Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Encore Bancshares, Inc. (NASDAQ:EBTX)

Q4 2008 Earnings Call Transcript

January 30, 2009 11:00 am ET

Executives

Rhonda Carroll – SVP & Chief Compliance Officer

Jim D'Agostino – Chairman & CEO

Andy Creel – EVP & CFO

Analysts

Bain Slack – KBW

Rick Duddle [ph] – Columbia Management

Tim Whitton [ph] – ICM Investments

Brady Gailey – KBW

Operator

Good day, everyone, and welcome to the Encore Bancshares fourth quarter 2008 earnings results conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Chief Compliance Officer, Ms. Rhonda Carroll. Please go ahead ma’am.

Rhonda Carroll

Thank you, operator. Good morning everyone and thank you for joining us. As Sue mentioned, I am Rhonda Carroll, Chief Compliance Officer for Encore Bancshares. This morning, Encore released earnings for its fourth quarter ended December 31, 2008. Here to discuss those results with you today are Jim D'Agostino, Chairman and Chief Executive Officer, and Andy Creel, our Chief Financial Officer.

Before we begin and I turn the call over to Jim, I need to take just a moment to address the Safe Harbor provisions. Some of the remarks made today will constitute forward-looking statement as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Act. Please see the last page of the text in today’s earnings release for additional information on the risk factors associated with these forward-looking statements. If you need a copy of the release, it is available on our Web site at www.encorebank.com or by calling the Investor Relations department at 713-787-3118.

With that, I will turn the call over to Jim.

Jim D'Agostino

Good morning everyone. In December we confirmed that one of our high net worth clients lost substantially all of his liquidity which supported our loan. This was the result of a precipitous decline in energy equities that he owned. We decided it was appropriate and prudent to charge-off that $6 million loan. Over the last several weeks and months, we then did a deep dive into our loan portfolios. We have had a third-party review of over $100 million of commercial loans, a third-party review of our first and second mortgage portfolios, an internal review of our residential construction portfolio and an internal review of almost all of our unsecured credits. These reviews were in addition to our normal year-end asset classification process. For the most part, these reviews fully supported our internal view of the credit quality of our portfolios.

While both the Houston and Texas economies have performed quite well through year end, with the price of oil and gas at current levels, we expect a decline in jobs in the first half of ’09. With all of this information including the reviews and the economic indicators, we acted to increase our loan loss reserve by $10.5 million to 2.06% level of total loans. Also in the quarter we took a $2 million non-cash impairment charge on a legacy CRA investment with centerline [ph] holdings. At the same time our key earning metrics remained strong.

The fourth quarter net interest income grew 26.6% to a record $11.9 million. Fourth quarter net interest margin increased 46 basis points to 3.31% which is down only 3 basis points from the third quarter as a result of the significant decline in Fed funds. Expenses were flat. Our business fundamentals remained very good. Deposits were up nearly 6% in ’08, non-interest bearing deposits were up nearly 24% in ’08. Loans were up 11% year-over-year in the fourth quarter we made $68.8 million in loans increasing loans 1.6% over the third quarter. Assets under management of $2.2 billion were down 19.3% for the year. That number included new business of $186 million – that is net new business of $186 million in our wealth management area offsetting partially the effects of the market decline. We remained very positive about the prospects of investors moving to conservative and sound investment approach of Linscomb & Williams and Encore Trust. Our capital position is one of the strongest in Texas and best among our public company peers in Houston. Tier 1 risk-based capital is 14.63%., total risk-based capital 15.9%. Our tangible common equity to tangible asset level is 7.75%. At the same time we have maintained high liquidity. Our cash securities available and Federal Home Loan Bank availability represents 26% of our deposits.

Let me return to credit quality. Nonperforming loans did increase by $8 million in the quarter over the prior quarter. In our commercial and industrial loan portfolio it was up $4 million that represents essentially two loans, two professionals in Houston. Our commercial real estate portfolio increased into nonperformers by $3 million represented by one loan in Florida which is with a co-borrower is a very wealthy doctor, and residential construction loans had an increase in nonperformers of about $700,000 representing one loan in Houston. To break out the nonperformers, we have nonperforming loans of approximately $16 million in Houston and $13.2 million in Florida. All other portfolios were flat in terms of nonperformers.

