VanEck China Bond ETF
Q3 2007 Earnings Call Transcript

Published: 22 Oct 2007

[Operator:]

Good morning or good afternoon, ladiesand gentlemen and thank you for standing by. Welcome to the Community Bancorp ThirdQuarter 2007 Earnings Conference Call. During today’s presentation all partieswill be in a listen-only mode. Following the presentation the conference willbe open for questions. (Operator Instructions). I would like to turn theconference over to Mr. Patrick Hartman. Please go ahead, sir.

[Patrick Hartman:]

Good morning. Thanks for joiningus today. Today we’ll make our comments related to the third quarter and year-to-dateearnings for 2007. Before we get to begin, please recognize that certainstatements will be made during this call may not be historical facts. They may be deemed, therefore, tobe forward-looking statements under the Private Securities Litigation ReformAct of 1995. Many important factors may cause the company's actual results todiffer materially from those discussed and were implied by such forward-lookingstatements. These risks and certainties willbe described in further detail on the company's filings with the Securities andExchange Commission including the Form 10-Q for the period ended September 30,2007, which will be filed within the next week. Community Bancorp undertakes noobligation to publicly update or advise these forward-looking statements. Thiscall will be approximately 1 hour duration. First, our Chairman and ChiefExecutive Officer, Ed Jamison will discuss highlights for the third quarter 2007.Similarly, we’ll open up the call for questions-and-answers session. Larry Scott, President ofCommunity Bank of Nevada.And I will join Ed and be available to address your questions. Now I would like to turn the callover to Ed.

[Ed Jamison:]

Thank you, Patrick. Good morningfor some and good afternoon for others. We appreciate your attendance here atCommunity Bancorp's third quarter earnings call. Community Bancorp's quarterresults are in line with our expectations given the challenging economicconditions we are in today. Earnings at $0.53 per share were impacted by$377,000 or $0.02 a share after-tax expenses, associated with the pay-off ofour trust preferred, that had a rate of LIBOR plus 340. This pay-off willprovide the company benefits of reduced cost moving forward. This expense alsoimpacted our efficiency ratio slightly, resulting in our ratio moving upwardabout 2%. The net earnings at $5.6 millionin the second quarter versus the $5.5 in the third quarter again were impactedby this one time charge just mentioned. The company's net interest margin was4.9 for the third quarter compared with the second quarter of 4.93, the slightmove in the margin. Six month net interest margin was 4.98 compared with a ninemonths of 4.95 for both the linked quarter comparison, and the 6 to 9 monthcomparison; we’ve had a 3 basis point reduction which we feel is veryencouraging. During the period NIM wasimpacted by the reduction in the Fed funds rate and the increase in the prime,which moved our earning asset, yields, and deposit costs. Loan yields have beendecreased a little, even with the Fed moving in the interest rates. With ourbalance sheets somewhat neutral, we’re able to match rates as they move. Ifinterest rates continue to downward, loan yields will be affected, as will thecost of spreading our portfolio and therefore the NIM. The increase in non-accrualsaffected our net interest margin by about four basis points this quarter, andwill be picked up when the loans are paid. Under the present and uncertainmarket conditions which we are expected to continue over the several quarters,loan pricing should remain market driven and deposit pricing dependent on theeconomy, and the direction of interest could move our NIM in a very narrowrange. Gross loans increased slightlyfor the period in double-digit percentage increase for the year. The loangrowth from our perspective this below our historic growth rates. Constructionlending which drives overtime provided the outstanding based on percentage ofcompletion, rather than immediate funding with term loans or other loan typeswhich provided much higher increase in loans outstanding. The quarter loan volume was quitelarge and the number of passes were very high, as well as resulting in modestgrowth. We continue to book high quality loans in both Nevadaand Arizona.As reported, our non-accruals increased from 10 basis points to 56 basispoints, a substantial increase for the period. As stated in the release theterm loans attributed 59% of the non-accruals. Without these term loans,non-accruals would have increased slightly over 20 basis points total. Weanticipate being paid in full of each of these credits as it continues toprogress and all the non-accruals during the quarter were in the near-term. We still have little directexposure to the residential whole market, no sub-prime loans and limitedresidential construction. As with the national economy, we see in our market amuch changed residential market and concerns for the near-term in theresidential sector. With the change in changing market dynamics we may seemodest growth, which will effect our growth strategies. As we have mentioned, as we'vemonitored the markets, we find a concern with the office market with anelevated vacancy factor, that is projected to move higher and therefore we arekeeping our underwriting standards in that segment strong and robust. Wecontinue to see strong occupancy in the retail and industrial segment with continueddemand, yet slower demand than we've seen in the past. Funding sources continue to be afocus of the bank. Core deposit growth has been limited, basically flat, and webelieve we have made some headway, and are encouraged by new products andservices that will attract and retain core deposit customers in the small tomedium business sector, as well as reach out to the professionals and servecommercial segments. We continue to produce synergiesfrom our 2006 acquisitions that should be fully implemented by year-end. Withthe potential costs savings we'll be somewhat offset with the expensesassociated with the three branches we opened this year. Two in Arizona and one in Las Vegas are performing as an anticipated. Deposits weregrowing and we are adding new customers. Both markets in which we operateare experiencing strong economic pressure in the residential sector. Likewise,there are many markets similarly situated. Fortunately, we're not directlylinked to residential construction, and are not facing problems in that area,to any degree. Regardless, we see potential linkage if the market conditionspersist over a long period. Additionally, well we may nowhave a balance sheet that provides sensitivity to interest rate and to sum upbalance could be cautious as to the future interest rate environment. With thatsaid, we believe that our markets are strong as a whole, and weak inresidential. We have a very strong comparison with other markets is jobs andemployment. From the last report we obtained we've defined that the commercialbuilding permits totaled a $154.7 million in July of this year, a 54.4 increasefrom the same period a year ago. Residential permit evaluationssale 56% to $120.8 million. Interesting to note that medium home prices increased4% for the year-over-year period. We don’t believe that will continue but itwas in that period. The unemployment rate has risen.Our total employment numbers have increased year-over-year by 3.3%. We havebillions of construction dollars and projects taking place in the Las Vegas strip and in ourmarkets in which we operate. All this construction will and has creating jobsin an expanding labor market. The need for housing, well are from the highs wewill be needed to supply housing for those workers coming for employmentopportunities, new hotels, restaurants, schools, hospitals and other services thata growing economy needs. We still see 60,000 new residence coming into theSouthern Nevada market and a greater number than that, approximately 70,000 to80,000, in the Arizonamarket. As we expect unemployment tocontinue, because this is where the jobs are, we acknowledge and understandthat we are operating in different economic climate where certain segmentsexperience difficulties. Also, there are other segments that are not affected. We are continuing to move in theright directions, face the challenges and produce results. Our economies inwhich we operate continue to grow and cautiously will provide us theopportunity to do likewise. Employment will be a strong driver and that's howwe’ll move our markets forward in the coming quarters. Patrick?

