West Bancorporation Inc (WTBA) 2011 Q4 法說會逐字稿

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

Okay, thank you. Thank you for taking the time to join us today. With me on the call are Dave Nelson, President and CEO of West Bancorporation; Brad Winterbottom, President of West Bank; Harlee Olafson, our Chief Risk Officer; and Dave Milligan, Chairman of the Board.

I'll 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, thank you for joining us, and to start us off, I'm going to turn it over to Dave Nelson.

Thank you, Doug, and good afternoon, everyone. Thank you for joining us. Well, 2011 felt real good for us, and we finished the year stronger in the fourth quarter. During the year, we significantly improved our credit quality, which translated into higher earnings, which then allowed our capital position to become strong enough to redeem the preferred stock investment. We were able to write a check to pay off the TARP investment without issuing any additional stock or borrowing any money.

We enjoy very strong and favorable relationships with our regulators, and based upon our financial position, our Board of Directors voted to increase our fourth-quarter dividend to $0.08 per share, payable February 28, 2012, to shareholders of record on February 6. We were also, last year, we were very pleased to be a State of Iowa's leader during 2011 in stock value appreciation with our 23% gain. Now, during this year, or during 2012, our primary focus is on our sales and revenue-building activities. We certainly do expect continued focus and improvements in our credit quality, but our larger challenge will be to grow profitably-priced quality loan portfolio. We are doing several things on purpose to position ourselves for success with that objective, and I would like to ask Brad Winterbottom, our Bank President, to provide some more thoughts and specifics around that.

Thanks, Dave. We are focused -- we have our sales team focused on new sales activities. We are creating much more, a number of new sales calls to -- and we're targeting existing customers, and we're targeting prospects, especially those customers that might be banking with some folks that have had some known problems, if you will. We've got an aggressive budget for 2012 in terms of new calls.

And you might be looking at loan volume at 12-31 versus 9-30 and why did it decrease? And really, we had three significant payoffs during the quarter. We had a customer sell an asset, a rather large asset, and that was paid off during the quarter. We had a refinance out of the Bank, there was a note maturing. We thought we were going to get the renewal. They had asked for additional concessions, or terms and conditions that we were not comfortable with, and another institution was comfortable providing those, and so we were refinanced. And then we had another customer that was looking for a significant amount of new money using same-collateral, and we chose to pass, and somebody else was willing to do that. So between those three transactions, we had about $40 million in payoffs, which impacted the quarter.

Okay. Thanks, Brad. Harlee Olafson, our Risk Officer, has a few comments.

Thanks, Doug. I don't think that anyone believes that credit quality or regulatory compliance ever becomes less important, and we certainly continue to believe that. Nevertheless, we're pleased with our continued improvement in credit quality. Across the board, we had decreases in non-accruals, substandard loans, and other real estate. The negative provision in the last quarter was necessary due to credit quality improvements, historical experience factors, and overall loan outstandings. I'm also pleased that we have ongoing improvement in our underwriting and analysis of both new opportunities and the existing portfolio. We certainly have a team in place at this time poised to support our focus for new loan growth.

Okay. Thanks, Harlee. When I think about the quarter, I think we've hit the high points, and we'll open it up for questions in a moment. However, during the year when we have these quarterly calls, we always have our 10-Q filed in the morning, and out there for people to look at, and of course that's not the case with the 10-K. That won't be filed for a few weeks, and I think there might be some analysts that would like a couple of average numbers. So let me just share those briefly. Our total interest-earning assets, average interest earning assets for the fourth quarter were $1,209,207,000. The average assets of the balance sheet, again, the quarterly average, was $1,293,661,000 and average equity for the quarter was $122,600,000. So with that, we would like to respond to any questions that may be out there.

(Operator Instructions). Our first question comes from Daniel Cardenas at Raymond James.

Just quickly, I missed it when you gave the total amount of payoffs during the quarter. Could you give that back to me?

Those three specific loans totaled right at $40 million.

Okay, so absent that, if they would have stayed the same, you would have shown net loan growth of, what, about $10 million or so?