Excluding the large charge-off, other charge-offs were actually down versus the link quarter, $2.4 million versus $2.8 million. Consumer credit quality remained (inaudible). Our first mortgage originated loans of $162 million had a 30-day delinquency rate of 1.4%. Second mortgage is the largest part of our consumer portfolio; $278 million had a 30-day delinquency rate of 0.1%. The first mortgage service by others and the second mortgage service by others remained fairly consistent and the HELOC portfolio of $81 million had a 30-day delinquency rate of 1%. The total delinquent loans in the originated portfolios the first, the second and the HELOCs were 15 loans out of over 7000 loans.

We have in this quarter dealt with a large loan. We have reserved, taken the OTTI against the CRA security and strengthened our reserves. Our underlying performance is on target and while there is uncertainty about the economy with our capital, liquidity, business model, the fact that we have 35% of our revenue from non-interest income puts us in a strong position till the economy eventually recovers. I personally take responsibility for the loss that occurred in that loan. We were monitoring that loan, we looked at it very carefully at the end of the third quarter, the portfolio – the information we had on the portfolio at that time was clearly that the person had a strong equity position. The month of September was a disastrous month for that person’s portfolio and by the time we got the next financial statement it had been eliminated. It happened within approximately 30 days.

That concludes my prepared remarks and I open it up for questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions) Our first question from Bain Slack with KBW.

Bain Slack – KBW

Hi, good morning.

Jim D'Agostino

Good morning.

Bain Slack – KBW

Looking into the deep dive that you guys did with the loan portfolio and if we look at the sort of maybe the beginning of the credit cycle for most of the (inaudible) of the economy like in the US what is the assumption do you think over the next one to two years of the tune of loss rates that you are all assuming?

Jim D'Agostino

We have looked at losses for ’09 in the range of $11 million for the year ’09 is basically what we are projecting for ’09.

Bain Slack – KBW

Okay. I guess I am just wondering have you looked at it from the tune of loss rate, what total losses to be over a cycle?

Jim D'Agostino

We have not done that but we feel very comfortable that – a lot depends upon exactly how it unfolds in Texas and that depends upon the price of oil and a number of other factors but at this point in time we have factored in about 40,000 to 50,000 job losses in the Houston economy to come up with the number I just gave you.

Bain Slack – KBW

Second question with regard to expenses, I guess specifically obviously for the industry FDIC premiums are heading upward, do you have any sort of range of what the impact will be in ’09 for you guys specially versus ’08?

Jim D'Agostino

I believe that there will be no difference other than the cost of the demand deposit the rates – sorry, we have plugged that in, Andy do you know what that would be because I have not –

Andy Creel

Affecting the charge we have a credit with the FDIC that is being netted against the charges and so really we don’t see much in the way of FDIC expense in ’09.

Bain Slack – KBW

Okay, so this credit will last through all of this year?

Andy Creel

Yes.

Bain Slack – KBW

I guess maybe if you could – how much of the credit or how long do you expect to benefit you all?

Andy Creel

It should run out in the fourth quarter of ’09.

Bain Slack – KBW

Okay. And I guess with rates where they are, I know this is kind of looking far out, with the credit rolling off and assuming all things else being equal, would you have an approximate estimate of what that impact would be say for 2010 potentially?

Andy Creel

I don’t have a number for that far out.

Jim D'Agostino

We will get you that number but we have done our ’09 projections but not ’10 at this point but obviously because of the credit running out that cost will go up and because a lot will depend too if you assume they continue the FDI insurance on demand deposits and the level at $250,000 or not.

