West Bancorporation Inc (WTBA) 2012 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 a 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 Mr. Doug Gulling, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Andrew. And welcome, everyone, to our fourth quarter 2012 earnings call. On the phone with me today would be Dave Nelson, our Chief Executive Officer; Harlee Olafson, Chief Risk Officer; Dave Milligan, Chairman of the Board; Brad Winterbottom, President of West Bank; and Marie Roberts, our Controller.

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.

So again, welcome and Dave Nelson will begin.

Thank you, Doug. Good afternoon, everyone. And thank you very much for joining us. I just have a few general comments. We had a great fourth quarter with both loan and deposit growth. We have been talking about having a strong pipeline all year, and we really saw significant growth during the fourth quarter that we'll talk more about. Also, our directors approved and declared a $0.10 dividend payable February 26 to shareholders of record as of February 6. Feel that we're very well positioned here. We're starting a new year, which also happens to be our 120th anniversary this year. And we also look forward to opening our new Grand Avenue bank facility here in West Des Moines during the first quarter.

With that, I'd like to turn the call over to our Bank President, Brad Winterbottom.

Good afternoon. Doug asked me to talk about our loan growth and our sales activities. And Dave mentioned that fourth quarter there was a nice increase in loan growth. And our activities throughout 2012 was really good. But we had significant payoffs. And a lot of those payoffs were anticipated throughout the year. And I would say in the fourth quarter we were able to actually book more than paid off. However, I will also state that some anticipated payoffs that were supposed to happen by the end of 2012 did not happen until the first week of 2013. So we're really starting the year at about a $900 million loan total.

That growth has been in both C&I and commercial real estate. More heavy in commercial real estate, but primarily owner-occupied transactions. The pipeline for the first quarter, first half of the year is as good as it's been all of 2012. I would add that, if you recall in 2012, we added a couple of business bankers. In the fourth quarter we promoted a couple of folks. Very inexperienced in terms of calling but good credit skills. We've added them to the sales team. And our pipeline is moving very nicely there.

As it relates to the mortgage activity, again, the low rate environment has been very beneficial for our folks. We added another mortgage originator in the fourth quarter. Continue to look for additional mortgage lenders. And we're probably going to add to some infrastructure there, as well, as that department is really growing.

In terms of the local economies in both our markets, the Eastern Iowa market continues to remain very steady and improving. The University of Iowa and the University of Iowa Hospitals certainly drive that. And then here in Des Moines, where the bulk of our assets are, I think the economy is showing slight improvement. I would say the homebuilding activity here has improved month over month, quarter over quarter. We're seeing signs of very limited lot availability for homes. And so, hopefully, there's some development that will take place to help free that. But we're seeing a lot of new homes being built and think that the economy -- there is a slight uptick there.

Those would be my prepared comments. And I'd like to turn it over to Harlee to talk about asset quality.

Thanks, Brad. Our credit quality continued to improve in the fourth quarter. I think, as we've discussed in past calls, some of the things that are within our non-performing assets tend to be a little stickier at this point. But we were able to settle and close on a significant decrease in the fourth quarter that reduced our non-performing assets. We did expect an even larger decline in that quarter, with another significant closing. That closing was delayed until the first quarter of this year. So our non-performing assets, we believe, will also decline in the quarter to come.

In regard to OREO, there's been very little adds to our other real estate portfolio. The write-downs that we have occur based upon annual appraisals received, and what our expectation is of what we will receive after selling costs. I believe that we have significantly less risk in our other real estate portfolio now that we have had at any time in the last few quarters. From an allowance for loan loss perspective, we continue to evaluate our portfolio and growth. And decided to add to our reserves to maintain a strong and conservative reserve. We also made numerous specific reserves on specific credits that also used some of our reserve in a specific way.

So, in summary, we do expect our credit quality will continue to improve. And have some good things going in this next quarter.

And I'd turn it back of to Doug.

Okay. Thanks, Harlee. I wanted to make a few comments about our net interest margin. Net interest margin for banks gets a lot of attention. And there's always discussion about the headwinds, which we are experiencing, like many other banks, or most other banks. And our margin did decline in the fourth quarter and ended up being about 3.3%. Part of that was due to the fact that we did have quite a bit of deposit growth, and a lot of that stayed in overnight funds. That deposit growth, some is seasonal, but we do believe that some will stay with us.

But we are doing a couple of things to try to improve the margin. And the one thing we did right at the end of the year was modify $80 million in Federal Home Loan Bank advances. And we did that by paying off three advances that had an average, or had a rate of slightly over 4%. And then we took out three new advances totaling $80 million, that are floating rate tied to 90-day LIBOR. And when we amortized the prepayment cost or fees over the life of the new advances, and factor in the coupon cost of the new advances, we've decreased our costs quite significantly. And then we put forward swaps on the three advances. One forward swap begins in 2 years, one in 2.5 years, and one in 2 years and 9 months.

