West Bancorporation Inc (WTBA) 2009 Q4 法說會逐字稿

Good afternoon and welcome to the West Bancorporation fourth quarter 2009 earnings conference call. All participants will be in listen only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Doug Gulling, EVP and CFO. Please go ahead.

Yes, thank you, and thanks for joining us today. With me is Jack Wahlig, our Chairman; Dave Milligan, our CEO; and Brad Winterbottom, President of West Bank, and I will begin 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, thank you for joining us. I'm going to begin. I will not reread specific numbers to you that are in the press release but I will begin just by making a few comments that I think are important as it relates to the fourth quarter.

First of all, I'd like to just mention that we believe we continued to wring the risk out of our investment portfolio. We are down to three trust preferred issues. Two of those are single bank issues, one is a pooled trust preferred security. As you may have known, we had a CIT bond in the portfolio which had a maturity date of December 15th and it was part of the repackaged bankruptcy. As soon as that took place then we sold that bond. And so we believe that we have improved the risk profile of the portfolio quite a bit. It is a fairly short portfolio. I think the average duration is a little under three years, and as a result that does put a little pressure on the margin. But we at this point in time believed that reducing the risk profile and being fairly liquid were the priorities.

Our non-performing assets were right at $53 million at the end of the year. And if you look back over the last few quarters, actually about the last three quarters, that number has been relatively constant. We certainly have had changes in the composition of the classification of the assets in non-performing but it has been fairly stable. As opposed to last year when each quarter, last year meaning 2008, each quarter we were seeing $9 million, $10 million, $11 million, $12 million increases in non-performing. I don't believe we're ready to say the battle is over. A lot of that will depend upon how the economy performs from here going forward but it is somewhat nice to have those numbers fairly constant and be able to work with a finite group of assets.

Our net interest margin has been lower than we would like this year. The last couple of quarters it's been right about, fourth quarter 2.85%, third quarter 2.86%. I mentioned the fact that our investment portfolio is relatively short in duration. That certainly impacts our margin. We have $53 million in non-performing assets that are earning little or no interest and that has an impact. And our SmartyPig deposits also have an impact in that those are paying a 2% rate of interest which at first blush would seem somewhat high for a savings account but our experience is that those deposits seem to be longer term and from that perspective, 2% is not out of line. However, SmartyPig has been growing quite a bit. Actually, those deposits have been growing faster than our ability to deploy the funds and so that is putting a little bit of pressure on the margin. As indicated in the press release, though, because of the success of SmartyPig and its growth, we fully expect in 2010 that those deposits will leave our bank and go to a larger bank and as a result, we're planning for that transition and staying somewhat liquid to accommodate that.

With that I'm going to turn the microphone over to Brad Winterbottom for comments on loans and credit.

Hello, everyone. A little bit about loan activity, I think year-over-year, we've seen the portfolio shrink in the 7% to 8% range and that has been due in part to loan demand just being soft. Customers that we visit with have taken a very conservative approach during the tough economic time and did not look at expansion, and as their balance sheets shrank, they paid back credit. So we've seen some significant paydowns. In terms of new business out there, we continue to make our marketing calls but, quite frankly, there is not a lot of activity out there. Not a lot of growth opportunities. So I think for the year it has been soft. We, again, shrank about 7% to 8% and do not see that trend reversing itself, at least in the interim.

Now, loan quality. Doug talked a little about our non-performings stabilizing and that's been a good trend, one that we need to improve upon. And then some other numbers behind that would be we look at past dues and past dues over 30 days would be something that we measure. That number has shown significant improvement since the middle of last year. So we don't think that that's a trend that we want to hang our hat on but we do see some optimism there. We've spent a lot of time and energy in terms of working out of some of our non-performing assets and we have great action plans. It just takes time and patience and we do not confuse that with urgency to remove and get rid of assets that are not performing up to our expectations. So those would be my comments as it relates to the loan portfolio.

We'll turn it over to Dave Milligan for further comments.

