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Virginia Commerce Bancorp Increase. (NASDAQ:VCBI)

Q3 2008 Earnings Call Transcript

October 21, 2008 11:00 am ET

Executives

Peter Converse - CEO

Bill Beauchesne - EVP and CFO

Steve Reeder - EVP - Retail Banking

Randy Anderson - EVP and CLO

Analysts

Gordon Beasley - Generational Wealth

Allan Bach - Davenport & Company

Michael Sharma - Raymond James & Company

Bryce W. Rowe - Robert W. Baird & Company

Doug Rainwater - Janney Montgomery

Roger Dullock - Private Investor

Carter Bundy - Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to your third quarter earnings conference call for Virginia Commerce Bancorp Inc. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. Peter Converse, CEO. Sir, you may begin.

Peter Converse - Chief Executive Officer

Thanks [Saeed]. Good morning and welcome to this third quarter earnings call of Virginia Commerce Bancorp Inc. Again this is Peter Converse speaking. I am the CEO of VCBI. The officers from our executive management team who will participate in the question-and-answer portion of this call are Mike Anzilotti, the President of our holding company; Randy Anderson, our Chief Lending Officer; Bill Beauchesne, our Chief Financial Officer; and Steve Reeder, our Executive Vice President for Retail Banking.

I will begin with a brief summary and commentary on our recent performance with some near-term guidance on certain metrics and strategic direction. Market conditions, especially relative to real estate and deposit gathering, will be discussed as management responds to questions following my presentation.

Despite severe and unprecedented market turmoil, Virginia Commerce continues to move forward with profitable results in the face of historically high credit costs. Like most banks with exposure in construction and land development loans, our journey through this credit cycle is challenging and difficult to say the least; but it is a journey we will successfully complete. Our earnings may suffer but we intend to remain profitable and well capitalized throughout this economic ordeal.

We have always been a well capitalized institution. But in these times we have determined that a higher level of capital cushion for increased credit costs and further market challenges, let alone continued growth, is prudent. To that end, last month we raised an initial tranche of $25 million in capital through the sale of trust-preferred securities to the Company's directors and certain executive officers. In the release announcing that capital raise, we indicated that we expected to raise an additional $25 million in capital through a private offering of equity instruments by the end of this month.

While we are in the midst of discussions and negotiations with a number of private equity sources, completing the next capital piece by the end of this month has proven to be a little ambitious. Now our plans are in a fast-paced transition as we seriously consider the Treasury's recently announced capital purchase program. Quite frankly, it is a very attractively priced alternative to raising Tier 1 capital. And there's one that many advisers are recommending that we take full advantage of. Whether we do and to what extent and whether in combination with other capital sources will be determined by our Board and management in the next few days.

Positive aspects of our performance include solid balance sheet growth year-over-year with assets, loans, and deposits of 19.4%, 22.9%, and 19.4%, respectively. However, considering a more recent decline in growth rates due to market conditions, continued competitive pressure, and a deliberate attempt to slow loan generation, we anticipate that balance sheet growth for the fourth quarter will be somewhere between flat and 2% sequentially.

Projecting out to 2009, we should be looking at balance sheet growth of 10% to 12%. As indicated in our last earnings release we will expect to -- we still expect to limit quarterly loan growth to know more than 2.5% [through] the first half of 2009. We achieved net loan growth of 2.2% this past quarter.

Despite a significant year-over-year and quarterly earnings decline, our efficiency ratio held up nicely, still in the high 40s. 47.9% for the quarter and 49.6% year-to-date. We intend to maintain a vigilant cost containment focus, although there never has been much fat in this organization to trim further. Nonetheless, hiring is being limited mostly to essential replacement positions. And new branching through 2010 has been curtailed to only two more sites we previously negotiated binding lease contracts.

Under trying operating conditions including a 12 basis point loss in loan yield during the quarter, due to increased nonperforming loans, our net interest margin improved 8 basis points from the prior quarter to 3.38%. For the foreseeable future, we still expect to range from 3.25% to 3.50%.

Yes, these are troubled times, especially for the financial services industry. However, we will get through this malaise because we have experience, determination, a successful track record, and the capital wherewithal to handle it.

Now I will open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Gordon Beasley] from Generational Wealth.

Gordon Beasley - Generational Wealth

Hey, Peter, Randy. Just quickly addressing period end allowance for loan losses. If I read it right it is around $26 million versus MPAs and 90 day greater past dues of about $85 or so million.

Peter Converse

No the $26 million was quarter end June 30.

Gordon Beasley - Generational Wealth

Okay. That probably answers my question. Where is [peer] then to 9/30? I might have missed it.

Peter Converse

$32.6 million.

Gordon Beasley - Generational Wealth

32.6 versus 85. And any idea off the top of your head where that might stand compared to your peer group?

Peter Converse

Much closer.

Steve Reeder

Probably compared to our National Peer Group. Gordon, I haven't seen the September numbers. As you know this is a fairly dynamic market across the country. The National Peer Group in June was about 1.35. I would expect that when we get everyone's numbers in September, that would be up a few basis points.

