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Sun Bancorp, Inc. (NASDAQ:SNBC)

Q4 2013 Earnings Conference Call

January 23, 2013 11:00 ET

Executives

Sid Brown - Interim President and Chief Executive Officer and Chairman of the Board

Tom Brugger - Chief Financial Officer

Imran Riaz - Chief Credit Officer

Analysts

Travis Lan - KBW

Matthew Breese - Sterne Agee

Operator

Sun Bancorp’s Fourth Quarter Earnings Conference Call will now begin. On the line for Sun Bancorp are Sid Brown, Interim President and CEO and Chairman of the Board; Tom Brugger, Chief Financial Officer; and Imran Riaz, Chief Credit Officer. At this time, Sid Brown.

Sid Brown - Interim President and Chief Executive Officer and Chairman of the Board

Good morning. This is Sid Brown, Chairman and Interim CEO of Sun Bancorp. As you know in the fourth quarter of last year, the board made a change in the leadership and decided to replace our CEO. Over the last two years, the bank has seen significant reductions in risk. The management team has been upgraded. Cost efficiency efforts have improved. And the risk management infrastructure has been upgraded. Even with these efforts, the bank has not returned to a sustainable level of profitability and continues to operate under regulatory order. Because of the lack of progress in these two areas, we thought at the board level that we needed to make a change.

As we search for a new leader, I am serving as the Interim CEO and will continue to push forward on getting the bank to levels of profitability and resolving the remaining regulatory compliance issues. We are searching for a new CEO. We are utilizing Spencer Stuart and we are looking for a CEO who can take the foundation that we have rebuilt and accelerate the execution of our vision to create a dominant New Jersey-based community bank which has prudent levels of risk and adequate returns to our shareholders. We are searching for a leader with a proven track record in growing revenues and experience and building a platform that is well regarded by the regulators. And we are happy so far with the flow of candidates that we have seen.

So let me move on to the results for 2013 as we have ended the year of transition. The transition involved methodically reducing the level of problem loans, enhancing the management team and Board of Directors, rewriting all loan policies and procedures, implementing a new enterprise risk management framework, ongoing implementation of a new risk rating policy, improving branch efficiency along with many other important foundational changes. Much of the heavy lifting is behind us and we anticipate moving to a new normal operating state in 2014. This means that the bank will operate under the leadership of a strengthened board with a new CEO and a newly enhanced management team. The bank will execute growth initiatives and efficiency improvements. We believe that the execution of these efforts with a high sense of urgency will make a difference in our performance.

As we close out 2013, we are pleased to report that we have significant reductions in problem loans. We do not execute – we did execute some sales of individual problem credits during the fourth quarter, but we also saw continued success with our normal course workout strategies. Classified loans dropped 41% during the fourth quarter. And so therefore our classified assets to Tier 1 capital declined from 56% to 34%, a major move. Our non-performing loans fell 31% during the quarter and are now down to 1.8% of total loans. And our reserves to non-performing loans are now at 94% level. All of these asset quality metrics saw a meaningful improvement during the quarter and the full year confirming the strategy we have put together at the beginning of the year.

Unfortunately, in order to get there, the bank had to record a loss of $8.4 million in the fourth quarter or $0.10 per share. The net impact of the individual loan sales was a loss of $6.9 million. Tom Brugger will cover the details of our earnings shortly, but total revenues continue to be a challenge. The net interest margin ended the quarter below 3% due to the excess liquidity accumulation. Total loans have declined. Mortgage banking income also fell due to reductions in origination and the negative seasonality and the overall decline in the mortgage business.

On the expense side they continued to be at a high level due to an elevated level of professional fees. Most of the consulting work in process was completed by year end 2013. There are some smaller ongoing projects that we will complete in the first quarter. I made the decision to curtail the use of consultants given our progress and the ability of the new management team to execute on our plan and not rely upon consultants to execute.

We have reduced headcount in our non-strategic businesses. In the first quarter of 2013 closed three branches and right sized the mortgage platform in the second half of this year to match the lower origination volumes. This focus on operational efficiency is important and will absolutely continue. More importantly we will focus on growing revenues in 2014. The balance sheet has been shrinking for the past five years and we need to change that trend. 70% to 75% of our revenue comes from net interest income, so it is important that we see growth there to move the top line revenues higher.

