West Bancorporation Inc (WTBA) 2010 Q3 法說會逐字稿

Hello and welcome to the West Bancorporation Incorporated third quarter 2010 earnings conference call. All participants will be in a listen-only mode for this event. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Doug Gulling, Chief Financial Officer. Please go ahead.

Thank you. And we would like to welcome you to our discussion of our third quarter results. We appreciate you joining us today. With me on the call are Brad Winterbottom, our bank President; Harlee Olafson, our Chief Risk Officer; Dave Nelson, our Chief Executive Officer, and Dave Milligan, Chairman of the Board.

I'm going to begin by reading our Fair Disclosure statement. Comments made during this conference 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.

I will begin by sharing some of the -- what we consider the highlights for the third quarter. Our net income available to common shareholders for the quarter was $3.4 million, or $0.19 a share. And on a year-to-date basis $8.2 million or $0.47 a share. And for the quarter our return on assets got above -- a little above that 1% on asset level, and return on equity just a little under 11%. We saw nice improvement in our net interest margin, which was expected and we had talked about that in prior quarters, due to the exit of the SmartyPig deposits, which took place at the end of July.

So there was still one month of the quarter that contained those deposits; but for the quarter, we averaged -- or our net interest margin was 3.14%, and I would anticipate that that's pretty close to the run rate here in the foreseeable future. Our allowance as a percent of loans outstanding was 2.06. That was just barely down from the second quarter. Our charge-offs were a little higher in the fourth quarter than a couple previous quarters, but they were at $4.4 million but $1.8 million of that related to loans that had been previously reserved.

We saw continued improvement in our capital ratios, which is a function of continuing income and a decline in the asset size, particularly due to, again, the exit of the SmartyPig deposits. And then one thing I'll mention. This has no impact on a consolidated basis, but at the end of the third quarter the bank paid off a $10 million subordinated note that it had with the holding company. The holding company in turn purchased about $9.6 million of REO projects from the bank. And we did that so that the holding company could serve as a source of strength for the bank.

The projects we moved up there were ones that we feel could have a longer marketing time, which in turn, depending on what the economy does, could subject those to potential -- further potential losses. And so we feel that that's serving as a source of strength for the bank. So with that summary, I'm going to turn it over to Brad Winterbottom.

Good afternoon. I'm going to talk a little about the loan portfolio and loan demand; and quite frankly, it continues to remain soft. Since 12/31, loan volume is off 9%, 10%; and quite frankly, I don't see that changing at least in the near term. We are out calling on customers and we're calling on projects; but quite frankly, the demand is just not there. It is -- demand is not exceeding what is being paid off.

And I think that that trend will probably continue certainly into the fourth quarter based upon some known payoffs that we anticipate. Credit quality improved, as Doug mentioned. Nonperforming assets were reduced about 22%. We continue to focus on asset quality and you'll hear a little bit more about that. And really, that's all of my comments. Dave?

Well, thank you, Brad. And good afternoon, everyone. First of all, I would like to thank all of you for your continued support and your advocacy. We are very pleased with the trajectory of most of our trends, particularly in terms of our earnings, our margin, and the declining level of our nonperforming loans, which does continue to be our number one priority. That remains the continued improvement in our credit quality.

We are building our infrastructure in alignment with our top priority; and during the third quarter we have added a new senior executive, Mr. Harlee Olafson to our team as our senior -- or as our Chief Risk Officer. Harlee has over 30 years of experience in commercial lending, and his primary focus here with us is to lead our efforts in credit quality and really in all aspects of our credit process. And with that, I'd like to ask Harlee to introduce himself.

Thank you, Dave, and I am truly pleased to have joined West Bank. The overall strength, history, and commitment to the community is evident here; and I get to know that more with each team member that I come in contact with. As Dave discussed, my entire banking career has been spent working in community banking as both a commercial banker and as a manager.

At West Bank, I'm pleased to be able to work together with the rest of the management team and staff as we review our systems, processes and procedures to build and expand our customer base. We have added experienced team members in compliance and credit to ensure our ability to support the overall banking team. And that, we believe, will help them have the opportunity, what they do best every day by providing the best in services to our customers.

