Sun Bancorp, Inc. (SNBC)
Q3 2008 Earnings Call Transcript
October 27, 2008, 11:30 am ET
Tom Geisel – President and CEO
Bruce Dansbury – EVP and COO
Steve Moss [ph]
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On the subject of capital, our ratios are still quite solid, as evidenced by the statistics in our release. Our total common equity available to shareholders currently stands at $357 million, with average total equity at 10.83% of average assets for the nine months and tangible equity is at 6.39%. Our capital strength is well in excess of regulatory minimums for an institution to be considered low capitalized. And as we have said before, we don’t intend to do anything to compromise that excellent capital strength.
Before we hear from Bruce, I want to give some brief observations about Sun Bancorp that we don’t hear very much because we are also fixated on this volatile and unprecedented economic environment. These are points that our institutional investors are likely to already understand, but they are still worth making.
Number one, Sun is strong because we are a conservatively managed bank that is always focused on disciplined and safe business practices that ensure the security of our customers’ assets. We have no exposure to subprime mortgages and no investment in Fannie Mae or Freddie Mac. And two, through these difficult economic times, we are making a serious effort to reassure our customers that Sun National Bank is here for them. We have money to lend, we have communities to support, and we have safe financial institutions in many options to offer.
At Sun National Bank, we see ourselves as having a fundamental responsibility to strengthen our home state of New Jersey and its residents and businesses. It’s a responsibility that we certainly take seriously.
Okay. I’d like to now turn it over to Bruce and then we’ll take some questions. Bruce?
Okay. Thanks, Tom. Well, clearly the economic climate and external influences continued to impact our credit quality. What we saw previously as a weakness in the residential real estate market has now spread to the overall economy, and we are seeing a slowdown affecting more of our commercial borrowers. Those experiencing the greatest impact are companies closely associated with the residential real estate market and consumer spending. Reduced consumer demand appears to be the rule of the day. Evidence of these economic challenges is reflected in our increased loan loss provision and increased level of non-accrual loans, as well as our loan charge-offs.
The primary driver of our loan loss provision was our recognition of weakening performance of a number of our borrowers through the normal function of our loan review and risk rating process. Additionally, we have tried to reflect in our provision through increases in various qualitative factors what we believe would be the prolong nature of this economic downturn.
Let me provide a few examples of relationships that we have recently downgraded. One is a well-established customer, a moving and storage company that has been in the business for almost 30 years. The company has seen its sales negatively impacted by the downturn in the residential real estate market and slowness in the economy in general.
Another example would be that of a large private school, for whom we provide the construction and permanent financing for a new facility. The current uncertainty has impacted their enrollment, as parents ponder their ability to afford tuition now and in the future. Additionally, through our risk rating process, we have downgraded the small number of our residential builders due to the continued soft demand for new homes.
In terms of our non-accruals, we saw a large increase from the second quarter to the third quarter. The same economic factors are at play here. One large relationship that has moved to non-performing status as they strike work [ph] an excavating contractor who historically relied on new residential sub-division as a major source of revenue. Weakening consumer spending has forced another relationship, a manufacturer and packager of high-end cosmetic, into the ranks of our non-accrual premise.
As I’ve explained many times before, we have always taken an aggressive stance in terms of recognizing non-accrual credits and have been proactive in ensuring that our risk ratings are current and accurate. In all the cases that I’ve cited, we are a secured lender and we are actively engaged in the workout process with these borrowers.
Our charge-off experience in the third quarter has been in line with our business plan of five basis points of average loans outstanding. We continue to see charge-offs centered in the commercial and small business loan portfolios. In terms of the front end process, commercial loan demand has remained strong with our new business pipeline in the range of $487 million at the end of September. While we are actively seeking new business, it goes without saying that we are underwriting new credits in the context of the current environment and our credit standards will not be compromised.
Residential construction, which has been our bellwether in terms of economic slowdown, saw a $4 million reduction in outstandings during the third quarter. At $66 million, we are about 3% of total commercial loans. This is down from about 3.3% at the end of June. Outstandings were spread over 87 loans to 61 borrowers as compared to 98 loans to 67 borrowers for the previous quarter. We expect to see this run-off continue in the short-term, and we continue to be highly selective in regard to any new projects that we consider.