We have a number of initiatives in process to deploy our excess cash. These initiatives will generate future revenue growth. And I might add that regarding the commercial line of business we have adopted over the past really 12 months a new credit culture and because of that we have lost some credit officers, but I think more importantly and very optimistically over the last 90 days we have now hired new commercial loan officers to the – who have either accepted or will begin and we have exited five. And we have actually two more in our pipeline. So I am very encouraged by the fact that we are rebuilding our commercial team and with talented people with the right credit culture to move this bank forward.

Even with the loss incurred we maintained solid capital ratios. Our Tier 1 leverage ratio ended the year at 9% while the total risk based capital ratio was at 14.3%. We proactively reduced the balance sheet in the fourth quarter by a little over $100 million. Considering our risk reduction and mild balance sheet shrink we believe that we have adequately – adequate capital at this time to execute on our business strategies. So we made some progress in 2013, but merely enough. We enter 2104 with a renewed focus on growing revenues, improving operational efficiency and getting to a sustained level of profitability.

Now, let me turn it over to our Chief Financial Officer, Tom Brugger.

Tom Brugger - Chief Financial Officer

Thanks Sid and good morning. The bank recorded a loss of $8.4 million or $0.10 per share in the fourth quarter of 2013 and ended the year with a loss of $10 million or $0.12 per share. The company has been focused internally much of the year as Sid described earlier. This internal focus coupled with a challenging external environment caused earnings pressure. Loan outstandings fell in each quarter of the year, which hurt our net interest margin. The funds from loan portfolio run-off were parked in interest bearing cash at the Federal Reserve, which runs just 25 basis points. We also saw a large falloff in mortgage banking activity due to rising interest rates, which reduced our mortgage banking income. Although we executed many cost efficiency initiatives during 2013, these benefits were more than offset by elevated professional fees. The professional fees were mainly were regulatory remediation efforts and risk management enhancement projects.

Getting into the numbers, first net interest income, net interest income fell $1.1 million sequentially to $21.9 million and the net interest margin was 2.99%, which is down 11 basis points versus the prior quarter. As a reminder we had $1.2 million interest recovery on a commercial credit in Q3, so if you adjust for this our net interest income and margin were relatively flat. Average gross loans fell $43 million sequentially or at an 8% annualized run off rate. Average loans were down $206 million or 8.6% in the past year. Average commercial loans were the major driver falling $50 million sequentially and $167 million in the past year. Our average investments increased slightly by $26 million to $440 million while average interest bearing cash balances decreased by $7 million to $342 million during the quarter. The elevated level of cash and falling loan balances have been pressuring our margin in recent quarters. If you would have deployed – if we would have deployed all the $25 million of the excess liquidity at 3.5%, the net interest margin would have been around 3.35%. So, on a go-forward basis, once we deploy the cash, the margin will pop out to that range.

Average deposits fell by $28 million sequentially and the cost of deposits fell 3 basis points. The bank reduced its rates on interest bearing checking and money market accounts and the mix became more favorable. We had very good progress in growing non-interest bearing DDAs during the quarter and the year. The average non-interest DDAs grew by $36 million sequentially, which is 26% annualized growth. In the past year, we grew these average deposits by $74 million, or 14%. We saw some seasonal reductions at retail and commercial deposits late in the quarter and also had some planned reductions in our government deposits. Therefore, period end deposits fell by about $130 million. We decided to re-price many of our large government deposit accounts to bring the profitability in line with the competition. We expected to see some run-off which did occur, which allowed us to reduce our cash balances and reduce the balance sheet size to enhance our leverage capital ratios. As we look into 2014, we expect to grow our deposits as our loan demand picks up.

Looking at asset quality and provision, provision expense totaled $2.6 million in the fourth quarter and $1.6 million for the year. Imran will cover our asset quality in more detail, but I would like to cover the provision expense in some detail. We decided to accelerate the resolutions of certain problem loans, where the present value of expected cash flow from these loans was close to the price paid by third-party buyers. Therefore, we sold $34.8 million bank balance of problem loans, which generated a charge-off of $10.2 million. We had $4.8 million of reserves allocated to these loans already. So the impact to clearly provision due to the sales was $5.4 million.

