The Sun Has Not Fully Risen Yet For Sun Bancorp

| About: Sun Bancorp, (SNBC)

Sun Bancorp. Inc (NASDAQ:SNBC) is a small commercial and consumer bank located in New Jersey with a market cap of ~ $304.7 million. Sun Bancorp is a holding bank company with operations being carried out by its principal subsidiary Sun National Bank. SNBC is mainly involved in giving commercial loans such as term loans, mortgage loans, construction loans etc. Sun Bancorp has over 60 branches in New Jersey. The company's revenue has almost remained constant since 2009 as the company has been shutting down unprofitable operations to reduce losses. SNBC is trying hard to turnaround by lowering its high NPAs. However, at this moment of time, I do not feel that the stock is a buy given its current valuation is not much cheaper than larger and more profitable banks and the company remains susceptible to a slowdown in its core NJ market.

Sun Bancorp Negatives

1) Stagnant Balance Sheet - SNBC's assets have been declining in the last 3 years as the bank has been closing down loss making branches in NJ. Analyzing the annual Balance Sheet of Sun Bancorp for the year ending December 2012, it can be clearly said that the bank's assets have been declining. The total assets were around $3.4 billion in 2010, which declined to $3.18 billion in 2011 and in 2012 reached $3.22 billion.

2) Declining Net Income - Sun Bancorp Inc has been reporting losses since 2010. The net loss was $185 million in 2010, $67 million in 2011 and $50 million in 2012. Operating expenses have been high when compared to the total revenue earned by the bank.




Total Revenue




Total Operating Costs




(Figures in thousands)

SNBC Net Income Annual Chart

SNBC Net Income Annual data by YCharts

3) Economic Slowdown - The core operating area for Sun Bancorp is New Jersey where the macro situation is not very good. The unemployment rate is 9%. The economic recovery has also been quite tepid. Also the state is still dealing with the after affects of Hurricane Sandy, which has affected many businesses and people. As the company itself noted:

Also across the country there has been a decline in the key economic indicators, such as housing permits new orders for manufacturing goods and overall consumer confidence. Here in New Jersey the struggle for recovery continues. The state has been near the bottom in economic for the last few years and remains hampered by high unemployment.

Though the state added thousands of private sector jobs this past quarter, nearly one in 10 in New Jersey are jobless. While the unemployment rate of 9% as of March is the lowest New Jersey had seen since the first quarter of last year, unemployment has not fallen below the 9% mark since May 2009 and it remains well above the national rate of 7.6%.

4) Small Size - Sun Bancorp is a small bank and faces strong competition from the bigger banks. Scale is very important for banks these days as the bank can spread out the increasing costs of IT, back end services etc. over a larger base of assets. The company's geographic concentration in one USA state also means that the company faces greater risk due to non-diversification of assets and revenues. The bigger banks are putting pressure on SNBC margins by luring customers through higher deposit rates. Sun Bancorp is facing competition from all fronts - price, ideas and customer service.

Competition Analysis

The company competes in the northeastern USA with other banks such as M&T Bank Corporation (NYSE:MTB) (the largest with a market cap of $14 billion), Signature Bank (NASDAQ:SBNY), and Webster Financial Corp (NYSE:WBS). The company also competes with the TBTF banks such as Bank of America (NYSE:BAC) and Citigroup (NYSE:C) for both deposits and loans. Bank of America (market cap $165.8 billion) is one of the largest banks in America providing banking and non-banking financial services throughout the USA. Citigroup is another large financial services company (with a market cap of $158 billion) providing financial products and services, brokerage and wealth management services. As can be seen in the table below, mostly all of its peers have better financial metrics in almost all respects.

Bank Name

Market Cap ($ Million)

Stock Price

ROA (% ttm)

Operating Margin (% ttm)

Center Bancorp










Eagle BCP Inc





Metro Bancorp





S&T Bancorp Inc





Signature Bank





Webster FINL CP





Arrow FINL Corp





Sun Bancorp





Sun Bancorp Positives

1) Quarterly 2013 Results - The first quarter of 2013 was a decent one with net income of $2.5 million. Non-performing loans have declined in the third quarter to reach 2.55%, down from 3.32% in the previous quarter. The total non-performing assets declined by ~$18 million to reach $60.5 million on September 30, 2013, as compared to $78.5 million on June 30, 2013. The decline was due to pay-off of three non-performing commercial loans of $15.5 million.

2) Decently Capitalized - The bank is decently capitalized with total risk based capital reaching 14.72% (Q3 2013), which ensures that Sun Bancorp has enough capital to sustain operating losses while maintaining a safe and efficient business environment.

To be adequately capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 4%, a combined Tier 1 and Tier 2 capital ratio of at least 8%, and a leverage ratio of at least 4%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. To be well-capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 6%, a combined Tier 1 and Tier 2 capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels.

Source - Wikipedia

3) Branch Optimization - The bank is trying to restructure its business operations by closing its weak branches. It closed three branches in April-May 2012 and has successfully closed/ merged 26 branches in the last five years, without taking a huge hit on total assets and deposits. There has been considerable decline in the operating costs because of such reconfiguration/ closure.

4) Wilbur Ross - The famous distressed assets investor Wilbur Ross had made a $50 million investment in the company along with his associates. Ross has a reputation of turning around companies with little prospects and the market had initially cheered his investment with a sharp increase in the stock price. However, the stock has gone back to its old levels after the company's performance remained lackluster.

Stock Performance has been quite Bad

The stock has fallen to $3.50 from the peak price of $13.80 reached during 2008. The stock has remained mostly flat in 2013, despite the overall market moving up by more than 15% during this time period. The stock remains near its 52 week high price and I feel there is limited opportunity for the stock to go up given the increasing competitive pressures.

SNBC Total Return Price Chart

SNBC Total Return Price data by YCharts

Stock Valuation is not Cheap

Sun Bancorp has a P/S of 2.4x whereas the industry's' P/S is 3.1x.The company has a P/B of 1.2x which is almost in line with the industry average of 1.4x. I think that the stock deserves a smaller valuation multiple given its loss making performance.

Institutional Ownership

The bank has a combined institutional and mutual fund ownership of nearly ~68%. Some of the major institutions owning SNBC stock are Invesco Private Capital Inc, Sigulfer Guff Advisers, Second Curve Capital and Anchorage Advisors LLC. About 65 institutions are holding shares in Sun Bancorp.


SNBC is on a multi-year turnaround after facing huge stress in the aftermath of the Lehman crisis. The company has been closing down unprofitable branches and has turned profitable in the last couple of quarters after piling up huge losses. However, the company faces strong competition in its core areas and the New Jersey market is also facing an economic slowdown with high unemployment. The company's valuation is also not too cheap with a P/B of nearly 1.2x. While the company has done reasonably well in bringing down its NPAs, I feel that the stock is not a buy. If the US economic recovery falters, then the company could again face big losses.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.