Good afternoon. Just a couple of very brief comments and then obviously would be available to answer any of your questions. As you're all aware we do operate in two markets here in Iowa, the Iowa City market and the central Iowa market. It's been interesting to watch the Iowa City market and the contrast of the two markets and the performance in this downturn. By and large, the Iowa City market, while not exempt is certainly faring, up until now anyway, much better from a credit quality standpoint than we have here in the Des Moines market. One could certainly attribute that to a number of things. The university, the hospitals, the relatively higher wages over there and the much lower unemployment. In addition to that our experience has been that real estate valuations have held up much better in the Iowa State market than they have in the Des Moines market.

In Des Moines, while certainly I'm sure some of our friends in Florida and Arizona and Nevada would be pleased to see the kind of unemployment numbers and some of the other issues that we have here, nonetheless by anything that we've been used to, it has been severe. We remain concerned about commercial real estate in particular. I think perhaps some of our C&I customers, while Brad has indicated and I think accurately, that we're not seeing a whole lot of growth there. I think we certainly are seeing some of those customers whose profitability incrementally is improving anyway, and we're pleased about that. So I suspect, and I certainly agree with Brad it's going to take some time to work through this.

We've also been pleased, or I have been pleased anyway, since I've been back here, with the cooperation and the energy of particularly our senior staff and their willingness to work hard to find a solution to this and bring us out on the other side.

And I think with that, I'll let Jack make a couple comments.

Happy to tell you we're in the final stages of the CEO search and would expect the new CEO to be on board yet in the first quarter, so I think we're just about there.

Okay, at this time, we would entertain any questions that may be out there.

(Operator Instructions) Our first question comes from John Rodis at Howe Barns.

Good afternoon guys. Nice quarter, all things considered. It sounds like you guys are cautiously optimistic on credit. Is that the case or am I misreading something?

I would not -- optimistic? We think it is not going down any further and we've seen a little rebound but I'm not ready to hang my hat on a significant reverse at this point in time.

The only thing I would add to that is I agree with Brad. I don't think there's anything unique to our customer base or our market here that would make me negative. I have macro and the national concerns and wonders about the double dip and maybe we're just, what we've experienced the last two years maybe we're more nervous than we need to be. But I guess that characterization of yours I wouldn't argue with but I'd lean a little more towards the cautious.

Okay, and then you guys made some comments between Iowa City and your central Iowa markets. Can you just refresh my memory? What's the split in the loan portfolio between Iowa City and then the central Iowa markets?

I would say our loan portfolio would have about around 15% of our loan portfolio would be credit originated out of Eastern Iowa.

Okay, so Iowa City.

Yes.

And then the remainder pretty much Central Iowa, Des Moines?

Correct.

Okay, and Doug, this might be a question for you. The deposit growth in the quarter was pretty good. Can you just maybe talk about that? Was that more seasonal or what are you guys seeing?

Some of that was SmartyPig related and then the remaining, I don't know if it's necessarily seasonal but we had a reward-me checking account is doing pretty well. And we continue to have people that leave money here because of the high FDIC insurance limits. And while doing that, John, I'd comment that we have been able to decrease the amount of our wholesale funds by quite a bit. We have not bid on any public money all year and at the beginning of the year, we had some wholesale CDARS money, if you're familiar with how that operates. And at the end of the year we were down to maybe $10 million in those types of funds. So I think the composition of our deposits have improved from the standpoint that we have a lot less deposits in the traditional wholesale categories.

Okay, and then you might have touched upon this but I guess the growth in deposits is what caused the growth in the securities portfolio? Is that correct?

Yes, and specifically, the growth in the SmartyPig deposits.

Okay and I guess the securities portfolio was up to $350 million. Where do you see that going heading into 2010?

It will remain relatively flat until we reach the point that SmartyPig deposits transition out of the bank. And at this point in time our plan would be, based on the numbers today, at the end of the year we had $185 million, roughly, in SmartyPig deposits. Roughly $100 million would come out of the investment portfolio and the remainder out of overnight Fed funds.

So to pay down SmartyPig, correct?

Right.

And I know you said that's a 2010 event but does that happen all at once, does that happen over time or what do you think there?

That would happen all at once. All of those deposits would transition out in one transaction, in one fell swoop.