We would have seen a provision reversal absent the loan sales. There are two primary reasons. First, we saw a significant reduction in classified loans. We had $20 million of upgrades of classified to pass rated during the quarter and $20.6 million of payoffs of classified loans. Second, we released $1.7 million of reserves, which we have recorded for risk related to Hurricane Sandy. We performed our quarterly analysis and have not seen any significant weakness. Therefore, we decided to reduce these reserves. We continue to maintain our external qualitative factor at an elevated level to provide reserves that cover our remaining Hurricane Sandy risk. The elevated factor provides approximately $2 million of reserves for these issues. We will continue to assess the trends in the coming quarters.

Overall, our ALLL to loans ended the year at 1.66%. While this is lower than the prior quarter, our risk is significantly lower as well. NPLs to loans, is down to 1.8% of loans. Our ALLL to NPL ratio improved to 94%. And our classified assets continue to fall. We are very pleased with the quarterly risk reduction in our level of reserves.

Non-interest income, non-interest income fell to $4.7 million in the quarter, which is down $1 million sequentially and $5.5 million over the past two quarters. Net mortgage banking revenue dropped $1 million versus $1.6 million in the prior quarter and $5.6 million two quarters ago. We sold approximately $55 million of residential mortgage loans in the fourth quarter versus $127 million in the prior quarter and $162 million two quarters ago. This weakness is due to recent interest rate increases and also due to normal Q4 slowdown in this business. We expect the volume to bounce back in the spring, but not to the elevated volumes that we saw in the first half of 2013. We have right-sized our platform by reducing some headcounts. We will look to grow this business if there is opportunity to do so, but we will focus on profitable growth. All other fees were relatively stable. We saw good performance out of our alternative investment group, which helped partially offset the reductions that we saw in service charge income during the year.

Looking at our expenses, total non-interest expense was $32.5 million versus $32.9 million in the prior quarter. Salaries and benefits and commissions continued to decline due to efficiency efforts implemented throughout the year and also due to a slowdown in mortgage banking activity and related commission income. Total salaries and benefits declined by $0.5 million during the quarter to $14.2 million. Just as looking back in time, Q1 salaries and benefits and commissions were $16.3 million. This decline is offset by increases in staffing in our risk management team. As we have talked in the other prior quarters, we have been building out our platform. And in the past two years, we have added about $3 million of salaries and benefits to support our efforts in risk. Professional fees totaled $4.9 million in the quarter and $18.2 million for the year. As Sid mentioned earlier, we expect to see this come down. And our estimate is that it will range between $1 million and $1.5 million per quarter beginning in the second quarter. All of our other expenses were relatively stable.

Capital ratios remained solid with Tier 1 leverage at 9% at the bank and the holding company. Total risk-based capital was 13.6% at the bank and 14.4% at the holding company. As we discussed earlier, we accelerated the reduction in problem loan levels at year end and used some capital to put these issues behind us. We believe that it was a prudent use of capital at this time. The bank will now focus on getting to a sustained level of profitability without the distraction of elevated problem loans. We also ended the year by shrinking our balance sheet by about $100 million. This will add about 20 basis points or so to our leverage capital ratios in the near-term. Overall, it’s important for the bank to become profitable on a sustained level to provide an accretion to capital and also to put the bank in a position to recover its deferred tax assets, which ended the year at $118 million.

I wanted to make a comment on the impact of the Volcker Rule. We hold approximately $9 million of pooled trust preferred securities and $74 million of AAA rated and AA rated CLOs. Prior to year end, the regulators issued the Volcker Rule and there was an uncertainty as to whether the banks had the ability and intent to hold these types of bonds until maturity. If banks were not permitted to hold these securities, we would have had to mark the bonds to market, which may have caused some losses. Fortunately, the regulators put out some guidance for the pooled trust preferred bonds, that exempts our holdings from the Volcker Rule. Our initial assessment of the guidance indicates that our CLOs will also not be subject to the rules or we will be able to restructure them to ensure that they can be held. There is still some uncertainty with the specifics for CLOs. So we will continue to monitor the developments. We do expect the regulators to put out additional information and guidance for CLOs in the coming weeks. We believe that both of these assets are attractive investment alternatives and do not expect any losses on an economic basis.

