West Bancorporation Inc (WTBA) 2010 Q1 法說會逐字稿

Welcome to the West Bancorporation, Inc.'s first quarter 2010 earnings conference call. All participants will be in listen-only mode for this event. 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 call over to Doug Gulling.

Thank you, and thanks to everyone for joining us today. With me on the call today is Brad Winterbottom, President of West Bank; our newly elected Chairman of the Board Dave Millgan; and our new CEO Dave Nelson. And will you hear from everyone through the course of this presentation.

But I will begin and just make a few comments on the financial results for the first quarter. When looking at the first quarter of this year compared to first quarter of last year, by far and away the most significant item is the fact that our provision for loan losses is $2 million, which was $1.5 million lower than a year ago, and that's representative of the lower net charge-offs that we experienced this year. So far, anyway, and we hope that that's a trend, but time will tell on that. As for as the bottom line is concerned, the net income available to common shareholders is $2.8 million compared to $2.3 million a year ago, and that translates to $0.16 a share this quarter, $0.14 a share last year first quarter. I got ahead of myself here.

Brad just pointed out to me that I do need to read our fair disclosure statement. So if you let me back up a minute. 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, I'll continue on. When talking about the components of the income statement, our net interest income was up a little bit from a year ago. The margin itself is down three basis points, but earning assets were a little higher. When we lack at the fee income area, on a gross basis fee income is lower than a year, but in the first quarter of 2009, we recognized $840,000 in gain from proceeds of a bank owned life insurance policy. And if you back that out, we're actually up a little bit over the first quarter of last year. However, delving a little bit further into the details, service charges on deposit accounts are down a little bit. Gains and fees from the sale of residential mortgages also are down. The activity has not been quite as strong in the first quarter this year as it was a year ago. What's driving our fee income increase over the prior year when we exclude the Boley transaction would be the service fee that we received from SmartyPig in the first quarter, and that was $267,000.

As far as our non interest expenses are concerned, in total, they're actually a little lower in the first quarter of this year compared to last year, but there were a few individual categories that are up. The category up most significantly over the last year is the FDIC insurance expense, and I think we know the story on that. Our category that we classify as bank service charges is up $80,000 over the prior year's first quarter. That is where we charge our expense for outsourcing the management of our investment portfolio. Then our other real estate owned expenses are up $75,000 from $35,000 to $110,000, and that's indicative of the environment we're in with the higher level of non performing assets.

So with that, I think I am going to stop and turn it over to Brad for some comments on loan and credit.

Good afternoon. Loan demand remains soft. We've had another 3% decline in the first quarter 2010 from year end, and, quite frankly, most of our borrowers are shrinking their balance sheets and not looking at any kind of expansion, equipment or real estate, and so we're feeling the effects of that. I will say that now is the time we're in the middle of line of credit renewals for businesses for their operating money, and generally what we're seeing is sales off 20% to 40%, especially here in central Iowa, and most have managed through that. Most have been able to reduce expenses, but certainly there's a little stress out there. Credit quality, I think our non accruals are moving in the right direction. We've had a little bump in our OREO, but the good news about that is we now control those assets, and we are trying to sell those. We are not fire selling those, but we are selling those. And we've seen a little increase in our troubled debt restructuring, but we're earning a little interest on those, and I think the yield on those is slightly north of 6% and virtually 90% in that category is in the current to less than 30 days past due range. So we don't lake the level of our non-performings, but we do think we're a little optimistic, but in the direction but I think those are coming down. In terms of on the deposit side, first quarter deposits, net of SmartyPig is up about 2.6%.

That's really about all I have to cover.

Thanks, Brad. I'm going to turn it over to Dave Milligan.

