West Bancorporation Inc (WTBA) 2009 Q1 法說會逐字稿

Hello, and welcome to the West Bancorporation quarterly earnings conference call. All participants will be in a listen-only mode and there will be an opportunity for you to ask questions at then of today's presentation. (Operator Instructions). Please note this conference is being recorded.

Now I'd like to turn the conference over to Doug Gulling. Mr. Gulling, please go ahead.

Okay. Thank you and thanks, everyone, for joining us today. With me is Tom Stanberry, our Chairman and CEO. And also on line but traveling is Brad Winterbottom, President of West Bank. I'll 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. Thanks again for joining us. And I'm going to turn it over to Tom to make some initial remarks.

Thanks, Doug. And thank you for joining us for the first quarter conference call. We ended the first quarter with what I would characterize as an average quarter but one that is trending in the improvement direction rather than the deteriorating direction. We did have good earnings for the first quarter, as you saw, in our earnings release that went out this morning. So I just want to highlight some key characteristics, significant issues that went on in the first quarter, without repeating what was in the earnings release and then we'll jump on to some other issues.

We had good solid loan growth in the first quarter, loans were up about $21.7 million since the end of 2008. Year-over-year, our loan were up about $116 million, and the credit quality of the loans that we are making has improved over that one year period. Deposits are up an extraordinary $1.2 billion year-over-year. We attribute --

Not $1.2 billion.

Yes, $1.2 million year-over-year. We attribute that to-- wish it was up $1.2 billion. We attribute that to a couple of factors. One, the increase in FDIC insurance from the $100,000 limit to the $250,000 limit. Which, as you all know, is a temporary increase although there's now legislation pending in Congress which was just amended today to extend the $250,000 limit for an additional four years. We also think that the decline in profit making ability in the equity market certainly has driven people into the fixed income area and driven people into banks and into deposits like, like we have at West Bank.

During the first quarter, as I indicated, the loans that we have been making have been improved credit quality over those of the past year. As we discussed in our annual meeting, one of our initiatives since the beginning of the year has been to improve the credit quality of the assets both in the loan portfolio and the bond portfolio. Want to talk about the loan portfolio first. We re-hired a former employee of the bank, who when he retired was the Chairman of West Banc, is a lawyer, and we hired him to come back and head up our adverse assets team and work on resolving the problem loans that we have in the classified category. He's been with us for part of the first quarter. His focus is entirely on resolution of adverse asset problems, and he's made a -- he's made a significant dent since the point in time that he's been with us.

During that first quarter, we also moved one of our employees into the role of Chief Compliance Officer. Tragically our old Chief Compliance Officer died in January after a protracted illness. We have moved Carol Stone, who was the Head of the Trust Department, but came to us with a long compliance background in the securities and insurance industry into the new Chief Compliance Officer position. One of the things she's done since she arrived has been to completely-- do a complete compliance audit of the bank, and we're now responding to the issues that she found in the course of that audit.

Also in the loan area, we have added another risk auditor who is screening all loans, and I mean all loans that we are making, prior to the, the actual closing of the loan for a series of compliance and legal issues that need to be approved before the loan can be made.

During the first quarter, our nonperforming assets increased year-over-year from the end of the year, I'm sorry, by about $8 million, primarily two real estate developers that we moved into the nonperforming categories that totaled about $6.5 million, and then just a smattering of other, other loans. We did make a provision in the first quarter of $3.5 million, which brings our allowance at the end of the first quarter to 1.61% of loans outstanding versus 1.42% of loans outstanding last year. And we're committed to continuing to obtain an allowance at that or potentially a higher level. We had two trust preferred securities that we moved into the impaired category as OTTI securities in the first quarter due to both of those issuers deferring dividend payments and falling below well-capitalized level. And so that totaled about 1.-- roughly $1.38 million of impairment that we took related to those two securities.

They indicated earlier we're also working on improving the quality of the investment portfolio. Part of our strategy has been to -- been a very meticulous manner, sell the corporate securities that we can without taking a significant loss in any of those securities and move out of the corporate sector. We did sell a number of agencies in the first quarter for a gain of about $1.5 million. We reinvested those proceeds from the sale of those agencies at a slightly higher yield by extending the maturities by two to three years beyond the maturities of the agencies that we were selling. So that really kind of highlights a number of the significant issues that have gone on during the first quarter at the bank and at the holding company level. Doug's going to talk about WB Capital and a number of other issues and I'll turn it over to him at this point.