In conclusion, as we close out 2013, we are becoming cautiously optimistic for a number of reasons. First, the drag on profitability due to asset quality issues is expected to revert to normal in 2014 as our problem loan levels converge with our peers that have a similar loan portfolio mix. Our cost to manage problem loans have now fallen and the net interest margin will improve as the full unpacked reinvesting funds from non-accrual loan reductions into new quality earning assets flows through our income statements, required reserves for new lending will decline, because our new conservative underwriting standards will result in lower portfolio charge-offs over the long-term. And thus, we will hold less reserves against them.

Second, we have asked our lenders to focus more time externally for the first time in several years and we expect to see loan growth in 2014. Our plans are to deploy all excess liquidity in the coming months. We had an average of $342 million in excess liquidity in the fourth quarter of 2013. Third, we expect to see our professional fees decline. We incurred $18.2 million in professional fees in 2013, and we believe that $4 million to $5 million is normal annual run rate for the bank. Once we saw a material reduction in mortgage banking activity in the second half of 2013 and we right sized the platform for the lower volumes. We expect a rebound in profitability in the spring, which will provide a lift to the operating earnings trends. We are looking at every opportunity to improve our profitability and we will begin implementation of numerous other initiatives. Overall, we need to drive profitability to peer levels and we are taking steps to make this possible.

With that let me now turn the call over to Imran Riaz to cover our asset quality. Imran?

Imran Riaz - Chief Credit Officer

Thank you, Tom. Good morning everybody. On the asset quality side we focused on two major initiatives during the past quarter, one, early identification of potential problem assets and developing an early exit strategy and creating an infrastructure and culture to foster smart growth going forward. We had made great progress in the portfolio risk management and continued to raise the box. Credit risk is an integral function and we have increased its visibility and involvement in all aspects of our business. Risk has a prominent oversight in areas like product development and new initiatives for growth. Furthermore, economic incentives are designed to foster active risk management and supporting smart growth.

As you heard during the past quarter we exited some relationships as part of our proactively pruning of non-core loans. This one-off sale has significantly reduced the ongoing drag on our earnings and poised us to move forward and grow the business. On the last call we had informed you that the new risk rating system had been introduced. The new rating system needed some tweaks. We started introducing these enhancements in October 2013 and expect that the rating based on the new models will be completed before the end of second quarter 2014. The rating system to avoid confusion called Rating 2.0 will establish the foundation for separation of PD and LDD models. The risk models are also industry and purpose focused, while they remove the traditional focus on loan to value. Although the project is not completely finished the general trend of Ratings 2.0 model has been positive with overall weighted average risk rating improving. Overall migration trend is moving in the right direction.

Tom and Sid have gone through the numbers, so I won’t repeat the numbers again, but in conclusion we had made substantial progress in asset quality and remain vigilant on maintaining this focus. The mantra remains the same. It is the scalable and sustainable credit management model that will allow us to grow in scale while adhering to sound underwriting and robust credit administration. Significant progress has been made, but we still have some work ahead of us.

Thank you. And I will now turn it back to Sid.

Sid Brown - Interim President and Chief Executive Officer and Chairman of the Board

Okay, so while 2013 nobody wants to have an income statement that has red numbers on it, we made a lot of progress, but we have got a lot more work to do. The management team here at Sun is energized to move the franchise forward both to complete our regulatory compliance issues that we have made a lot of progress on, on the last year and really to get back out in the marketplace and to start to grow the revenue base for the bank and to create some real viable income streams around interest income and other services so that the bank can get back to profitability, we store our deferred tax asset that’s out there and to put our capital ratios in a position that we can continue to build the franchise.

So at this point I guess I will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Now we will go first to Travis Lan with KBW.

Travis Lan - KBW

Thanks. Good morning guys.

Sid Brown

Good morning.

Travis Lan - KBW

Sid, in terms of the CEO search you said, could you give us some more specifics on a candidate profile you guys are targeting whether it’s preference for big or small bank background and if you value no experience in your own market of those things weighing your decision, just how are you thinking about it?

