West Bancorporation Inc (WTBA) 2010 Q4 法說會逐字稿

Good afternoon, and welcome to the West Bancorporation, Incorporated quarterly 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, Executive Vice President and Chief Financial Officer. Please go ahead.

Okay, thank you, and welcome, everyone. Thank you for joining us today. I'd like to first of all introduce everyone who is on the call with me. We have Dave Milligan, our Chairman; Dave Nelson, our Chief Executive Officer; Brad Winterbottom, President of West Bank; and Harlee Olafson, our Chief Risk Officer.

And let me 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.

Again, welcome, and to begin the call, I'm going to turn it over to Dave Nelson.

Thank you, Doug. Good afternoon, everyone. Thank you very much for joining us.

In reviewing and looking at our fourth quarter, we're certainly very pleased with our progress, and we're very proud of the success of the team during the fourth quarter and throughout 2010, but we're certainly not satisfied. Very pleased with the continued improvement we've had in our non-performing assets. Essentially we've cut our problems by more than one-third during 2010, actually by 37%, 37% reduction. We've also been very focused on making infrastructure investments. And this investment in infrastructure is not only to enhance our credit process and our credit quality, but they're really also designed to position us for growth.

We've recently completed our strategic planning process, and we involved all team members of the organization in the process, and we asked everyone to reflect upon and answer two simple questions -- those being, why is it that people choose to do business with us, and what does it mean to be a community bank? The purpose behind that was really to reveal our competitive advantages, and be able to identify what's most important to us and to our customers, and so we can remain focused upon that.

Next step in this process, and a top priority of mine, is to develop expectation clarity at all levels of our organization for every position, that people know exactly what's expected of them, and what it is that we can do on purpose to stay focused on what is most important. And we're really shifting focus to the sales and business development efforts. We're in a position now where we believe we're poised for growth, and are looking forward to what lies ahead.

Also as part of our strategic planning process, we will be making applications for the small business lending fund, and we will also be filing a shelf registration. So later in the year, as things progress, we'll be able to evaluate our course of action regarding whether or not we would be -- what our alternatives are for the repayment of TARP, but look to that as being an area of focus for us here during 2011.

And with that, I'd like to turn it over to Brad Winterbottom, our Bank President, for your thoughts about our loan growth and our sales activities.

Thanks, Dave. First, I'd like to talk about our residential mortgage area that's lead by Jim Glaser. That group produced revenue year-over-year up about $400,000 in fees, and we are looking for good things to come in 2011 as well. That staff just about doubled by mid-year of 2010, so we have hired and continue to look for very seasoned mortgage originators in the marketplace, and will continue to do so in 2011. Loan demand continues to be soft, but there's a little bit of hint that maybe some things are coming back. And certainly, Dave touched on us spending some money on infrastructure. We've taken some duties off our business development folks' hands and moved that to support staff, and we have been spending a lot of time working on business leads and creating some sales activities that I think will pay off in 2011.

Harlee Olafson is going to talk more about asset quality, but with an improvement in our non-performing, I would also say our past-due loans at the end of the year was about as low as they've been since about 2007, and I'm very pleased with that. If you back the non-accrual out, past dues 30 days and more still accruing minus NPAs totaled about $1.6 million. So asset quality certainly is improving.

That's my brief comments, and I'd like to turn it over to Harlee.

Thanks, Brad, and good afternoon, everyone. As Brad did discuss, our asset quality over the last quarter has improved. In conjunction with that, each quarter we go through the process of evaluating our other real estate portfolio, and on an annual basis have made adjustments to our carrying values of other real estate based on those updated appraisals. So we did have some costs in regard to that based upon values not being as strong as they were in the previous year.

Secondly, we are also in the final stage of looking at a loan processing system that will help us become more efficient and effective in our loan decisioning process and our ongoing monitoring of individual customer relationships. In conjunction with that, it will also be able to help us stress test our portfolio based on different factors that might occur and different scenarios that we might input.

As David talked about, we have added to our team in both the compliance and credit area. And in that, with those additions, we will be more proactive and have a better ability to stay out ahead of regulations, and strengthen our total credit administration. These additions will also help us in Brad's area take advantage of the opportunities within the market to grow a sound loan portfolio.

That's pretty much all I have, and I'd turn this back over to Doug Gulling.

Okay, thanks, Harlee. I'm assuming most everyone on the call has seen the press release, and the accompanying financial statements and numbers, but I just wanted to hit on a couple of items. One thing, the fourth quarter was the first full quarter without the SmartyPig deposits on our balance sheet, and as a result our net interest margin is up to 3.46%. Our capital ratios are all strong. We have a table in the press release showing those measures.

As far as the earnings for the quarter available to common shareholders, we were at $2.9 million, or $0.17 a share, and that's down a little bit from the third quarter. But the third quarter, if you recall, had a non-recurring or unpredictable item in the form of proceeds from bank-owned life insurance of about $440,000 approximately. So all things considered, and given where we are in the economic cycle, credit cycle, whatever, we felt good about the fourth quarter.

And with that, I think we will stop our prepared remarks, and ask for any questions that may be out there.

We will now begin the question and answer session. (Operator Instructions) We have a question from Daniel Cardenas of Howe Barnes. Please go ahead.

Good afternoon.

Hello, Dan.

A quick question on the infrastructure investments that you were talking about earlier. Have all of those been made?

Dan, this is Dave Nelson. Yes, essentially they have all been made. Some were during the third quarter with the remainder being prior to year end during fourth quarter.

So then as we look at the fourth quarter expense line, that probably seems to be a pretty good run rate as we look forward into 2011? Is that a safe statement?