So, we are anticipating that the Fed is going to keep short-term interest rates low for a couple more years. And, as a result, hope to have significantly lower costs on our Federal Home Loan Bank advances. The 90-day LIBOR rate would have to increase approximately 170 basis points from where it is today for all of our benefit to evaporate. So we think that's a pretty big jump from where we are today. And from everything we hear, believe that we should have some positive benefit over the next couple of years.

Then the other thing that we're going to do is, at the end of the year we had $111 million in Fed funds. And that ballooned up a little higher right after the first of the year. And we are working to put $100 million into our investment portfolio here during the first quarter, which obviously will also help the margin.

So I think with that, we'll conclude our prepared remarks and would like to answer any questions that may be out there.

(Operator Instructions)

Andrew Liesch of Sandler O'Neill.

Nice quarter. Good to see that loan growth come in.

The one question I have regards mortgage banking. It seems like -- I didn't think you were going to make a huge push to hire a ton of folks -- but it seems like maybe that strategy has changed a little bit. Maybe add an office assistant, or something like that. I thought you were just going to stick with maybe have one in each branch. Can you just comment on that a little bit?

That is our plan, is to get at least one originator in each branch. We're not there yet. I would say that we're about two-thirds there. And the typical person that we're hiring there has a fair amount of experience in the marketplace. And I would say -- when I say fair, I'm saying north of 10, maybe 20 years experienced mortgage originators.

We need some -- as we've added some of those originators, we need some -- we need to make sure that the back room is fully functional. And so we would see some staff there. And we're talking about maybe another management person to help us with the deal flows.

Got you. And then one housekeeping question. Do you have the average balances of loans throughout the quarter?

You're making Doug work, you know.

I'm looking, Andrew.

Andrew, while he's looking, and he'll hit me when he has the numbers, I would tell you that our closings -- a bunch of closings -- took place in December, mid-December. So I would say quarter over quarter is probably not much. The last 10 days we had about six significant closings that really drove that number up to the $927 million mark. So I would not anticipate -- Doug's still looking -- I would not anticipate, though, that quarter-over-quarter averages changed much.

Okay. So then, presumably, even though you had the $27 million or so that came down early in this quarter with those balloons being added near the end of the year, that should have some mitigating part or offset with that, and maybe help the margin a little bit?

I'd look at it like we maybe got about a three-step head start in a 100-meter race when you compare first quarter '13 to fourth quarter '12.

Andrew, we'll have that number in a minute. We'll circle back on that.

All right. Thank you.

(Operator Instructions)

Daniel Cardenas of Raymond James.

Good quarter.

Just a follow up on Andrew's question. Could you maybe quantify the infrastructure investments that you're looking to make in 2013? And then maybe talk about the timing. Is this a first quarter event? Second quarter? Or is it spread throughout the year?

I would say that a sales manager in our mortgage origination area seems -- that will happen in the first quarter. So will a processor. That won't add much to overhead. Other than that, I think, quite frankly, we're well positioned for a lot of growth here without adding much more to the infrastructure.

Dave, do you have a different opinion?

No, I do not. Really, it's just those two positions that we're looking at.

Okay. Fair enough.

And then, as we look at the deposit growth this quarter, how much of that was public funds and could potentially go away in early 1Q?

We probably had between $20 million and $30 million increase in public funds. And there is some seasonality to that. In Iowa, property taxes are paid March 31 and September 30. And so, during October, those monies find their way from the state down into the various municipalities and school districts. So there is a little seasonality there.

Fair enough. And could you provide a breakdown on non-accruals, TDRs, and maybe days past due?

Yes, we can. At the end of the year, non-accruals were $6.4 million. Troubled debt, restructured loans, $856,000. Our other real estate owned totaled $8,304,000. And we have one non-accrual investment security of $1,334,000. So total non-performing assets, $16,894,000. Now, loans past due and still accruing were zero -- loans past due 90 days and still accruing were zero.

Okay. And then one last question and I'll step back here. Maybe just comment on watch list trends. Has that changed much quarter to quarter?

Yes. Downhill.

I would say the trend in the watch list is that our most difficult credits are declining. We still have some that have some bumps in the road, but our credits that would hit non-performing are continuing to decline. And have declined.

Great. Thank you.

The average loan balance for the fourth quarter was $872,271,000. So $872.3 million.

(Operator Instructions)

Seeing that there are no other questions, this concludes our question-and-answer session. I would like to turn the conference back over to Doug Gulling for any closing remarks.

Just to thank you for your interest in our Company and joining us today. And we'll review the first quarter on -- I think it's April 25 or 26, whatever that Friday is. We'll talk to you then. Thanks.

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