AmericanWest Bancorporation (AWBC)
Q1 2008 Earnings Call Transcript
April 24, 2008 1:00 pm ET
Pat Rusnak – EVP and COO
Rick Shamberger – EVP and Chief Credit Officer
Bob Daugherty – President and CEO
Brett Rabatin – FTN Midwest Securities
Hello and welcome to the AmericanWest Bancorporation First Quarter 2008 Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator instructions) Please note this conference is being recorded. Now I would like to turn the conference over to Pat Rusnak. Mr. Rusnak is the Chief Operating Officer. Please go ahead.
Good morning and welcome to the AmericanWest Bancorporation first quarter financial results conference call. With me here this morning are Bob Daugherty, President and CEO, and Rick Shamberger, the Chief Credit Officer.
The call is being recorded and will be available for replay approximately one hour after its conclusion. It will be available for 30 days. The recording may be accessed through our website at www.awbank.net/IR or by calling 877-344-7529 and entering the passcode 418315#.
During this call, we may make statements regarding future events, performance targets or results that are forward-looking in nature, which AmericanWest intends to be covered under the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors which may cause actual results to differ from expected results are included in AmericanWest's 2007 Form 10-K, which was filed with the SEC on March 4, 2008. AmericanWest cautions investors not to place undue reliance upon forward-looking statements and undertakes no obligation to publicly revise any forward-looking statements made during this call to reflect subsequent events or circumstances.
I will begin with a review of our operating results for the first quarter, which included a net after-tax loss of $31.6 million, or $1.83 per share. Included in the first quarter results was a goodwill impairment charge of $27 million or $1.57 per share. There was no tax benefit for this impairment charge. Excluding the goodwill impairment, the net loss for the quarter was $4.6 million, or $0.26 per share. This compares with a net loss of $3.5 million or $0.21 per share for the fourth quarter of 2007 and net income of $2.2 million or $0.19 per diluted share for the similar period of the prior year. The results for the first quarter reflect a provision for loan losses of $12.8 million as compared with $14.6 million for the fourth quarter of 2007.
Our operating results were clearly disappointing, driven principally by continuing challenges with our construction and development portfolio and margin compression due to additional Fed easing in the first quarter and the impact of increased non-accrual loans.
I will start by covering the margin. The tax equivalent net interest margin for the first quarter of 2008 was 4.62%, down 35 basis points from the fourth quarter of 2007, and seven basis points from the same period in 2007. The impact of non-accrual loans on the margin for the first quarter was approximately 15 basis points.
The average yield on loans for the first quarter of 2008 was 7.41%, down 62 basis points on a linked-quarter basis, and 61 basis points from the first quarter of 2007. The reduction in the average yield on loans was due in part to the repricing of approximately $800 million of variable rate loans, most of which are indexed to prime.
As of March 31, 2008, approximately 42% of the portfolio was indexed to prime with a reset of less than three months with the balance of the portfolio split about evenly between hybrid adjustable and fixed-rate loans. Fixed-rate loans had an average remaining contraction maturity of approximately eight years. Approximately $113 million, or 14% of the $740 million of variable rate loans tied to prime had contractual interest rate floors. The current average floor rate as of March 31, 2008 was 7.61%. As a result, about 85% of the loans were at or below the contractual floor level at March 31.
Loan fees comprised 30 basis points of the average loan yield for the first quarter as compared to 37 basis points for the fourth quarter of 2007 and 21 basis points for the first quarter of 2007. Net deferred loan fees represented about 18 basis points of total loans at March 31, 2008 as compared to 21 basis points at December 31, 2007. A substantial portion of our deferred fees are from construction and development loans. As origination of these types of loans has been significantly curtailed, we expect that the contribution of fees to loan yield and the level of net deferred fees will both decline over the balance of 2008.
The average rate, exclusive of fees, for new loans booked during the first quarter of 2008 was 6.42% as compared to 7.77% for the fourth quarter of 2007. The average prime rate for the first quarter was down 120 basis points from the fourth quarter of 2007. Fixed-rate loans represented about 32% of the production for the quarter with an average rate of 6.70%. The average rate for the first quarter new variable and adjustable rate loan production was 6.29%.
