Sun Bancorp, Inc. Q3 2007 Earnings Call Transcript

by: SA Transcripts

Sun Bancorp, Inc. (NASDAQ:SNBC) Q3 2007 Earnings Call October 16, 2007 11:30 AM ET

Executives

Mr. Dan A. Chila - Chief Financial Officer

Mr. A. Bruce Dansbury - Chief Operating Officer

Mr. Sidney Brown - Vice Chairman of the Board and Acting President and CEO

Analysts

Joseph Fenech - Sandler O'Neill & Partners L.P.

David Darst - FTN Midwest Securities Corp.

Bret Ginesky - Stifel Nicolaus & Company, Inc.

Matthew Kelley - Sterne, Agee & Leach

Steve Moss

Ross Harverman

Michael Cohen

Operator

Earnings Conference call will now begin. On the line for Sun Bancorp are Dan Chila, CFO, Sid Brown, Vice Chairman of the Board and Acting President and CEO and Bruce Dansbury, Executive Vice President and Chief Operating Officer

At the end of the presentation, we will have a question and answer session. Now over to Dan Chila.

Dan Chila

Good morning, this is Dan Chila. I am the Chief Financial Officer of Sun Bancorp. Joining me is Sid Brown, Chief Executive Officer of Sun Bancorp and Bruce Dansbury, our Chief Operating Officer.

Sid and Bruce will have some brief remarks and then we will take questions, but first let me read the Customary Safe Harbour statement. The following discussions may contain forward-looking statements concerning the financial condition results of operations and businesses of Sun Bancorp. We caution that such statements are subject to a number of uncertainties and actual results could differ materially and therefore you should not place undue reliance on any overlooking statements we make. We are not under any obligation to and may not publicly release results of any revisions that maybe made to any forward-looking statements we make to reflect the occurrence of anticipated or unanticipated events for circumstances after the date of such statement. At this time, I will turn it over to Sid.

Sidney Brown

Thank you, Dan. This is Sid Brown. I would like to comment about our quarter. We had a very good quarter. We did not have a lot of ongoing one-time items or one time charges or extraordinary items. So what I would like to do is just recap a couple of the key financial performance highlights and then we will move on to any questions that you may have.

First of all though, I do want to reiterate that on behalf of the Board of Directors that we were pleased to announce that Bruce Dansbury has been named as permanent Chief Operating Officer, which formally locks in a role that Bruce has been performing for several months on an interim basis. He has been doing an outstanding job in managing the day-to-day operations for the bank and reporting to the board.

Bruce also serves as the bank’s Senior Credit Officer and Chief Credit Policy Officer, a position which he is responsible for Sun’s credit products and policies, as well as providing senior loan review and general oversight of our credit portfolio and I am sure that some of you will have some questions for Bruce later on in the presentation.

Before I go on and talk about some of the financial highlights I would like to talk about the ongoing CEO search process.

As many of you know, we have been working with Heidrick & Struggles for the last couple of months, one of the top national search firms in the process of trying to find a CEO for the bank. We have interviewed a number of candidates and we are continuing to interview candidates. We feel very good about the process. We have not been motivated by making a decision for the sake of making a decision. We want to make sure we make the right decision for our franchise. The Board of Directors is very pleased with the ongoing operations of the bank at the present time. We are very pleased with the job that Bruce has done in the role of Chief Operating Officer, so we feel compelled to make sure that we make the right decision for the bank and not make a decision for decision’s sake, for timing’s sake.

So I just wanted to kind of give everybody a brief update on where we are relative to the CEO search.

And now, let me comment on some of the highlights for the quarter.


Since I have been here, we have now had three consecutive quarters of improved earnings which have met our expectations given the environment that we are in. Net income for the third quarter was up 21.2% over what we reported for the third quarter a year ago, and this includes a one time charge that accounted for a penny a share.

As we reported in our earnings release, the one time charge was a combination of two things, $250,000.00 in cost associated with the early redemption of a trust-preferred security that was refinanced at a better interest rate, and roughly $185,000.00 charge related to several branch consolidations during the quarter, so as a result, we took the one penny charge for these extraordinary items.

Net income for the nine months was up 21% from the prior year period. On the loan side, loan production was steady. We continued to have a fairly solid pipeline and we are tracking it along pretty much according to our plan for the full year.

Loan pre-payments still continued to be an issue, but there isn’t much we can do as some loans have been paid down prematurely, but as expected, the impact is mainly in the real estate related loans.

Total loans were about $2.5 billion at the quarter end, up $122 million or 5% on a year-over-year basis, and on linked quarter basis, loan growth was 2.1%. Total loan growth over year 2006 was 10%. These numbers are all normalized for prepayments and branch sales.

