West Bancorporation Inc (WTBA) 2010 Q2 法說會逐字稿

Hello and welcome to the West Bancorporation second quarter 2010 earnings conference call. All participants will be in listen-only mode for this event. (Operator Instructions). Please note this event is being recorded. I would now like to turn the call over to Doug Gulling. Please go ahead, sir.

Yes, thank you, and welcome, everyone. With me today are Brad Winterbottom, President of West Bank, Dave Nelson, CEO of our Company, and Dave Milligan, Chairman of the Board of our Company, and I'd like to 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, welcome and I'm going to begin just by summarizing the quarter and highlighting a few items, and then we'll pretty much go around the table and then open it up for questions. Second quarter results, we thought all things considered, we felt pretty good about the second quarter. Net income available to common shareholders was $2 million or $0.12 per share for the first six months of the year, and net income available to common holders was $4.8 million or $0.28 per share.

Items affecting the quarter included a $900,000 loss on an investment we had in a renewable energy closed in fund and this investment was made originally to support WB Capital, and this started at least two years ago and if it had actually got to market, WB Capital would have been the Investment Manager and it would have been a very nice piece of business for them. It's not, I'm not saying that it's completely dead, but at this point in time, when we look at the conditions surrounding that fund, we just felt it was not prudent to continue to carry that investment and so we wrote that off in the second quarter and that amounted to $0.05 per share.

In addition, our provision for loan losses this quarter was $1.4 million. That was down from $2 million in the first quarter and our net charge-offs were lower in the second quarter compared to the first quarter and also our non-performing assets declined about $6 million during the second quarter and Brad and others will have more comments on the loan portfolio and the credit quality. Also in the second quarter, we did writedown OREO another $600,000 or so. That was the result of our ongoing updating evaluations on other real estate projects and we also had $188,000 securities impairment on a trust preferred security.

I'm going to conclude my comments at this point in time just by reminding everyone that today is the day that SmartyPig, that those deposits will transfer from our bank to BBVA Compass. I think we've talked about that certainly for several months and quarters, and everything is on track for that to be completed today officially, it's as of August 1 but with that being on a Sunday, we will be moving those balances this afternoon, so I am going to stop at that point in time and turn it over to Brad Winterbottom.

Good afternoon. My comments are regarding primarily the loan portfolio. I would say new business opportunities continued to be soft. We certainly are out chasing deals as we are made aware of them, but quite frankly, it has been a soft market and I continue to see it being soft through certainly by the end, through the end of the year.

Our main focus continues to be on improving asset quality. I think Dave Nelson is going to talk about a new position that we've created and we've hired this person, but we've added a couple of other folks to assist us in improving asset quality. We're starting to see a decline in our total non-performing assets, and that decline is a combination of the asset being improved and upgraded either through new equity or just improved margins. We've moved some assets out of the bank through refinance and obviously we've had a little bit of charge off as well, but asset quality is improving and we've got a ways to go, but I like the path and I like the action plan that we have on most if not all of our non-performing.

That's really my comments as it relates to the portfolio. I'll turn it over to Dave Nelson.

Good afternoon, everyone. Thank you for joining the call and thank you very much for your continued support. We are very pleased with the quarter and with several of the trends, but certainly not completely satisfied. Very pleased with our $6 million reduction in our non-performing assets. We're pleased with our earnings and pleased with several trends, including our improving margin. I've now been in my new role for almost four months, and my focus during that time is and has been to identify our priorities and assess how our resources are being deployed, and now we've come to the decision that we are going to be making some investments in our infrastructure, primarily to improve our credit quality and our credit process, and Brad spoke to this but we have created a new position, senior level position that is, for a Chief Risk Officer. This position is new to our organization. We've identified a very experienced and highly skilled individual that will be joining our team next week. The role and the focus of the Chief Risk Officer will expand with time.

There are several types of risk that are inherent in our business, not just credit risk but many others, interest rate risk, compliance risk and technology risk, to name a few and the scope of this position will expand with time, but right now, our priority number one is our credit quality and our credit process and this addition to our team is consistent with our top priorities and we look forward to having Harlee Olafson join our team next week. With that, I'd like to turn it over to our Chairman, Mr. Dave Milligan.

Again, good afternoon. I really don't have anything specific to add to Management's discussion. The Board likewise was generally pleased but not satisfied with the performance of the subsidiary bank during the quarter. My only further comment would be to assure everyone that the Board both at the subsidiary level and the Company level is fully engaged with Management in dealing with our issues, and I think at that point in time I would conclude my remarks and look forward to your questions.

Yes, we would be glad to respond to any questions at this time.

(Operator Instructions). Our first question comes from John Rodis of Howe Barns. Please go ahead.

Good afternoon guys.

Hi, John.

Hello.

Thanks for having the call. During the quarter like you guys said you saw some nice movement downward in non-performing assets. Can you talk a little bit about the trends you were see as far as watch lists and delinquencies, maybe 30 to 89 day past due loans?

Sure. 30-90 day past due loans, I would say relatively flat from the first quarter and relatively flat to maybe just a slight uptick from the end of the year but a lot of those that sit in that close to 30 versus the 90 day category would be kind of on purpose, if you will, in that waiting for financial statements, asking for additional documentation before it is presented to the loan committee for renewal, that was a significant part of that 30-89 day category, so I am pleased with that level of low delinquency and the action plan that's going on there. We are asking more questions and we're asking for more information and it's not uncommon that if a banker brings it in to the credit committee that we may defer until we get some additional information and that might take a week or two for them to assemble it and bring it back in for approval so that piece is okay.

Okay, and you guys talked a little bit, I think it was you, Doug, you talked a little bit about the other real estate portfolio and you talked about recent appraisals and I guess it looks like there's probably maybe 20 different credits in that portfolio. Can you maybe, how recently has each one of those credits been appraised? I mean, is it fair to assume that maybe each one of those has been appraised at least within the last six months, 12 months?

