Tom Geisel – President and CEO
Bruce Dansbury – EVP and COO
Steve Moss [ph]
Sun Bancorp, Inc. (SNBC) Q3 2008 Earnings Call Transcript October 27, 2008 11:30 AM ET
(Conference Call Starts In-Progress) remained intensively competitive, especially during this quarter, as deposit pricing remained high, driven by several large institutions’ need for liquidity.
On the subject of capital, our ratios are still quite solid, as evidenced by the statistics in our release. Our total common equity available to shareholders currently stands at $357 million, with average total equity at 10.83% of average assets for the nine months and tangible equity is at 6.39%. Our capital strength is well in excess of regulatory minimums for an institution to be considered low capitalized. And as we have said before, we don’t intend to do anything to compromise that excellent capital strength.
Before we hear from Bruce, I want to give some brief observations about Sun Bancorp that we don’t hear very much because we are also fixated on this volatile and unprecedented economic environment. These are points that our institutional investors are likely to already understand, but they are still worth making.
Number one, Sun is strong because we are a conservatively managed bank that is always focused on disciplined and safe business practices that ensure the security of our customers’ assets. We have no exposure to subprime mortgages and no investment in Fannie Mae or Freddie Mac. And two, through these difficult economic times, we are making a serious effort to reassure our customers that Sun National Bank is here for them. We have money to lend, we have communities to support, and we have safe financial institutions in many options to offer.
At Sun National Bank, we see ourselves as having a fundamental responsibility to strengthen our home state of New Jersey and its residents and businesses. It’s a responsibility that we certainly take seriously.
Okay. I’d like to now turn it over to Bruce and then we’ll take some questions. Bruce?
Okay. Thanks, Tom. Well, clearly the economic climate and external influences continued to impact our credit quality. What we saw previously as a weakness in the residential real estate market has now spread to the overall economy, and we are seeing a slowdown affecting more of our commercial borrowers. Those experiencing the greatest impact are companies closely associated with the residential real estate market and consumer spending. Reduced consumer demand appears to be the rule of the day. Evidence of these economic challenges is reflected in our increased loan loss provision and increased level of non-accrual loans, as well as our loan charge-offs.
The primary driver of our loan loss provision was our recognition of weakening performance of a number of our borrowers through the normal function of our loan review and risk rating process. Additionally, we have tried to reflect in our provision through increases in various qualitative factors what we believe would be the prolong nature of this economic downturn.
Let me provide a few examples of relationships that we have recently downgraded. One is a well-established customer, a moving and storage company that has been in the business for almost 30 years. The company has seen its sales negatively impacted by the downturn in the residential real estate market and slowness in the economy in general.
Another example would be that of a large private school, for whom we provide the construction and permanent financing for a new facility. The current uncertainty has impacted their enrollment, as parents ponder their ability to afford tuition now and in the future. Additionally, through our risk rating process, we have downgraded the small number of our residential builders due to the continued soft demand for new homes.
In terms of our non-accruals, we saw a large increase from the second quarter to the third quarter. The same economic factors are at play here. One large relationship that has moved to non-performing status as they strike work [ph] an excavating contractor who historically relied on new residential sub-division as a major source of revenue. Weakening consumer spending has forced another relationship, a manufacturer and packager of high-end cosmetic, into the ranks of our non-accrual premise.
As I’ve explained many times before, we have always taken an aggressive stance in terms of recognizing non-accrual credits and have been proactive in ensuring that our risk ratings are current and accurate. In all the cases that I’ve cited, we are a secured lender and we are actively engaged in the workout process with these borrowers.
Our charge-off experience in the third quarter has been in line with our business plan of five basis points of average loans outstanding. We continue to see charge-offs centered in the commercial and small business loan portfolios. In terms of the front end process, commercial loan demand has remained strong with our new business pipeline in the range of $487 million at the end of September. While we are actively seeking new business, it goes without saying that we are underwriting new credits in the context of the current environment and our credit standards will not be compromised.
Residential construction, which has been our bellwether in terms of economic slowdown, saw a $4 million reduction in outstandings during the third quarter. At $66 million, we are about 3% of total commercial loans. This is down from about 3.3% at the end of June. Outstandings were spread over 87 loans to 61 borrowers as compared to 98 loans to 67 borrowers for the previous quarter. We expect to see this run-off continue in the short-term, and we continue to be highly selective in regard to any new projects that we consider.
With the potential and actual deflation of residential real estate values, another area of continuing concern has been the health of our home equity portfolios. Outstandings at the end of June have increased only marginally from $348.6 million to $356.6 million at the end of September, or about 13.4% of total loans.
We currently have some 6,300 accounts in the portfolio, which includes both term loans and lines of credit. You see too [ph] our home equity lines of credit remained consistent with the historic experience at about 52% of the committed amount. Overall home equity delinquencies including non-accruals totaled 37 accounts for about $3.5 million or less than 1% of the total home equity outstandings at the end of September. This represents a small increase in the number of accounts in delinquent dollars, but continues at the same level in terms of overall outstandings.
I would like to stress once more that while we’ve taken comfort in our conservative underwriting standards for home equity credit in terms of loan-to-value exposure, an increase in the unemployment rate as the downturn continues, may put us at a higher risk for delinquency and future defaults.
In summary, let me say that while we all have concerns about the severity, breadth, and duration of the economic downturn, we feel we are on the top of our gain when it comes to recognizing problems early on and addressing them aggressively so as to preserve our overall credit quality. At the same time, we will continue to pursue sound well-structured lending opportunities that withstand the stresses of the world we live in and allow us to move forward as a bank.
Thank you, Bruce. Before we open it for questions, I just wanted to make everyone aware that late last Friday we closed the sale of our six Delaware retail branches with WSFS Bank. The total deposits sold approximated about $96 million at a premium of 12%. This strategic sale solidifies our commitment to our core New Jersey franchise. We are maintaining our commercial loan production office and our commercial loan relationships in Delaware and plan to expand our commercial presence in the state.
Operator, I’d like to open it up for questions.
(Operator instructions) Our first question comes from the line of Steve Moss [ph]. Please proceed with your question.
Good morning, guys.
Good morning, Steve.
Just if you could give a little more color on – with regard to asset quality for the 30 to 89-day delinquency?
In which portfolio?
The total portfolio.
Okay, hold on a second. I haven’t broken down by all the portfolios.
Hold on a second, I feel I can – to give you an idea, our home equity delinquencies at the end of the quarter were around – about 1.1% on our floating portfolio, about 0.55% on our fixed, our small business portfolio was running just over 3%, and our commercial was about 2.2%.
That includes all non-accrual and past dues in those areas that I just mentioned here.
And then with regard to the treasury’s TARP program here, what are your thoughts on that?
We are actually, Steve, in the process of analyzing at this point. If you take a very quick look at our asset base right now, the TARP would allow us to borrow anywhere from a minimum of $30 million to a maximum of about $90 million. Certainly as we stated in – and I stated in my opening comments, and we all know capital is king right now. So having the ability to avail ourselves of it is certainly nice, but at this point we’re still in the process of really analyzing it.
Okay. Thank you very much.
We have no further questions in queue at this time.
Okay. Well, then in that case, that wraps up our earnings call for today. We want to thank everyone for participating, and we will talk to you at year-end.
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