We’ve an increase this quarter in total non-performing assets which will not be problematic. These credits are well-collateralized and in fact, full payment is expected on a portion of them in the beginning of the fourth quarter. Bruce will talk more about this later.

The net interest margin is the real story here for the quarter. The reported margin is 3.549%, normalized it would be 3.53% if we take out the cost of the redeemed trust preferred securities during the quarter. On the linked quarter basis, the reported margin at June 30th was 3.19%, normalized it would have been at 3.2% if we take out the cost of redeemed trust preferred securities during the second quarter.

So essentially, the linked quarter margin improvement reflects a net spread increase of approximately 30 basis points. This improvement is due to an increase in the interest earning asset yield of 15 basis points and a decrease of 15 basis points in the cost of interest-bearing deposits as we allowed some of our higher cost CD money to run off and we made pricing adjustments on certain segments of our deposit base.

On the expense side, we did reach a milestone of sorts by achieving a record low efficiency ratio of 69.4% for the quarter, understanding that it is a record low for the bank, but it is not something that we are exactly satisfied with yet, but we’re moving to meet her in the right direction. It’s been a major goal for this bank to drive the number below 70%. A year ago, we were at 71.3% and for the second quarter, we were at 73.8%.

We have a lot of work ahead of us yet to continue to drive that number down and keep it there, but we are making progress and that is what it’s all about.

Just to recap a couple of key numbers in the area of expenses, non-interest operating expenses on a year-to-date basis decreased 3.4% over the first nine months of 2006. The primary components driving this are a 4% decrease in salary and employee benefit cost and a 4.4% reduction in occupancy and equipment expenses. One of the things that we incurred this year that we did not have last year was the FDIC insurance expense that was instituted by the government that increased our expenses by $585,000.00 over the comparable prior year period due to this new assessment regulation effective this year for all banks.

On the branch rationalization side, we continue to downsize on a business as usual basis mode right now. We are now at 70 branches, down two from the last quarter, and down a total of seven from September 2006. I would point out that we continue to increase our deposits per branch over this period as well. Our average deposit size per branch is currently over $38 million and is up almost 12% over September 2006.

So during this quarter, we closed and consolidated two branches and two existing offices, and we also relocated two branches, one into a newly constructed branch and the other into a renovated former closed office of ours. We said in our last conference call that we’ve engaged in an outside company to evaluate the advantages and disadvantages of our branch offices. The primary objective is to analyze market demographics, the density of our existing locations, our competitor’s locations and try to ascertain what the positives and negatives are of reformulating our branch network. We are still working on that. We have made some tweaks to the network already as evidenced by what we did this last quarter. We will continue to make tweaks to the network and we are taking the information that we gather and we’re trying to make the best intelligent decisions that we can.

We’ve been looking at it on a market by market and by that I mean, county by county, region by region in order to ascertain what is in the best interest of the complete franchise for Sun National Bank.

Needless to say, we are going to continue to focus on a variety of profitability enhancement initiatives that are currently underway, but always with particular emphasis on expense savings, we’ve made some great progress there. We are continuing to make progress and we believe that we will see some things begin to kick in in the fourth quarter and until next year that will help us in our mission to reduce our efficiency ratio from where it is now.

What I’d like to do is ask Bruce to give a brief update on the credit markets and credit quality and then I’ll wrap it up before we take any questions.

Bruce Dansbury

Thanks, Sid and good morning everyone. As Sid mentioned earlier, we have continued to see loan growth, especially in our commercial and small business markets, overall, year-to-year, we’re up about 5.2% as he said earlier, and a little over 2% quarter-to-quarter linked quarter. As many of you have already seen in our release, we did have some increase in our non-performing assets this month. We have an increase of about $3.7 million overall in non-accruals and our over 90-days loans were up about a $1.7.

These increases are primarily related to one borrower in the residential real estate market. It is a couple of homes that are still pending sale. At this point in time though, we have chosen to base these loans on non-accrual, however, we do expect the $1.7 million to be paid off in the next couple of weeks here, so while it’s an increase in our non-performing, it’s certainly a manageable increase. We are well collateralized and feel that there will be a zero or a very minimal loss related to these particular credits.


That being said, as I’ve said on our previous calls, we are seeing a much tighter credit market at this time in the cycle. Much of it is related to some of our small business loans. At the very low end, it is not a very large portfolio for the bank, but there does seem to be stress there with some of the smaller companies in the marketplace, and of course companies that are related to the residential real estate market. We have maintained our provision coverage at 1.07%. We have increased quarter-to-quarter our total provision from what it was at the end of second quarter, and as we do our modelling and very aggressive outlook over the next quarter, we think we are adequately provisioned and we’ll continue to see some tightness, but in a manageable way.