Generally, John, within the last 12 months. That would be our normal practice, certainly if there's anything that would indicate that we need to look at the valuation, we would do that, but at least every 12 months.

Okay, and maybe either a question for Dave Nelson or for Brad. Just obviously loan demand remains relatively weak. What are you guys sort of hearing from your borrowers, your customers as to what would make them get more excited, up beat about their business and ultimately lead them to want to start borrowing again?

That's a tough question to answer.

Realizing there's no correct answer maybe.

I think everyone has looked at how some of these temporary government programs have rolled off as an example, the homebuilding, that tax credit I think expired here in March, April, and some of our folks that were in the homebuilding business had some brisk early sales and it's fallen off, so that certainly is an issue .

This is Dave Nelson, John, and so we have a lot of very creditworthy customers, businesses and individuals who seem to still be making conscience decisions that they aren't ready to expand at this point in time, and conversely our deposits are trending upward, but still some conscious decisions about not yet ready to expand inventories or upgrade equipment but the good news in that is that must mean there's some pent-up demand out there and that we'll be positioning ourselves with the focus on credit quality and credit process now that we'll fully be able to a vail ourselves of that opportunity when it arrives.

John, Dave Milligan, just one brief comment. I don't think there's anything specific to our two marketplaces to answer that question. I think it's more macro and things that you're quite familiar with on the national level, uncertainty over the government policy, uncertainty over tax policy, people have been more burned over the last couple years and I think they are just looking for a little bit more certainty than what they see right now.

That's fair enough. Maybe just one more question, Doug. I noticed the tax rate kind of moved up in the quarter. What's sort of a good run rate to use going forward?

Right at the moment, John, I'd say in the 30% range.

Okay, thanks guys.

Thank you.

Thank you.

(Operator Instructions). Our next question is from Brad Ness of Choral Capital Management. Please go ahead.

How are you guys doing?

Hi, Brad.

Yes, I appreciate you guys having the conference call. With SmartyPig is it as easy as when I look at this adjustment that $800,000 in fee based income will go away, but that will probably show up in the net interest income so it's kind of neutral on an income statement perspective?

That's exactly right, John. That fee was reimbursing us for the difference between our interest expense on the SmartyPig deposits and what we were earning in overnight funds, so yes, on the bottom line it should be neutral but our net interest income, certainly our net interest margin will go up quite a bit.

Okay, appreciate it. And another question here, a little more global in nature. Myself included, a lot of analysts looking at longer term earnings potential of companies, as I look at you guys I remember back seven to ten years ago, consistently put up 2% on assets and 20% on equity within anywhere between 8% and 10% tangible common equity, when we get out of this credit cycle, when credit costs are normal, what do you think the core capacity of your Company should be as far as whether it's ROA or ROE basis?

Brad, I'll take a stab at that. And hedge it all the ways I can, but sitting here today, there's no question that compared to seven to ten years ago, our level of infrastructure as Dave Nelson has alluded to, we're continuing to build it but even today it's much greater than it was seven to ten years ago. Much greater in the compliance area and the internal audit area. You layer in Sarbanes-Oxley, you layer in all of the regulatory changes that have taken place and that are going to take place, level of infrastructure is much higher. Brad, I'll just hazard a comment here that I think that if we get back to 15% ROE and 1.25 ROA, I think that will be a pretty decent level.

This is Brad and Doug touched on it but seven to ten years ago, we really didn't have a full time compliance person, but with all of the compliance and regs that have been pushed down our way, our compliance team today, we've added about eight people and we need to add a couple more, and we're looking to add a couple more, and sending out notices, making sure that we're in compliance with all consumer regs, it is just growing, I won't say out of control, but it's just it's becoming real hard with the old cost structure. It's impossible.

And the other, this is Dave Milligan. The other side of that equation too is we're not quite sure on the revenue side of things some of the actions particularly in the new Fin Reg Bill whether it perhaps limits revenue sources. I don't think we feel we're going to be as effective as much there as some of our larger competitors but nonetheless it may well be that we're going to find out exactly what we can charge and what we can price is going to be severely regulated.

Okay, appreciate that. That makes sense. One other kind of follow-up related question. On the net interest margin side, I imagine the SmartyPig transaction will add 50 or so basis points putting you close to, we'll call it 3.15% interest margin. Is that artificially depressed due to the zero interest rate environment we're in and maybe it should be closer, over the long term, closer to 3.5% or how would you look at kind of the normalized margin for you guys?

Well, it was artificially depressed this past year or so because of SmartyPig and the liquidity we were building, knowing that those deposits would transfer, so if you set that aside, is it artificially depressed because we're at the slower interest rate environment? Well, I guess part of me says it's not artificial because that's the real world we're living in, but there's no question that if short-term rates go up, the margin is going to go higher because the incremental earnings over non-interest bearing deposits for instance instead of being 25 basis points will be whatever the short-term rates are, so Brad, I think that when Smarty Pig goes away, we're going to pop into I think the 3.2% to 3.3% range but if you go back again four or five years ago, 3.50% to 3.75% was our normal rate margin. Will we get quite back there? When there's such unclear visibility on where the economy is going the next couple of years and unclear visibility on the direction of rates, I don't think we're going to see that for a couple of years.

Okay, appreciate it. Thanks guys. Have a good weekend.

Thanks.

Thank you. This does conclude our question and answer session for today. Gentlemen, do you have any closing remarks today?

No, just that we appreciate everybody joining us and I would remind everybody that we did file our 10-Q this morning also and that's available either out on the SEC's website or on our Investor Relations website, so thanks again and we'll visit with you in October.

Thank you.

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