Thank you, Harlee. We also have our eye on the future, and we are planning for our future growth. Right now we're in the midst of our strategic planning process, which will be used to create internal expectations leveraging our expanded sales team. And we are also targeting specific areas for growth and developing strategies to support our sales initiatives.

Our investment in infrastructure is not just about complying with increasing regulatory compliance, but it's also about building our sales team and the technology needed to support our growth. And with that, I'd like to pass the conference to Mr. Dave Milligan, our Chairman.

Good afternoon. Just a brief comment perhaps to augment what Harlee had to say. In order to further the focus and concentration on the risk area, the Board has formed a risk committee that is chaired by George Milligan, no relation to me. And that committee will be meeting rather regularly to look into all aspects of risk to the Company. Obviously, credit is very high on that list. But as you're all aware, there are certainly other areas of risk and the Board is committed to doing all that we can to mitigate that risk.

Other than that, the Board is very pleased with the performance of the Company over the last quarter and look forward to continuing that trend. We've now had five consecutive earnings quarters, so I'm a little more comfortable using the word trend; but again, that's again said with some caution. That's all I have to say.

One highlight I meant to accentuate was the fact that our nonperforming assets dropped -- Brad mentioned the percentage but our nonperforming assets dropped to $37 million from $50 million at the end of June. So didn't want to leave that out. But at this time, we would like to respond to any questions that may be out there.

Thank you. Well will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Daniel Arnold with Sandler O'Neill. Please go ahead.

Good morning, guys.

Hello.

Hey. First question is just on the credit front, looked like the OREO costs came down quite a bit this quarter. I just wanted to see what you guys were kind of generally speaking. Are you guys having more success in moving that stuff off your books? And have real estate balances stabilized a little bit such that the marks that you guys had previously taken seem kind of appropriate now, and that's the level that you guys are able to get these things off at?

That number's a combination -- a net number between our ongoing expenses of carrying REO and any gains that we have from the sale, and we were able to close some sales this quarter. We did not have the marks in the third quarter that we did in the second quarter, so that was an improvement. And that's just -- and that part of the equation's going to kind of move around and fluctuate as time goes on.

I mean, we work to make sure that none of our appraisals are less -- are greater than 12 months old; and so depending on the timing of those appraisals, we may -- we evaluate everything every quarter but formally update appraisals every 12 months. So that could jump around a little bit.

Okay. And then I mean, I'd say the biggest positive for me this quarter was the margin. Obviously it was related to those SmartyPig deposits. I guess, since you guys only had two months of benefit from that this quarter, should we expect kind of half the growth that you saw this quarter kind of to continue on to next quarter or -- ?

Well, there might be a little bit of an uptick from where we are, but we're also seeing some investments called away in this environment. So I'm a little hesitant to state that it's going to improve much more from where it is right now.

What was like the average cost of those deposits?

That went away?

Yes.

Around 2%.

Around 2%. Okay.

And if you recall, though, for most of this year, and if you look on the -- particularly in the 10Q, in the noninterest income area, we have a line item for SmartyPig service fee; and that was a reimbursement for the fact that those were a little higher cost deposits. And so even though our margin improved, there wasn't any real benefit to the bottom line because of the reimbursement we had been getting for that.

Okay. So there was a revenue offset to the margin side.

That's right.

Okay. And then kind of -- last question, mortgage banking income obviously re-fi volumes are extremely high right now, and that was evident in the numbers that you guys put up. How have you guys been seeing volume so far into the fourth quarter? Has that slowed down at all or is the pipeline just as strong as it was in the third quarter?

Pipeline is as strong, if not a little stronger.

Okay. So should I expect that to at least continue for the next quarter or two?

Well, at least through October 29th.

Fair enough. Fair enough. All right. Guys, thanks a lot. I appreciate it.

Yes, thank you.

Our next question comes from Daniel Cardenas of Howe Barnes. Please go ahead.

Good afternoon, gentlemen.

Hi, Dan.

On the OREO purchases by the holding company, what was the holding company's capacity to do additional types of purchases, these types of purchases?

Right at the moment, there isn't a lot of additional capacity. We're thinking about ways to try to increase that, but at the moment there really isn't much additional capacity.

And those loans, were they purchased at a gain or at par?

They were purchased at the net realizable value .

Great. So then as I look at the improvement on nonperformers during the quarter, the majority of it then was coming from that $9.6 million purchase? Is that right?