[Patrick Hartman:]

Thank you, Ed. Before I turn onthe call over to the operator I would like to set some guidelines for theQ&A. As this is a one-hour call, we invite you to present a couple ofquestions at a time. As time permits, we will address any follow-up questions. Josh, would you please explainthe technical elements of the Q&A session.

[Operator:]

Yes, I certainly can. Thank you,Patrick. Ladies and gentlemen we will now begin the question-and-answersession. (Operator Instructions). Our first question is from the line of Jim Bradshawwith D.A. Davidson. Please, go ahead.

[Jim Bradshaw:]

Good morning.

[Ed Jamison:]

Hi, Jim.

[Jim Bradshaw:]

Hey Ed, can you talk about what'schanged or what philosophically you might be doing with capital now that thepace of growth is slowing or do you think about dividends or share repurchaseactivities something in that regard?

[Ed Jamison:]

As to our capital, yes, we dohave a large percentage of capital based on our size. We did initiate a stockbuyback, and we will continue moving that forward, but right now we are in ablackout, so we couldn’t execute a purchase at this time. Likewise, dividends have alwaysbeen discussed and will be looked at as we move forward, but we hope that wecan always have adequate capital to move our plans forward.

[Jim Bradshaw:]

Sure, can you talk about your loanpipeline, how big it is as we sit today compared to where it was a quarter ago,and maybe give me some color on what’s the predominant focus on the loan side,commercial real estate, commercial construction, etc, if you can break up thepipeline by growth pieces, that will be helpful? Thanks.