Sid Brown

So we decided to kind of look primarily for somebody in rather call the Northeastern part of the country, specifically if we could find somebody within the footprint of what we operate or in close proximity to what we operate would be the ideal situation but we didn’t want to eliminate just to the New Jersey marketplace. And really today we look at the bank as a bank that it closes the New Jersey based bank that does business in Eastern Pennsylvania and Southern New York State, the Metro New York area and the Metro Philadelphia areas. So that opened up our ability to look at candidates beyond just what I call the New Jersey footprint. In terms of experience we have looked at candidates that have come from larger institutions and smaller institutions but we really wanted to try to make sure we’ve got somebody that had at least run a franchise at the size of some or larger and we have – has a really good flow of candidates. They see the progress that has been made, the foundation that has been built, the strength of the capital investors behind this franchise and so I’m pretty encouraged by the candidate flow. The other thing I would tell you is that we also are looking for somebody that has had good regulatory experience and has had proven track record of building franchises and so far we’ve seen candidates that fit that role.

Travis Lan - KBW

That’s helpful. I wonder could you say - could you also expand a little bit more on some of the specifics of the liquidity deployment initiatives that you alluded to in your comments, I don’t know if there is anything specific that we weren’t thinking about already?

Sid Brown

So the bank has a number of areas that they have been involved with C&I lending, real estate lending, asset-based lending, healthcare lending, syndication loans. But we had to pullback, we had to get make sure all our credit underwriting standards, policies, procedures were built for a strong foundation going forward. So there is like a multi-channel approach is the way I like to look at the revenue stream from those various areas. So now we’re beginning to build the teams up.

I’m really encouraged by some of the folks that have agreed to come on to join the bank. They see the opportunities here; they haven’t had to deal with the pain I guess over the last couple of years. But they are in - good people want good credit standard so that they can go out and bring on good loans to the bank. And I’m encouraged that we will generate more initiatives around most of the areas that I mentioned, I will tell you that we probably aren’t going to try to promote healthcare lending in a big way until we see a little bit more of an shakeout and understanding of what the ramifications are of the new health wall. But we’ve got strong credits that are in healthcare, ones that are with us today and we’re encouraged by some of the other lines that I mentioned.

Travis Lan - KBW

Got you. So that leads into my next question. Just on the new lenders are these typically coming from larger banks or community banks similar to yourselves and what kind of lag do you expect between them coming on board and you’ve seen actual commercial loan traction?

Sid Brown

So, I would tell you that most of them are coming from I would think are really kind of larger institutions than us. And I think one of the reasons have become disenchanted with the direction of some of those larger institutions maybe they are not as nimble as we’re going to be. The lag time typically with experienced lenders can be three to six months; sometimes you get lucky and get something a little bit before them. So in the interim we’re going to look at some strategies around accelerating into some areas like potentially getting some syndicated loans on our books that makes sense, meet our criteria and can generate some revenue fairly quickly. So, I think we have a short term strategy around redeploying this cash quickly but more importantly a longer tem strategy of really developing commercial relationships with a number of our customers as we bring on new business. This bank has not been aggressively out in the marketplace bringing in new business in a way that a typical commercial banker would like to be because we’ve had that inwardly refocus our efforts on fixing this bank.

Travis Lan - KBW

Alright, that’s helpful and then just last one, Tom. Could you give us a sense for what the yields are on your CLO portfolio today?

Tom Brugger

Yes, it’s around LIBOR on a weighted average basis, it’s been a LIBOR plus 150.

Travis Lan - KBW

Okay, alright. Thank you so much guys.

Operator

Thank you. (Operator Instructions) We will go next to Matthew Breese with Sterne Agee.

Matthew Breese - Sterne Agee

Good morning everybody.

Sid Brown

Good morning, Matt.

Tom Brugger

Good morning.

Matthew Breese - Sterne Agee

Just on your commentary about deploying the excess liquidity over the coming months. With that – is that kind of time to your guidance of getting to that 3.35% net interest margin as well, should we be thinking that like kind of a big pop in the first quarter for the margin?