Gordon Beasley - Generational Wealth

Yes, I agree. Okay. Thank you.

Operator

Our next question comes from Allan Bach from Davenport & Company.

Allan Bach - Davenport & Company

Hey, guys, thanks for taking my call. Just wondering if you wouldn't mind shedding a little bit more color on what you're seeing in the commercial real estate portfolio?

Peter Converse

Sure, be happy to. I'm going to break it down between commercial real estate construction and the commercial real estate income property and owner-occupied. On the income property and owner-occupied side, we have been I might say pleasantly surprised that our delinquencies and our problem loan situations have been very manageable. On the commercial construction side, we had a couple of surprises -- obvious from the numbers in the third quarter.

Both of these actually related to activities of the borrowers that we were not involved in, related to residential construction and residential development that unfortunately impacted their financial position, their ability to carry the debt to the point where those loans became nonperforming. That amounted to $[20] million of the increase in nonperformance in commercial construction.

Allan Bach - Davenport & Company

Then I guess in your comments in the press release you had increased your guidance for NPAs, I guess, from 3% up to 4%. Was that primarily due to commercial real estate construction? Or is there anything else that is involved with that increase?

Peter Converse

I think that's a fair assessment that the commercial construction side is causing us a little more concern. What we are seeing particularly in I'll say outer markets, outer Western Fairfax County, principally, and then Loudoun -- is the impact of the residential markets and also employment issues on the commercial, the small-business sector and their desire to either rent or buy the commercial space. That's causing us some concern, so we want to be proactive in that regard.

Allan Bach - Davenport & Company

Very good. Thank you very much.

Operator

(Operator Instructions) I am showing no one in the queue at this time, Sir.

Peter Converse

Pardon?

Steve Reeder

There's nobody in the queue. Okay.

Operator

We just had one participant queue up, Michael [Sharma] from Raymond James.

Michael Sharma - Raymond James & Company

Good morning. Last quarter you provided a margin range of 3.25 to 3.50 for the next six months. Is that still valid or can you provide an update?

Peter Converse

That's still a good range for the foreseeable future. The foreseeable future is at least for the next six months. It could extend well through 2009, but, yes, that's still a very good range.

Michael Sharma - Raymond James & Company

Okay. And also you provided a charge-off range of 0.35 to 0.5 --?

Peter Converse

Yes and we are sticking with that range with the 0.5 being the worst-case.

Michael Sharma - Raymond James & Company

Okay. That's all I have. Thanks.

Peter Converse

Thank you, Mike.

Operator

Our next question comes from Bryce Rowe from Robert W. Baird.

Bryce W. Rowe - Robert W. Baird & Company

Good morning guys. Maybe, Bill, you can talk a little bit about deposit pricing in those markets. And if you've seen any impact or effect from Wachovia's pending or acquisition involved with Wells Fargo?

Bill Beauchesne

Yes. Let Steve start with that. He's certainly closer to the -- to the pulse on that one. Then I will add in where I can.

Steve Reeder

Good morning, Bryce. Deposit pricing -- nothing has really changed since the Fed meeting and the interim rate decrease. Things are holding steady there. In terms of Wachovia's troubles and their acquisition by Wells, that has put a lot of money into play. And some of that is making our way over to our bank. It remains to be seen just how significant of an increase we might get, but that's certainly creating some opportunities for all banks in this market.

Bill Beauchesne

In part, I would say that part of our determination of the range of the margins does lie in the fact that CD rates, despite everything that has happened over the last 90 days, are pretty much stuck where they are. We are not seeing really much movement there at all. You know Treasury rates can fall significantly, but we are not seeing anything happen on the CD side. The competition for them in this market is still pretty strong.

Bryce W. Rowe - Robert W. Baird & Company, Inc.

Okay. And, Bill, is that competition, is it smaller banks like you all or is it some of the larger banks still keeping those deposit rates up?

Bill Beauchesne

I would say it's sort of a blend. Probably we are seeing it from Citibank here locally. We are still seeing some high rates from Wachovia, and then, maybe two or three of our smaller competitors.

Bryce W. Rowe - Robert W. Baird & Company, Inc.

Okay. And from a new CD booking perspective or where CDs are rolling over right now, what kind of rate range are you seeing?

Bill Beauchesne

Well, certainly we are seeing, where CDs are rolling over right now, the overall cost of that portfolio. Everything is pretty much rolling over at that same level. That's why I'm not seeing in the foreseeable future much ability to either lower that cost or to see that cost rise.

Bryce W. Rowe - Robert W. Baird & Company, Inc.

Okay. And then, Peter, you mentioned capital and the desire to take down a little bit more. Any idea -- do you think you tried to take advantage of the TARP program to the maximum extent? That is 3% of risk-related assets?

Peter Converse

Well, I don't think I'm in a position to comment on that now, Bryce. But obviously the range of 1 to 3% gives us quite an option. That's anywhere from, what, $23 million to about $70 million, $71 million.

So, that whole range is on the table whether we take advantage of it is what we need to decide. Or to what extent we take advantage of it is what we need to decide.

Bryce W. Rowe - Robert W. Baird & Company, Inc.