Bain Slack – KBW

I guess, the last question I have is looking obviously at the stock it has reacted quite dramatically to what is going on in the industry and it looks to us that obviously it looks as if the stock is certainly quite cheap here, I am wondering if you could give us some color on what are insiders right now thinking about the stock versus maybe our capital, maybe insiders will be interested and what are your blackout dates one without lift do you think?

Jim D'Agostino

I will be in a position to make an acquisition first thing Tuesday morning and I can’t speak for all of the insiders but certainly the sentiment is that the price is ridiculous and that it would be an opportunity but again everybody has their own particular issues with what they can and how much and what they can do in the way of an investment so I can’t speak to others. I know that I am selling other assets and we will be using all of those proceeds to invest in the stock come first thing Tuesday morning. I personally believe that the price, it is a personal opinion only; I think the price is ridiculous. We have a great capital position. Our tangible equity is almost $12 of book value. The difference between book and tangible book is represented by the value of Linscomb & Williams and the wealth management business and our insurance agency and those businesses are more valuable today than they were when they bought them, producing more earnings today than when we bought them. So the difference between those values and the current price is just I can’t understand – I certainly understand market conditions and what is going on in the market but I certainly don’t understand why someone would lop $10 off of book value.

Bain Slack – KBW

We definitely agree with you. Thank you for the time and the call this morning.

Jim D'Agostino

Thank you Blaine.

Operator

Our next question comes from Rick Duddle [ph] with Columbia Management.

Rick Duddle – Columbia Management

I was hoping to get some clarification on the impairment charge, the CRA, I know you said it is a legacy centerline holdings, I don’t even no – I know what CRA is but I guess I am a little confused, what is this about?

Jim D'Agostino

Yes. We had one security in our portfolio that was subject to this kind of situation and this is it, several years ago in order to meet our commitment for investment under the Community Reinvestment Act we made a decision to buy this investment which is a preferred security in centerline holdings which provided affordable housing to people. That organization has run into some difficulty and while we have every reason to believe that if they make it they will pay us back, there has been no bankruptcy yet but for over a year the stock of that company has now been delisted and while the company is still out there obviously the possibility that we would not be paid back on our preferred – Andy, what is it now, a year and a half from now we have a put?

Andy Creel

2012.

Jim D'Agostino

2012 it is putable, so it is hard to determine what will happen and if you put a discount factor on the probability that that will be paid in 2012 and given the proper accounting for such an investment we made the decision to go ahead and to take the impairment charge at the end of the year.

Rick Duddle – Columbia Management

Are you getting a current return on your preferred until now or when did that –

Andy Creel

They are no longer paying dividends.

Rick Duddle – Columbia Management

But when did that stop?

Andy Creel

The second quarter of this year.

Rick Duddle – Columbia Management

And the impairment did not happen until the fourth quarter?

Andy Creel

Yes.

Rick Duddle – Columbia Management

You are probably a little slow to react there it sounds like to me but just going to one of your answers to Blaine I just want to clarify, so expected $11 million in losses in ’09, was that just Texas or was that everything?

Andy Creel

It is everything.

Rick Duddle – Columbia Management

Okay, just to clarify. It sounded like he asked the question about Texas going downhill and you answered everything.

Andy Creel

We plugged it all in.

Rick Duddle – Columbia Management

Okay. Are you comfortable here today saying that you expect to be profitable in ’09?

Andy Creel

Yes.

Rick Duddle – Columbia Management

The outside review the third party, was that just the Houston market or did they also do work on Florida?

Jim D'Agostino

The third-party review covered $100 million of commercial loans that were primarily Houston. The third-party review also did first and second mortgage portfolio which had mostly Texas and Houston and we had already in the third quarter had an extensive review of the Florida portfolio so that review did not establish, we do our regular process but we did not have a third-party review Florida, we had done some work in Florida in the third quarter so we didn’t repeat that so I didn’t mention that. We have had a very hard look at the Florida portfolio that was actually in the third quarter.

Rick Duddle – Columbia Management

Okay. Do you have any thoughts on Florida, whether it is starting to look like things have begun to bottom or what is your assessment of Florida as we stand here?

