deposits in the time deposit area of approximately 74%. Or another way to look at it is approximately 74% of our customers that are using that particular product are rolling over and renewing their CDs which is a very strong renewal rate for us.

Fourth quarter also contained several bumps in the road for us. As we have disclosed in our last two 10Qs, we have owned for sometime a structured note composed of trust preferred stock issued by a collection of banks and insurance companies. The securities known as ALESCO X, we owned a tranche that when we acquired it was an A-rated tranche and--with a good, strong yield. After doing an analysis of all the banks and the insurance companies in the pool, it appeared to us at that time, which has now been several years ago, that this was an investment quality--investment grade quality investment and with a strong yield arm.

We analyze the cash flow every quarter and in the fourth quarter based on our analysis of the current cash flow, and a higher default rate on the banks and insurance companies that are in the portfolio, we made the decision to classify it as OTTI, other than temporarily impaired, and take the loss on a portion of that security in the fourth quarter. We also own a security which is a unit trust that invests in the common stock of a number of community banks. We bought that stock in the late fall of 2008--or bought the trust in late fall of 2007, that's right, and it has--it has deteriorated recently just from looking at the price of the common stock of all of those community banks, we have decided also to treat it as other than temporarily impaired and so we have now classified it in the OTTI area and taken a loss associated with it.

During the fourth quarter, as the press release stated, we did charge off an additional--excuse me, an additional $4 million of loans, bringing charge-offs for the total year to approximately $10 million. That contrasts to 2007 when we charged off approximately $2 million. We have continued to be aggressive in classifying loans in our portfolio as substandard and non-accrual and equally aggressive in charging them off if we think there's little or no opportunity to collect the principal and interest payment due on the loans.

When you look at income, and I'm going to let Doug talk primarily about income; but when you look at income for the fourth quarter, the core earnings were strong. The two OTTI classifications obviously absorbed a substantial amount of the core earnings, but the core earnings of the bank were strong.

Also in the fourth quarter, another significant event occurred. We had made application to the US Department of Treasury for $36 million of capital purchase program money as part of the troubled asset recovery program that Congress passed early in the fall. We received approval and we closed on the $36 million on December 31, 2008. We took $2 million of that and reduced debt at the holding company, and $34 million was put into the bank as additional paid-in capital.

As a result of that, our capital ratios have increased significantly. The holding company capital ratios now are well in excess of the well capitalized range. They had been in slightly of excess of well capitalized prior to the receipt of TARP monies and now we sit several percentage points above well capitalized. So we have a nice cushion of capital as we go into 2009.

We--in our earnings release this morning, we did announce that we were declaring a dividend of $0.08 per common share. The $0.08 per common share represents approximately 66% of net income generated in the fourth quarter. This is a reduction from the $0.16 per common share dividend that we had declared in prior quarters, but as we look at the nature of the economy going into next year, both at the local level as well as at the national level, the composition of our customers in retail business, the general commercial and industrial business, and other customer lines, we decided the prudent action to take was to reduce the dividend now and hope that--that $0.08 dividend continues to be payable throughout the next year.

When you look at the historical amount that we have paid out, the 66% that we paid out in the fourth quarter was about 10%--10 percentage points higher than what we have paid out historically. When you look at what we believe earnings will be going forward, the percentage points--the percentage should be in line with the $0.08 per common share.

I think I'm going to stop at that point and turn it over to Doug to talk about margin liquidity and then we'll come back and talk about the activity at WB Capital, a couple of other items, and then open it up for questions.

A couple of comments about the margin.

In the fourth quarter, it declined to 3.23%. That was down from 3.37% during the third quarter, and really a couple of reasons for the decline. One is that we are liability sensitive and in the short run, when the fed cuts dramatically like they--like they did in the fourth quarter, the immediate impact is--tends to be negative; but over time, we make it up, and that's noticeable when you compare the margin for the entire year at 3.38%, compared to last year at 3.28%. And then the other thing in the fourth quarter, we--Tom mentioned, we had an increase in deposits when the government expanded the FDIC coverage limits and of course, the other opportunities for placing money were under stress.

Our deposits increased and we kept that money really short. In fact, a lot of it just stayed in fed funds over year end and so the mix of our earning assets was more weighted to fed funds than what it had been historically. And going forward, we'll work that down and work that out, but in the fourth quarter, it did have a little bit of a dampening effect.