Okay. And then, last question for Randy. Randy, if you could speak to -- I guess values -- not necessarily home values, but some of the development project values. Are you -- have you seen appraisals come down and by how much?

Randy Anderson

Certainly, appraisals have come down. It depends on what type of property you are talking about. Let's talk about land for a second.

Bryce W. Rowe - Robert W. Baird & Company, Inc.

Okay.

Randy Anderson

Some of the things that drives the as-is appraisal value for land is absorption rates. And the absorption rates, I think the appraisers tended to err to the conservative side and have taken those absorption rates out much further than what we've seen in the past. And when you did that -- count that down to present value, that does impact the as is value. If you see that project through, build it out, then that value may not be what you're dealing with. But that's the value that it stands today.

On the residential side, I did a little review on a September-to-September comparison on what's happening in terms of prices. Again, same pattern that we’ve talked about on past earnings calls, where the inner submarkets are faring much better than the outer submarkets. But I will tell you there's been a slide pretty much across the board.

A September-to-September comparison in the Arlington and Alexandria markets shows 12% to 18% September-to-September price decline for single-family home. You get out into Lyman and Prince William County, that's 31% to 38%. On a blended basis looking at the greater Northern Virginia area as a whole, the September-to-September comparison -- which I will caution you -- is that that's just that. It's looking at September last year and September this year. It's down 32%.

Here's the positive side of that. Sales are up 92% in greater Northern Virginia as a whole on a September-to-September comparison, and in some of those outer markets it's 50% plus. Prince William County is over 200%. So what we're seeing, I think, is a flushing out of a lot of the foreclosure short sales and so forth. And we are also seeing in the inner markets homeowners coming to the realization of what the market realities are and listing accordingly.

Bryce Rowe - Robert W. Baird & Company, Inc.

I think that's all I got. Thanks.

Randy Anderson

Thank you.

Operator

Our next question comes from Doug Rainwater from Janney Montgomery.

Doug Rainwater - Janney Montgomery

Gentlemen, good morning.

Peter Converse

Hi, Doug.

Doug Rainwater - Janney Montgomery

I know you've given some information in the past, I think, in general terms maybe more specifically about loan extensions on the construction book. And I wondered if you might be able to give an update related to that?

Peter Converse

Sure. Be happy to. The way we track this is we've become sensitive when a loan goes into its second extension or more and the total construction portfolio, 24% are in their second extension or more.

Doug Rainwater - Janney Montgomery

And do you remember last quarter, roughly, where that's set at?

Peter Converse

It actually has only moved -- I think it was 22 or 23, so it really hasn't moved significantly on a quarter-to-quarter basis.

Doug Rainwater - Janney Montgomery

Okay. Thanks.

Operator

(Operator Instructions). Next question comes from Roger Dullock, Private Investor.

Roger Dullock - Private Investor

Good morning. Could you tell me, please, at the end of the third quarter what the tangible net book value is per share? And how that changed from the second quarter?

Randy Anderson

Yes, tangible would be $6.71. There, we don't have any interchangeable assets on our books at this time. And did you say the second quarter?

Roger Dullock - Private Investor

Yes. How that compares with the second quarter?

Steve Reeder

It was up slightly. Second quarter was 6.6.

Roger Dullock - Private Investor

Okay. Thank you.

Steve Reeder

You’re welcome.

Operator

Our next question comes from Carter Bundy from Stifel Nicolaus.

Carter Bundy - Stifel Nicolaus

Good morning, everyone. Just a follow-up on Doug's question, Randy, if you don't mind. You said that 24% of the total construction portfolio was on second extension?

Randy Anderson

Correct.

Peter Converse

For more.

Randy Anderson

For more.

Carter Bundy - Stifel Nicolaus

Okay. And so that was -- I thought that -- I guess just the residential pays. The loans, the commercial builders, the single-family homes. I thought that was closer to 37%.

Randy Anderson

No. That's not correct.

Carter Bundy - Stifel Nicolaus

Last quarter it wasn't?

Randy Anderson

No.

Carter Bundy - Stifel Nicolaus

Okay. Do you also have the 30 to 89 balances there?

Randy Anderson

I do. 89 balances in total were $15.4 million. That was heavily weighted towards residential construction and commercial construction. C&I was $1.9 million, which is 0.7%. single house portfolio is $150,000, 0.13%. Closed-end, one to four families $325,000. 0.15%, commercial real estate both owner-occupied and income property, $3.6 million, 0.35%, and the commercial construction $2.1 million, 0.83%. Residential construction $8.2 million, 2.4%.

Carter Bundy - Stifel Nicolaus

So you said that total was right around 16.4?

Randy Anderson

0.4 which is 0.72% of total loans.

Carter Bundy - Stifel Nicolaus

Okay. Thank you very much.

Operator

(Operator Instructions). I am showing no one in queue at this time, Sir.

Peter Converse

Okay. Give it a few more seconds and then we will conclude the call.

Operator

(Operator Instructions).

Peter Converse

Okay. [Saeed], thanks for your help on this and thank you, everyone, for listening in and for your interest.

Operator

You're welcome, Sir. And, ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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