We are very, very aggressive in our approach to early detection and early aggressive action with credits as they get into trouble, and that model has served us well in the past and I’m sure will serve us well in the future to maintain a very good credit quality here at the bank.

I think that probably covers it. I guess what probably maybe on some folk’s mind, if you look at our residential real estate construction portfolio, as it is directly related to the housing market today, for the bank here, we have about 8% of our portfolio in the construction area. Of that 8%, about half of it is related to residential construction projects. We’ve reviewed all those projects. They’re spread out across about 70 different borrowers. We’re very comfortable with where most of those borrowers are today. We don’t see anything that is giving us great, great concern today. They are performing, they’re selling their homes albeit a little bit slower, but they’re getting through projects and winding them down.

So it’s an area that we’re watching closely, but it’s also an area that is a very manageable sized portfolio for us here at the bank, and we’ve had a good track record with it in the past and we expect to continue that. So I think that will cover my initial comments so we take questions. Sid.

Sidney Brown

Okay, thanks, Bruce. Just to kind of summarize here, I think we had a good third consecutive quarter of increase in earnings particularly given what some of the results are of some of our peers. I think we’re moving in the right track. The franchise has positively got some earnings momentum going here. On the retail side, we’ve seen some continuous success in revamping our retail franchise. The sales culture has definitely been evident as the lift that we’re getting out of our retail group and I appreciate all the efforts that Ed Melandro has done in trying to change the sales culture at our retail franchise. We have stabilized our workforce in the retail branch network. If you remember at the last call, we talked about the fact that we’d gone through a lot of change in personnel at the retail level over the last year, and over the last three to six months, it seems to have stabilized and we’re beginning to see the fruits of those efforts.

The 70 branches that we operate continue to add value to Sun, some more than others, and that’s the process we’re continuing to evaluate in terms of our branch optimization.

But at this point in time, I think we will open up to questions that anybody may have and see if we can answer them for you.

Question-and-Answer Session

Operator

(Operator Instructions)

The first question is from Joe Fenech. Please proceed with your question.

Joseph Fenech – Sandler O’Neill & Partners

Good morning, guys.

Dan Chila

Good morning, Joe.

Joseph Fenech – Sandler O’Neill & Partners

I have two questions for you. I guess, first on the asset quality front. The provision came in line with what we’re expecting, but your non-performers, you’ve charged off a bit ahead of where we thought you’d be. With the reserve at 107 basis points of loans and you’re barely covering your problem loans, you’re certainly not in the early state of trouble in the situation is what we are seeing with some of your peers, but why not take the opportunity this part quarter to maybe boost reserves.. I know the issue with the account, FCC et cetera, but it seems as though you have the justification to do so, and then also considering that you exceeded expectations by so much, can you talk maybe a little bit about the thought process there? And then I have a follow up.

Sidney Brown

Good question, Joe, and we do take all of that into consideration; you mentioned in the first part, we do have to be able to support what we do with the FCC and those types of regulations. I guess, right now as we’re looking at it Joe, our modelling, and we have a pretty robust system for calculating our specific reserves and our needed reserve and we’re well within those guidelines and limits.

The other piece of it is that we look out over the next two quarters. We also project what we expect charge-off to be of course and other areas. We’ve got recoveries. We’ve got charge-offs and the real answer is by the time we get done with all of our modelling, we’re right within our guidelines and expectations, so we thought it was a appropriate to hold where we are at right now.

Joseph Fenech – Sandler O’Neill & Partners

So it sounds like, you’re still cautious obviously with the environment, but there is not much you’re seeing that concerns you overall?

Sidney Brown

That’s correct.

Joseph Fenech – Sandler O’Neill & Partners

Okay, and then, I guess, Sid, my second question has to do with the CEO search. From my perspective, the things seem to be clicking real well for you guys. You made more progress in the last nine months than the prior two years or so, and you’re doing it in a tougher environment as you said, so the question is with the search continuing, we’re coming up on a year since Tom left, would you consider taking the job on a permanent basis with just with the thought of, ‘why mess with a good thing’ and if it’s time commitment issue for you with your other responsibilities, would you maybe consider staying on as CEO, but delegating maybe more of the day-to-day responsibilities once you have the structure and the culture that you want fully in place. Just interested in your thoughts there.