When you look at the other major categories of the income statement--well, because of the improvement in the margin in '08, our net interest income was up over the prior year. Non-interest income, if you accept for the impairment charge was up a little bit and most areas showed slight increases. Probably the more notable increase was in the fees that we collect from sale of loans into the secondary market.

In the middle of '07, we added a real estate loan originator and since that point in time, we have added a couple of others; and so our activity has increased quite significantly and that's reflected in the fee income from that--from that product. We have a decline in revenue from WB Capital. That's, I think, a natural result of what happened in the market place, particularly in the last half of '08.

When you look at our expense categories, those are really under control and where we did experience increases, it was in the area of the FDIC insurance premium, our credit that we enjoyed and many banks enjoyed went away in the second quarter and we started paying full FDIC insurance premiums; and then also the expenses in the area of legal and expenses related to other real estate-owned were much higher in '08 than they had been in '09.

With that, I will stop there and bounce it back to Tom.

A couple of other things that I want to cover that are pointed out in the press release, but I think we should highlight. We now closed the books for the year and have gone through all of our compensation and profit sharing review. We reduced profit sharing contributions to employees by roughly 50% this year; and at the same time, we reduced bonuses to non-executive employees again by roughly 50%.

Executive employees will receive no bonuses this year, and no cost of living adjustment in their compensation. We think this is consistent with the performance of the organization for the year, and have tried to allocate the 50% reduction in bonus amounts where appropriate among all of our--both front line business employees, as well as the back office employees that run the infrastructure of the organization on a day-to-day basis.

We have charted out a course for this year, and while it will not be business as usual, we have made sure that employees and customers and everyone understand that we are making loans. Contrary to what you either read or hear in the national media, we are certainly making loans and we are making loans in the same sectors that we have in the past. We are looking toward an improvement in the credit quality of the type of new loans we make in 2009; and we'll be obviously increasing collateral requirements and a number of other requirements to help offset against any further deterioration of the economy.

The bulk of the loans that we saw in the fourth quarter came in the commercial and industrial area and in small business area. Our commercial real estate development and construction loans, as you would imagine, have dried to just about zero with the exception of a number of already committed to either owner occupied commercial facilities or commercial facilities not owner occupied that have committed tenants. One of our strong emphasis in 2009 is going to be to continue to improve the credit quality of the portfolio in the bank of our loans as well as a few of our investments that have deteriorated because of the economy. So that's going to be--that's going to be a big strategic push for us in the next year.

We announced two weeks ago that Scott Eltjes, the CEO of WB Capital; and Jeff Lorenzen, the Chief Investment Officer of WB Capital had resigned to take other positions. They were not related resignations, it was purely coincidental that they resigned at the same time. Scott will be going to work in the financial services area for another financial services institution, and Jeff is going to work, as the announcement said, for American Equity Life Investment holding company. We are currently in the process of looking for a CEO, and doing an overall strategic reassessment of WB Capital and the direction that it's going to go.

I will stop there and we'll open it up for questions.

Two numbers I want to get. Some of you like this number. Let me give you those two numbers and then we'll go to questions. The average interest earning assets for the quarter totalled $1,377,701,000 and for the year, average earning assets were $1,276,877,000.

So with that then, we'd like to answer any questions that you may have.

(Operator Instructions).

Our first question comes from Jason Werner of Howe Barnes.

Good afternoon.

Hi, Jason.

My first question on the credit quality side, the non-performing loans on a linked quarter basis didn't go up all that much, but yet you did have the $4 million in charge-offs. So obviously that stuff was kind of replaced. I was just kind of curious what was added to non-performing in the quarter.

The actual dollar volume?

The actual dollar volume or if you can explain what it was. Was it one credit, is it a variety of credits? What new went bad?

It was a variety of credits. It wasn't a single credit. We had a--well, really as we have all year, we were very aggressive in the fourth quarter with putting deteriorating credits on our watch list and then moving them from watch into the substandard or non-accrual. So the additional classifications were several kind of a collection of several smaller credits as opposed to one large credit.

Okay.

And then what's happening to the watch list? Is that getting bigger in the fourth quarter or is it--is there any signs of stability there?

The watch list grew in the fourth quarter, and I would anticipate it's going to grow--it's going to continue to grow a little bit. A lot of our small business customers are in the retail arena; and of course, we had six consecutive months of decline in retail sales. So we are just now starting to see some fourth quarter financial statements from retail customers and while they are not horrible, the second half of the year was not as strong as many had hoped. And so I think we are going to see some deterioration there from our retail customers.