The impact of the reversal of previously accrued interest related to the placement of loans on non-accrual status and the recapture of previously reversed interest income on loans restored to accrual status did not have a material impact on net interest income for the first quarter of 2008. The average cost of interest-bearing deposits for the first quarter of 2008 decreased by 42 basis points compared to the fourth quarter of 2007 and 79 basis points from the same period last year, a continued reflection of our actions first initiated in September 2007 to reduce both interest-bearing transaction account and CD deposit rates with each Fed easing.
Average deposits decreased by $30 million during the first quarter as compared to the fourth quarter of 2007 while the ending total deposits increased by $53 million over year-end 2007. Average CDs, as compared to the fourth quarter, increased by $12 million, which included an increase of $26 million in brokered CDs. This was more than offset by declines in average non-interest-bearing deposits of $24 million and savings and money market accounts of $14 million. The average non-interest bearing deposits were 21% of total average deposits for the first quarter compared to 22% for the fourth quarter of 2007.
The margin for the first quarter of 4.62% is slightly below the bottom of the range projected on last quarter's call of 4.65% to 4.75%, principally due to the additional 75 basis point reduction in the Fed funds target rate on March 18. The impact of a 25 basis point reduction in the target Fed funds rate on our margin based on current modeling is now about five basis points. Our outlook for the second quarter margin, assuming no additional change in the Fed funds target rate, is in the range of 4.30% to 4.35%.
We recognized a provision for loan losses of $12.8 million for the first quarter of 2008 or 289 basis points of average loans annualized as compared to $14.6 million or 331 basis points for the fourth quarter of 2007. Rick will cover this area in a little more detail in a few minutes with his asset quality update.
Non-interest income was $4.2 million for the first quarter of 2008, down slightly from $4.6 million for the fourth quarter of 2007, and up 75% over the first quarter of 2007. The linked-quarter decline is mainly attributable to a decline in fees and service charges on deposits, which decreased $170,000 or 6% compared to the fourth quarter of 2007. This was mainly related to a reduction in NSF and overdraft fees of $109,000 and a decline in debit card fees of $45,000 from Q4. Both of these declines are due in part to seasonal volume fluctuations with the fourth quarter reflecting increased holiday transaction activity.
Mortgage banking revenue remained relatively constant at $862,000, down about 3% as compared to the fourth quarter of 2007, and up $520,000 or 152% as compared to the first quarter of last year. We continue to have success with recruitment of experienced mortgage lenders, which is enabling us to maintain production volume despite a slowdown in residential real estate. Twelve new lenders have been hired since January 1 with average industry experience of over 10 years.
We expect origination volumes and related fee revenue to pick up as we enter the spring season and the second quarter is off to a good start with mortgage revenue for the first three weeks of April exceeding the results for March and February.
Although our SBA volume for the first quarter was comparable to the fourth quarter at about $2 million, no gain-on-sale revenue was reflected in the first quarter financial results due to some administrative delays. During the April a gain of $53,000 was recognized on the sale of SBA loans.
Non-interest expense for the first quarter of 2008 was $45.8 million, which included the $27 million, or $1.57 per share goodwill impairment charge. Excluding the goodwill impairment charge, non-interest expense would have been comparable with the fourth quarter of 2007 at $18.8 million. The goodwill impairment charge was due principally to the decline in the market value of AmericanWest's common stock and the declines in bank M&A transaction values generally. The impairment charge did not have any impact on our regulatory capital ratios, liquidity, or cash flows. The goodwill impairment charge represented about 21% of the total precharge balance of $128 million. We will continue to evaluate the goodwill for impairment on an ongoing basis in accordance with GAAP and future impairment charges may be necessary.
Salaries and employee benefits expense increased $408,000, or 4% over the fourth quarter. This increase is mainly related to retirement costs of an executive of approximately $200,000 and a reduction in deferred costs associated with loan originations of approximately $190,000. Additionally, equipment, and occupancy expenses increased $222,000 over the fourth quarter of 2007 related mainly to seasonal snow removal costs for the first quarter – this is Spokane's second snowiest winter in history and it is still snowing this week – and rent expense for our new consolidated support center.
We have a number of facility initiatives underway, including the sale leaseback of some bank facilities and the sublease of excess space, which we expect will ultimately decrease [ph] a significant portion of the new support center cost. The amortization of core deposit intangibles declined $178,000 over the prior quarter related to the Far West Bancorp deposit intangible, which is being amortized on an accelerated basis. Approximately $3 million, or 23% of the original balance of the core deposit intangible, has been amortized to expense during the first year after closing.