Sidney Brown

Joe, you really put me on the spot here. I guess, at this point in time, we’re going through a process that the Board and myself have been involved with, and I think in the meantime, I’ve committed to the Board and to the franchise that we will continue the momentum. I would tell you that there’s a group of management here at the bank that have really done a great job and I just want to publicly acknowledge that this is just not me. This is a team effort and we’ve been doing a great job of business franchise moving forward in a way that we had all expected as Directors that it would.

So, at this point in time, I appreciate your endorsement for me, but we’re still continuing the search and the Board and I will continue to work through that process.

Joseph Fenech – Sandler O’Neill & Partners

Got it, thanks.

Operator

Our next question is from Steve Moss. Please proceed with your question.

Dan Chila

Good morning, Steve.

Steve Moss

Good morning, guys. I just want to ask about your expectations with regards to the margin here. Obviously, your loan yields were improved, but what are your expectations going forward.

Sidney Brown

I would say that our expectations from margin is that we would probably not see another 30-basis point improvement from quarter to quarter because then you guys would really begin to scratch your head and figure out what we’re doing, but I would say that we expect to maintain somewhere around where we are now. Hopefully, we’ll have a little bit slight improvement in margin because we’re going to continually push the envelope in terms of pricing on our loans and pricing on our deposits, but we think that relative to our peer group and relative to what we believe we can do, we’re going to try to continue to push margin up. I don’t think we’re going to see improvements quarter-to-quarter like we have over this part quarter.

Steve Moss

Okay. And what are your expectations for loan growth going forward. You mentioned the smaller borrowers having some difficulties and pay down.

Sidney Brown

I would say that there’s definitely been a slowdown in the marketplace on loan demand. I don’t think anybody who is in the business who would not tell you that there has been a slight slowdown out there and what we’re doing is we’re aggressively going out there and trying to find the opportunities in our marketplace.

There have been some disruptions that have taken place, and when I say disruptions, some announcements of some merger activity taking place in our market, and anytime that takes place, there’s always opportunities for the remaining players to take advantage of that, and we hope to take advantage of that over the next six months to a year as those events take place. But it’s tough out there. Obviously, residential has come to a grinding slowdown, and so therefore, we’re focusing much more on the commercial side of the house. Our retail branch network has made significant strides in loan growth through the home equity product and we’ve seen a big increase in the last couple of month in that product, so we’re attacking it from all different angles, but I would tell you that I think it’s going to be a tough road over the six months to a year in order to maintain double-digit loan growth. But we’re going to try like hell.

Steve Moss

Okay, and actually following up on the merger disruptions of Commerce, do you expect the loan or deposit pricing will improve going forward and have you seen Commerce frequently in your markets?

Sidney Brown

Yes, I mean, Commerce has obviously been operating in most of the markets that we operate in today. That announcement was just made a week or ten days ago whatever it was and we expect to see an opportunity out there to be defined shortly for ourselves in terms of, we’re still going to be a New Jersey-based bank with a local operations here and we think that we’ll be able to have some competitive advantages once that integration takes place that maybe didn’t take place at this point time. That’s yet to be determined.

Steve Moss

Okay, thank you.

Operator

Our next question is from Bret Ginesky. Please proceed with your question.

Bret Ginesky – Stifel Nicolaus &Company, Inc.

Hi, guys. Congratulations on the quarter.

Sidney Brown

Thanks, Bret.

Bret Ginesky – Stifel Nicolaus &Company, Inc.

A couple of questions for you, first, just regarding consolidation plans for branches going forward. Where do you stand on that? What is the ideal branch number that you guys are looking to get to? Will there be more consolidations and relocations in the upcoming quarter?

Sidney Brown

Bret, I would tell you that we don’t have a fixed number in place right now, but I will tell you that the number of branches that are performing at levels less than expected has dwindled from where we were two years ago versus where we are today.

Part of that analysis was making sure that we had the right people in the right seats at the branches to really see what the branches could do for us. The second part of that is that we have some branches that needed some renovations that we’ve accomplished and we’re continuing to accomplish that would give us a better environment for selling our products and services. And then the third thing is to determine whether or not the expenses of the branches are offsetting either the low cost of funds or the cost of funds that we’re getting from them, so we’re going through that complete review right now. And there’s a franchise value here and we don’t want to disrupt this franchise value and the name recognition in the markets that we operate, so we don’t think that just arbitrarily closing five to ten branches without a clear cut strategy against it is the answer.

You will see the expense of the branches, but you’ll also increase your cost of funds from those deposits to go away if we don’t have what we call obvious consolidation opportunities. So we’re looking at that whole network and we’re being cautious because there is value to it, and we want to tweak it and make it what’s right as opposed to making the wrong decision. So we’ve made decisions, we’ve acted and basically, either closed or sold seven branches in the last year, which is 10% of the network, so it’s not like we’re sitting idly by, and we’re continuing to evaluate what the next couple of locations are in terms of making some decisions.