Good afternoon. For those of you who have seen the 8-K we filed yesterday, I wanted to commented a little bit on, what certainly in the Des Moines paper anyway, was on the business section this morning, is the informal enforcement action of the memorandum of understanding we entered into with the state of Iowa and the FDIC on Wednesday. In January of this year, the state of Iowa conducted its regularly scheduled safety and soundness exam. That exam primarily covered calendar year 2009. As a result of that exam, and certainly as no surprise to us, or for that matter, I'm sure to you, they expressed concerns over primarily two points. One being the negative earnings that we experienced in 2009, and secondly, as Brad indicated earlier, an elevated level of non performing or classified assets. And as a result of that we entered into discussions with the Department and it's culminated in us entering into this voluntary informal agreement just on Wednesday of this week. Again, it's attached, so that you can see it, but we believe, anyway, at this point in time that we are currently and have been for some time in substantial compliance with the material terms of the memorandum. It does not require us to raise any additional capital. We are in excess of the required ratios per the memorandum. And we do not believe that continued compliance with this memorandum will be any impediment to our operations.

And with that, I think I will stop and if we want to we can discuss that later on.

Okay, thanks, Dave. And at this time, I'll turn it over to Dave Nelson.

Thank you, Doug, and good afternoon, everyone. I had the opportunity to meet and introduce myself yesterday at our annual shareholders meeting. Perhaps some of you on the phone were also in attendance. But if not, I certainly hope to have the opportunity to meet each of you during the near future. My new role just began the first of this month, so although I'm very pleased with our results for the first quarter, I was not yet on the team during that point in time. I'm very pleased to see the trend that is being established.

I thought I could just introduce myself a little to you over the phone to give you a bit of background about myself. I am originally from Des Moines, so I don't really feel like I'm brand-new to the organization because of my familiarity with the Des Moines community. This is my hometown, where I grew up. I also knew quite a few of our team members here at West Bank from years ago. I also had the chance to spend some time with the team prior to my start date. And being from Des Moines, I've been a student of our organization for a very long time. As I mentioned, I grew up here in Des Moines, both my wife and I are graduates of Hoover high school, Des Moines-Hoover. I went on to Drake University, both undergraduate and graduate school. Following that I went to work for Bankers Trust here in Des Moines for just a few years before moving to Minnesota. I joined the Norwest organization in Mankato and was in business banking, a commercial lender for eight or nine years in Mankato before moving to Rochester, Minnesota to be the manager of the business banking and commercial division. And soon after that became the bank president of Rochester, and then later a district or regional president for the southeast Minnesota area of then Wells Fargo.

My wife Kathy is also Des Moines. We have two teenage children at home and they are going to be relocating here to Des Moines during the month of June. We've found a home and look forward to making that transition.

As I said, having been a student of our organization for a long time, I'm very familiar with our history and the history of strong earnings and big dividends and the pride that we have had in our efficiency ratio and our community leadership. Also very aware of our recent challenges with our elevated level of non performing loans. What I really was drawn to with this opportunity, not because I was looking for a job, but because of my familiarity with the organization and our ability to have strong core earnings, and the talented and dedicated team that we have and the focus on community leadership. I believe that I'm really a good fit for this opportunity and this situation. And the first month that I've spent here in my new role really has validated everything that I thought I would find. And very much looking forward to the future. I spent this first month meeting with my team and gathering input and assessing our resources. We're developing initiatives based upon our areas of focus and plan to make continued investments in our infrastructure and to move forward with reducing our non performing assets and continuing the positive trends that have been established.

So I want to thank each of you for your support for our organization and also to our shareholders for giving me the opportunity to join the team. With that, we'll entertain questions.

Thanks, Dave. At this time, we'd like to answer any questions that may be out there.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from John Rodis of Howe Barnes.

Good afternoon and welcome Dave. Maybe just a quick question on the operating environment. And I know you touched on it a little bit, as far as how things are going in Des Moines, but could you maybe just give a little more detail on the Des Moines market versus, say, the Iowa City market? How are things going as far as business activity and stuff like that?