No, no. The improvement that you're seeing is on a consolidated basis. So what I described or -- that movement to the holding company really doesn't have any impact on the consolidated numbers. That dropped from $50 million to $37 million was -- did not have anything to do with that $10 million movement. That $37 million is a consolidated number, adding the holding company and the bank together.

At 13, approximately $13 million reduction in NPAs would be a combination of refinanced elsewhere, out of the bank, asset sales or charge-offs.

And those asset sales then, are there potentially more of those in the pipeline right now?

Yes.

So we could see continued improvement, then, as you guys are working on chipping away at these levels?

We are optimistic. I don't want to -- I don't think any of us want to be committed to tell you that those numbers are going down, but we are spending a lot of time and energy trying to get -- reduce those volumes.

Okay. And what are watch list trends looking like right now? Are they also moving down? Are they stable?

They are moving down.

Great. All right. Thank you.

Yes, thank you.

(Operator Instructions) Our next question is from Brian Martin of FIG. Please go ahead.

Hey, guys.

Brian, how you doing?

Good. Say, those credits you talked about that are in the pipeline that maybe -- I guess you're not confident are going to get better, I mean, are those -- can you quantify kind of the size of those credits? Are those larger credits, smaller credits or kind of a combination or -- just a little bit more color?

We don't make many projections and just due to the uncertainty of that, I hesitate to throw numbers out there. Hopefully at the end of the fourth quarter when we have a call, we'll have some further decline, but I just hesitate to throw a specific number out there.

Okay. How about the -- you talk about the loan portfolio continuing to shrink and the current market conditions. You also talk about you're targeting specific areas for growth. Can you elaborate a little bit on that?

Well, we have -- our loan balances have shrunk. Obviously, when our economy's not expanding, I'd think it's reasonable that our net outstandings would also be reflective of that. But we have a lot of very credit-worthy customers, individuals and businesses that are still making conscious decisions that now is not the time to purposely expand their businesses and grow their inventories or upgrade equipment or put an addition on a building. So the good news in that is we believe there is some pent-up demand that's building and we're positioning ourselves to be in the best position to really avail ourselves to that opportunity when it comes.

But at the same time, what we're doing on purpose is really having a robust calling program, knowing that our new loan volume is going to have to come from some place else other than just through growth. So we are targeting very specifically high credit quality opportunities that we're aware of and being very specific about who we're trying to do business with.

I think for those of you who aren't that familiar with Iowa, or the marketplaces that we operate in Iowa. It's worth pointing out that the two markets we serve, which is greater Des Moines and the Iowa City, Johnson County market. Johnson County, of course, location the University of Iowa, their unemployment rate is somewhere in the 4% range, and their economy has remained fairly robust throughout this downturn. In Des Moines, although we haven't been quite that fortunate, I think unemployment in Des Moines is somewhere, I think I saw the other day 7.4% or so. While again, it's not where we want it to be, I think compared to a lot of our peers nationally we may be better positioned than some.

Okay. How about just lastly with credit getting -- taking the turn for the positive like it did this quarter and capital getting a bit better, how are you guys looking at TARP at this point? Has there been any change in how the Board looks at it at this point?

This is Dave Milligan again. In our press release, I don't know if you had a chance to look at it, we did make the statement, and I'm just going to quote, I wouldn't want to elaborate beyond this. "Due to the continued profitability of the Company, the downward trend, the Board is evaluating alternatives for the repayment of the preferred stock and planning for the resumption of dividend payment to common shareholders." I think I would leave it at that. For the simple fact that we put it into the press release, we wouldn't have put it there if we didn't mean it.

Okay. All right. I appreciate it.

Thanks, Brian.

Our next question comes from Brad Ness of Choral Capital. Please go ahead.

Hello, guys.

Hi, Brad.

Follow-up question here on capital. With your tangible equity assets now sitting at around 8.2%, do you feel that that's a good level for the intermediate long-term, or would you like to see that higher or do you think that's maybe too stout? What's you're gut feeling regarding where you guys should be on kind of this tangible common equity ratio?

Yes, Brad. This is Doug. I think that's a pretty good level right now. We were down around 6 not too long ago; and I guess in my mind I thought we get over 7, we would be in pretty good shape. So sitting here at 8, I think that's a pretty decent number.

