Sun Bancorp (SNBC)

[Enterprising Investor]

Sun Bancorp, Inc. Reports First Quarter 2014 Results (4/23/14)

First Quarter Highlights

•Announced expected hiring of Thomas O'Brien as CEO, subject to regulatory non-objection

•Continued progress on expense control as non-interest expense declined by $4.6 million sequentially to $27.9 million

•Interest bearing cash averaged $220.1 million or 7.2% of average assets

•Tier 1 Leverage Ratio increased to 9.4% and the total risk based ratio increased to 14.9%

Sun Bancorp, Inc. (NASDAQ: SNBC) (the "Company") reported today a net loss available to common shareholders of $1.9 million, or a loss of $0.02 per diluted share, for the quarter ended March 31, 2014, compared to a net loss of $8.2 million, or a loss of $0.09 per diluted share, and net income of $2.5 million, or $0.03 per diluted share, for the fourth quarter of 2013 and the first quarter of 2013, respectively.

The following are key items and events that occurred during the first quarter of 2014:

•No provision for loan loss was recorded in the first quarter of 2014 compared to provision expense of $2.1 million in the fourth quarter of 2013. The allowance for loan losses equaled $33.8 million at March 31, 2014, a decrease of $1.8 million from December 31, 2013. The allowance for loan losses equaled 1.62% of gross loans held-for-investment and 90.2% of non-performing loans at March 31, 2014 as compared to 1.66% and 93.6%, respectively, at December 31, 2013.

•Occupancy expense totaled $4.3 million, an increase of $860 thousand from the prior quarter, as winter weather related expenses totaled $1.0 million in the quarter ended March 31, 2014.

•Professional fees totaled $1.5 million in the first quarter of 2014 compared to $4.9 million in the prior quarter.

•Net interest margin was 3.07% in the first quarter of 2014 compared to 2.99% in the fourth quarter of 2013.

"We made good progress in the first quarter on expense reduction efforts, executing on our regulatory remediation efforts and enhancing the capital ratios of the Bank," stated Sid Brown, Chairman, interim President and CEO. "We are disappointed to report a loss but believe that we are taking the necessary steps to get the Bank back on the right path. We are all looking forward to working with Tom O'Brien on returning the Bank to sustained profitability. Tom O'Brien started working on April 2nd as a consultant to the Board of Directors and is expected to be appointed as CEO, subject to regulatory non-objection to his assumption of the positions of President and CEO."

Discussion of Results:

Balance Sheet

•Total assets were $3.04 billion at March 31, 2014, as compared to $3.09 billion at December 31, 2013.

•Cash and cash equivalents were $282.1 million at March 31, 2014, as compared to $267.8 million at December 31, 2013. The increase of $14.3 million in the first quarter of 2014 as compared to the prior quarter was primarily due to declining loan balances, including those held-for-sale, partially offset by a decrease in deposits.

•Gross loans held-for-investment were $2.08 billion at March 31, 2014, as compared to $2.14 billion at December 31, 2013, a decline of $53.6 million which was primarily due to loan paydowns.

•Deposits were $2.57 billion at March 31, 2014, as compared to $2.62 billion at December 31, 2013. The decrease of $48.1 million in the first quarter of 2014 as compared to the prior quarter was primarily due to decreases in public funds deposits.

Net Interest Income and Margin

•Net interest income decreased $543 thousand from the linked quarter to $21.4 million for the three months ended March 31, 2014. The net interest margin increased eight basis points to 3.07% for the three months ended March 31, 2014 from 2.99% for the linked quarter, and decreased nine basis points as compared to the first quarter of 2013. The average yield on interest-earning assets increased seven basis points to 3.54% for the three months ended March 31, 2014 from 3.47% for the three months ended December 31, 2013. The decrease between the quarter ended March 31, 2014 and the comparable prior year period is primarily due to a decline of $184.1 million in average commercial loans and an increase of $40.9 million in average interest earning bank balances. The increase from the linked quarter is due primarily to a decrease of $122.3 million in average interest bearing cash balances.