[Ed Jamison:]

I think, Larry can jump in here alittle bit and give us some color as well. Our pipeline is basically somewhatat the similar product act that we have been doing this year, more in a retail.We are moving cautiously away from office because of concern about current, butalso projected vacancy rates in that sector. So, we are doing the same basickind of products and services we did in the past. We don’t look at lot of landtransactions unless we believe those lands acquisition can go from acquisitionto development to vertical, and it will be normally in the commercial sector,but the pipeline is relatively strong. I was surprised to see thenumbers that we see. Now, with the pipeline, what goes on between now and thebooking is sometimes two things. So I think, Larry, can probably jump in herein too, but I think, I am encouraged by what we see as the perspective pipelineand volume we could do. Larry?

[Larry Scott:]

Jim, I would just probably addthat if you were to compare our pipeline today, versus a year ago, clearlythere are two segments of that pipeline that are minimal or don't exist much atall. There is very little land activity in the pipeline, there are constructionloans that are being completed; there is very little new construction activityin the office market. We have replaced much of those segments, however, withopportunities in retail construction and our permanent loans and someindustrial activity as well. And then our commercial andindustrial activity has begun to pickup, and so the commercial, industrial andexpanded opportunities in retail and industrial have seemed to have filled upmuch of the void that has been created in the land and in the officeconstruction that was taking place. The net effect, however, though is we havecontinued to move off loans out of our portfolio, that we had in those tworespective categories, that we saw is either being currently problematic orhaving some challenges out into the future, if the real estate market continuesor if it is protracted into a further downturn of the market. So, we have actedrather conservatively in moving deals off and so our net-growth has not beengreat, but the opportunities still seem to be a very strong force.

[Jim Bradshaw:]

Great, I appreciate it. Thanksvery much.

[Ed Jamison:]

Thanks Jim.

[Operator:]

Our next question comes from lineof Christopher Marinac with FIG Partners. Please, go ahead. Christopher Marinacwith FIG Partners, your line has been opened.

[Christopher Marinac:]

Thank you, Good afternoon. I wantto ask, just a continuation of Jim's question related to the loan pipeline. Canyou elaborate on sort of what type of opportunities you would like best in Phoenix proper? Is thatany different from what you generally answered a few minutes ago.

[Ed Jamison:]

Chris, this is Ed. The ArizonaBank has a much smaller legal lending limit. So these opportunities are alittle different then we see in the Nevadamarket, even though we still maintain a loan production office in Arizona or the NevadaBank, because they could make a larger loan, because of their legalrequirements. So we’re seeing an expandedopportunity as we bring on more people that are used in customary to do thatkind of retail or industrial centre, or small or occupied condominium officespace is a big product type in Phoenixas well.

[Christopher Marinac:]

Okay.

[Ed Jamison:]

So we're just moving and growingin that direction. The Arizona bank is really strongly focused in on theC&I in the smaller credits.

[Christopher Marinac:]

Got you. And then my follow-up, this has to do withthe deposit cost and seeing that the cost of CDs was up slightly this quarter.By how much of the Fed cut has the pass along and do you do expect that we haveadditional Fed cuts that you pass as loans quickly from a funding costperspective?

[Ed Jamison:]

Chris, as you know, we wish as aninstitution, lot of steps fifty basis points. We'll go fifty basis points downon our deposits mix, but that's not competitive. So, we take a look out it andwe look at the reductions based on the product type and the competition. Butunder the fifty basis points, some sectors took a substantial reduction whereasothers were more modest. Overall, I think 40% we took off of the total ratherthan the fifty.

[Christopher Marinac:]

Okay, great. So will the marginhave some more pressure from here?

[Ed Jamison:]

Pardon me.

[Christopher Marinac:]

Will the margin have somepressure on the downside from here in the fourth quarter and first quarter?

[Ed Jamison:]

No. I don’t think so. I think it what’srepresented here is pretty reflective of where our NIM is now.

[Christopher Marinac:]

Okay. Great Ed. Thank you verymuch.

[Ed Jamison:]

Thanks, Chris.

[Operator:]

Our next question comes from the line of Manuel Ramirez withKBW. Please, go ahead.

[Manuel Ramirez:]

Hi, good morning. On the share repurchase, I apologize that thisisn’t in the press release, how much exactly did you buy back in the quarterbefore you went into your blackout?

[Ed Jamison:]

Up 43,000 shares.