Expenses related to foreclosed properties decreased $92,000 due to a valuation adjustment on a property of $77,000 recorded during the fourth quarter. The effective tax benefit rate for the first quarter of 2008 was 25%, excluding the goodwill impairment charge. The anticipated non-taxable items for 2008 are a higher ratio of estimated pre-tax income than in prior years, which causes the effective tax rate to decline. The rate will continue to be evaluated during 2008 based on anticipated year-end results, and is currently expected to be between 23% and 27%. The effective tax benefit rate for the fourth quarter of 2007 was 40.7% and reflected a cumulative year-end impact of 2007 pre-tax net income being significantly lower than the previously estimated amounts on which accruals for the first three quarters of the year were based.
Our efficiency ratio for the first quarter of 2008, excluding the goodwill impairment, was 70.2% as compared to 64.6% in the fourth quarter of 2007, 78.8% for the first quarter of 2007. Margin compression was the principle reason for the reduction in operating efficiency on a linked-quarter basis, representing over 400 basis points of the increase.
The capital levels for AmericanWest Bank and the consolidated Company remained in excess of their requirements for well-capitalized status at March 31. Two capital ratios we focus on principally, total risk-based capital and tangible capital, were 10.04% and 6.73% respectively as of March 31 for the consolidated Company. The principle limiting regulatory capital ratio at the bank level is also total risk-based capital, which was 10.02% as of March 31.
In light of our operating performance for the past two quarters, a considerable portion of our cushion above the well-capitalized minimums has been eroded, and today we also announced the immediate suspension of our quarterly cash dividend. Although it is permissible under Washington law to pay a dividend even if there is a retained deficit – our retained deficit was approximately $3 million at March 31 – we believe that retaining capital and strengthening our balance sheet is the prudent course until such time as our credit situation stabilize and we are able to once again generate excess capital through consistent earnings.
We are also continuing to explore various methods to strengthen the Company's capital base through raising new regulatory capital at the holding Company level. Part of our consideration of the capital-raising alternatives available to us, we will endeavor to undertake the approach that is the least dilutive to our shareholders as possible.
I will now turn the call over to Rick for a review of our credit quality.
As of March 31, 2008, our total non-performing assets, excluding government-guaranteed amounts, were $49 million or 230 basis points of total assets, up from $40 million or 198 basis points at year-end '07. Non-performing loans, net of government-guaranteed amounts, at March 31, 2008 totaled $46.8 million or 267 basis points of total loans as compared to $39 million and 221 basis points at year-end. Other non-performing assets, which represent foreclosed properties, totaled $1.6 million at year-end and comprised of six properties.
I'll briefly walk through the major moving parts comprising the change in non-performing loans during Q1. 31 loans totaling approximately $20.8 million were placed on non-accrual status. Substantially all of the loans were related to residential construction or development projects and charge-offs totaling $4.3 million reduced the carrying value of these loans to $16.4 million at quarter-end. The non-performing loan total was reduced by $4.5 million of paydowns, $6.3 million of charge-offs on loans, which were classified as non-performing as of year-end, $639,000 for loans transferred to ORE, and a single relationship totaling $763,000, which was returned to accrual status due to established repayment performance and borrower financial capacity.
As we've stated previously, in making the determination as to whether or not a construction or land development loan should be classified as impaired and placed on non-accrual status, which we consider these two classifications as being one and the same, we focus principally on expected project absorption rates and borrower liquidity. As we have indicated previously, the existence of an interest reserve or borrower financial guarantee, individually or collectively, is not sufficient, in our view, to warrant classifying a loan as performing when the expected cash flows from the sale of lots or homes has been delayed due to market conditions and the borrower does not have liquidity sources in an amount sufficient to qualify as the primary source of repayment.
In addition, we have entertained offers on some non-performing loans in which the prospective buyer expected financing in excess of 100% and other extremely favorable terms that fall outside of standard policy. We do not intend to take this approach as we feel that the long-term downside risks exceed the short-term windowdressing upside. In addition, we anticipate that such approaches will be viewed with healthy [ph] skepticism by our bank regulators. This is not an environment when a weak borrower should be traded for a weak loan structure.
As I did with last quarter's call, I will take a few minutes to walk through some of the details on the largest non-performing loans, starting with the large loans moved to non-accrual status during the first quarter, and concluding with an update on the six relationships, which were discussed on last quarter's call.