Sid Brown

Well, theoretically and I think that’s what Tom has presented here is theoretically as all those assets were redeployed into interest earning assets in the form of loans, our spread would go up and instead of earning 25 basis points, hopefully we would be earning some dollar in the neighborhood of 3.5 to 4 points better than that. And so therefore our overall portfolio would yield a 3.3% to 3.35% interest income spread. The other thing is that we have a lot of loans sitting on the balance sheet that were non-accrual, earning nothing. So that has been significantly reduced, so you redeploy that into interest earning assets and you are going to pickup basically instead of you pick up another 25 basis points on the spread on those assets. And I made comment that what’s left in our portfolio that’s classified as non-performing, the mix is much better, more – higher percentage of those non-performers are actually still making interest payments versus where they were a year ago. So the whole mix of the portfolio and even though they may be on non-accrual they are paying, so that’s a favorable trend in terms of looking at the credit profile.

Tom Brugger

And Matt just to be clear it’s – we are going to deploy the cash over the coming quarters, but the margin – the full effect of it won’t be till say late second quarter, end of the third quarter.

Matthew Breese - Sterne Agee

Okay, so that – so the full effect of deploying the cash from capital and potentially getting to…?

Tom Brugger

Right we have been doing it, yes we have been just monitoring what is fully deployed, what we want to get to, what’s the vision for what the balance sheet is kind of look like, so we have set that target now we are just seeing to execute to get it there.

Matthew Breese - Sterne Agee

Got it, okay. And then with that you have mentioned seeing some positive loan growth in 2014. To what extent do you think you can grow loans?

Sid Brown

To the extent that you would – you can’t grow loans when you don’t have anybody out on the street trying to get new business. So to the extent that we have got a team out there of seasoned lenders growing loans, I mean our goal is to exceed the growth that we have – or the negative growth that we had last year I guess. But our goal would be that try to put a couple of hundred million dollars of commercial loans on the balance sheet fairly quickly. And we are going to do it prudently. We are going to do it with the right credit underwriting standards. And we are not going to do it in huge junks or hopefully going to do it in $5 million and $10 million chunks. So I don’t know that I – it would be prudent for me to just give you a percentage increase or I think there is a goal, there is a mission for us to move this franchise forward and start generating some loan growth. And I am encouraged by the team we are putting together.

Matthew Breese - Sterne Agee

Alright and then on the expense front, outside of lower professional fees, are there any other cost saving initiatives or branch rationalization plans and I am just trying to drive that what the core expenses are going to look like for 2014, what the run rate will look like?

Sid Brown

So let me take a stab and maybe Tom might want to add some comments to that. So number one, we have discontinued just about every consultant that was working for the bank that was what I call non-essential. They were there to help us with the regulatory issues we are behind that now and we are executing with our own folks. With us that’s mattering of a couple of people here and there. And I have spent time with all the individuals in each department looking at the budget trying to assess where we are spending our money and how we can cut cost reasonably and prudently. And we have some initiatives around that. Some of them will take a little bit more time than others. But I can tell you that there is a real focus on cost control. And I will give you one example is over time just we put out (indiscernible) that unless it’s absolutely necessary we are not going to allow overtime at the bank. You start looking at little pieces here and there and you are going to start pecking away the overall cost structure of the bank.

Tom Brugger

And again to if you look back at 2013 and you look forward what we have been doing is executing a number of efficiency improvements. So for example, we closed three branches last year. It improved our expense run rate right by $1.2 million. We – late in the year we saw the volumes decline in our mortgage company, so we took out some of the infrastructure, which will save us $1.2 million going forward. We also in the first quarter of last year we did in efficiency we did both a strategic review in some of our business units and also an efficiency, look at the back office how can we reduce costs. We took out another $2 million of expense. What we have been doing is taken those savings and we have been reinvesting it into either revenue production, which is for this year. And last year we took some of that savings, we put it into building our risk management group. We added some people in our credit function, our enterprise risk. So it’s really important on a go forward basis we will have all these initiatives to pair expenses that of our businesses that are not producing a return, we will make sure we are sufficient in the branch network and any every other back office function. And ideally we want to reinvest that into the lending efforts to grow the revenues. So expenses we are trying to really keep an eye on expenses and taking the professional fees out and we really like to keep that flat.