I think we have seen all--almost all--I hate to say all, but almost all of the commercial real estate and real estate development loans that we have deteriorate to the level that we have them on watch. So I'm not anticipating a material increase in the amount of real estate related or construction related loans going on the watch list. Our C&I customers tend to be pretty strong and doing okay. They are obviously suffering some of the signs of the recession, but they would be among our strongest credit quality customers.

Just to clarify, you said almost all of the commercial real estate and construction is on watch now?

I think all of it that needs to be on watch is on watch. We still have several developers that are very strong financial developers or are either very strong or are strong and do not have debt associated with non-income producing property and consequently no negative carrying costs, and they are doing fine. But I think we have substantially all of the loans that need to be on watch in the real estate area are there at this point. I don't see a big increase coming there.

Can you quantify how big the watch list is?

No. That's not public information.

Okay.

Can you quantify how much total exposure you have to the retail sector? You said you had a lot of retail customers. How big is that?

I can't tell you exactly what the volume of the exposure is. Most of those are small businesses. We do not--excuse me, we do not have exposure to any large retailers, big boxes, national chains. So most of these are going to be locally owned smaller retailers. As a percentage of the overall portfolio, I can't tell you what that percentage is.

Is it greater than 5%. Do you know that?

It's greater than 5%, but I can't tell you the actual percentage. I'm not trying to dodge the question. I just--I simply don't have it segmented in that fashion. So all the small business--what I would describe as small businesses, even in retail cuts across so many different class codes that I just don't have the--I've never added up all of those class codes to see what you would classify strictly as retail.

Okay.

What, I guess, is your thought. You said you have most of the things you are worried about on watch. What is your thought going forward in '09 for that stuff migrating to non-performing? I mean, how bad do you think this gets?

Well, that's a good question that's probably can only be answered if we know exactly how bad the economy is going to get. If the forecasts for continued deterioration in the general economy hold true and you add on to that what appears to be the beginning of deterioration or maybe we are into the early phase of deterioration in the agricultural economy; and while we have no direct ag loans, we certainly have loans to businesses that make their money from dealing with farmers, whether it's an auto dealer selling trucks or cars or other related businesses. I think we're only going to know that once we see how deep this recession gets.

Okay.

It sounds like there's a couple of spots here that bear a lot of watching. I'm just kind of curious how you guys take that into account with your provisioning going into '09? Are we likely to see the provision we saw this quarter repeat itself or is it too early to tell that kind of number?

I think it's too early to tell, but our plan for '09 is to be similarly aggressive with classifications and charge-offs and consequently keep the provision at a percentage of our outstanding loans, close to or maybe even excess, but close to where we are right now. I see no--I see no reason why we would back off of our provision at this point in time.

Okay.

(Operator Instructions).

Mr. Werner, your line has been reopened.

Thank you.

My next question was in regards to net interest margin. Obviously it was down in the quarter, you gave your reasons why. I was kind of curious as you get a chance to put some of that liquid assets to work; how quickly can we expect a rebound, if at all? Obviously the fed can't keep cutting rates, or they are pretty much done with that. What is your thought process on margin going forward?

I think the margin going forward is going to be about where it was in the fourth quarter. I mean, I said that we are going to put a little--some of that, that was in fed funds at the end of the year, put that to work, but it's still going to be relatively short. Just to keep it available. We don't know, we had a lot of deposits come to us in the fourth quarter as I mentioned and for the reasons I mentioned, while I don't think any of us think that the opportunities in the bond and the stock market are going to be tremendous in the short run, at some point in time, some of that money is going to start to leap back out. And so we're going to keep that relatively short.

Okay. So it's not a lot of improvement at least early on?

No.

Okay.

And also, I was kind of curious if you could give us some--maybe some forward-looking thoughts on WB Capital Management. Obviously in this kind of environment, it's not surprising that that revenue stream is dipping; it was a little more than I was modeling this quarter. I guess, what's your thoughts?

First of all, before we get there, I want to ask you what assets under Management are and how much they were down year-over-year?

They are $4.3 billion, and a year ago they were $4.5 billion plus.

Okay.

I mean, it would be reasonable to assume that that would continue to go down unless you are in possession of information I don't know, I would expect that to go down and then expect pressure on that revenue stream kind of going forward. Is this--this quarter, is that--is that a good number to start from or is there anything else in that number? It was a pretty big drop linked quarter. What should I think in terms of my modeling?