Okay, and how does that transition of the SmartyPig balances out of the bank, how is that going to affect the bank going forward?

It will lower our total assets but from a liquidity and a funding standpoint, it will not really impact or hurt the bank because we're planning for that, as I mentioned earlier. We have more or less not physically segregated but certainly mentally segregated the funds that we will use to fund that transition. And in reality, that will improve net interest margin a little bit.

Just because you should be able to get cheaper funding I guess than the 2%, right?

We won't need to get more funding. We will let the deposits go and so we're going to take $185 million out of savings accounts on the liability side, we will sell $100 million in investments, and then we will drawdown the remainder in overnight Fed funds.

So you've got actually a negative spread on some of that I guess obviously?

Incrementally that would be true.

Okay.

And John, when we think about SmartyPig and you say we have a negative spread, it is true, particularly at these levels where we have not been able to deploy efficiently the deposits that have come in the last half of the year. But West Bank is also an equity owner in SmartyPig and we believe that there will be good value in that investment.

So just along those lines, are you actually selling your investment in SmartyPig?

No. That would not be the plan.

Okay, and just to refresh my memory, how big is that investment?

Well we own about 13%.

Okay, and as far as dollar terms?

No, we can't really quantify that at this point in time.

Okay, but you own 13%.

Yes.

And you're not selling that? Okay, maybe just final question. I was just looking at operating expenses. Operating expenses in the quarter, was that a pretty clean $5.7 million? Was that a pretty good number going forward or were there any one-time items in there?

That is a pretty clean number, John. There would be some collection expenses in there that I would feel is slightly elevated and we hope to correct over time, but yes.

Brad's right. Depending upon how some of our other real estate owned expenses and collection expenses go, but otherwise, salaries, benefits, that's a pretty clean number, occupancy. As I look down through the categories, everything is pretty clean.

Okay, fair enough. Thanks guys.

Our next question comes from Kevin McLaughlin at BDF Investments.

Hi gentlemen. I'll just throw these out there. That last questioner did cover some of what I was going to ask about SmartyPig. It seemed to me you originally had an 18% stake in SmartyPig. Is that right?

Kevin we started at 20% but then there have been a couple of investments after SmartyPig was started that diluted our position.

Okay, and do you expect further dilution as time goes on? That was a great number to see that $179 million of new deposits attributable to SmartyPig this past year.

Do we expect further dilution of our position?

Right.

Sitting here today, no, but there always is that possibility. But sitting here today, no.

Is there any benefit to you in the transfer of those deposits? Is there anything you get paid to do? Is it going to have any kind of an impact as far as your revenues are concerned?

No.

And my last question would be the country club credit at Glenn Oaks. I was wondering if you could update us on that. I saw that you were reserving for loan losses. Was any of that reserve related to that credit or can you comment on that for us?

This is Dave Milligan. I'll comment a little bit. First of all, on the legal proceedings on that. West Bank obtained a judgment back in November against the club in Iowa. And I suspect probably a lot of places right now the period of time between judgment and the going to the sheriffs sale and us obtaining title has lengthened substantially, and we're not anticipating now that that may take place until April or May. However, the bank has applied and is expecting, probably not by hearing but by agreement with the club, that we will be appointed the receiver here any day which will put us really in the position of running the club. And we are negotiating now with a consulting firm, a management firm, to come in and take a look at those operations for us. We continue to negotiate with a number of prospective buyers and have interest from a number of buyers. We just haven't had interest yet that has reached the point that we would be willing to sell it. And I guess the only thing that I would say relative, we've analyzed, like we do all of our credits, we've analyzed Glenn Oaks along with the others and we feel that we have it appropriately booked at this point in time, based upon appraisals and expressions of interest.

Yes, we've written it down to where we think the value is and other than it sitting in a non-accruing asset for us, there has not been any expenses to continue to maintain it.

Okay, thank you very much. I appreciate it and good quarter. Thank you very much for all your efforts.

(Operator Instructions) At this time there are no further questions. Would you like to make any closing remarks?

Just thank everybody for joining us. We appreciate your interest, so thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.