That would be correct, Dan, yes. Of course those payoffs occurred at various times throughout the quarter. But on a quarter-end to quarter-end basis, that's correct.

Okay, all right. And then in terms of the new growth that came in, can you give me some indication as to the type it was? Was it commercial? Was it C&I? Was it mortgage?

It was primarily C&I business, maybe a little bit of flavor of commercial real estate.

Is that owner-occupied?

Yes.

All right, and then as I think you were alluding to, it sounds like your pipelines are building up a little bit as we're into the first quarter?

Absolutely, yes.

All right. And the flavor of that, is that also kind of C&I and CRE-related?

Yes.

Okay.

It's a combination of both, commercial real estate and C&I.

And could you give us a breakdown on non-performing assets, the dollar amount and maybe by category?

Yes. I'm just flipping to a page here, Dan. At the end of the year, total non-performing assets are about $18.7 million and nonaccrual loans are $4.35 million. REO is just under $11 million. TDRs, $2.1 million, and non-accrual investments, that one pool trust preferred that we have, $1.2 million.

Okay. So, the numbers are down on a sequential quarter basis.

About $2.8 million, something like that.

Okay, and how are 30- to 89-day trends looking right now on a linked quarter basis?

We're at -- our 30 days and more past dues at the end of the year was approximately -- I want to say just under $9 million, which included about $4.5 million of non-accrual, and we had one other rather large loan, it is a substandard credit. But between the nonaccrual and that substandard credit, that is approximately 93% of the loan portfolio that's over 30 days past due. 30 days and infinite past due. Not 30 to 89, but 30 and all the way up.

Dan, yes, just to subtract out the numbers Brad talked about, the 30 to 89 portion would be $5.2 million.

All right, and then just kind of jumping over to the margin, for the quarter, could you -- I didn't see a cost of funds number. Could you provide that for the fourth quarter?

Sure, you bet. It was 1.27%.

Okay. Is that for total cost of funds, or is that for cost of interest-bearing liabilities?

That's total cost of interest-bearing liabilities.

All right. How about total cost of funds? It was 105 last quarter.

Dan, we don't compute that. We don't throw our -- I don't have that, Dan.

All right. So then as you look at your cost of interest-bearing liabilities, it was down a little bit. I mean, how much more room is there to bring that number down going forward? I know Iowa's a competitive market on the deposit side, but is there a lot of flexibility to shave that number down during 2012?

Not a lot. If the market rates stay where they are, we're not getting much -- there's not much repricing opportunity left in the CD portfolio. We did tweak some of the non-deposit, or the non-CD deposit accounts at the end of the year, including our Reward Me checking account, where that -- and we dropped that rate, I believe December 1, so there's a partial benefit in the fourth quarter.

But that headline rate had been 3% on balances up to $30,000 and 50 basis points over $30,000. And we dropped that to 2% on that first tier up to $30,000 and 25 basis points over that. And of course, that's one of those accounts where you need to have a few debit card transactions and get your statement electronically, that type of thing, to earn that rate.

So once you factor in some of those income items, the effective cost of that account is lower than the stated interest rate. But we did drop that at the end -- around December 1.

Okay. All right. So then, as I look at the margin, I mean, we had some compression in the quarter, and obviously I think some of it was probably due to the paydowns, but absent any meaningful loan growth, is it going to be -- do you have the ability to expand that number?

I think a little bit. If you notice, our investment security portfolio totals, it went up in the quarter and we did add to that, but it was right at the end of the quarter. And so we moved roughly $50 million out of liquid funds, Fed funds, into the investment portfolio at a yield of about 1.88%, and so we'll get the full benefit of that in the first quarter. And so that should give us a little bit of a benefit in the margin.

Dan, I would add, which would be a little opposite to what Doug just mentioned. The competition out there, we have a lot of pre-payment penalties. But notes are coming due, and balloons are coming due, and there is pressure to lower the rates from what's been on the books. And with the Fed discussion that took place this week, I think that will continue. So, it's tough out there.

Okay, and how about your securities portfolio, the other portion that you didn't grow? I mean, is there a lot of interest rate risk right now in that portfolio?

