The third installment of the Banks in my Mind series was going to be about Sun Bancorp (SNBC), that I considered one of the unbelievable banking opportunities that I mentioned in the introduction to the first installment. Wilbur Ross has accelerated events, so for sake of speed let me mention some initial thoughts.
First, after Wilbur Ross's decision I like it even more. It is not the conditions, at $4 per share for a 24.9% stake, it was only at a small premium to the $3.61 previous day closing and it is slightly dilutive considering that this bank had $9.18 of tangible book value per share and no TARP. The seal of approval of a good investor is nice but is has not changed my opinion about SNBC or its management
It is more that Mr. Market at the current $5 price still considers it a distressed bank even though with the injection of $100M SNBC has no capital worries.
Upon completion of the capital raising transactions, the Company’s total risk-based capital ratio is projected to be at or above 14%, Tier 1 risk-based capital at or above 13% and leverage ratio at or above 11.75%, all levels which are significantly above the general standards to be considered well-capitalized, and which exceed the terms of the minimum capital requirements imposed by the Office of the Comptroller of the Currency previously announced in April.
I have not run the exact numbers after the news but it is probably priced at 0.3x book value and 0.6x tangible common equity . I twitted about SNBC a couple of months ago as a good example on how too much emphasis on CRE can distract you from good opportunities (numbers are pre Wilbur Ross):
- My conclusion, CRE issues largely overblown. As an example let’s see SNBC with 55.27% of their loans classified CRE
- NPAs down (3.32% <- 3.86%), allowance coverage large and up (73.53% <- 62.56%)
- Tangible book value stable at $9.18/share while TE/TA improving (6.34%<-6.25%)
- What gives? 50% of CRE is owner occupied: one of best risks in banking. Low Construction and Development C&D: one of the highest risks
- SNBC gave back TARP because it was too politicized. CEO was buying all the way down till March 09 and Directors still buying
- What does Mr. Market say? 0.57x tangible common equity and 0.34x book value
Also management mentioned that the capital raise was partially for growth. As we have seen in Charting Banking, New Jersey was not even close to ground zero for the crisis. However, I do not doubt this statement. Conditions for new capital, of that large relative amount, for banks of this size, with capital issues have been much more stringent. Just check the conditions of Gerald Ford to invest in Pacific Capital Bancorp (PCBC). And $100M is not for buying a series of banks, most probably to take just one assisted transaction and maybe do a couple of mergers (for that they need a better valuation)
UPDATE: Check the comments at the bottom of this post for a better estimate of the tangible common equity per share after the new equity
Disclosure: Long SNBC