Okay thanks, Tom. I wanted to comment a little bit on the net interest margin. You'll notice it did decline here in the first quarter compared to the fourth quarter last year. It's at 2.87% for the first quarter. Net interest income is up slightly over a year ago, but the margin itself is down. The reason for that is that we are very liquid right at the moment. We've, as Tom mentioned, we've had a lot of deposit growth and that growth has been for various reasons. Some due to external market conditions, some of it certainly due to a couple of attractive product offerings that we have. But not knowing how long the money that came to us as a result of external market conditions will stay with us, we've kept that money fairly short. We're starting to get a little better feel that some of it may be staying longer, and we are going to be moving into some longer term investments, but it did impact the first quarter. And it will take -- it'll take a good portion of the second quarter to get some of that money invested into -- or put into the investment portfolio.

Bob mentioned the untimely death of our Compliance Officer. As a result, our [Boley] program had an $840,000 death benefit that was recognized in the first quarter. And from the-- on the expense side, really two issues there. FDIC insurance premiums are much higher than they were a year ago, and probably will go higher, where-- we don't know exactly where the special assessment's going to end up in final form, but if it's between that 10 and 20 basis points that's being kicked around, that could be anywhere from $1.2 million to $2.4 million for us on a pretax basis. And the way we're interpreting the timing of that, that would be a second quarter charge even though's not payable until the third quarter.

As far as WB Capital is concerned, the net income was pretty low the first quarter. As you know, we had the CEO and the Chief Investment Officer leave at the beginning of the year, but we promoted from within for the Chief Investment Officer. We have had very little if any client defections. The remaining team is in place, remains in place, and is very capable and doing a great job. We have-- of course the decline in asset values have impacted revenues, but we're hopeful that going into the second quarter with a little bit of increase in the Dow and S&P that that will improve asset values a little bit going into the second quarter. Plus, our public fund business has been picking up here at the end of the first quarter and is actually at record levels for us, and is -- we would expect that to carry over into the second quarter for a while. But there's no question that some of those public fund will get sent out to other taxing authorities. And we have -- we did do a little cost reduction in WB Capital here at the beginning of the second quarter, though it'll probably be the third quarter before that's fully recognized. With that, I think we will stop with our comments and open it up to questions.

Thank you. (Operator Instructions). We have a question from Brian Martin of Howe Barnes.

Hi, guys.

Hi, Brian.

Sorry I missed a little bit of the beginning of the call here, I was on a second line. But just wanted to get a little bit of just color, just kind of about credit -- the credit situation in your markets and maybe if you'd just elaborate a little bit about kind of what you're seeing in the market? In particular -- I know in the K you talked a little bit about the problem loans that you have there that are out there. And-- so just kind of want to get a feel for what, what those problem loans, what do they look like today as far as size, and just if you can give us some color on how those are performing thus far?

Well, if you -- let me talk about the market in general first. And then we can talk specifically about our classified and nonperforming assets.

Yes.

The market in general, as you know, for banks in the metropolitan area tends to break down between consumer, commercial loans, commercial real estate and historically going back to the last probably, eight to 15 years, a lot of land development loans. The land development is at virtually a standstill except for some large projects that had been started and continue to kind of sputter along. The commercial real estate market is soft. There, as you would expect, any time you have layoffs, the people that were visiting retailers have stopped visiting those retailers if they've been laid off. The retailers are seeing a downturn in their business, and that, in turn, trickles upward to the, the owners of the buildings and owners of the strip malls and so we're seeing some softness in commercial real estate. Although it hasn't deteriorated as fast as I thought it would when we were looking at these same issues in the fourth quarter of last year.

The commercial sector is starting to feel the effect of the recession as has happened with every recession in the last three or four decades, the recession lags in Iowa. In part isolated or insulated somewhat by the ag industry, and in part because we never see the big upswing that the coastal cities see or the coastal states see. We don't see quite as big a downswing, but we are starting to see some impact on the commercial sector of this recession. It's not a big magnitude at this point in time. It's hard to say where that's going to go.

So for us when you look at our classified loans, a significant amount of those classified loans are related to land development, commercial real estate and to a lesser degree commercial. Land development as I indicated is at a dead standstill. And it's going to be sometime -- it be real presumptuous of me to put a timeline in effect, but it's probably late 2010 before we're going to see much of the land development start to occur again. Consequently, raw land that we have in OREO or raw land that we have classified where owners could not continue to pay the, the debt service on the land, it's going to take us a little, some time to work entirely out of that land.

We haven't seen a much of a change in our commercial real estate portfolio. What change we've seen has been a deterioration but hasn't been much of a change yet. And again, when you look at the classified loans that we have that are commercial real estate, there's been some deterioration. We've been able to work out of some of them. We have extended guarantees in a number of cases and added guarantees on loans. Shored some of them up with additional collateral. But we're going to see some more deterioration I think in the commercial real estate area.

In our commercial portfolio, we know there's some stress. We're meeting with customers on a regular basis. We can see from their financials and talking to them that there's some stress. But we also have a number of customer that's are expanding. So we have, we have quite a number of commercial customers that are expanding inventory, expanding lines and their business is very good. They're balancing out some of the loans that are at the other end of the spectrum. That's a 10,000-foot view of the portfolio.