Almost everything we've added in the last two years has been in the mortgage -backed security category, and with a relatively short term effective life, and so it's going to throw off a fair amount of cash, which may or may not be g good. When we were doing it over the last year or two, we thought rates would be headed up by now. But, so there are going to be a fair amount of reinvestment dollars flowing from that investment portfolio, and it looks like it's going to be at fairly low rates again this year.

All right. And then just jumping back to loans, maybe if you could talk -- you said competition is pretty intense right now. The growth that you did see, was it taking market share away from larger players or smaller players, or a combination of the two?

I would say primarily similar in size to us, but maybe known financially struggling, maybe asset quality struggling.

All right.

If that helps.

Yes, it does. So, as you look forward, would any future growth be more a market share grab rather than businesses looking to expand?

Exactly. It will be a market share grab. And if we get any help with the economy, then we'll have our existing customers expanding, and that will help.

Just one question and then I'll step back. For purposes of calculating book and tangible book, what was your common share outstandings for 4Q?

They did not change, Dan. It would be 17,403,882.

Okay, great. I'll step back for now.

Okay. Thanks, Dan.

The next question comes from Brian Martin at FIG Partners.

Doug, maybe -- I guess I'm not sure who would be best to take it, but just as far as the classifieds, can you talk about classified and substandard, and do we think about the trend that we see in non-performings and that's how classifieds and special mentioned trend below the fourth quarter when you guys filed the K?

So that -- I'm not quite getting your question, Brian.

The substandard and doubtful loans that you publish in the, in all of the filings, just -- how did those track this quarter? And did they track similar to the performance we saw in the nonperformings?

Yes. No, got you. I'm looking at -- I want to make sure I tell you the right thing. Substandards trend down just a little bit.

Okay. How about, but how about the special mention, or the watch list? Did those--?

That trended down also.

Okay. So, both favorable trends there. And just from a standpoint to the work you guys have done on the credit front, when you talk about the pace of dispositions, as you go forward here, I mean, I guess do you think the improvement from here slows down a bit, given what you've already seen and the work you've already done, or do you see any big credits and resolutions that are on the horizon, or where do things stand that way? I don't know. In the bucket of nonperformings if there's one or two large ones that you see some resolution on, or is it going to drag out for a bit of time here?

This is Harlee Olafson. Yes, the dispositions have certainly been at a relatively high level during the last year and a half, especially. There is a couple of significant credits that we have plans for disposition early this year. Now, nothing is written in stone at this point, but we do believe that we have some plans that would even strengthen our portfolio more, with those dispositions this first quarter, or early in the next quarter.

And let me add to that, we've had a couple of credits that sit in the substandard category. Real estate secured primarily. We don't have the operating lines, and in both those instances, one of them actually sold an asset, and they sold it on contract. So, we were able to pick up that contract as additional collateral, which, we still have that in substandard.

But we have nice third party repayment sources in that transaction, and then in another real estate-secured transaction, they were able to renegotiate their borrowings and bring in equity that, that will -- substantially enhances the repayment probability. And we just need to see some history, a little more history of payment activity there and those would be -- those may warrant upgrades.

Okay. That's helpful. Thanks. And, maybe one of the just broader picture questions. From an expense standpoint, do you guys see some of the pressure that a lot of banks are expecting on the margin, maybe some of it's defensible this year, maybe not as much next year, depending how low the rates on, how much you're able to bring down the cost of funds.

At some point that bottoms out and you're still having the pressure on the asset side. Is there anything to think about on the expense side that you guys are contemplating that can help you get, squeeze something on that side that you haven't already done? Or is it already at a level that you're just not able to do a whole lot with the expense side at this point?

Brian, I think that sitting here today, we think the expenses are probably at the level that we need them to be. I don't think we would anticipate any substantial expense cuts coming out of our infrastructure.

Okay.

Yes, I would answer it about the same, but maybe a little differently in that I think a couple years ago, we tried to cut the expense. Our focus now is growing the top line.