I would say most of the commercial borrowers are very cautious. We're out knocking on doors and looking for new business. We certainly have not shut that off. But honestly, it is soft, and there's not a lot of activity. I think people are digesting, very few are we seeing increased sales. It's flat to down a little bit, but we've seen some customers off 40%. Homebuilding, there's been a little activity there, but more on the starter, or say under the $200,000 price range. Over that, not a lot of activity. I think the health of our portfolio in Des Moines is a little weaker than that in Iowa City. Iowa City -- the eastern Iowa portfolio, quite frankly, is very healthy. They're as cautious over there. We're not seeing the homebuilding activity over there as is in Des Moines. On the other hand, the University of Iowa and the hospital over there kind of run the show over there, and things appear to be okay at the University of Iowa and the Iowa hospital.

Could you guys maybe just talk a little bit about as far as early credit quality indicators, delinquencies and watch list trends? What are you seeing there right now?

Past dues, I'll go down to the 30-day level category. That trend improved substantially from second quarter '09 to end of the year. There was a slight uptick at the first quarter, but quite frankly, a couple of days later, we would have been flat, and those were good numbers. Maybe it was around $14 million over 30 days past due at the end of the year. That number may have been, I think, $28 million at the end of the first quarter, but within a few days after that, some documents showed up for renewals and would have taken those numbers back down to comparable levels at year end. So we look at the past dues, and I've drilled down to the 30 days and over, not at the 90 days. Our charge-offs have definitely been shrinking. Our non performing assets is flat, maybe up a few million dollars, but they're moving in the right categories. I mentioned yesterday that there were about 14 assets totaling just under $5 million that since April 1st we've sold and closed, sold, getting ready to close or are in serious negotiations of having them gone and over the next three months, and that's best estimate, and, in fact, another one today sold, but it's a small amount.

John this is Dave Milligan. I just want to add a little bit to what Brad commented regarding particularly the OREO. One of the encouraging things has been, as we have liquidated the assets out of OREO, we have very generally recovered what we had them booked for, and that's a bit of hopefully a validation, anyway of, our valuation process at this particular point in time, anyway.

Okay. Maybe just a final question for David Nelson. David, just curious, you've had about a month on the job now, and obviously some interesting times in the industry, and obviously you enter into the MOU. I'm just curious, after the first month, maybe what's better, what's worse than expected, if you don't mind?

That's a great question, John. I think I'll probably enjoy answering that question again about another month from now. But I have not experienced or come to learn anything in terms of anything being negative to what I was not aware of. In fact, I've been very impressed getting to know the team and the longevity of the service here. We have many team members that have been here a very long period of time. I'm becoming aware of very deep customer relationships. I was also pleased to learn that there have been some significant investments in infrastructure that have taken place over the last 12 months, some reinvestment into process, procedures, infrastructure, technology, and that's certainly a direction that we plan to continue.

Okay. Fair enough, guys, thank you.

Our next question is from Ira Wonder a private investor.

Good afternoon. I have a question to ask. The good news came out that you had a 16% increase in income, then the next article I read was West Bank takes ownership of Glen Oaks Country Club. Reading the article, it says that the loans were made to the Country Club's previous owners. Were they on the guarantees, or did you have the property in security?

This is Dave Milligan. I will take that. West Bank has a long relationship with Glen Oaks going back to the early '90s when it was first formed. The bank did have as collateral all of the real estate, all of the structures and all of the personal property of the club. It was not personally guaranteed. Yesterday, just by coincidence, the day of our annual meeting, happened to be the day that we had nothing to do with but the day that was set for the culmination of the foreclosure procedure resulting in the sheriff's sale yesterday, and we were the only bidder. So in that process it now means that as of today the bank does own the property. That was not unanticipated. That is fully well what we expected to happen yesterday. It did, and we have been and will continue to actively market the club. Actually, absent the debt service currently, the club is actually functioning at a break even to a slight profit so we are not bleeding. That does not mean we do not want to sell it.

Who am I speaking to?

I'm sorry, Dave Milligan.

Dave, question. You said that you had security on the land, and what else?

Basically the entire assets of the company. The land, the clubhouse, the maintenance shed, all of the pots, pans, plates, all of the assets.

The other question I had, I see your loan committee is made up of four independent directors. They approve or decline all credit relationships greater than $5 million. Are you saying that the loan committee approved this loan way back when?

Yes, definitely.