[Manuel Ramirez:]

43,000. Okay. And are you managing your capital ratios to aparticular level -- particularly if you look at tangible common equity?

[Patrick Hartman:]

We’ll remain well capitalized.

[Manuel Ramirez:]

Okay.

[Ed Jamison:]

I think we have always maintained a little bit more thanwell-capitalized, and that’s been a plan of ours, because of our real estateportfolio. So we have always been more than well capitalized.

[Manuel Ramirez:]

Okay. By the way, is there any inclination to maybe keepmore capital than you would in a stronger economic environment given theuncertainty that we see out there right now even if you don’t have directexposure to a lot of stuff that’s happening?

[Ed Jamison:]

I don’t think that would be, no, we are not -- it’s not partof our strategy, is nowhere we are looking. We believe that the capital isstrong and we could utilize it through additional organic growth.

[Manuel Ramirez:]

Okay, and then Larry’s comment on trying to run off some ofthe parts of portfolio that you saw as higher risk. Is most of that behind you soit will be a little bit easier to grow your portfolio on a net base going inthe year-end, or you just expecting overall forward basic growth going forward?

[Ed Jamison:]

Manny, I would say that theanswer to that is yes. Most of it does appear to be behind us, however, I wouldleave the caveat in there as the economy may deteriorate more than we may movethat pressure on a little bit further, but as what we see right now, ourexpectations are that we have moved these substantial portions of our portfolioout that we would desire and sub.

[Manuel Ramirez:]

Okay. And then the last question,can you provide a little bit more detail on the $2.9 million loan participationthat was non-accrual? Just the nature of the loan; that would be helpful?

[Ed Jamison:]

Manuel, this is Ed, I'll give youa little bit of information we have. This is a participation which we are --the total loan is approximately $10 million, the loan was originated in one ofthe acquisitions. Likewise, the current holder of the other side of theparticipation requires that credit through acquisition, as well, and we areworking through that. It is a residential component, and we are moving throughthat process as we speak.

[Manuel Ramirez:]

Okay, Ed was that a land or aconstruction loan?

[Ed Jamison:]

It was a construction loan.

[Manuel Ramirez:]

Construction loan? Okay.

[Ed Jamison:]

Yeah, it was.

[Manuel Ramirez:]

Okay. And we can infer that youdon't expect material losses from this?

[Ed Jamison:]

We don't expect any loss,whatsoever. On the two primary large non-accruals that went on, one was the$2.9 million the other one was about $1.6 million, you arrive at your the 59%,and the other one, we are first mortgaging our current appraisal on that was$3.4 million. That's as of the couple of weeks ago. We’ve got $1.6. So, we justcan't see our way where a loss would occur in that credit.

[Manuel Ramirez:]

Great, thanks Ed.

[Ed Jamison:]

Thank you, Manny.

[Operator:]

Our next question comes from theline of Brent Christ with Fox-Pitt. Please, go ahead.

[Brent Christ:]

Good morning guys.

[Ed Jamison:]

Hi Brent.

[Brent Christ:]

Just a follow-up on credit anddid you guys provide any specific reserves this quarter for any of the newnon-performers and if so, how much? And then secondly, just in terms of yourthoughts on reserving going forward with the potential for maybe some moreadverse migration in the portfolio, how you guys are thinking about that?

[Ed Jamison:]

As far as this specific reserve,no, we did not put a specific reserve. And as we go through our several methodologiesto arrive with the adequacy of our reserve, we found that all sectors wereokay, based on even the increase in the non-performings. Now moving forward, asI said in the release, we are going to monitor these very closely and we willmake adjustments, but right now our reserves at $1.18, $1.19 is we believeadequate and we believe that in line of what we see in peer groups anddefinitely a lot greater than what we see in Nevada banks themselves. In fact, Nevada banks were lessthan 1% as a whole in reserve, and so we believe that ours is adequate. We havea very detailed methodology, several methodologies looking at if we had anadequacy of reserve. Now, if things change more, we are going to put thereserve as is needed. We have no problems doing that.

[Brent Christ:]

Got you. But the other 500,000 orin provisioning this quarter was specific, had you other non-performers?

[Patrick Hartman:]

No.

[Brent Christ:]

Okay. And then could you justgive a little bit more details in terms of those two larger credits that werenon-performing. What kind of the issues were with them individually?

