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Sun Bancorp, Inc. (SNBC)
Q1 2008 Earnings Call
April 15, 2008 1:30 pm ET
Dan Chila – Chief Financial Officer
Tom Guysell – Chief Executive Officer
Bruce Dansberry – Chief Operating Officer
Ed Milandro – SVP, Retail Banking
Rick White - GI Montgomery Scott
(Operator Instructions) at this time, Dan Chila.
» Sun Bancorp, Inc. Q3 2008 Earnings Call Transcript
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“The following discussions may contain forward-looking statements concerning the financial condition, results of operations, and business of Sun Bancorp. WE caution that such statements are subject to a number of uncertainties and actual results could vary materially and therefore should not place undue reliance on any forward-looking statements we make. We are not under any obligation to and may not publicly release results of any revisions that may be made to any forward-looking statements we make to reflect the occurrence of anticipated or un-anticipated events or circumstances after the date of such statements.” Now I will turn it over to Tom Guysell.
Thanks Dan, this is Tom Guysell and I am pleased to be hosting today’s call after my first full quarter at Sun Bancorp. Let me make a few comments about our performance over the last three months, and then I will ask Bruce Dansberry for an update on the lending side of the balance sheet and some commentary on credit quality. I will then come back with a few brief thoughts on some of the principal issues that we are focusing on as we move into 2008. We will then take your questions.
As an overview, our earnings -per -share came in below the street consensus, primarily, as a result of rate- driven margin compression. Gross loans were up 1.6%, over the fourth quarter of 2007, while deposit growth was essentially flat. The net interest margin for the first quarter was 3.35%, compared with 3.47% for the quarter. We experienced a 200 basis point drop in Fed rates in the quarter, and we have made up about 175 basis points of that decrease. We aren’t really in a position to drop our deposit rates any further. We‘ve had to react quickly and be aggressive in dropping our rates. But in order to preserve market share, and given the competitive landscape, we have not had the luxury in being able to lag far behind what the Fed has been doing. However, could not match a point-for-point reduction. So, market dynamics have clearly had an impact on the margin, as we move through the year, we do expect to see the margin benefiting somewhat from downward re-pricing of a significant portfolio of short term CDs assuming there are no further rate reductions from the Fed. Loan Buy-in was a little behind plan for the quarter but we feel this might be due to timing as our pipeline is solid, and composed of good credits. Bruce will have more detail on this in a moment. Operating non-interest income improved during the quarter, and advanced about 5% over the fourth quarter, and about 29% over a year ago as our hedge-direct derivative products, mortgage banking, and SBA loan fees and income received from Boley were all up. There was also a gain from the Visa Public Offering, which we are also reporting as non-operating income. Expenses are elevated and deserve explaining.
Total operating, non-interest expenses increased 2.4 million, or 11.2% over the first quarter a year ago. And increased 2/1 million, or 9.8% over the fourth quarter of 2007. This quarters’ total expense growth increased over the fourth quarter is partially attributable of expense reduction of $545,000 of reserve for unfunded loan commitments recognized in the fourth quarter of 2007. The expense variances are detailed in the release, but let me give you an overview. The higher operating non-interest expenses over both the prior year and the linked fourth quarter were due to a variety of the same factors, primarily we have increase of about $1.5 million in the first quarter over the prior year in salary and benefit costs, which includes annual base salaries, higher employer payroll taxes and stock-option expense. Actually I would like to point out that our current employee count has remained essentially flat over the past few months, or past year. One item that we noted as an increase is commission expense. As we stated in the release, we changed the structure of our investment products sales-force at the beginning of the year. The sales representatives are now employees of Sun Financial Services, and last year they were employees of our independent third-party broker dealer. As such, their commissions are now paid by the company and no longer netted against our revenue. With salaries and benefits $600,000 on a 1.5 million dollar increase for an apples-to-apples comparison with Q1 and Q4 of 2007. So going forward you will continue to see the separate reporting of gross top-line and related expenses to this business. This area continues to do well and we would expect and hope to see continued increases in commissions, which means that the top-line revenue is growing. There were also higher First Quarter advertising costs compared to prior year and linked quarter. During the current quarter we launched a successful marketing campaign called “Kapow” which was aimed at commerce customers. This was extremely successful and brought in a large number of new accounts and increased our average balances per account. In addition, compared to First Quarter 2007 FDIC expense increased about $400,000. We also have experienced increases in problem loan costs compared to last year in linked quarter, which you would expect in this environment. We also had increases in professional fees and services which mainly relate to the normal first quarter activities related to share holder annual reporting and proxy. The most important point I would like to make here is that we don’t see an increasing expense trend developing. We are intensely focused on expense control and we fully expect to move through the year with that discipline and philosophy. On the credit side total non-performing assets were 30.7 million at March 31st for a 1.2% in total loans and real estate owned compared to 29.6 million Net charge off’s for the quarter were $1.2 Million, and the loan loss provision was $2.1 million or .05% and .08% of average loans outstanding respectively. Comparatively, the charge-offs and the provision respectively were .19% and .22 % for December 31st and .24% and .03% for March 31st a year ago. The allowance for loan losses to total loans is 1.9% compared to 1.08% December 31st and March 31st 2007. Coverage of non-performing loans is 102.60% compared to 95.77% at December 31st, and 177.14% at March 31st of 2007. So that is a quick overview. Most of that was obviously submitted in our press release. I would like to now turn it over to Bruce Dansberry for an update on our pipeline and our credit quality.