Okay, the other question I have, are any of the board of directors, are they residents of that property out there?

Yes. One.

Pardon?

One.

Just one?

Yes.

I see. Okay. You answered that one for me. The reason I'm disturbed is I own 22,000 shares of the bank, and I depended on that for retirement, and now all of a sudden no dividends, you have an MOU which is horrible. To have an MOU on a bank is a disgrace. And meanwhile, we have directors, you're paying out I think $260,000 a year to directors fees, you have 14 directors. What do these directors bring to the bank? I read here that they're all bringing something to the bank. I don't see what they're bringing to the bank. I think you've got to start from the top and start cutting a little bit. If I'm taking a beating, I think they should take a little hit. I know they're stockholders also, they're taking a hit on their dividends, but as far as the directors' fees and that I think that ought to be cut back.

Dave Milligan again. I'll just comment, first of all, as to that particular loan you're talking about, at that time that that loan was made the bank had an appraisal on the property of, if I recall correctly, about $13.8 million. Obviously we've learned in that credit and learned in many credits, times change. Appraisals may not mean all that much, but the loan to value on that property at the time the loan was made was approximately 50%, and the club was make money. Obviously things changed.

I know there are some big hitters that live out there. I don't know if they were customers of the bank, if that swayed the bank on making this loan or not, but it doesn't smell right that we have to take such a beating. We are going to take a beating of $3 million, and you've got loan losses. What have you got set up, $24 million?

We have $20 million in our allowance.

Okay. Then you took a hit a couple years ago on a subdivision for $6 million?

I don't recall that.

It was a developer, couple years ago.

That was a $5 million loss, yes. Spring of '08.

Right. What did you have as security on that property?

That was an unsecured loan.

Unsecured loan. That was good business. That's fantastic business. The reason I'm asking these questions, I've got to be honest with you, I'm in the banking business, and to have an unsecured loan like that, I don't understand what the loan committee was thinking of when they did something like that. Because here we're sitting here, getting no dividends, and with an MOU, in order to give dividends, even if you make a big profit, you've got to get the clearance of the Fed, and it's not that easy to do. I just think some changes have to be made at the bank. You've already made a change. I feel sorry for this Mr. Nelson who is coming into a bank that has an MOU on it. He's got his work cut out for him. He's got a big job ahead of him to get you out of the MOU, which takes time. Takes time and money.

We're all shareholders, and we understand the disappointment in the share price and the lack of a dividend. You can look back and question certain things. Certainly the economy has played a major part. But we're committed, and I think the board's committed, and with the new CEO, we're working as hard as we can to turn things around and that's what we're doing.

Okay. I understand that. But I just don't understand how it got out of hand so fast, which it did. It just got out of hand so damn fast. The audit committee, they should have seen some of this coming on and reported it. I would think McGladrey should have seen some of this coming on and said, "Hey, guys, stop, stop where you're at right now."

I was going to mention this at the end of the presentation, but I'll mention it now. We had our annual meeting yesterday. And later this afternoon, we will file an 8-K that communicates all the comments and all the slides that were used at the annual meeting. So I would encourage everyone to take a look at that, because in that, not that misery loves company, but we did some peer comparison. And while we don't like our situation, we don't think we're the lone ranger.

That's right, there are other banks worse than you are, that's true. The real-estate market ate a lot of guys up.

I think we understand your questions and comments, and we appreciate that, and we are working diligently to return to a higher level of profitability and to restore those dividends, but it will take a little bit of time.

The reason I'm ask, I'm 83 years old, I can wait so long. If nothing happens, I'm just sitting here with no income on the bank stock, which I have a big investment in.

Well, thank you.

All right, thanks a lot, Dave.

Our next question is from Brian Martin of FIG Partners.

Hi, guys. Doug, I just wanted to touch on a couple of things. Can you give a little bit of color. I know John asked about the economy, but it feels like credit quality is at least beginning to feel a little bit better from the comments you made But you talk about the customers, the year end financial statements, being able to hold on here, and some of them struggling. But can you just talk about where you perceive the concern or risk as you look forward on the C&I side? You give a pretty good detail in the Q of the individual categories in C&I. The same thing on the non owner occupied commercial real estate. Just to give us a sense for where you are really keeping a close eye or where you are seeing any weakness that may pop up here.