One loan represented $12.6 million or 61% of the total amount transferred to non-accrual during the first quarter. This loan is related to a construction of a three-phase condo development in the suburban Salt Lake City area, of which one 36-unit building is approximately 90% complete. Due to market changes since the project was initiated in 2006, the expected retail sales price per unit has fallen by approximately 30%. Charge-off of $3 million was recognized on this loan during the first quarter based on an updated estimate of the collateral value, reducing our carrying value to $9.6 million. This equates to about $225,000 per unit, which is a price point where we believe there can be significant absorption of units based on the current market conditions, plus the estimated liquidation value of the infrastructure and the land for additional phases. At this time, we do not plan to advance any additional funding on the other two units until there is pickup in sales activity or the borrower obtains some additional equity for the project.
The 30 other loans totaling $8.1 million placed on non-accrual status during the first quarter, construction and development loans represented $6.2 million, or 77%. The aggregate carrying value of these loans was reduced by $1.2 million to $5.1 million through the recognition of specific charge-offs based on collateral liquidation estimates. Most of these loans are located in the Utah market. The single largest exposure to one borrower in this group was less than $1 million. The average loan carrying value as of March 31 was less than $300,000 and all homes are substantially completed. We are in the process of initiating foreclosure action on all of these construction loans.
Next, I will provide a brief status update on the six large non-performing loans that we discussed last quarter. First, an additional charge-off of $3.4 million was recorded on our Boise area residential development loan, which is our only loan in that market. This reduced the carrying value to $5.1 million, our updated estimate of value based on expressions of interest from qualified investors, interest from [ph] purchasing the note or property once the foreclosure process is completed. As we noted on our prior earnings call on January 31, we have received an updated appraisal on this property, which is a partially completed residential development with 93 finished lots, infrastructure for – infrastructure in on an additional 82 lots and entitlements on another 43 acres that indicated a book value of approximately $10.4 million and we wrote it down at that time to $8.5 million. I think this is a good example of just how quickly market values are moving and the inherent shortcomings of the standard appraisal approach in an environment where values are declining.
Loan two represented an aggregate exposure of approximately $5.7 million as of year-end 2007 related to a Utah-based residential builder. The principal reduction of $383,000 from the sale of two homes and aggregate charge-offs based on updated valuations totaled about $375,000, reducing the relationship carrying value to $4.9 million. As of March 31, the relationship included seven loans with a net carrying value of $1.1 million, $162,000 on average, for completed homes in the Provo area market.
In addition, there are five loans secured by substantially completed homes in the St. George market with an aggregate carrying value of $3.8 million, or $756,000 on average. Although we anticipate sales activity will pick up for the Provo homes in the spring given the mid-$200s pricing, liquidation prospects for the St. George properties are less promising. We believe that the discounted appraised values will permit the liquidation without any significant additional loss, although it will likely not occur in the short run, given the market conditions there for higher-end homes.
Loan three is for a completed land acquisition and development project in the Provo area market that had a carrying value of $4.9 million at December 31, representing the fifth phase of a large subdivision in an established area. Charge-off of $1.1 million was recognized during the first quarter based on an updated valuation of the lots reducing the carrying value to $3.8 million, or about $82,000 per lot. The market for homes above $400,000 continues to be very slow in the Provo area and we do not expect any significant lot absorption in the near term as we continue to pursue the sale of the note and the foreclosure process.
Loan four was a $2.9 million residential development loan in the St. George market. We accepted a cash payoff of $2.7 million and recorded a $220,000 charge-off for the deficiency balance during the first quarter.
Loan five is secured by finished lots in the Provo market and had a carrying value of $1.6 million as of December 31 and March 31, 2008. We have initiated foreclosure action and believe the discounted collateral value will fully cover the outstanding principle.
Loan six is a relationship consisting of raw land with a carrying value of $1.4 million and a $500,000 residential investment property loan as of December 31, 2007. Charge-off of $470,000 was recognized on the land loan during the first quarter due to an updated valuation and foreclosure action that’s been initiated.
Our portfolio delinquency remained within our target range at March 31 with 30-day delinquencies of $2.1 million, or 12 basis points, and 60-day delinquencies of $3.4 million, or 19 basis points. Although the 30-day delinquency is comparable to the prior quarter-end, the 60-day delinquency reflects an increase of approximately $2.9 million, or 16 basis points. Substantially all of the 60-day past due balance was comprised of loans for a single agricultural loan relationship, which was paid current subsequent to quarter-end.