Sid Brown

The other thing I would add is that at the end of the – actually the end of, I think at the end of fourth quarter we did hire a new person who come in as our Chief Operating Officer subject to regulatory approval, but he is working right now as a consultant to the bank, Jack Allison. And Jack’s responsibility is for oversight of our IT area and our retail network. And Jack is working with his team to really take a look at the retail network. I think anybody today in banking has to kind of assess what the branch network looks like today, but what will it look like a year or two from now, what the size of these branches should be, where they should be located. And we are going to be working very diligently to come up with a firm strategy, but I can tell you that the footprint that we have today will probably change no different than. These are retail stores and I think you just saw that the food traffic in retail stores across America has been reducing and it’s no different for retail branches. So we have to right size the branches, we got to get them in a right location and make sure we need to determine whether we need as many as we have. And all those decisions are going to be made not only with the team that we have here, but hopefully as a new CEO comes in they will be made rapidly, so we can deploy our strategy against that.

Matthew Breese - Sterne Agee

Okay. And then my last question, Sid you mentioned putting the bank with the capital ratios you have in a position to succeed, does that in anyway mean that there has been a change in how we should be thinking about the possibility of the capital raise given deployment capital, potential loan growth in 2014, is there any need for additional capital?

Sid Brown

So at this point in time I don’t think so. I think our focus needs to be on getting the bank to profitability because as soon as we can get the bank back to profitability we can start calling back our deferred tax asset, which is going to increase our capital ratios significantly. So our goal would be to bring the bank back to profitability, call back the deferred tax asset and continue to build the franchise forward. So right now, I do not contemplate any reason that we need to move forward with a capital raise. And I clearly believe and believe me I have suffered as a shareholder as much as anybody that the losses that we have incurred over the last couple of years due to the credit issues are for the most part behind this now. I mean we really have made the last final decision to bite the bullet and move on. So it’s now a matter of just executing against an operating strategy to build the bank.

Matthew Breese - Sterne Agee

Do you think on – looking at the entire 2014 year that the bank will be profitable?

Sid Brown

My goal and the goal of the entire management team is to get this bank back to profitability as soon as we can. And I would expect the bank to be profitable for the year, absolutely.

Matthew Breese - Sterne Agee

Thank you very much.

Operator

Thank you. Next we will take a follow-up from Travis Lan with KBW.

Travis Lan - KBW

Thanks. Sid, I was just wondering how you and your partners at the Board level would think about the potential for strategic alternative that could include you guys finding a partner that could help accelerate your growth plan, I mean obviously that’s kind of the path put forward I mean on the gross side. So just wondered do you – are you vetted to doing it on a standalone basis or do you think a potential partner could help you with that?

Sid Brown

No. I would tell you that some of these discussions are obviously are discussions that any Board today would have to take a look at in the banking industry. And we have had some discussions at the Board level. I think that it would be prudent for us to look at opportunities as they come forward to see once we get our earnings back in shape to really look and see how we move the franchise forward. But we believe that we have gone through a lot of pain here in the last couple of years to create the foundation that we have. And we believe right now the best thing for us to do is focus on just this bank and growing this bank and getting it profitable. But I would tell you that as we look out in the marketplace, we will keep our eyes and ears open.

Travis Lan - KBW

Thank you very much.

Operator

Thanks. With that we have no further questions in the queue. I would like to turn the program back over to Mr. Sid Brown for any additional or closing comments.

Sid Brown - Interim President and Chief Executive Officer and Chairman of the Board

So like I just want to maybe end with the idea that the last couple of years have been difficult years for the bank, but we are energized by the accomplishments we have been able to make particularly this last year on the regulatory side and on the credit side although the credit issues have really been – we have been dealing with them for a number of years. But the progress we have made, I just want to publicly thank all the employees that are working at Sun Bank for their efforts and that they are going to continue to move forward and make this franchise a proud franchise and what it was few years ago. And I am encouraged by the spirit and attitude of all of our employees that I encountered in the short-time I have been in this seat. So and I am also encouraged by the opportunities that will exist and can exist when we get a new leader in here that has a platform to move this franchise forward. So I think that’s it.

Operator

Thank you. That does conclude today’s call and thank you for your participation.

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