Jim D'Agostino

Obviously Florida has gone through a lot. In terms of our portfolio, our nonperformers were flat in the third quarter over the second quarter, they did increase by one $3 million loan in the fourth quarter and so in general we are not seeing any significant broad based deterioration but it still remains tough in general, there are some good things that we are hearing in terms of residential real estate sales actually picking up and in fact for the last 12 months there have been residential real estate sales improving in various parts of Florida as prices had significantly declined. We certainly have not seen prices really come back but the Prices have not significantly been falling in the last several quarters. So I think they are now more subject to the broader national economy problems and a lot will depend upon how quickly any stimulus comes in and how much they will be affected by actions of the broader economy. They do have some impacts to that since they have a lot of retirees and their economy is based a lot more on health and care and some other things and also we have seen the economy there, the tourists and the normal people coming down for the winter time has remained reasonably strong, so all in all I would say we recognize it to be tough but we don’t see any major deterioration in our portfolio going forward.

Rick Duddle – Columbia Management

Then back to Texas, if you were to look at your overall exposure directly to energy, so not necessarily I guess it would be hard to measure this somebody that is employed in the energy sector that has a mortgage with you, I guess I am not looking for that but more on the commercial side the energy and then I guess I would go and count this guy that you lent money to that was based on energy equities that went (inaudible) on him but when you assess that what is your exposure?

Jim D'Agostino

That is a good question. We have very little exposure directly to energy. We make no oil and gas loans, we have almost no exposure to oil field service companies or the like. We have about $10 million of exposure directly. We have exposure to a pipeline construction company that has very good prospects for the rest of the year that lacks oil field activity. So in general the exposure that I look at in Texas and in Houston in particular is that we are now being affected by the national recession that is going on and lower cash flows in the state to the extent that that affects commercial real estate activity that is where we are most focused and obviously that is where we have some reasonable exposure here in Houston. So that has been our area of focus and as you have pointed out obviously we have made loans to individuals some of whom may lose their jobs. The thing is that that is part of the expectation that went into our analysis that there would be some job losses both here in Houston and in the state but I think commercial real estate is the focus that we have that at this point we are assuming there will be some deterioration more from the national economy than anything specific to energy.

Rick Duddle – Columbia Management

Okay and then as far as collateral goes on – I don’t know if you had personal guarantees from the gentleman you were lending money to to bid on energy equities but in general what do you look for when you are assessing credits like that, what do you look for to get from the prospect?

Jim D'Agostino

I would say to you that this was a professional who had other sources of income, his success in his equity investments was very strong for a number of – we originally made the loan back in late 2003 early 2004 and everything was performing absolutely normally right up until the fourth quarter. So he was very successful, had other sources of income and in hindsight I would say to you that we did not have it secured and that was a mistake but in that regard we have done a full review of every other loan that is unsecured or in any way associated with this kind of a situation and we have not determined that there is any other loan that was done this way not to say that we are – and in terms of exposures to energy securities through our borrowers we have other than Axon [ph] stock or that kind of a holding – but again that is not significant in terms of a large dollar amount unsecured or anything like that. So regrettably this is the only real situation like this that we had in the portfolio.

Rick Duddle – Columbia Management

Okay. You said other sources of income, what happened there?

Jim D'Agostino

He was enjoying his success in his portfolio and let those other sources slide.

Rick Duddle – Columbia Management

Okay. Alright, that is all I have.

Jim D'Agostino

Thank you.

Operator

(Operator instructions) The next question comes from Tim Whitton [ph] with ICM Investments.

Tim Whitton – ICM Investments

Hi Jim.

Jim D’Agostino

Hi Tim.

Tim Whitton – ICM Investments

Just sort of following up on the last question, you said you reviewed all your unsecured lines via third party –

Jim D’Agostino

No, we did the unsecured lines internally Tim.

Tim Whitton – ICM Investments

Internally, okay.

Jim D’Agostino

I personally conducted the review.