[Ed Jamison:]

Let me address it, and some of itmaybe we can't speak fully on, but the participation loans was more of, webelieve management on maybe the lead lenders part. That -- there was a surpriseto us in some respects, of the deteriorations of the credit. They were doingthings that we weren't necessarily advised of. So, we believe that there ismore and better communication now I think when we get those resolved. Now, likewise the other credit isprepared to be financed by another institution but there is some issuesregarding some water rights. So, I think that's still pending and couldpotentially be there. Likewise, there is a second mortgage there on that thatloan, that if they want to protect your interest anyway they are going to haveto -- as I said before, we got $1.6 from $3.4 million appraisal.

[Brent Christ:]

Got you, okay. Thanks a lot guys.

[Ed Jamison:]

Thanks, Brent.

[Operator:]

Our next question comes from theline of Todd Hagerman with Credit Suisse. Please, go ahead.

[Todd Hagerman:]

Good morning everybody.

[Ed Jamison:]

Hi, Todd.

[Todd Hagerman:]

Hi. A couple of questions, onejust in terms, can you give us a sense of the pass through trends, pass through90 days, what those have been looking like as of late?

[Ed Jamison:]

The 90 days really, of coursetrended up because primarily the size, because of these two credits. We haven'treally seen a dramatic shift in our overall delinquency other than these twocredits which sort of bumped up during the quarter.

[Todd Hagerman:]

Okay. So, outside of these twocredits the -- really that the pass through trends are basically somewhat flattish,if you will?

[Ed Jamison:]

Or slightly elevated, but wedon't see anything within that would bring us to further non-accruals. Todd?

[Larry Scott:]

I agree, most of those were under-- between 30 to 60, 50 to 90 category, and nothing look ordinarily with thosecredits?

[Todd Hagerman:]

Okay. So, I guess that would holdtrue as well in terms of your watchless trends just in terms of risk migration?

[Patrick Hartman:]

Well Todd, we've taken a prettystrong look at everything to make sure that we have an adequate grade there.And, in some respects, we may have been a little more aggressive to re-gradethem, being a little more pro-active so we look at very -very strong. It's moreof a pre-emptive than we want to be pro-active rather than reactionary. So,we've looked at them, we have analyzed them and we don't see a lot of movementbut we are looking at a hard line in those credits.

[Todd Hagerman:]

So you still feel --

[Patrick Hartman:]

Institutionally, we look at thesecredits once a month, and for re-grading any kind of credit that has any typeof material size or a problem. So we are constantly monitoring these. These aresomething that we just don't look at quarter-to-quarter, we look at itmonth-to-month.

[Todd Hagerman:]

Great, and then just secondly,just in terms of the participation, can you give us a sense of otherparticipations you may have in the portfolio either acquired or otherwise orwhere you may be the kind of sub-participant?

[Ed Jamison:]

Todd, that's not -- we have notdone a lot of participants over the term simply because we've been able to belarge enough. We are going to be the lender; we wanted to be the whole lender.I just don't believe that we have a substantial amount of participation; littleare we a participant rather than the lead with the exception of, we do havesome gaming credit where we are a participant in a C&I transaction, but,it's well under the national. We’re are looking at national gaming credits thatare all headquartered here in Las Vegas, but we just don't have a lot ofparticipations outside of these.

[Todd Hagerman:]

Okay.

[Ed Jamison:]

I think as a matter as I said, itwas acquired was not something that we originated.

[Todd Hagerman:]

Right, but just in terms of kindof the acquired portfolios, as you look at those, and again the migrationtrend, there is nothing really there outside of this one credit that youreferenced that really is giving you any part or cause of concern at least today?

[Ed Jamison:]

No. Let me tell you what we do iswhen we did an acquisition and let the -- sometimes these smaller banks do, doparticipations because of the size. If there was good quality, we either boughtthe participation back out, and become a full lender ourselves where weencourage the loans to lead. So, it's been an ongoing process, but we don'twant small bank acquisitions. We'll buy out a participant and take the loan inwhole.

[Todd Hagerman:]

Okay, great. Thank you.

[Ed Jamison:]

Thanks, Todd.

[Operator:]

(Operator Instructions).Gentlemen, there are no further questions at this time. Please, continue. Pardonme, Patrick. We do not have any further questions at this time.

[Patrick Hartman:]

Okay. Well, thank you very muchfor listening to our call, and we look forward to talking to you next quarter.