Bret Ginesky – Stifel Nicolaus &Company, Inc.

Okay and then on the expense issue, just what are some of the things you guys are looking at trying to continue to lower the efficiency ratio. I know you did a pretty good job so far, but it seems like obviously, the first half of the year, you tend to have a higher efficiency ratio historically, so will you be able to, for 2008, lower the entire year efficiency ratio below 70% and what types of things are you doing to try and get there?

Sidney Brown

There are three or four things that I will just highlight without getting too specific. We have looked at the actual headcount in the organization, and we have streamlined this organization. We continue to streamline it in areas that we think we get efficiencies out of the workforce and the people that are remaining at Sun had done a great job of rallying around and really stepping it up and I think our employees have done a great job of picking up where before maybe we had three people doing something, we’ve got two people doing it.

So one would be from just strictly the salaries and benefits line, I think we are keeping a real lid on cost there. Second thing is, we’ve really attacked various what I call back office operations, various expenses in terms of how we run the bank, how we can become more efficient at running the bank, and that could be in ways that are dealing with things like just the telecommunications expense, the security expense, it just runs every single expense line, we really made some progress against.

We’ve also looked at trying to increase and enhance the revenue side of this thing. One of the areas that we’ve been successful is repositioning our investment portfolio to get a better yield than we had historically in the past without taking too much risk. We’ve seen success in that. We’ve also been looking at the borrowings that we have on our balance sheet and we’re restructuring some of the investments we’ve made historically in the past to provide better yields for next year, and we expect to see some improvements going forward in the fourth quarter and into next year on some of those initiatives.

I would tell you that there’s no stone left unturned in terms of the analysis that we have of trying to create better revenue enhancements to what we’re doing in trying to cut expenses. We’re looking at getting involved in some other areas that can provide some additional sources of income. One of the areas that we’re contemplating, doing some testing on is in the insurance area. We’ve been working on this for a while and we have some opportunities that I think we’re going to test to see if it works, but if it doesn’t work, we’ll try something else. But it’s an all frontal attack because it is a tough environment out there today. There’s no question about that.

Bret Ginesky – Stifel Nicolaus &Company, Inc.

Okay, and then I guess, just going back to the credit issue. I know you guys ran over everything, but you had, I think, it’s six consecutive quarters of non-performers going up, do you believe that, I know you went through about the $1.7 million that you think is probably going to come off, what are you most worried about that’s still on there and other things in the system that could continue to come on to the non-performing list going forward?

Bruce Dansbury

Well, you always worry about the unexpected, and I would say for the most part, anything of any size that’s in our non-performing portfolio right now, we have a very good handle on, and we feel that there’s going to be a resolution to it with very little loss to the bank. As I said earlier, probably the area or the portfolio that concerns me the most for some of our smaller businesses portfolios. We have some SBA loans in there that tend to have trouble earlier on in the cycle, so I already commented on our real estate lending route. Our largest non-performing as we stand right now is $2.5 million and it’s well collateralized, well secured and moving towards resolution.

In the State of New Jersey, as you go through the foreclosure process with your non-performing, it’s just a long process and it takes time to get through that. So we’ve had these cycles before where our non-performing had then stopped and then we get some recoveries out of it and then it comes back down, but I think my biggest concern right now is just where we are in the economic cycle out there.

Sidney Brown

Let me address this because I’ve spent a lot of time with Bruce and the group going through the portfolio and making sure we understand where credit issues are and the comfort level that I hope may be able to convey is that we just didn’t do a lot of lending of 30 units and 40 units in 50-unit type places where there potentially could be a big hit to this bank. It was not the nature of the bank.

We did two and three unit type of residential construction lending where maybe one of the houses was under contract and two others were being built in the same area, so our total exposure to any one credit here on expected basis is very minimal and that’s why I think as Bruce has gone through the analysis of our credit portfolio and looked at the way we model historically in the past, in terms of our loan loss reserve, we feel very comfortable that we are appropriately reserved at this point in time.

Bret Ginesky – Stifel Nicolaus &Company, Inc.

Okay, great. Thanks a lot. I appreciate it.

Operator

Our next question is from Matthew Kelley. Please proceed with your question.

Matthew Kelley – Sterne, Agee and Leach

Hi, guys. It has been a nice quarter. I wonder if you can just give a little bit more detail on the rate on interest bearing demand deposits and it is about 30% a year deposits down 24 basis points sequentially in terms of the cost there and kind of give us a sense of where you stand now relative to current pricing and kind of promotional type offerings that you are offering throughout the system.