I think the fourth quarter number is kind of a good starting point.

Okay.

And then depending how much money runs out, it could go even lower as the year progresses?

Well, it certainly could. If your models take into account a continued deterioration, I'm not sure what pace your modeling continued deterioration in the overall investment market, but if you've got that factored in, fourth quarter coupled with that deterioration should match their earnings capacity. I don't--while we are always gaining accounts and losing accounts, we don't have anything on the horizon that tells us there's going to be a gigantic run off of accounts taking monies out, but we know that we'll--we'll continue to lose asset value, just from market deterioration.

Right and I suppose it's probably too soon to have any fall out from the change with the two executives leaving?

Yes.

You had said that one of them went to another financial institution. Was that another bank?

It has not been publicly announced yet.

Okay.

I will step back and see if anybody else has any questions. Thank you.

Thanks.

(Operator Instructions).

Our next question is from Mr. Werner of Howe Barnes.

Well, if nobody else wants to ask one, I guess I'll ask a couple more.

The drop in compensation, that sounds like a lot of that was due to the reducing of the profit sharing and the bonuses. Kind of going forward, what kind of a run rate do you guys start to accrue with that stuff? Do you anticipate a similar type of a year performance wise, and not go ahead and accrue things there or do you go ahead and be optimistic and accrue it?

I think starting out we'll tend to be a little optimistic and accrue some of that back. In addition, we're probably going to add a couple of--two or three bodies. So we're going to see first quarter will probably be a little higher than the fourth quarter.

What kind of bodies are you adding?

Compliance, loan audit, loan review, and mostly--well, and workout. So mostly in the legal and compliance area. We will be adding another trust officer as part of a--kind of a rotation of some people in the bank, but most of this is infrastructure, back office related to loans.

And I will follow up on Doug's comment.

We are going to accrue--at least we are going to start out accruing 2009 at an optimistic pace. I'm not necessarily optimistic about where the economy is going to go in 2009 and I think we are in for a very difficult three maybe four quarters followed by a very slow recovery. But having said that, our plan is to continue to be a community bank and continue to work with our clients and generate as much value for our shareholders as is possible in this economy, and to do that, we have to have employees.

So we have to be able to reward them. We have to--we have to be able to pay them at market rates. If there are profits, we have to be able to share profits with them, and contribute to their retirement and wealth accumulation packages. My sense is in a situation like all banks find themselves in right now, our--the key asset that we have to keep on board, keep engaged, and keep the morale high on are our employees.

So we are going into the year optimistic that we're going to be able to hit some of our targets and consequently we are accruing at an optimistic rate for comp and profit sharing.

Okay.

On the fee income side, obviously we have seen a big drop in mortgage rates. I don't think you guys broke out what your gain on sale of loan was in the quarter. I'm kind of curious what that number was and what you kind of think going forward. Obviously, I would expect there to be a pretty good pipeline of mortgages given what's happened.

While Doug is looking for the gain on sale, I can tell you that our loan originators are not working seven days a week and keeping 12 and 14 hour days. The pipeline of mortgages--you can look at it two different ways. We look at applications and we look at closed mortgages. We are not seeing any falloff between applications and closed mortgages in the pipeline of new applications is at an all-time high. So most of this is refinancing. There's not a lot of new home purchases, but we're certainly--certainly enjoying a huge benefit from that.

Jason, our gain on sale of mortgages in the secondary for the year was $544,000, compared to $161,000 last year.

544?

544 for the year. For the quarter I don't have that.

I can back into that.

Yes.

I would expect that you would have--I know the loans held for sale isn't a huge number, but I would think that that number only goes bigger at least next quarter, I mean, there's got to be some built up demand that hasn't closed yet. Given the timing of when mortgage rate came down and the holidays and all that kind of thing, I would think that there's probably a good chunk of this stuff that would close and sell in the first quarter. And whatever that number ends up being goes higher, is that kind of a good starting point?

I think so.

I think you are right that there's carry over from the fourth quarter that will close and sell in the first quarter; and at the rate we are taking new applications, if it stays at this pace for another 20, 25 days, a lot of those applications are going to close in the second quarter. So we're--it's a strong pace.

Okay. That is all that I have. Thank you, guys.

Thanks, Jason.

(Operator Instructions).

At this time, it appears we have no further questions.

Okay.

We appreciate you joining us today, and we'll talk to you at the end of the first quarter. Thanks.

That does conclude today's teleconference. Thank you for participating. You may now disconnect.