Pretty much, Dan. I mean there were two or three people added during the fourth quarter that wouldn't have the entire salaries in the fourth quarter, but for the most part, it's pretty close to a run rate.

Okay. And then just a quick question on loan growth. I think you'd said that you're starting to see hints or green chutes that growth is emerging. I mean what kind of evidence are you seeing?

Oh, not getting real specifics but a couple of fronts. One would be refinancing debt at other banks and there's a couple of banks here in town that are having some difficulty and that may be causing some unrest. So we're getting some opportunities to look at refinance of that business. And then in addition to that, there has been a little activity in terms of some equipment, excuse me, equipment financing and maybe a few construction projects.

So then as we look at-- I mean during the quarter we saw a little bit of contraction in the loan portfolio. I mean do you expect some continued bleed in the first quarter and then stabilization?

Yes, we have two fairly good size transactions that we know have run its course and are planned pay off in the first quarter, and those are significant to us. They're going to go away. So, I would think that at the end of the first quarter, it will be hard to have loan growth just because of those significant pay-offs. But the activities and the things that we're currently chasing lead me to believe that 2011 will reverse our last two-year trend.

Okay, so really more expectations for some single-digit loan growth, low single-digit loan growth probably for 2011?

Yes.

Okay. And then on the margin, the SmartyPig, the sale of the SmartyPig deposits definitely helped. I mean is there still some room for further margin improvement as we look forward?

Dan, I think there might be a little bit but probably not real significant because while we may be able to tweak some deposit rates a little lower, we do see municipal bonds being called from time to time. We see loans that have been on the books for a few years repriced at lower levels. All in all, I don't think it's going to change significantly over the next quarter or so.

Then last question and I'll step back here. As I look at your efficiency ratio and the community banking strategy, I mean do you kind of expect that number to start to trend up in 2011? You ended the year at about 47% in the fourth quarter, but is it more expensive to execute on the community banking strategy, which is typically higher touch, higher service?

Well, I think we've got most of the infrastructure in place that has been planned. So, I don't really see the efficiency ratio moving up much from fourth quarter. I don't think you're going to see a significant increase in the efficiency ratio. Now keeping in mind that the efficiency ratio doesn't include impairments or the allowance, that type of thing, but it does include REO write-downs. And we could still certainly have some more write-downs, the longer we hold some of this REO property. So I think any change in the efficiency ratio is going to be more due to those types of things than it's going to be to just our overhead structure.

And then in addition to that, there's probably some elevated legal expense too involved as we work through some of the reduction in our non-performing assets. We've been very proactive in getting them removed out of the bank.

Okay, great. Thank you.

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

Yes, how you guys doing?

Hi, Brad. Good.

A few questions here. One, with your effective tax rate, it jumped around a lot, quarterly, throughout 2010, I think it ended for the year around 28.5%, right around there. Would that be a pretty good assumption looking forward into 2011?

Brad, yes, it would be. In fact I had our tax people kind of look at that for next year and we're thinking a 29% effective tax rates going to be a reasonable rate to assume next year.

Okay, and just some housekeeping items here. Regarding your non-performing assets, it looks like I saw the OREO balance and I saw the total NPA plus 90s balance. Is there any way you could give me the non-accrual and the renegotiated balance also?

Yes, I will. Non-accrual balance is $7.945 million. The loans 90 days past due and still accruing is $198,000. Our TDRs, our troubled debt restructured loans, $4.787 million. Then as shown on the balance sheet, the other real estate owned is $19.193 million. We have a non-accrual investment security of $1.339 million, and that totals our $33.5 million in non-performing

Okay, great, thanks. It sounds like you guys feel pretty good about the state of the portfolio and state of the economy where it looks like those non-performing assets should be declining in 2011?

We believe that the trend line is down. We don't know that it's going to be a straight line down but we do believe that the overall trend is down.

Okay, great. Lastly here, I know you touched on the margin and it sounds like it's relatively stable, too, maybe some slight upside in kind of a stable rate environment. What happens when the Fed starts increasing interest rates? Can you just give us some clarity kind of near term and longer term impacts?

Sure. We are slightly liability sensitive and so that would indicate that if rates do start to rise that could hurt us. But a lot of the liability sensitivity has to do with managed rates on non-term deposits. So, they won't move in lock step with any increase that the Fed or the market shows. Overall, our projections show if rates start moving up that we should stay fairly confidant, fairly well balanced moving forward. There's no question that we've got some loans with floors on them where tied to prime but with a floor and primes got to move a little bit before we see increased yields on those loans, but that's all built into our interest rate sensitivity. So overall, I don't think that it will have a significantly detrimental effect on us.

Okay, great. Actually let me throw out one more here. We are in a very low interest rate environment for short-term rates, which is I think is irregular. Once we get to kind of a more normalized interest rate environment call it Fed funds at 3% or 4%, is there a potential to get closer to a 4% margin, kind of like the good old days? Or do you think 3.5% margin is probably a good core long-term margin for you guys also?

Brad, that's kind of hard to guess at, but if you just look at our margin over the last 10 years, I think our highest was around 3.75%. I don't know that things are going to be a whole lot different going forward that would suggest that we could get up to 4%.

Right, okay. Great. Thank you.

Yes, thank you, Brad.

(Operator Instructions)This concludes our question-and-answer session. I would like to turn the conference back over to Doug Gulling for any closing remarks.

Well, we have nothing else to add. We just appreciate your interest in our Company and spending a few minutes with us today. Sitting here today we will plan on filing our 10-K around March 11, so that'll probably be the next piece of financial information that comes from the Company, so you can look forward to that. Otherwise, thanks for joining us.

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