West Bancorporation Inc (WTBA) 2012 Q2 法說會逐字稿

Good afternoon and welcome to the West Bancorporation 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. Mr. Gulling, please go ahead.

Okay, thank you and welcome to our quarterly conference call. With me on the line today are; Dave Nelson, our CEO; Harlee Olafson, our Chief Risk Officer and Brad Winterbottom, President of West Bank. I'm going to 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. Going to turn it over to Dave Nelson to get us started.

Thank you, Doug and good afternoon, everyone. Thank you very much for joining us. We appreciate your interest and your support. We had a good second quarter. We believe that the four most all-encompassing financial performance metrics are return on equity, return on assets, efficiency ratio for expense control, and Texas ratio as our asset quality measure.

All of these ratios improved during the first half of this year except for an increase or an uptick in our efficiency ratio, and this was due to investments that we made in our infrastructure coupled with some pressure on our net interest margin and low loan demand. But it is our expectation to perform within the top quartile of our peer group with all four of these metrics and that is where we are year-to-date. And these investments that we've made in our infrastructure, they were not only designed to improve our credit quality and to make permanent improvements in our processes which has happened and our credit quality continues to improve. But they were also designed to provide a foundation for growth which we are now starting to see signs of. They were also, in part due to the increasing regulatory burden which is not unique to West Bank, and this is ongoing.

But in light of this performance, at our July 25 Holding Company meeting our Directors declared a quarterly dividend to common shareholders of $0.10 per share which represents a 25% increase to our quarterly dividend. This $0.10 per share dividend will be payable August 28, 2012 to shareholders of record as of August 8, 2012. With that I'd like to turn the call over to our Bank President, Brad Winterbottom.

Good afternoon. Loan volume showed a mild uptick. We're up about $8 million for the quarter and roughly just under $20 million for the first half of the year. That growth is coming in our C&I business, a small increase, and that increase was the result of really acquiring or having a couple of prospects become actual customers. Then we're seeing some growth in our commercial portfolio and our construction and land activity. We have a few large construction projects that are right in the middle of build and we anticipate that continuing to grow through the third quarter but unfortunately, construction will end with those projects and we're out looking for more but those will probably exit the bank late third quarter, early fourth quarter.

Harlee will address loan quality in a minute. Outlook for continued loan growth, we're spending a lot of time hitting the streets and we're seeing signs of getting more market share. We are asking customers to -- we're trying to grab more wallet share from our customers and those activities are developing as it does take a while. And in terms of our mortgage activity, our residential mortgage group had a nice quarter increase. We're about $1.3 million in fees versus just under $500,000 from the prior quarter.

Great activity for that folks, the refinance activity is booming given the low rate environment and we've added a couple staff there and we anticipate hiring more folks here in the near term. In terms of the local economy, we were talking earlier today and Dave called that kind of our economy is dormant versus depressed and I would -- that might be a little tongue and cheek but that's not too far off. With that said I'd like to turn it over to Harlee, and he is going to talk about asset quality.

Thanks, Brad. On asset quality, overall the quality has remained strong and continues to improve. Because of that, we had no provision to add to our allowance and that's due to the allowance being adequate compared to the processes that we go through to determine whether or how the allowance should be handled. We have very low levels of past due loans. In fact, at the end of the quarter, loans past due over 30 days that were not on non-accrual was in the neighborhood of just over 0.1%.

Overall, loan quality has improved. Our total classified assets are down. We believe that we're properly registering the values on our real estate on hand. Nothing significant has been added to that. The overall asset quality is very good and has been improving. With that, I'd turn it back to Doug.

Thanks, Harlee. I just want to make a couple of comments on other areas of the income statement. We are facing net interest margin headwinds just like I think most of our industry is. Our margin deteriorated about 6 basis points from the first quarter to the second quarter. There's just no question that when loans renew, they are generally at a lower rate. When our investments are mature or are called, we have to reinvest at a lower rate.

Now we did just this week lower most of our non-CD deposit rates. From time to time we tweak our CD rates. But we have been fairly deliberate on our non-CD rates and we hadn't changed them since the first part of the year and so this week we changed virtually we changed every non-CD rate and lowered those. That will lower our interest rate cost somewhat, but there's no question we expect to continue to see some margin pressure.

I would point out that we did have some security gains this quarter which we don't have on a regular basis but we were able to sell some CMOs where the prepayment speeds were expected to pick up and go into some lower coupon CMOs and recognize a gain but not really give up any yield. So it was a pretty good transaction. We continue to see impairment on the Alesco pool trust preferred security we have, but that's just something that we're living with. I think with that, we'll stop. Those are our prepared comments but we would love to answer any questions that you may have.

(Operator Instructions)

Daniel Cardenas, Raymond James.

Good quarter. Quick question on the loan growth. Could you maybe give us a little bit more color as to flows versus outflows?

Inflows versus outflows. There's been a few construction projects that is driving some of our growth. Our pipeline report is full in terms of things that we are chasing and some of those have had initial conversations and interest to working on documentation, getting appraisals, and making sure that all those ducks are in a row before funding. I would also tell you that the outflows -- we're halfway through a couple of very large construction projects that have maturity dates before the end of the year. And those in fact we anticipate having some pay-offs, so those might be replacements. But I think when you look dollar for dollar, the volume is more than the anticipated payoffs. But there will be spikes.