Sidney Brown

Matt, what I could tell you is that one of the things we did was we tried to further simplify our deposit pricing and then when we looked at our deposit pricing relative to our competition, we began to tweak some things that made sense in terms of pricing and that was not only on just consumer pricing, that’s on public funds pricing. It was on all sectors of the deposit portfolio.

The second thing is, I think if you go back a quarter or two, I made mention at the last call that we were bringing in money at CD rates and turning around and selling to the Fed with almost no spread at all, which made no sense. So we did do some adjusting to the CD rates to basically get ourselves appropriate, so we could make some margin on that money and essentially probably run off a little with the CD portfolio as a planned action because we weren’t making any money on money that we were bringing in and turning around and selling to the Fed.

So I think what we’ve done is we’ve really tried to look at the components of the different products that we have and it goes across the spectrum of all our deposits and said okay, ‘How can we push the envelop to make sure that we are making a spread on all the different products?’ And we have in certain areas for example, we had a run-off in one of our areas that was not interest bearing in total, and we decided to go the opposite way and add some interest to those accounts because we felt as though we did not want to lose that customer base. So this was a general review of both positives and minuses in terms of looking at the total deposit portfolio.

Matthew Kelley – Sterne, Agee and Leach

Okay, just along the same lines, maybe average cost a year of time deposit right now is 4.82%. If you kind of look around the New York, New Jersey market place, the average rates are not too much far below that, the average six months around 4.50, the average one year is around 4.75, and it seems like the deposit competition is still pretty intense and so you’re not getting some of the benefits of lower rates and Fed action that maybe people have been anticipating on the deposit side, I know for you the wholesale funding has come down a little more.

Sidney Brown

I would say that you’re right. I think our numbers right now are about 4.50 similar like the numbers that you were talking about, so I think we’re right in there.

I didn’t see all the banks, the day the Fed made their cut, turn around and reduced their cost of money by a corresponding amount.

I would expect that if the Fed continues to do this, the banks will have to because there is just no way you can continue to keep the high cost of money up if your yield on your loans are going to come down correspondingly. So you are right. We have seen some adjustments but we have not seen the 50 point adjustment that the Fed made.

Matthew Kelley – Sterne, Agee and Leach

Right. Separate issues on capital management, I mean, tangible equities now are almost 6.5%, would buybacks be considered at all?

Sidney Brown

We didn’t mention it we did not mention it in the quarter and we probably should’ve but in the quarter we bought back about 500,000 shares. Is that right, Dan?

Dan Chila

To date, we have purchased back from our announcement of the buyback, about 550,000 shares.

Sidney Brown

And we will continue to buy back our stock because we think it’s a good investment and at an appropriate price right now. Just to clarify, we had announced a million shares, stock buybacks—

Dan Chila

Stock buybacks that was roughly a million shares and we’re halfway there.

Sidney Brown

Right, and so we’re halfway there. That’s right.

Matthew Kelley – Sterne, Agee and Leach

Okay, great. And going back to that part of the issue to kind of make sure I’m clear, you said 8% of total loans are in the construction, that’s about $200 million worth split 50/50, residential and commercial.

Bruce Dansbury

Roughly, yes.

Matthew Kelley – Sterne, Agee and Leach

Okay. Had there been any restructuring of either of those buckets? The structuring of individual loans that maybe they’re not showing as the non-performers but you have restructured in extended terms?

Bruce Dansbury

No, we have one loan that had somewhat of a restructure, but it was actually more collateral was added and the principal was added into the reserve, so I wouldn’t even classify that as a restructure. I would say no. Not at this point.

Dan Chila

Matt, nothing that requires any type of restructuring accounting in the portfolio.

Matthew Kelley – Sterne, Agee and Leach

Okay, and home equity loans have been a pretty significant driver of some of the loan growth over the last couple of years, any credit metrics that you can give us on the home equity portfolio that now stands $250 million, any combined LTV ratios or vital scores on that portfolio?

Bruce Dansbury

On the whole portfolio?

Matthew Kelley – Sterne, Agee and Leach

Yes.

Bruce Dansbury

No, I don’t have that kind of information off the top of my head. We can get you some information on that later if you’d like just to give you a call back.

Matthew Kelley – Sterne, Agee and Leach

Okay, that would be great. Thank you.

Operator

Our next question is from David Darst. Please proceed with you question.

David Darst – FTN Midwest Securities Corp.

Good morning.

Dan Chila

Good morning, David.

David Darst – FTN Midwest Securities Corp.

Could you talk us a little bit more on the securities portfolio repositioning you did during the quarter and what some of the yields were that came out of the portfolio?