Dave Milligan again. My perception right now in looking is probably the area of highest concern, at least to me probably, remains the commercial real estate, and in particular the non owner occupied. I think there may most recently be a little bit of stability there, but that is still probably overpopulated, at least in the Des Moines market. You can't drive down any major street here without seeing a 4xX 8 plywood sign saying "space available." And of course the landlord/owner is getting squeezed as the leases come due or as the tenants come in and request modifications. On the other side of that coin, we have reduced our exposure in that area, which we felt is prudent under the circumstances.

And when you give the breakdown there, as far as the non-owner occupied, is it primarily the retail, is it the $45 million that you're referring to as the most stressed at this point? I think that was the category. That's the second largest area within that non owner occupied component.

Give us a second. We're going to look for that page so we know exactly what number you're looking for.

I would say in the retail category would sit probably some strip centers, and the ones that certainly have my attention would be ones that we stressed fairly hard, and right now, they are all current, and performing. And we've seen some vacancies pick up, but they still cash flow. So we certainly need a little bit of help with the economy picking back up, but we're watching that category very closely. I don't know if that answers your question or not.

I was curious if you looked on that list on that page, you talk about that being the area of most concern. I'm not trying to highlight retail. I'm just trying to get a sense for within that bucket on the non owner occupied, which is the area of most concern, if there is one. If it's retail, that's fine. If it's not, you look down, if there's something else that's more concerning just with the lesser dollar amount attached to it.

Retail, maybe office as well. The medical retirement, we've got some really nice relationships there, and those are all fully, 98% type, occupied, and throwing off nice cash with some long-term leases.

Okay. And then the second question, I think you mentioned in the Q, as far as the margin goes, I thought you talked about having a little bit of an upward bias in the second quarter. If you start to see a little bit less loan demand, does that assume there's some rotation from the loan bucket to the securities portfolio, and does that put some pressure on the margin or just temper what you are looking for?

There's no question, if the loan portfolio continues to decline a little bit, those funds most likely will go into investments, and put a little squeeze on the margin. We talk a little bit about SmartyPig in the Q, and our best guess at that time moment is that will have a new home around June 30th, but when that happens that will improve our margin a fair amount. So I would fully expect that if SmartyPig leaves around the end of the second quarter, that the third quarter margin will be substantially higher even if the loan portfolio continues to shrink a little bit.

All right. That's all I had. I appreciate it.

Our next question is from John Rodis of Howe Barnes.

Quick follow-up question on the golf course. Just for the record, that is already obviously on non performing status, right?

It went there second quarter last year.

We took that into in substance foreclosure, or OREO, second quarter last year and really took our write-down in the second quarter of 2009.

And can you say what you've currently got it marked at?

We would prefer not to John.

Can you say what the original loan amount was, though?

The original loan amount was in the mid $7.3 million or $7.4 million. Ultimately with the sheriffs sale yesterday, the amount of our judgment, which, of course, included a lot of interest and costs, came to $8.2 million.

Okay. And you said the original appraised amount was like $13 million.

$15 million-something.

Okay, thanks, guys.

Our next question is from Fred Carpenter who is a private investor.

Good afternoon, guys. Thanks for the telephone conference today. Appreciate the information you're sharing with us. My question was, if there has been any internal discussions on any possibilities of selling or merging with a larger banking institution.

Fred this is Doug Gulling. At this point in time, there has not been, although if there were, we wouldn't be able to comment on it. But in this environment, we're focused on returning the bank to higher levels of profitability.

Okay, thank you so much.

(Operator Instructions). Gentlemen, we are showing no further questions at this time. Do you have any closing remarks for today?

No, I would just remind everyone that later on today, the commentary and graphs from our annual meeting will be posted out on our website, and I would encourage you to look at that for some additional information. But we do thank you for joining us today, and we will have another call at the end of July. So thank you very much.

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