Non-Interest Income

•Non-interest income was $4.9 million for the quarter ended March 31, 2014, as compared to $4.7 million for the quarter ended December 31, 2013 and $10.9 million for the comparable prior year quarter. The increase from the linked quarter was primarily attributable to a decrease of $672 thousand in negative derivative credit valuation adjustments from the prior quarter partially offset by a decrease in net mortgage banking revenue of $365 thousand. The decrease in the negative derivative credit valuation adjustments from the prior quarter was primarily due to swap termination fees of $1.0 million recorded in the fourth quarter of 2013, compared to no swap termination fees recorded in the first quarter of 2014. Mortgage banking revenue, net, decreased from $1.0 million for the quarter ended December 31, 2013 to $635 thousand for the quarter ended March 31, 2014, which was due to lower production volume in a higher interest rate environment.

Non-Interest Expense

•Non-interest expense was $27.9 million in the first quarter of 2014, a decrease of $4.6 million compared to the linked quarter and a decrease of $3.4 million from the comparable prior year quarter. In comparison to the linked quarter, decreases in professional fees, other real estate owned, advertising, commission expense, and salaries and employee benefits of $3.4 million, $385 thousand, $317 thousand, $201 thousand, and $186 thousand, respectively, were partially offset by an increase of $860 thousand in occupancy expense. Professional fees declined as the Company reduced its reliance on regulatory compliance consulting services. Commission expense has decreased due to reduced mortgage production volumes. Occupancy expense for the first quarter includes $1.0 million of snow removal expenses.

Asset Quality

•During the first quarter of 2014, there was no provision expense recorded, as compared to provision expense of $2.1 million in the linked quarter and $171 thousand in the comparable prior year quarter. The allowance for loan losses was $33.8 million, or 1.62% of gross loans held-for-investment, at March 31, 2014, as compared to $35.5 million, or 1.66% of gross loans held-for-investment at December 31, 2013. Net charge-offs were $1.8 million in the first quarter of 2014, as compared to net charge-offs in the linked quarter of $15.5 million and net recoveries in the comparable prior year quarter of $1.1 million.

•Total non-performing assets were $40.2 million, or 1.91% of total gross loans held-for-investment, loans held-for-sale and real estate owned at March 31, 2014, as compared to $40.5 million, or 1.87%, at December 31, 2013. Non-performing loans decreased $531 thousand to $37.4 million at March 31, 2014 from $38.0 million at December 31, 2013.

Capital

•Shareholders' equity totaled $248.9 million at March 31, 2014 compared to $245.3 million at December 31, 2013. The Company's tangible equity to tangible assets ratio was 7.01% at March 31, 2014, as compared to 6.77% at December 31, 2013. At March 31, 2014, the Company's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 14.87%, 12.75%, and 9.40%, respectively. At March 31, 2014, Sun National Bank's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 14.08%, 12.83%, and 9.45%, respectively.

The Company will hold its regularly scheduled conference call on Thursday April 24, 2014, at 11:00 a.m. (ET). Participants may listen to the live webcast through the Company's website at www.sunnationalbank.com. Participants are advised to log on 10 minutes ahead of the scheduled start of the call. An Internet-based replay will be available at the Company's website for two weeks following the call.

Sun Bancorp, Inc. (NASDAQ: SNBC) is a $3.04 billion asset bank holding company with its executive offices located in Mt. Laurel, New Jersey. Its primary subsidiary is Sun National Bank, a full service commercial bank serving customers through 50-plus locations in New Jersey. Sun National Bank is an Equal Housing Lender and its deposits are insured up to the legal maximum by the Federal Deposit Insurance Corporation (FDIC). For more information about Sun National Bank and Sun Bancorp, Inc., visit www.sunnationalbank.com.

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