Dan Chila

David, it wasn’t so much a restructuring, if anything we did, we announced earlier in the year that because of the duration of our portfolio for all year in the year, approximately one-half of our portfolio was going to be maturing and as that portfolio was maturing, the reinvestment in that portfolio which was going to extend duration out modestly and the improving yield resulting in us picking up almost 90-basis points on the portfolio from a year ago and so the restructuring had just been a reinvestment of the maturities that have been ongoing.

David Darst – FTN Midwest Securities Corp.

But did you have any reinvestment this quarter? It looks like you have got a decline of 9% in the linked quarter?

Dan Chila

We did. I don’t recall and how much matured, we probably have approximately $10 to $20 million a month that it is growing off between cash flows and maturities.

Sidney Brown

And we were far below where our peer group was and I think we are getting closer to where our peer group was in terms of expected yield off the investment portfolio.

The other thing was the investment portfolio had been running off to fund loan growth because we were not getting the deposit growth out of our retail network. That has stopped as we’d begun to get some deposit growth out of our retail network.

David Darst – FTN Midwest Securities Corp.

Then how about the improvement in loan yields? Is that from re-pricing or did you have some from lower yielding loans?

Bruce Dansbury

I do not think it was necessarily was re-pricing. During the quarter, there was a slight uptake of the rates and the—

David Darst – FTN Midwest Securities Corp.

Re-pricing of risk?

Bruce Dansbury

Pardon me?

David Darst – FTN Midwest Securities Corp.

Re-pricing of risk.

Bruce Dansbury

Oh, re-pricing of risk, I will tell you the way it goes out there, I would love to say that we are getting really solid risk pricing-based right now, but it has been and continues to be very, very aggressive out there so it is somewhat more of a marketing competitive driven.

Sidney Brown

Although we see it, we do see a lot of stuff we turn down because they used to be able to get the stuff in other places but—

Bruce Dansbury

Right, one of the other areas we have seen is more on the real estate side with, once things really got tight, some of the conduits pretty much left the market, and enabled pricing to go back in the north a little bit of what it had been especially on some of the real estate deals.

David Darst – FTN Midwest Securities Corp.

Would you say that that has been one of your primary competitors, especially for the payoffs that you’ve seen?

Bruce Dansbury

It had been prior to the last couple of months, yes, that had been a competitor.

David Darst – FTN Midwest Securities Corp.

So, how has that been impacting your pipeline? Is that shrinking it?

Sidney Brown

I think it’s more that the pre-paids are not as much as it seems to be. It’s slowed down a little bit on the prepaid because some of the stuff that was already in the portfolio that had been fully seasoned credits were pretty good candidates for that kind of product and we’re seeing a little bit less of that pre-payment. It’s starting its deceleration in the pre-payments.

David Darst – FTN Midwest Securities Corp.

Okay. And then it looks like some of the momentum you’d picked up with the service charges and fee income took a breather this month through this quarter. Do you think you can address it?

Bruce Dansbury

Yes, that is the point. Let me address this. It is a very good point. One of the areas that we had a shortfall on was the SBA area, what happened is all of the credit markets tightening up here, the ability to sell those SBA loans in the secondary market, we were getting a premium of 108 before on those loans. The premium dropped down to 105 and we decided as an institution to hold on to those credits to see if the market would recover a little bit and we’ll just get the income off of that portfolio and one of the things we’re looking at right now is from an SBA standpoint as we continue on to see whether or not it makes sense to expand that portfolio and hold it versus turning around and selling it and we’re going through that analysis right now.

The second thing that happened is that, I do believe we have seen a little bit of a levelling off of our overdraft charges on the service charges, and we expected that, and we believe that we are for the sized portfolio bank we have, in terms of deposits, we’re getting our fair share of service charges and feel pretty comfortable that we’ve done what we intended to do in terms of generating the level of service charges.

We are continuing on working on things like debit card penetration and in order to continue to get our charges up, so we are looking at other ways of continuing to add to our non-interest income. But another thing that we will tell you is that we have some other products like investments and hedge direct fees that sometimes it’s a timing issue. We expect to have a very good fourth quarter on both those accounts, so I would expect without forecasting, but I would expect that we should see some improvement in our service charges in our non-interest income fourth quarter to third quarter.

David Darst – FTN Midwest Securities Corp.

That is the hedge.

Sidney Brown

The one wild cart out there is the SBA market. And we’re not alone. I think we saw another one of our competitors has made a strategic decision right now to just hold on to the portfolio until the market kind of settles down, and that might be a strategy that we employ for a while.

David Darst – FTN Midwest Securities Corp.

Okay, thanks.