Tim Whitton – ICM Investments

Okay. By the sight of this, this must have been in your top 15 loans in the bank or top 20 loans.

Jim D’Agostino

It was.

Tim Whitton – ICM Investments

Do you have any other top 15 that are unsecured?

Jim D’Agostino

We do, none exactly like this but we do. Let me look at my list here, one second, in the top 30 loans, I do have one, two, three, four, five, six loans that are unsecured.

Tim Whitton – ICM Investments

Right. What would those be in total roughly?

Jim D’Agostino

About $25 million.

Tim Whitton – ICM Investments

$25 million. When you are in an unsecured position, how do you protect yourself against something like this?

Jim D’Agostino

We have gone back and looked at each of these loans and in a number of cases we have – most of these individuals that we have still remaining are very strong individuals with significant assets but we are in many cases asking them for collateral or for negative pledges of assets, it has a line which I am including here but has never borrowed from us, has $12 million worth of liquidity, others have well over in the $50 million plus range of liquidity that is not otherwise subject to the kind of situation we saw and so as I have gone through each and every one of those we will be changing our conditions going forward but I am very comfortable that each and every one of those individuals and situations is in hand.

Tim Whitton – ICM Investments

Right. How quickly do you have the ability to change those (inaudible)?

Jim D’Agostino

Generally these are one-year lines of credit and so most of them come up for renewal in the next six months.

Tim Whitton – ICM Investments

Got it. Then switching to ’09, did you have an expectation with respect to loan growth and margins?

Jim D’Agostino

It is very modest.

Tim Whitton – ICM Investments

On the loan growth side, the loan growth is –

Jim D’Agostino

So the loan growth is very modest. As to margins, the margin, we are not expecting a significant increase in margin for the year although we have been cautious in that regard because of the significant drop in interest rates but I think the assumption was that we would be certainly – we were 318 for this year for the full year, we think we can be on target of 325. So there is some slight margin built in but you can see that is actually less than it was in the fourth quarter so we have been conservative in that regard. Fortunately we have seen the deposit pricing improved in the last few weeks and as we renew facilities and renew certificates of deposit we may be able to improve on that but at this point the target is 325 for the year which I feel comfortable that we can achieve.

Tim Whitton – ICM Investments

Then switching over to wealth management, do you have a sort of a target for asset growth there?

Jim D’Agostino

We do. I think it is 5% for the year. So, it is 5% average for the year Tim. Your guess is probably better than ours but that is our assumption for the year. We expect additional new business too as part of that number but that was the assumption for the year.

Tim Whitton – ICM Investments

Okay great, thank you.

Jim D’Agostino

Thank you Tim.

Operator

Our next question comes from Brady Gailey with KBW.

Brady Gailey – KBW

Hi guys, I just had a quick question kind of following up with what Tim was asking about the (inaudible), I know in the past the company has had a stated goal of 325 margin for ’09 which looks like has come true but it also had a goal of a 65% efficiency ratio and a 1% ROA, I was just wondering with the slip in the economy have you all revisited those goals and if so do you all have a new guidance for ROA and efficiency ratios?

Jim D'Agostino

Clearly I think with the credit losses that we have assumed that I mentioned earlier, the one ROA target will not be met in ’09 and I think also depending upon what credit costs will represent, we will be somewhere between our 65% goal and around 70% on the efficiency ratio. So we may not quite make the 65% although certainly we will work very hard on our expenses this year. We have managed to keep expenses absolutely flat for the last three years and we would anticipate that we would be able to at least do that this year, so a lot will depend upon how much the margin improves this year and what expenses may be associated with managing credit quality, but certainly somewhere between 65% and 70% is the range I would give you on the efficiency ratio and I don’t have a ROA number but I will try to get that out.

Brady Gailey – KBW

Okay thanks.

Operator

(Operator instructions) There are no further questions, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Joe D’Agostino

I appreciate everyone’s interest and thank you for your questions.

Operator

That concludes today’s teleconference. Thank you for your participation. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Encore Bancshares, Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts