Sun Bancorp, Inc./NJ (SNBC) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Sun Bancorp, (SNBC)

Sun Bancorp, Inc. /NJ (NASDAQ:SNBC)

Q2 2013 Earnings Call

July 25, 2013 11:00 am ET

Executives

Tom Geisel – President & Chief Executive Officer

Tom Brugger – Executive Vice President & Chief Financial Officer

Steve Rooney – Deputy Chief Credit Officer

Analysts

Travis Lan – Keefe Bruyette & Woods

Matt Breese – Sterne Agee

Operator

Sun Bancorp’s Q2 Earnings Conference Call will now begin. (Operator instructions.) On the line for Sun Bancorp are Tom Geisel, President and Chief Executive Officer; Tom Brugger, Chief Financial Officer; and Steve Rooney, Deputy Chief Credit Officer. At this time, Tom Geisel.

Tom Geisel

Thank you, Operator, and good morning everyone. This is Tom. As the Operator indicated, joining me here today are Tom Brugger, our Chief Financial Officer, Steve Rooney, our Deputy Chief Credit Officer, and other members of my executive team. I trust you all have copies of our presentation, and while we don’t plan to cover every point in the presentation we will use it as a guide.

You’ve all reviewed our Safe Harbor Statement and non-GAAP disclosures on Page 2 and 3 of the presentation so I will not read them. Following my remarks I’ll turn the call over to Tom and then Steve for additional comments.

In Q2 2013 we maintained our focus to strengthen the balance sheet and transition the company to benefit from a stronger economy, stronger risk management foundation, and an improved interest rate environment. In doing so we achieved positive earnings. In our comments ahead we will review the quarter in more detail. First, let’s discuss the economic environment.

Since most of you follow the national economy closely I’m going to focus my comments on our core market of New Jersey. In New Jersey, economic recovery continues to lag most other states and the nation as a whole. Across business sectors in New Jersey the progress is uneven. Manufacturing is seeing slight improvement and the state’s large healthcare, life sciences and logistics industries are growing again.

In commercial real estate, the industrial market is doing better but the commercial and office market is still being challenged by high vacancy rates and a surplus of space. Construction has boosted thanks to increases in apartment building and public works projects, plus a temporary boost stemming from Hurricane Sandy repairs.

We’re about halfway through the summer season and area businesses and individuals who were affected by Hurricane Sandy are operating but still navigating the maze of insurance reimbursements and funding issues for repairs and rebuilds. In late 2012 Sun set aside reserves to address the potential exposure in our loan portfolio related to Hurricane Sandy.

To date, we’re fortunate that impact has been minimal. But the first half of the summer has been eclectic at best, so we expect to have more accurate information and an understanding of the full impact of Super Storm Sandy on businesses after the summer season.

Residential mortgage activity overall in New Jersey has slowed, mainly because higher interest rates have moderated the pace of refinancings. Home price appreciation, a market driver for several other areas in the country, is relatively slow here. The state also has the second highest share of foreclosure inventory as a percentage of mortgaged homes in the country, trailing only Florida. It’s likely that the weakness in the housing market has also negatively affected other areas of the economy, such as household wealth, credit scores and workforce mobility.

Unemployment is the most challenging issue New Jersey faces. New Jersey’s unemployment rate rose slightly to 8.7%, the first time it has increased in a year, although compared to this time last year the overall rate has improved nearly a full point. However, that rate is now more than a full point above the national average of 7.6%. Until business owners feel confident enough to hire for the long term and New Jerseyans can secure permanent jobs, the state will not see sustained economic growth or recovery.

In all markets deposit gathering still seems to be rational. As rates rise we can expect to see a more dynamic market of competition. On the commercial side competition has maintained its intensity. We have talked on prior calls about the rate wars and effects one everyone’s margin, but now we’re beginning to see consistent breaches in structure by our competitors in an effort to grow loan portfolios. We will compete on price, ideas, customer service and experience but won’t sacrifice growth for unsafe and unsound structures.

Amid the ongoing challenges in our markets we have maintained our focus on execution, controlling what we can control and capitalizing on opportunities to further strengthen the bank and grow our business. Now let’s turn to Q2 results.

Speaking to Page 4 of the presentation, we reported a profit for the quarter of $0.01 per diluted share. This is comparable to net income available to common shareholders of $2.5 million or $0.03 per diluted share for the linked quarter, and a net income available to common shareholders of $1.3 million or $0.02 per diluted share for Q2 2012.

In Q2 2013 we saw continued progress in our [workout] activities which led to net recoveries for the second consecutive quarter and a continued reduction in our nonperforming loans. Our workout efforts resulted in $2.8 million of net recoveries for the quarter and $3.8 million year-to-date, and we have achieved a 41% reduction in nonperforming loans in the past three quarters.

Our provision for loan losses was negative due primarily to those successful resolutions with net recoveries as well as reserve releases related to the sales of long duration portfolio jumbo mortgages. The positive trends in workout resolutions are an indication that our problem loans have been adequately written down to realizable value and we are choosing value maximizing strategies for resolution.

We continue to be vigilant in ensuring our loan portfolio is properly valued and expect our asset quality metrics will continue to improve over the year. We do anticipate any further bulk problem loan sales given the success, and we continue to see line of sight to peer asset quality metrics in the coming quarters as measured by NPL to loans and NPA to loans.

Understanding where we have come from, the economy’s fluctuation and our competitors’ willingness to gamble on loan structures we’ll continue to give cautious stance on balance sheet growth, focus on risk reduction, infrastructure building and enhancement to our risk management practices. Because of this cautious position, net interest income is weak and we continue to generate excess liquidity.

Our spending on consultants and advisors to enhance regulatory and risk reduction initiatives in recent quarters has also affected our performance. However, we believe that these short-term investments, while expensive, will pay off in the long run with a stronger foundation. These expenses will begin to moderate between now and year-end and are expected to normalize in 2014. The company is in a strong liquidity position and total risk based capital has risen to 14.8%, well above the regulatory-required level.

This past quarter we also continued to enhance efficiency through our branch optimization process and address the changing demands of retail delivery and customer preferences by leveraging technology and reducing operating costs. Earlier this month we completed the previously announced closure of branches in Cherry Hill, Lawrenceville, and Mystic Island. This enables the company to realize $1.2 million in gross annualized expense saves and brings our total number of branch closings, sales or consolidations to 26 in the last five years – or 30% of the total network.

Because of the strength of our customer relationships and the smooth transition we’ve provided to customers, combined with our ability to integrate mobile and online banking services, our retention in the wake of this has been good. In fact, we have seen over a 90% deposit retention rate to date among customers from the branches that have closed this month, and close to 70% from those that closed within the last year.

Turning to Page 5, we continue to balance our efforts to de-risk the balance sheet with opportunities to achieve measured growth across the organization. Our commercial lending teams continue to drive loan production in an extremely competitive environment with a conservative credit philosophy and targeted spread. Production in the first half of 2013 was down 24% compared to a strong 2012, but the pipeline for Q3 is robust and we are on pace to meet our 2013 production goals.

Of the $115 million in production year-to-date, 63% was from new relationships, demonstrating our competitive advantage in the market and ability to create those new relationships. Our consumer loan portfolio continues to show growth as a result of the mortgage division. Booked mortgage production for the quarter totaled $232 million, a 32% increase over the previous quarter and a 67% increase as compared to Q2 2012.

The division’s success is its strong alliances with builders, realtors and community groups. We still believe there are untapped opportunities to cross sell other retail loan and deposit products into this client base. Our mix of business for the quarter was 59% purchase and 41% refi. Asset quality remains strong and underwriting parameters are conservative to the market. This is an important business for us as we continue to generate noninterest income in an environment where the quality of interest earning assets are difficult to build.

In retail, average core deposits increased by $45 million or 3% in comparison to the prior quarter, and average checking account balances have increased 10% over the comparable prior year – all while decreasing our cost of deposits two basis points from the prior quarter to 43 basis points. We believe our relationship-focused, core deposit driven strategy will benefit us as rates rise.

Now I will turn it over to Tom Brugger to talk in more detail about the quarter. Tom?

Tom Brugger

Thanks, Tom. Good morning everyone. As Tom mentioned, the bank reported net income of $0.7 million in Q2 or $0.01 per share. We saw good progress in our workout activities and more reductions in our nonperforming loans. Net interest income continues to trend below optimal as the bank increases its mix of cash on the balance sheet. Excess liquidity has grown due to the sale of long duration, low margin mortgages and investments and a continued discipline on pricing and structure in our lending portfolio as Tom mentioned previously.

Let’s get into some of the detail and begin with asset quality. Our nonperforming loans declined $2.1 million on a linked quarter basis to $71.7 million, and nonperforming assets declined $3.8 million to $78.5 million. We expect to see additional reductions in NPLs and NPAs in the coming quarters using normal workout processes. We have begun to see more refinance take outs of problem loans which is always the preferred path. We still have an elevated level of NPAs and are very focused on reducing these problem assets in the coming quarters to bring the bank in line with our peer group. As evidenced by our recent recoveries we do believe that we have properly valued our problem loans.

We continue to have about $3.8 million of reserves to cover the risk from Super Storm Sandy. So far we have seen limited losses from the storm and our uninsured customer losses from damage have been negligible. As Tom indicated, we need more time to assess the impact of Sandy to customers’ cash flow during the important summer season and assess the impact to the economies near the shore. We will continue to assess our reserve adequacy every quarter for Sandy-related risk and adjust accordingly.

Net interest income drifted lower as the bank continues to grow its excess liquidity. Our net interest income was $21.8 million which is down $1.3 million from the prior quarter and $2.2 million from two quarters ago. In the past three quarters our net interest margin has fallen from 3.30% down to 2.96%. Average cash grew to $307 million in the quarter, and average short-term US Treasury securities grew to $60 million. This elevated and growing amount of cash is the primary reason for the margin contraction we experienced recently.

As we mentioned on previous calls we have been focused internally on reducing the credit risk and interest rate risk of the bank. Our problem loans continued to fall and we decided to sell about $250 million of fixed rate investments and longer-duration mortgage loans from the portfolio in the first half of the year. We do not think that it makes sense to take material amounts of long-term interest rate risk with rates at such low levels. This decision to sell these assets will put short-term pressure on the margin but will put the bank in a better position when interest rates shift higher in future quarters and years.

For a number of quarters we have been focused internally on enhancing our operational and risk management infrastructure. This takes time and it definitely takes internal focus. Therefore we have not been originating loans at what we believe to be our maximum potential run rate. We will begin to prudently put this excess liquidity to work in the coming quarters. If we deploy all of our excess $300 million or so of excess liquidity it would enhance annualized net interest income revenue by approximately $8 million.

Our balance sheet continues to be well positioned for rising interest rates. With a 1% increase in interest rates the bank would pick up about $2.3 million in net interest income, while a 2% increase in rates would increase net interest income by $4.9 million. We benefit more from rising short-term interest rates because we have a lot of variable rate loans tied to Prime and LIBOR. We are primarily a core deposits-funded bank which will help enhance the margin when short-term interest rates rise.

With a recent rise in long-term interest rates we will benefit as we do some fixed rate lending and purchase some short- and intermediate-term fixed rate investments. But again, short-term interest rate movements are the key driver of the benefit for us. To sum it up, we believe that there are opportunities to enhance our net interest income revenue and margin in the coming quarters and year due to the deployment of excess cash and the eventual rise in short-term interest rates.

Moving to the balance sheet, total assets were essentially flat for the third straight quarter at about $3.2 billion. On a linked quarter basis, loans held for investment fell by $93 million; loans held for sale increased by $26 million; investments increased by $25 million; and cash increased by $131 million.

Average non-interest bearing deposits rose by $24.6 million to $531.0 million due to an increased effort in our branch network to grow this valuable business. All other average interest bearing deposits fell by $5 million during the quarter. So our deposit portfolio is stable and the cost of funds continues to drift lower over time.

Total noninterest income fell on a linked quarter basis by $0.7 million to $10.2 million. If you strip out the security gains from Q1, our noninterest income rose by $2.8 million. Net mortgage banking revenue increased to $5.6 million which is up from $3.4 million in the previous quarter and $1.3 million in the year-ago quarter. We continue to see increases in the volume of loans sold and in Q2 we also saw an improvement in our gain on sale margin.

We continue to have resources enhancements in our mortgage banking platform which helps to improve the profitability margins. $1.5 million of the gain came from the sale of primarily jumbo mortgage loans from the loan portfolio. We are originating jumbo loans for the portfolio but as the secondary market conditions improve for jumbos we may originate some of these loans for sale on a recurring basis.

Total noninterest expense came in at $33.2 million, which is up from $31.3 million in the previous quarter and $31.6 million two quarters ago. We continue to see elevated spending on professional fees. These expenses totaled $4.8 million in the quarter and $7.4 million in the first half of the year. Normal spending is about $1 million per quarter for us. As Tom mentioned these expenses are related to infrastructure and regulatory enhancements. We expect this spending to continue in the second half of the year but at a lower level. We then expect these costs to normalize in 2014 and beyond.

All other expenses are stable. Salary and benefit expense dropped to the lowest level in the past year. This is due to the previously announced headcount reductions and lower benefit costs. As a reminder, we reduced staff in certain back office and non-core business units and are reinvesting in our mortgage company and risk management teams. Overall, we expect expenses to fall from Q2 levels in Q3 and Q4, and then normalize in 2014.

With limited balance sheet growth and deployment of excess liquidity into low-risk assets our capital ratios grew during the quarter. Total risk based capital ratio at the bank ended up at 14.1% and 14.8% at the Bancorp. The tier one leverage ratio at the bank ended up at 9.3% and at 9.4% for the Bancorp. When considering the following risk in our balance sheet, considering the recent workout progress, considering the large amounts of excess liquidity and considering the levels of our capital ratios we do believe that we have adequate capital to execute on our business plan in the next year.

To conclude, we are making significant progress in our efforts to improve the operating performance of the bank. If you add back the opportunity costs of holding excess liquidity and the nonrecurring consulting expenses incurred, the bank would have earned an additional $0.10 in EPS in the first half of the year.

When we look into the second half of the year we do see a higher net interest margin as we deploy our excess cash into quality loan growth from our growing commercial and consumer lending platforms, and as we opportunistically purchase investments. We see a more normalized run rate for credit related costs. We see falling operating expenses as we see a tapering of the consulting expense. We see mild fee income growth due to steady growth in our Sun Home Loans mortgage banking business.

Thank you and let me now turn it over to Steve Rooney to discuss asset quality. Steve?

Steve Rooney

Thanks, Tom, and good morning everyone. We continue to make progress in our credit quality metrics. We remain aggressive, proactive, and cautious in our risk rating assessments. We’re seeing our competitors’ lower pricing and stretch on credit and structure while we have remained conservative. We believe our underwriting for new credit remains well structured and prudent and our monitoring procedures sound.

Looking at Slide 13, classified loans decreased by $16.8 million or 10% since year-end to $151.0 million; however, quarter-over-quarter we saw a 5.3% increase. This increase was mostly centered in one C&I loan downgrade in the amount of $9.3 million which occurred in April and was primarily driven by a lack of timely financial statement reporting, a non-negotiable requirement of our newly implemented risk rating methodology and not by the borrower’s financial performance.

This methodology is more metric driven than the previous method and removes much of the interpretation of credit evaluation. This method is also more heavily weighted towards leverage, liquidity and cash flow and less reliant on subjective factors such as the economy, borrower’s management, and the line officer’s judgment. However, as an offset of these downgrades we had upgrades to [PAS] of $2.5 million, all of which occurred in June. We continue to be vigilant in monitoring these loans and expect upgrades to continue through the remainder of the year.

This quarter also saw four large payoffs of classified loans totaling $15.7 million. While we have made progress in improving asset quality, we will remain watchful to identify issues early and be proactive in our loss mitigation efforts. These efforts include the normal watch list monitoring and loan review process as well as enhanced portfolio stress test, enhanced reviews of performing credits, and early intervention and partnership with our Special Assets Department.

Moving to Slide 14, as of June 30, total nonaccrual loans were $71.7 million, or 3.3% of loans held for investment, a decrease of $2.1 million from the prior quarter and a 25% reduction from the year end. In Q2 we had payoffs of two large commercial real estate transactions totaling $6.2 million, one of which resulted in recoveries of $3 million. Total net recoveries for the quarter were $2.8 million and year-to-date recoveries were $3.8 million.

Slide 15 details our real estate owned portfolio. Balances at June 30 were down 10% from year-end and 20% from the end of Q1. The number of REO properties was 24 at the end of June, down from 29 at year-end and down from 30 properties at the end of Q1. During Q2 approximately $1.7 million of REO properties were disposed of, including four commercial, one residential and three branch properties. These disposals were offset by the acquisition of one commercial and one consumer property through share of sales. The balance of our real estate owned portfolio is expected to increase next quarter as foreclosures continue to settle. Our strategy with regard to REO has not changed. We plan on disposal of properties within twelve months of acquisition and to keep the balance at an acceptable level.

Moving to Slide 16, the allowance increased slightly from $47 million at March 31 to $48 million as of June 30. As mentioned previously, there were net recoveries for the quarter of $2.8 million, primarily due to a $3 million recovery on one commercial real estate loan. We continue to have solid coverage ratios as reserves to loans held for investment were 2.2% at the end of Q2, which is up from 2.1% at March 31 and 2.0% at the year end. Provisions for the quarter was a negative $1.9 million due to elevated recoveries, continued reductions in problem loans, the sale of portfolio mortgage loans and limited loan growth.

During the quarter we sold and committed to sell $73 million of mostly jumbo mortgage loans from the portfolio. We released approximately $900,000 of reserves allocated to these sold loans. We have approximately $3.8 million of reserves set aside for risk related to Super Storm Sandy as Tom mentioned earlier, and we will continue to assess the adequacy of these reserves every quarter. We have incurred approximately $160,000 in loan losses from the storm as of June 30th.

In conclusion, the risk management process we have put in place, our cautious underwriting and proactive monitoring and remediation efforts have enabled us to make meaningful progress in our asset quality metrics and trends. We anticipate this progress will carry through the balance of the year to create a stable asset quality profile moving forward. Now I’ll turn it back to Tom Geisel.

Tom Geisel

Thanks, Steve. As we mentioned last quarter we continued to transition through this Q2 as our asset quality improvement efforts demonstrate sustainability, we reposition the balance sheet, enhance our infrastructure and risk management practices, and take a conservative, disciplined approach to lending. A deliberate transition is needed to ensure that we add solid assets to a solid foundation, maximizing the ability to provide sustainable, reliable earnings and returns to our stakeholders.

Operator, that ends our prepared remarks. We’d like to take questions; we can go ahead and turn it over to the analysts.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions.) We’ll go first to Travis Lan with KBW.

Travis Lan – Keefe Bruyette & Woods

Thanks, good morning guys. On last quarter’s call I think you had guided to modest commercial loan growth for the year. Does that guidance still stand despite the quarter’s decline and some of the competitive pressures you alluded to before?

Tom Geisel

It does. It still stands. I mean we are, as we look at our pipeline probably for the next 60 days, the pipeline is probably $120 million or so and it’s a pretty diverse pipeline. Once we issue a terms sheet and a commitment letter, we’re not losing deals. It’s taking them a little bit longer to push them through the cycle, really just because of the time of the year – financial statement preparations by the borrowers, their accountants, etc. So we still have that same guidance as we move through the balance of the year.

Travis Lan – Keefe Bruyette & Woods

Excellent, that’s helpful. Steve, given the optimistic outlook on credit, how much room do you think you have to lower the allowance as a percentage of loans going forward?

Tom Brugger

This is Tom Brugger. You know, you look at the allowance – as we mentioned before we have about $3.8 million of reserves against Hurricane Sandy. So over the next few quarters as we get more information on that risk from that storm we’ll be in a position to assess whether we reduce those reserves or use them for losses. So that’s one component. I think that’s the next two to three quarters where we’ll have a lot more information.

The other portion is you take a longer-term view of the past two to three years, the amount of problem loans and the uncertainty in the portfolio every quarter declines. So when you do your reserves you have different factors for qualitative type factors. And with a lot of the infrastructure building we’ve been talking about, and as you just have more time with a portfolio that uncertainty starts declining. So as we get further along here we may be able to reduce some of those reserves based upon that increased confidence and track record.

But right now we’re still taking a cautious approach, but we’re real pleased with the progress. The other metric, we’ve been talking about the recoveries that we’ve been seeing on workout. We’re real pleased with that because it’s just demonstrating that the portfolio, the NPLs that we have and the stressed portfolio that we have, we’re marking them at the right level – also a sign that the economy’s recovering.

Travis Lan – Keefe Bruyette & Woods

Right, right. Just in terms of the [DTA], Tom, do you consider – and this is just my lack of understanding: do you consider the recent results of the last two quarters where you were profitable because securities gained in the negative provision, like does that indicate sustainable profitability? Would you say that you’re kind of two quarters into the four to six quarter target period?

Tom Brugger

Yeah, we’ve talked about in the past that there’s no bright line test on this. It’s a conclusion you have to make after considering ten to fifteen facts. One is the level of profitability per quarter, but you know, our core profitability needs to improve above what we’re seeing right now before we could look at that. But we believe it’s four to six quarters of profitability, and then we have to see growing profitability each quarter and then our outlook for the future needs to show sustained profitability over a two-year to three-year period. So that’s how we’re looking at that. So it’s a judgment. We’ve had four of five quarters now that have had a profit and if we keep drifting out and get to five, six, seven out of eight the case builds for turning that.

Travis Lan – Keefe Bruyette & Woods

Gotcha, that’s helpful. And then last one just on the mortgage bank, were mortgage volumes and (inaudible) sale margins fairly consistent through the quarter? Or did things kind of change meaningfully in June when rates spiked?

Tom Brugger

The movement in rates was kind of close to the end of the quarter so there wasn’t a material effect on Q2. So that’ll come later, but we are seeing a shift and the refi volume is dropping off. But the purchase volume’s holding up but no, it didn’t impact Q2.

Travis Lan – Keefe Bruyette & Woods

Alright, thanks very much.

Operator

(Operator instructions.) We’ll go next to Matt Breese with Sterne Agee.

Matt Breese – Sterne Agee

Good morning guys. Just curious about some of the gain on sale margins related to the jumbo residential pieces. So it looks like the margin, if I just took the $1.5 million against the $46.0 million in jumbo loans you sold this quarter it’s around a 3.3 gain on sale margin. Is that margin consistent with what’s slated to be sold in Q3?

Tom Brugger

No, I would say that gain on margin was pretty attractive. And again, some of those loans were in the portfolio so that, if we can get 3.3% every quarter that would be a wonderful thing. But we can’t. It’s a little high.

Matt Breese – Sterne Agee

So for the $27 million that’s expected to be sold next quarter, what kind of gain do you expect to take on that?

Tom Brugger

Well that gain we recorded already because it was a committed transaction that settled into Q3, but yeah, that we booked already. If you look at the jumbo market, too, on a go forward basis, the markets aren’t functioning on a regular basis – the jumbo market. So what we’re trying to do over time is when the markets recover have a lot of sale outlets, so you can sell on a consistent basis at a consistent margin and you basically solve for the margin you’re looking for and you price accordingly. But what we’re doing right now is we’re being opportunistic. We’re reaching out to people who are interested in buying loans; we’re staying in contact. If we see an opportunity we’ll sell the product. But we’re real pleased with the execution we got on the jumbos in Q2.

Matt Breese – Sterne Agee

Right, okay. Now for the conventional paper, you had mentioned that there was a targeted 2013 projection for total originations. What is that total origination? Where do we stand and what was that versus where it was in 2012?

Tom Geisel

Matt, it’s Tom. We’re looking at probably somewhere between $800 million and $850 million for this year, and I think that target still is in place for us. One of the things that we have to go back and look at in this mortgage business of ours, this mortgage business for us, from it being a sizable contributor is relatively new. We were averaging somewhere around $250 million in originations a year and a half ago, so we’re building this business pretty quickly which means that we’re continuing to invest in infrastructure here.