Okay. All right. And then just from an acquisition standpoint or M&A standpoint, I guess what are your thoughts on the market? I guess, what opportunities are there for you, or if there's not opportunities, I guess if other people look at opportunities, how did that impact you guys if you don't act on something at this point, I guess, if you can just give a little color on that?

Well, Brian, this is Dave. And we certainly are very aware of a lot of opportunities that exist, and we receive a lot of inquiries. It's something that's part of our strategic planning that we continue to discuss and to evaluate. Certainly do not rule any of that out, but it's something that we continue to study.

Okay. I mean, do you expect much activity in the state this year, I guess, in your mind? From what you're seeing out there, it sounds as though there's a fair amount of conversation going. Is that fair to say, or is it more or less than it has been?

Well, we do, we do anticipate that when our economy returns to some sense of normalcy, that the consolidation in our industry will pick up. It's also our opinion that with some of the higher costs of doing business, that some of our smaller institutions might be more incented than they have been in the past to gain some economies of scale and some efficiencies, and may be looking for partners.

I think we're all aware of those amongst us that are struggling with their capital adequacy that may be forced to find a partner, or to merge. But yes, there's a fair amount of activity that I think that we could say that it is taking place or discussions, but I think, I think that level will probably increase in the years ahead from where it's at today.

Okay. I mean, I guess it just seems to me as though there's a lot of the smaller banks are more spread-dependent. If the margin pressure is ultimately coming, they are probably worth less over time, that they would be wanting to at least try and do something sooner to align themselves with a partner such as yourself, that is stronger and they could benefit that way from, and I guess it's just -- it doesn't seem like it's materialized up there as of yet, and so there's still a bit of a disconnect. But I appreciate the color. So thank you, guys, for taking the questions.

(Operator Instructions). And our next question comes from Brad Ness at Choral Capital.

I have several questions here. The first one on loan growth. I know the fourth quarter disappointed me, as far as the net loan growth, but looks like you guys are geared up towards more impressive growth in 2012. Can you quantify whether dollar amount or percentage that you think would be realistic in this environment?

For next year?

Exactly.

Yes, I guess, Brad, I would probably hesitate to do that from the standpoint that we just -- we don't give a whole lot of guidance. I mean, it's -- you use the word significant, and I don't know what significant, it means different things to different people. I think that without being very specific, I don't think any of us expected to crack double digits.

Sure. Okay. I appreciate that. Let's see, I have several questions which will hopefully give me more color on net interest margin and potential pressure. For one, what is your average duration on your investment securities portfolio right now?

It is right around three years.

Three years, okay.

Yes.

And what's the breakdown of your loan portfolio between variable or adjustable and fixed-rate loans?

The chart that you'll see in the 10-K, which I know is still a few weeks away, but it's going to show less than $100 million in variable. And the reason, we do have more loans that are coded variable, but they have floors on them. And so if the floor is more than 150 basis points or so above where it would otherwise be, we consider that a fixed-rate loan. So in this environment, a good portion of our portfolio would be considered fixed.

Okay. So, it may be a different way of asking it, do you have a dollar amount of your loans that have floors on them?

I don't have the precise number in front of me, Brad.

Do you have an estimate?

My estimate, and take it as a pure estimate, my recollection is somewhere in the $200 million range, but I think that's in the ball park. But I can't get any closer than that right now.

Sure. Do you happen to know your average floor? The rate?

Oh, the average floor would probably be 4.75%.

Okay, and let's see, lastly here, you obviously had a great quarter as far as mortgage banking revenues in the fourth quarter. What does the pipeline look like currently?

You're talking about the secondary market?

Yes.

Their pipeline is very full. I anticipate a very good first quarter. And we are -- we continue to look at maybe expanding that, as well, that area in terms of adding additional originators. We haven't committed to it, but we, we are looking at it.

Okay. Appreciate it, guys. Have a good weekend.

(Operator Instructions). At this time, there are no further questions. I would like to turn the conference back over to Doug Gulling for any closing remarks.

Only would like to just thank you again for joining us, and we'll talk again when we have first-quarter results. Thanks a lot.

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