We also had $3.6 million of loans, which were reported as over 90 days past due and still on accrual status at March 31. Although we generally transfer all loans over 90 days delinquent to non-accrual, this amount represented loans for which the borrower, a Utah-based residential construction company, was in the process of closing on a significant injection of equity capital from new investors. Although the funds were with the closing agent at quarter-end, the transaction was not completed until the first week of April. All loans have now been paid current and we believe that sufficient capital has been injected to support continued classification as a performing loan.
Potential problem loans, which we define as adversely classified loans not reported as non-performing, totaled $25 million, or 1.4% of total loans at March 31, as compared to 1.5% at December 31, '07. As was the case in the fourth quarter, substantially all of the loans placed on non-accrual status during the first quarter were rated a special mention at December 31, 2007, and as a result, the level of potential problem loans remained relatively flat without much activity for newly classified loans being added and reductions for loans transferred to non-performing status. The nature of construction loans does not typically provide for a gradual deterioration of the borrower's financial condition over time as you would find with commercial loans.
Net charge-offs for the first quarter totaled $11 million, or 248 basis points of average gross loans on an annualized basis. This compares to $10.4 million, or 235 basis points for the fourth quarter of 2007. We did not have any significant charge-off recoveries during the first quarter. Approximately $8.3 million, or 75% of the total gross charge-offs were related to five credits, which were covered earlier.
As Pat mentioned, we've recognized a provision for loan losses of $12.8 million or 289 basis points of average loans annualized for the first quarter. Future provisions will be dependent upon, among other things, changes in the internal risk ratings of loans, non-performing asset levels, loan growth, economic conditions, and real estate market valuations, charge-offs, and recoveries.
The allowance for credit losses to total loans ratio as of March 31, 2008 was 1.62%, up 11 basis points from year-end 2007, and 37 basis points from a year ago. The allowance coverage ratio at March 31, 2008 was 61% as compared to 68% at December 31, 2007. We believe that the allowance for credit losses at March 31 was adequate.
As of March 31, 2008, our land acquisition and development portfolio totaled $258 million, or 15% of total loans outstanding. Approximately 80% of the total is related to residential land acquisition and development. Our construction loan portfolio totaled $224 million, or about 13% of total loans as of March 31, and was segmented as follows – commercial construction of $117 million, or 52% of the total construction loans and consisting of owner-occupied commercial loans of $42 million, or 19% of the total construction portfolio; investor commercial at $49 million and 22%; multi-family at $26 million and 12%.
Residential construction loans of $106 million, or 48% of the overall construction portfolio consisted of consumer residential of $35 million, or 16%, builder spec at $66 million and 30%, and builder custom at $5 million, or 2%. Our consumer residential portfolio represented 144 loans at March 31, all of which were fully underwritten to exceed secondary market standards at the time of the origination. At March 31, only three loans totaling less than $600,000 in aggregate were classified as non-accrual and none of the consumer construction loans were delinquent more than 30 days.
Our main portfolio, residential construction and development exposures, are in four key markets – Utah County, principally in Provo, Salt Lake County, Washington County, which is the St. George market, and the Spokane metropolitan area, which includes the adjacent Idaho Panhandle counties. Our residential construction and development exposures and the key housing market trends for these areas are as follows.
In Utah County, at $32 million in residential construction and $80 million in land development loans, the average price for quarter one sales of homes in the market was $235,000, up about 6% from the fourth quarter of '07. Currently, 17 months of housing inventory, which is up by two months over the prior quarter-end.
In Salt Lake County, we have $15 million in residential construction and $15 million in land development. The average price for sales in Q1 for homes was $253,000, down about 6% from the fourth quarter of '07. There's currently eight months of housing inventory, which is largely unchanged from the prior quarter.
In the St. George, Washington County market, there is $12 million in residential construction loans, $13 million in land development. The average price for first-quarter sales was $275,000, essentially unchanged from the fourth quarter. There is 28 months of housing inventory and 30 months of finished lots inventory. The reporting distinction that we have made from first quarter from last quarter is that in the fourth quarter of '07 we reported aggregate inventories of lots and homes together for Washington County; we have separated them for this reporting period.
In Spokane County, we have $19 million in residential construction, $29 million in land development loans. The average price for sales in the first quarter was $179,000, and about 4% from the fourth quarter of 2007. There's currently eight months of housing inventory, which was up from six months of the last quarter.