Okay, and then you'd mentioned during the quarter the growth you saw was spread out between C&I, construction, and commercial. On the commercial side was that primarily owner-occupied or how did that break down and what percentage of the growth was it in?

I'm not sure I have the percentages. I don't know, maybe I'm kind of looking at Doug for maybe a little help there but this is more of a gut feel than anything. Owner occupied would probably be roughly 20%, maybe Doug is going to find a better number than that. We have financed a couple of larger apartment projects and those are not only in construction but we have many firms on a couple of those. And then the C&I business -- we've had a couple, I'm saying two significant new relationships developed over the past quarter.

Well, these are percentages, but for the first half of the year commercial loans are up about $5 million from $255 million to $260 million. Our construction is up about $6 million from $101 million to $107, and commercial real estate is up about $14 million up to almost $400 million.

And this is a rough number, but normal monthly payments on term debt, it's somewhere between $7 million and $8 million a month redemption, so for us to keep that number steady we've got to find probably $8 million of new business a month just to keep up with normal amortizations.

And so then the new business you're getting in, it's just a market share grab right now?

Yes, yes.

And what are your customers telling you? Are they still -- I think you said in the press release -- that they are still kind of cautious and just kind of waiting to see how the economic tea leaves play themselves out here over the near term.

Well more than a handful, but some of the customers that I've talked to are, virtually said I'm waiting to see what happens for the election before I do anything of any significance in terms of expansion or lack thereof.

And then just given the drought situation in the Midwest, is that having any impact on you guys right now?

Well, we can't water our lawns if that's what you mean. (laughter) I don't think that's what you meant, Dan, but--

Yes, I don't think it is yet. I think there will be a delayed impact there if there is anything. I mean and what impact could that be? It would just be from the standpoint of increased commodity prices and what that might do to the economy later on, but I don't think I'm kind of looking around the table but I don't think there's an immediate impact directly to us.

Direct ag exposure is very small for us so it would be through suppliers and suppliers of their suppliers.

Got you, okay. And then a quick question on the reserves. I mean your credit numbers just -- you guys are doing a good job of bringing them down and they get better every quarter. As I look at your reserve levels, you're still around that 2%, 196 reserve to loans.

Dan, at the end of the quarter here we're at 179,180.

Okay, well can you maybe just give me a little color too in terms of your thoughts on maybe drawing down on those reserves a little bit more aggressively?

You mean--

Just kind of recapturing some of that reserve back into the capital.

Negative provision?

Correct.

Well, we look at that every quarter and we've got four or five components that we analyze and add up to get to determine whether it's adequate or not of the allowance. I think that it's hard to sit here today and predict. My sense sitting here today though is that we probably wouldn't have a provision for the rest of this year and I really wouldn't anticipate a negative provision, but a lot of it depends on the direction our loan balances go and what charge-offs we may run into as we go through each quarter.

I would just add that we have spent a lot of time continuing to analyze our current customer base, and those surprises are just, the surprises are a lot smaller and if there are any surprises at all. So I think we've got a good grasp of the quality of our portfolio and as Harlee mentioned earlier, you take the non-accruals out of our over-30 past due and it's under $1 million and you can count them on less than 10 digits on your two hands.

That's helpful. Then just a quick question, you guys mentioned you made some investments in your infrastructure. Could you maybe give us a little bit of color as to what type of investments were made?

Well Dan, this is Dave and the investments were really in people and process, to some degree technology, and that was primarily pointed at the credit quality and credit process improvements and we're really done with that. We do anticipate some additional staffing hires but those would be on the revenue generating side, mortgage originators, some income producers in terms of business bankers both in Des Moines and the Eastern Iowa Markets. But the investments that we made in people, they were in terms of credit analysts, maybe some lower cost personnel where we identified routine and repetitive activities that our highest paid, highest trained might have been doing and consolidated them into a lower cost position. We performed the task but at a lower cost. And those investments have been made but we would anticipate that any additional FTE increases from here on out in the foreseeable future would be on the income-producing side.

I think too if you look at the investments in those people and infrastructure, most of that occurred last year but the full effect of that is really felt now as they're all in place. So as you might compare last year to this year, I would think that some of that total would level out in comparison with third quarter and fourth quarter.

Fair enough and then the last question and I'll step back after this. Just in terms of M&A, are you guys considering that and if so, what's the environment looking like right now?

This is Dave again and that's certainly -- although it's not a strategic objective of ours, it's something that we're very aware of. We've had a lot of discussion about trying to decide in advance what parameters would need to be in place to get our attention or be worthy of advancing a conversation but really our focus now is organic. We think that with the sales culture that we have and the way that we're coaching to that that there's a tremendous potential for us here in the markets that we serve to grow our market share just with our existing customers.

We have experienced some success with business customers and new relationships. We've got plenty of capital and we have to continue to assess how best that is deployed. We would like to think that we're going to experience some loan growth through our organic driven efforts. We know we have the ability to make acquisitions. It's something that's being considered and discussed.

So kind of a case-by-case as things come up.

We see ourselves as an Iowa bank and we wouldn't see ourselves leaving the State of Iowa but there's for the right set of reasons, we are interested in continuing to look for opportunities.

Great, thank you.

Thanks, Dan.

Thank you.

(Operator Instructions)

Showing no further questions. I will turn the conference back over to management for any closing remarks.

Well, we don't have anything else to add at this time. We thank you for joining us and we'll do this again next quarter, so thank you.

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