Operator

Our next question is from Roth Harverman. Please proceed with your question.

Roth Harverman

Good morning, gentlemen. How are you?

Dan Chila

Good morning, Roth.

Roth Harverman

Quick question, could you go over just the categories of loans, talking about what is the strongest and what is the weakest in terms of loan demands today? Commercial, residential and so forth?

Sidney Brown

I would tell you that I think the commercial demand is still relatively strong out there. We’re still seeing a lot of activity in our pipeline. In fact, we have focused our lenders on the commercial side of the business as opposed to the residential because that’s where the action is going to be over the next 12 to 24 months. So we are still seeing a pretty good activity in our pipeline on the commercial side.

More specifically, what else could I answer for you?

Roth Haverman

On the SBA loans, historically, you’ve sold them?

Sidney Brown

Yes.

Roth Haverman

Could you tell us a little bit about what you’re seeing today in terms of those spreads or lack thereof compared to six or nine months ago?

Sidney Brown

Okay, six to nine months ago, we were getting about an 8% premium in the marketplace. It dipped down at one point back in August down to a 4% premium and now it’s about a 5.5% to 6% premium. And there is a point of inflection where it may make more sense for an institution to hold on to those SBA credits as opposed to selling them into secondary market and I think that is the analysis that we are going through right now with probably along with lot of other financial institutions.

Roth Haverman

Okay. I appreciate the help. Thanks guys.

Sidney Brown

Okay.

Operator

Our next question is from Michael Cohen. Please proceed with your question.

Michael Cohen

Hi. Just a quick question for you as you kind of look out at the marketplace and some of your context that are kind of closing some of your branches and kind of figuring out which ones are optimal, but you kind of look out longer term. How do kind of see the new direction of the market shaking out now that sort of commerce is probably going to come under the front ownership and they see some type of cultural shift, and kind of do you see yourself in that context as kind of consolidators or maybe someone kind of looking at you as an attractive target for the markets that you’re in? Do you look to expand geographically beyond where you are today? Maybe you could talk about that sort of in big picture?

Sidney Brown

I think in big picture, I think it’s between the Yardville transaction and the Commerce transaction like you mentioned. I think there’s going to be lots of opportunity. We will be, according to what I can gather after Commerce is purchased by TD Banknorth, that Canadian outfit. We will be the second largest commercial bank headquartered in New Jersey behind Valley. And we see that as a real competitive advantage and we’re going to try to figure out how to take advantage of it in the marketplace.

Commerce has been a very good competitor for everybody and it is yet to be known exactly how that whole thing is going to shake out. There have been good acquisitions and there have been bad acquisitions, so it is yet to be determined what will happen with Commerce. But we compete against people other than Commerce and other than Yardville, but we see opportunities to really emphasize our New Jersey and local based groups not only New Jersey, but Delaware and try to take advantage of that in the marketplace. Sometimes, these acquisitions take place and Commerce had a culture that may or may not survive that acquisition or it may survive it. There is no guarantee.

Michael Cohen

Would you see yourselves sort of looking to expand to other sort of markets where there maybe some smaller institutions in New Jersey that you could bring into the fold or would you anticipate kind of, it’s hard to think about organic growth when you’re kind of shrinking branches as it is.

Sidney Brown

That’s an excellent question, and I think that that was one of the questions that Joe posed to me early on, I think on the first call that I had nine months ago, and I said that at the time, I felt we needed to get our own house in order before we look to make acquisitions. This bank was essentially grown through a series of acquisitions, with a little bit of sprinkling at the mobile branches, and I think going forward that this bank will get ourselves to earning at a level that we’re comfortable with and get the machine fine-tuned and then find opportunities for acquisitions and I don’t think that’s too far down the distant future as opposed to where we were nine months ago. So I would say to you that if the opportunities present themselves for some in-market or expanded acquisitions, we’re going to actively look too see what we can do over the next year or so.

Michael Cohen

And then in longer term, would you envision yourself remaining independent over a five to ten year period or how do you think about that?

Sidney Brown

I think I’ve said this on prior calls that this bank is not for sale at this point in time, and I don’t have a crystal ball to see five to ten years from now, but our plan is to grow this and if a transaction is done with Valley at some point in time, then hopefully, we’ll become the largest commercial bank in New Jersey and headquartered in New Jersey and continue to build this franchise and service the state and service Delaware as best we can and that is really the short term outlook as I see it right now.

Michael Cohen

Great, thank you very much.

Operator

There are no more questions in the queue.

Sidney Brown

Is that it on the questions?

Operator

Yes, we have no more.

Sidney Brown

Okay, well thanks everybody for listening in and we’ll see you next quarter.

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