I'll now turn the call back over to Bob for some additional comments.
Thank you, Rick and good morning. I appreciate your taking the time to join us this morning for this morning's call. As I mentioned last quarter, credit remains our number one priority for us. We are continuing to approach the identification of problem loans aggressively and to establish collateral liquidation values realistically. I personally meet with all of our senior credit administrators on a weekly basis to review the status of workout – of all our workouts on our existing problems, and to be briefed on any and all new recently identified ones.
Clearly, adjustments made to our underwriting standards during the third quarter of 2007 are resulting in us passing on many more deals, but also reducing the potential for additional problems down the road. We have a dedicated and highly experienced loan workout team that is solely focused on the prompt resolution of problem credits and the best possible financial outcome for AmericanWest Bank.
As Pat mentioned, we also are faced with some very difficult decisions with respect to capital planning, and suspending the cash dividend was not a decision taken lightly. However, I am confident that the decision is consistent with our long-term strategic planning objectives, which we have – which have been dealt an unfortunate setback by an unprecedented contraction in some localized residential real estate markets. Fortunately, some of these same markets still offer good long-term growth prospects for both population and job creation growth. And excess housing inventory is something that can, and we believe will, be absorbed over the next several quarters as market pricing continues to reset.
We have also made considerable progress with rationalizing staffing levels throughout our franchise with 35 FTE positions recently being eliminated in our retail banking operations through the use of new staffing models. Combined with other staff reductions achieved throughout the rest of the bank, we expect to realize annualized pre-tax expense savings of approximately $1.5 million beginning in Q2.
We also will complete the closure of an underperforming financial center next month, which is expected to reduce annual operating expense in excess of $300,000 annually, subject to subleasing the facility.
Stabilization of some of the weaker residential real estate markets in our footprint, especially the St. George and Provo areas, is a prerequisite for a material reduction in our non-performing loans. Looking forward to the balance of 2008, we are optimistic that the housing markets will begin to stabilize over the next two quarters, and we are seeing indications of a pickup of sales activity that's generally expected with the onset of spring.
As I explained to our entire staff this morning on our regular monthly all-employee call, we must deal directly with the challenges and implications presented by the current economic cycle. We have a fundamentally solid core franchise with a unique intermountain [ph] regional footprint with limited need for additional infrastructure investment.
Our initiatives to grow over our mortgage lending, government-guaranteed lending, and cash management, and deposit service fee initiatives are making continued progress. With respect to the latter, we added 14 new corporate cash management clients in Q1, increasing deposit suite balances by 20%. We added 28 new clients using remote deposit capture, 33% increase over the prior quarter, and have increased debit card penetration by nearly 1800 cards during the first quarter.
Most importantly, however, we have a very dedicated and experienced staff that is highly committed to our customers, shareholders, and Company.
In closing, our annual shareholder meeting is scheduled for next Wednesday, April 30, at 1:30 p.m. local time in Spokane. In addition to the standard proposals for election of directors and the ratification of independent auditors, two other proposals will be considered for approval. One of these is requesting an amendment to our Articles of Incorporation to authorize the issuance of up to 5 million shares of preferred stock. We have stated explicitly in the proxy statement that the Board of Directors does not intend for such shares to be used as an anti-takeover device as it is not in our shareholders' best interest. Please refer to Page nine of our proxy statement for more details.
PROXY Governance Inc., in its report issued April 11, which recommended a vote in favor of the proposal, noted that over 90% of U.S. publicly traded companies have blank check authorized preferred stock and indicated that management should be given reasonable flexibility in the absence of any pattern of prior abuse. Given the current challenging environment for raising capital, we firmly believe that this is in the best interest of our shareholders to have the ability and the flexibility to use the best and least dilutive capital instruments available to us.
That concludes this morning's prepared remarks. At this time, we will be glad to answer any questions. We will not, however, be providing any guidance for our earnings going forward. Operator?
(Operator instructions) Our first question is from Brett Rabatin of FTN Midwest. Please go ahead.
Brett Rabatin – FTN Midwest Securities
Hi, good afternoon, guys.
Brett Rabatin – FTN Midwest Securities
I wanted to first talk about capital. It sounds, if I am reading this correctly, it sounds like you are – obviously, with 10% total risk-based, you are going to try to do something here in the next quarter or two – are you limiting the amount you are going to raise to the preferred that you just mentioned earlier or will you also look at other convertible potential or can you give us some more color on – I know you are evaluating things – but more color on what you are looking at in terms of capital?