And our teams are doing a good job taking that business away from the other competitors in the marketplace. And as refis because of rates start to diminish you will definitely see our purchase business increase, but even when refis because of rates were still strong our purchase business was at least 50% of our total portfolio. So we’re comfortable that we’ll still be able to come in somewhere between $800 million and $850 million, recognizing that the refi part of the market is going to slow down.

Matt Breese – Sterne Agee

And I’m sorry, what was the total originations for this quarter that were sold?

Tom Brugger

The amount that was sold was about $155 million, $160 million. $155 million.

Matt Breese – Sterne Agee

Okay. My next question was around commercial real estate structures. You mentioned that competitors maybe are pricing things overly aggressively. Would you care to comment on some of the yields and terms you’re seeing and perhaps some of the maybe weakening covenants that are attached to them?

Tom Geisel

I’ll comment on a couple deals we’re seeing, and I’ll let Steve comment on it. But you know, I think your comments are pretty optimistic. You talk about covenants – I’d love to be able to talk about covenants because we’re seeing deals done with no covenants. And we’re seeing seven-year fixed rate deals done with no covenants on marginal credits, which to us is kind of crazy. And I think we’re entering a phase where from a bank perspective, from a credit perspective, from an investor perspective – and I don’t know, you’ll have to tell me from an analyst perspective – we may be having some short memories here as to what’s happening. But we’re seeing some sustainable deterioration in structures. Steve, you want to talk some more about that?

Steve Rooney

Sure. I think some of the other, just the basics we had been seeing before – whether it’s a guarantee or the reporting requirements, we’ve definitely seen them loosen by some of our competitors. And there are just things, whether it’s the type of financial statements that they’re going to send in or an [aging], and this is obviously not keen eyesight. These are things we just won’t budge on. This is information that’s critical for us to do our normal routine analysis and we’ve seen that these are the first things that tend to be dropped by our competitors when we’re both looking at the same type of a deal.

Tom Geisel

To give you some other examples, in our ABL group typically we’ll put in two types of covenants. We’re seeing deals done with one or none now.

Matt Breese – Sterne Agee

How does this all kind of shake out in terms of rates? We’ve seen the five-year Treasury up 65 basis points year-to-date. How has that translated into new loan yields? Are you guys seeing the full benefit or are people competitive and maybe you’re seeing no benefit?

Tom Brugger

Yeah, we’re definitely seeing a benefit. I mean the spreads on the commercial business are pretty good right now. We’re seeing spreads of 3.25% for new credits, but we do about 70% variable rate loans in our production. So we keep the spread constant as rates drift up, so the fixed rates have drifted up along with the move in long-term rates.

Matt Breese – Sterne Agee

Okay. My last question was Tom, you described the summer season as being somewhat eclectic. I was just hoping with everything going on with Hurricane Sandy if you could provide just a little bit more color as to what’s going on in your backyard?

Tom Geisel

Sure. Well first of all we have not had the best weather. We’ve had a lot of rain which is not good, and despite all of the advertising we’ve seen about the Jersey Shore being open there does tend to be less crowds. When I say eclectic it’s you know, you could go to the Jersey Shore on a Saturday afternoon at 3:00 and not sit in traffic which is very strange for the Jersey Shore; or be able to find a spot on the beach. And then you could go the next Saturday and the boardwalk could be packed, but people are really walking and enjoying but not spending.

And so that’s what I mean by eclectic. Normally in our summer seasons at the Jersey Shore, you know, there were crowds, they were spending and it was consistent. Yes, you had weather that affected it but when you had good days it was consistent. And so those are some of the things that I mean when I talk about it being eclectic. You can’t predict what a day’s going to bring, whether it’s sunshine or rain right now. It’s a little bit strange.

Matt Breese – Sterne Agee

That’s good color, thank you very much.

Tom Geisel

Sure.

Operator

And at this time there are no other questions in queue.

Tom Geisel

Great. Well thank you all very much. Have a great day and we will speak with you at the end of Q3.

Operator

Ladies and gentlemen, thank you for your participation.

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