Okay. And conceptually, as I look at the ability to start paying some cash dividends and knowing that you guys historically had been maybe 60% payout type Company, in theory what do you guys think of where a Company like you guys should be as far as a dividend payout ratio?

This is Dave Milligan again. Clearly, I do not see a resumption at any time in the foreseeable feature, anyway, those levels. Even if we were in a position to do those levels, I'm not sure it would be advantageous in the best interest of our shareholders. I would suspect ultimately we could get somewhere in a 30%, 35% payout would be much more realistic going forward.

Okay. Appreciate it. And as I know you guys have made a lot of investments in the infrastructure over the past many years. As I look at expenses going forward, is that infrastructure buildout nearing its kind of natural end, I guess, as far as the overbuildout or just where the growth rate is a little bit more aggressive than it has been over some of the previous years?

I'll take this. This is Dave Nelson. That's a very good question. And we are nearing the end of what we feel that we are doing here in the near run; but it's not -- our investment in infrastructure isn't just about positions and infrastructure that's non-revenue generating. We're also -- we're expanding our sales team. We're making some investments in technology. In terms of what we have planned in regards to that, we're almost complete with that.

Okay. Just a couple more questions here. In the -- this relates to the income statement, the $253,000 for SmartyPig. Should I assume that in the fourth quarter that that $253,000 will go away, but that probably $253,000 will go to the net interest margin, fee based income?

Yes. Exactly, Brad, yes.

Okay. And last question, I'll let some other people jump in. The miscellaneous loss, I noticed in the 10Q you cited some losses in secondary market loans due to documentation and underwriting guideline violations. Could you just give me a little more color on that?

Which number is that?

$100,000.

Oh, about $100,000. Sales in the secondary market, the private mortgage insurance market is really scrubbing loans purchased that we have sold, and they have defaulted. And we had one specific instance where we purchased back and maybe two others that we set aside. And those would have been loans that probably originated and sold maybe three years ago, and I think we've created some additional procedures this year to really minimize that.

Okay. And is that portfolio under reviewed?

Say that again, Brad.

Has that portfolio been reviewed to see if there's any other instances of underwriting issues?

It has and we are doing further analysis, but we have -- we've scrubbed it pretty good.

Okay. Appreciate it, guys. I'll let some other people jump on.

Thanks, Brad.

(Operator Instructions) We have a follow-up from Daniel Cardenas. Please go ahead.

Hey, guys. I guess in terms of lack of meaningful loan growth within your footprint, what's your appetite for doing participations?

That's funny.

Not good, Dan.

Just wanted to make sure. And then in terms of some of the investments that you're making in terms of expanding your sales team and technology, can you give maybe a little bit more color as to how many folks you're looking to hire, what kind of initiatives you're looking to undertake?

Sure. Well, the major addition is the new position of our Chief Risk Officer. We're also making some additions in our compliance area, preparing for all of the new rules that are yet to be written, and to help us absorb what that may mean to our industry and to us.

We're also -- we're making additions into our sales team in preparation for a more robust economy where we want to position ourselves in a place where we have the staff and the expertise to really take advantage of the growth that will be available when we start getting some economic expansion. So it's in sales. It's in credit infrastructure. And a little bit in technology to support our credit and sales processes.

Okay. And then in best guess, when do you think that begins to occur? When do you think we begin to see improvement in the economy so you can take advantage of these investments?

That's a good question. I certainly -- I don't see much improvement, if any improvement, through the first quarter and I -- typically around here things seem to get a lot more active on the commercial loan demand side towards the end of the first quarter, early second quarter and that's what I would say I'm hoping for in 2011.

Okay. And then just given your enhanced capital position, does this whet your appetite for any potential M&A type of activity?

Dave Milligan again. Never say never, but I doubt it and clearly probably not outside of our footprints. If there was an opportunity, I suppose the Board might conceivably look at it, but I think that that is unlikely in the near future.

Thank you.

(Operator Instructions) Gentlemen, we're showing no further questions. Do you have any closing remarks today?

No, we don't. I guess just to thank everyone for joining us, and we'll visit with everybody at the end of January to talk about fourth quarter. So thank you.

Thank you, gentlemen. The conference is now concluded. Thank you for joining. You may now disconnect.