Sure, Brett. This is Pat Rusnak. Obviously there is only a handful of alternatives at the holding Company level. One is trust-preferred securities. The market for the full trust preferred securities is effectively closed at the moment, although there is an ability to perhaps do a registered underwritten offering of trust-preferred securities is one possibility.
We currently don't have the ability to issue preferred stock and that is why we are requesting that authorization with the annual meeting. So we got [ph] down that we could potentially evaluate some form of preferred and perhaps whether or not we would have conversion privileges, we would have to examine at the time. And finally, a common, through a rights offering, PIPEs offering or some other mechanism. I think that we will – expect that we will have – or at least our conclusions as to what direction we are going to head completed in the next probably six to eight weeks.
Brett Rabatin – FTN Midwest Securities
Okay. Will you follow-up with any kind of press release following the meetings with what your conclusions are?
I think at the time that we are making a decision to move forward with one of the alternatives, we will do a release, and obviously we will be, of course, subjected to the disclosure restrictions under federal securities laws.
Brett Rabatin – FTN Midwest Securities
Right. And if you are going to do something, would you be raising capital to reach a 12% total risk-based or can you give us any idea of what level you might be comfortable getting to with any raise?
At this time, I would like to say that we probably be – I see that we would be at least where we were prior to the fourth-quarter results, so look back to where we were at the third quarter when, I think we were the least one to be back to that level.
Brett Rabatin – FTN Midwest Securities
Okay. And then just moving to the other side of the equation, will you consider any – it sounded like you don't want to do anything aggressive with loan sales or any kind of transactions where you might have some bulk sales. Is your intention to shrink the balance sheet, whether in the construction portfolio or otherwise via any kind of sales?
Brett, this is Bob. We have, in fact, been identifying pools of assets, loan assets that would be available for sale if that is the route that we decided to go. We are not seeing growth by design in our loan portfolio right now. We've passed on a large number of loans that we otherwise would have maybe done a year ago. We are managing our loan portfolio very closely. We have not decided to take action on any potential loan sales just yet, but there are certainly pools that would be very marketable.
The other thing is that there are a small handful of loans that are participations that we have purchased over the years from other banks in terms of loan participations. Those have relatively short-term maturities that will be coming due over the next short while and we have no intentions of renewing those bought loans.
Brett Rabatin – FTN Midwest Securities
Okay. And then just one thing related to credit, you noted that the spring selling season – and I have heard this from many different markets – March numbers were a little better than very poor January and February numbers, and I am just curious to gauge how you view the operating environment relative to your loan portfolio if – let's assume that home sales stay at March levels or about there, does that, in your opinion, would that mean that further deterioration in your residential construction portfolio would transpire or can you give us a gauge of just how you see the level of home sales and level of activity relative to what needs to occur to improve the credit?
Brett, this is Bob. The majority of the credits that we have booked in the residential arena over the last year or so have been in the entry level or first step-up house pricing. Those markets are still very vibrant, and if those products are priced properly, and I say that price point is $250,000 and below, that product is moving very rapidly. It has continued to move rapidly through the winter months as well.
Our exposure to some of the larger product, which we inherited through the Far West acquisition, predominantly in the Provo and St. George markets, that product has priced north of $500,000 is on the market for a while. We are seeing a mild pickup and some interest in that product, but I think people are sitting on the sidelines and waiting to see where that trough is before they buy in. We are well aware of lots of capital pools out there looking to buy product and I think they are looking for that point of entry before they start jumping in.
So I think we are going to see a little bit of carry time on that larger product, larger-priced product anyways, and as you all know, with the new regulations in terms of stated income mortgage applications are a thing of the past. People qualifying to buy these larger products are – it is a little bit more challenging to get the financing, conventional financing on these products and that also will prolong, I think, the carry time on some of these larger products.
Brett Rabatin – FTN Midwest Securities
Okay, great. Thanks for all the color.
(Operator instructions) We show no further questions at this time. I would like to turn the conference back over to Mr. Rusnak for any closing remarks.
Yes. I will let Bob make the final remarks here.
Thanks, Pat. Well, thank you very much for listening to AmericanWest's financial results conference this morning. We very much appreciate your continued support and look forward to discussing our second quarter operating results with you in July. I very much appreciate your continued support of our overall Company. Thank you very much again for attending today and have a great day. Bye now.
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