Sure. And in the, the potential problem loans at quarter, I guess at year end, I don't know if you've updated those where they are today. But just -- when I joined the call, I know you had talked about two credits coming aboard this quarter that were real estate developers. Were those part of the ones that were problems at year end that transitioned over? And I guess if they were, I guess how does the health look at the remaining ones that were out there, and just --

Well yes, those two were identified at the end of the year. The others that were --

But we've downgraded--

Yes.

In the quarter. Right, okay, during the third.

But the remaining loans that were identified at the end of the year just have not had a significant change for any further downgrade. And the other-- kind of the other class of loans that we have in nonaccrual would be biofuel, or renewable energy loans. And those, those are-- we've got specific reserves against a couple of those. Actually, we had specific reserves at the end of the year and we did not need to increase those here in the first quarter. And we're working through those loans, and at this point time it doesn't look like we'll have any additional loss in-- any greater than what the specific reserve is against the loans at the present time.

Okay. So it sound like you mean the commercial, all the commercial portfolios are under little bit of stress. But the greatest stress is still being seen in the construction, the construction book and in particular in the land book-- in the land piece of it.

I think that's accurate.

Okay. And the exposure you guys have to me within your construction book that's strictly land, have you broken that out or is that possible?

It's strictly land?

Right.

Yes.

And then maybe just if you-- I don't know if you, Doug, if you updated what the problem loans were at at quarter end?

Not at, not at the same level that we did at the, at the end of the year.

Okay.

In land development, Brian, we've got about $8 million that's in the one to four family category and $19 million that's in multi-family.

Okay. So $18 million and $9 million multi-family. Okay.

Total. That's total.

Total, okay. And how about the just kind of the 30 to 89-day past due trends, what are you seeing there?

They're about flat.

Okay. Flat.

From probably the last two quarters.

Okay. So they're holding up reasonably well. And I mean, has that been a pretty good indicator I guess on the credit front from what you can -- looking back here?

Yes. I'd agree with that.

Okay. All right. And just with the, with the dividend reduction in the quarter, I guess can you give a little thought on just what your-- kind of what the capital objectives are here? Just maybe what the goals are in the short run?

The short-run goal is increase our tangible common equity ratio.

Okay. Meaning, do you have a comfort level where you want to get that to and maybe just timing of what it takes to get there?

Well it's funny because there doesn't seem to be a lot of consistency out in the market about where the --

Where it should go.

What the level should be. I can pick up a report from one analyst that says 5% plus is--

Good.

Adequate.

Yes.

And I can pick up a report from another analyst that says 6% plus is adequate. So our goal is to continue to increase it. I'd like to get it up to 6%. So short-term goal is increase tangible common equity. Kind of an intermediate goal is to pay back the capital purchase money as quickly as possible. Obviously we're not going to pay that back just from retained earnings.

Right.

But I do -- we can with the $0.01 dividend and keeping that in place until both the tangible common equity ratio and the economy improve, we can increase that ratio from attained earnings up to-- I think we're acceptable now, but we can get it up to a higher level.

Right. So I mean the goal is you should be able to get it higher than 6% within a quarter or two. I mean, with where tangible common's at right now? Intangible common right now is about what 5.8%?

That's correct. Yes.

Okay.

But the second quarter, we don't know --

But the FDIC --

The biggest driver on the second quarter is going to be the special assessment on the FDIC.

Yes. Okay. So maybe it's a year end type of event with just some of the dynamics that are going on.

Right.

Okay. All right. And just-- and Doug, you talked a little bit about the margin obviously being a little bit soft in the quarter just due to the liquidity. With you ramping up, getting those into -- I guess kind of deploying it into longer term securities or, I guess relatively longer term securities, versus what it's in now. What's realistic as far as expectations on the margin? Is it -- I guess can it get back to the level it was at this quarter just maybe it's two quarters off. Is it kind of an incremental step in the second quarter before going back? Or --

I think it's definitely an incremental step in the second quarter. I think we might be able to get back to 3 for the second quarter and then take it beyond maybe 315 in the third quarter.

Okay. And as far as just the expense trends in the quarter, is everything -- is this quarter pretty representative on the expense side as--of what's, what's reasonable to look at? Are there-- I know there's-- with the trust company, there's some staffing changes. Just kind of where -- directionally where you're thinking here on the expense side. Is this-- does this look like a pretty good-- a pretty clean quarter, are there any staff reductions you guys are contemplating? Or --

We had a staff reduction at WB Capital. But the impact of that really won't be felt until the third quarter. And then really on the expense side, the first quarter's pretty representative I would say of a normal quarter with two exceptions. And that being, well, FDIC insurance premium that we reported for the first quarter certainly representative or -- but second quarter is going to be higher based on the special assessment. And then the other item is that our contribution expense in the first quarter was $200,000, and that was a portion of the death benefit proceeds that we received, and we kind of front loaded our, our contribution expenses and we would not expect any additional contribution expenses for the remainder of the year.

Okay. So the $200,000 won't be there going forward?

Correct.

Okay. Other than that, it's -- it's --

It's pretty representative.

Okay. And just the, the two credits that you talked about that came aboard this quarter, those-- the real estate developers, what-- and I guess just from that perspective, just kind of the resolution of some of these credits, is it-- like you said, is it just going to be timing issue with I guess those two, and just the current nonperformings? If you can just talk about if there's any resolutions on the horizon and just as far as moving some of the credits out.

There are -- there are a number of resolutions on the horizon, neither the stage that we can discuss at this point. But we've had, we've had success in extending some of the credits where developers and owners are willing to work with us. So we believe we have adequate collateral and they have the strength to continue to make payments.

Okay.

A little like kicking a can down the road.

Yes.

We've also will -- optimistically I guess say that there are some workouts in place right now that I think within a quarter or two will start to show some improvement. It's just too early to discuss any of them, but we've got a-- we have a number of different credits that are in various stages of being restructured or potentially resolved.

Okay. And you feel pretty good that the level of allocation against them is-- there's not significantly greater hits that have to be taken to move them out?

No. Doug mentioned the biofuels area in particular. And we're obviously working really hard to take care of all of those as quickly as we can since that industry doesn't seem to show much improvement. And we're feeling pretty comfortable right now that the reserves we have against the probable biofuels projects are adequate. I think in the other cases, everything we have-- where we have the specific reserve is adequate. And then the general reserve, at the level that we have it right now, we think is, is adequate. But obviously we're, we're continuing to monitor and will continue to grow the allowance.

Okay. And that is -- kind of go there. Just the reserve coverage of the nonperforming loan still looks a little bit light. And I guess-- my guess is, is that a number you guys watch closely, or I guess -- I don't know if there's one number that you focus more on than another. But that seems to be something you'd want to take higher. Is that, is that reasonable?

Well, actually we don't focus on that number that closely. I mean, when we are going through our analysis of the, of the allowance at the end of each quarter -- well, we kind of-- we do it monthly but we do it in much more detail quarterly. And once we build it up that way, that's how we get comfortable, just going through various components. And that actual ratio is not one we follow a whole lot. A lot of our nonaccrual loans are real estate based. And so once we determine what we think the value is --

Right.

And put a specific reserve against it from a-- it's different than if we had a bunch of --

C&I loans or--

C&I loans, yes.

Okay. Okay. Well, just the last thing and I'll let someone else jump on. Was the -- just the investment portfolio and the OTTI charges. And just how you feel about that going forward. I mean-- what concerns are still in there that, I guess might have to be addressed or I guess is there -- is there something down the road that's still a possibility in there?

Well we've got -- I think we've detailed that we've got six trust preferred security issues, all single issue-- or single issuer trust preferreds totaling face value of about $4 million, and we've got a market value, fair value on them of about $2 million right now. Well, in that -- when I think about those six, sitting here today, the largest one I don't think, there's no doubt in my mind that that one we will-- that that's a good company, and we will be getting all of our principle and interest back. It's just a matter of the market conditions that have devalued that, that particular security. The others are pretty small pieces individually, $250,000 to $500,000. At this point in time, we think those entities are okay, but time will tell.

Okay. But that's the rest-- the six trust preferreds and you've already got them written down for all intents and purposes at $0.50 on the $1?

Yes.

Okay.

As I said earlier that we're watching that overall corporate portfolio. We have one we deemed this week that we had watched pretty closely and it was redeemed at par. We have a -- we have another corporate bond that right now I think we have marked down to about $0.40 on the $1. We're watching it pretty closely. It did just renew all of its credit lines and just had its credit rating reaffirmed by both Moody's and S&P, but the business is clearly under some stress. And that's another one where, while it's a fairly short maturity, we're just going to have to watch it for a while and continue to remain comfortable if that they've got adequate cash flow.

Okay. Okay. That's-- that should take care of most everything. I appreciate it. Thanks.

Yes, thanks, Brian.

Thank you. Our next question is from Ross Haberman of Haberman Fund. Please go ahead. Pardon me, Mr. Haberman, is your line on mute? Pardon me, Mr. Haberman? Okay. (Operator Instructions) Gentlemen, we have no further questions in the queue.

Okay. Well, thank you for joining us today and we'll visit with you next quarter. Thanks a lot.

Thank you. This does conclude today's conference. You may now disconnect.