Sun Bancorp (SNBC)

[Enterprising Investor]

Sun Bancorp, Inc. Announces 3Q 2014 Earnings; Significant Progress on Restructuring Initiative; Improved Capital Ratios and Asset Quality; Management Team Enhancements (10/23/14)

MOUNT LAUREL, N.J., Oct. 22, 2014 /PRNewswire/ --

Third Quarter Highlights

•Significant progress in executing comprehensive strategic restructuring initiative.

•Successfully exited mortgage banking business, asset based lending and other high-risk loan relationships.

•Non-interest expense fell 27% to $24.1 million versus $32.9 million in the year ago quarter.

•Successful completion of $20 million common equity raise: Sun Bancorp, Inc. Tier 1 Leverage Ratio increased to 9.8%.

•Planned balance sheet reduction led to a $180 million decline in loans during the quarter.

•Average interest-earning cash balances grew by 67% during the quarter to $406 million.

•Continued improvement in asset quality as non-performing loans held-for-investment fell to $14.1 million, or 0.8% of loans, from $55.4 million, or 2.6% of loans, one year ago.

Sun Bancorp, Inc. (NASDAQ: SNBC) (the "Company"), the holding company for Sun National Bank (the "Bank"), reported today a net loss of $825 thousand, or a loss of $0.05 per diluted share, for the quarter ended September 30, 2014, compared to a net loss of $24.2 million, or a loss of $1.39 per diluted share, and a net loss of $4.9 million, or a loss of $0.28 per diluted share, for the second quarter of 2014 and the third quarter of 2013, respectively. On a pre-tax basis, the Company had a loss of $516 thousand for the quarter ended September 30, 2014, compared to a pre-tax loss of $23.9 million and a pre-tax loss of $4.9 million for the second quarter of 2014 and the third quarter of 2013, respectively.

"During the third quarter, we successfully executed on all facets of our restructuring plans, and are now witnessing the initial impact. While there remains much work ahead, we have made significant, transformational progress towards achieving the platform that will support our long-term success," said President & CEO Thomas M. O'Brien. "We have aggressively confronted both the substantial legacy barriers to performance, and at the same time have started to build a platform that can support meaningful revenue generation and growth."

Discussion of Results:

Balance Sheet

The Company continues to execute on its previously stated objective of shrinking the balance sheet. Overall in the third quarter, the Company reduced assets by $74.8 million. This included reductions of $179.7 million in gross loans held-for-investment, $21.8 million in loans held-for-sale and $29.0 million in investments, partially offset by an increase of $173.9 million in cash and cash equivalents. Deposit balances declined by $102.1 million in the third quarter of 2014 to $2.17 billion due to planned deposit run-off, primarily related to public funds balances.

"Although we have experienced a year over year reduction in overall deposit balances, this was planned as certain non-strategic, higher rate deposit segments were re-priced. We are continuing to emphasize building profitable business relationships with our commercial and consumer clients and we are pleased with the progress in this respect," said O'Brien.

The Company had $26.3 million in loans held-for-sale and $192.1 million in deposits held-for-sale at September 30, 2014 related to the pending sale of seven branches to Sturdy Savings Bank which is scheduled to close in the first quarter of 2015. Sturdy Savings Bank recently received all regulatory approval required for the acquisition of the branches and systems conversion planning has begun. A first quarter 2015 transaction close remains the target.

Net Interest Income and Margin

The net interest margin declined 16 basis points to 2.87% for the three months ended September 30, 2014 from 3.03% in the linked quarter as commercial loan balances continue to decline and the Company's cash balances remain elevated. Average interest-earning deposits grew to $405.8 million, up $162.8 million from the linked quarter. With the elevated level of loan payoffs, we saw an increase in prepayment penalties during the quarter which had a positive impact on net interest income. Prepayment penalties totaled approximately $691 thousand in the quarter which boosted the net interest margin by 11 basis points. These fees offset what would have been a larger decrease in net interest income for the quarter. We expect to see prepayment penalty revenue decline in the coming quarters as payoffs normalize.

"The plan to significantly de-risk the loan portfolio inevitably leads to building liquidity. It is a price that we fully anticipated and one that we believe is entirely prudent given the circumstances. While our liquidity levels are expected to remain elevated, we have begun to build a focused commercial lending platform through which we can begin to deploy our excess cash balances into quality commercial loans," said O'Brien. "With new commercial banking leadership, as well as enhanced lending teams based in Edison, N.J. and Manhattan, the Bank is preparing for future loan growth."

Non-Interest Income

Non-interest income was $4.7 million for the quarter ended September 30, 2014, as compared to $4.0 million for the quarter ended June 30, 2014 and $5.8 million for the comparable prior year quarter. The increase from the linked quarter of $718 thousand was primarily attributable to $1.2 million of negative derivative credit valuation adjustments in the prior quarter associated with commercial loan sales. Net mortgage banking income declined by $106 thousand from the second quarter of 2014 to $423 thousand for the third quarter of 2014 as the Company continues the orderly unwind of Sun Home Loans. The decrease in non-interest income from the prior year quarter is due primarily to a decline in net mortgage banking revenue. Mortgage banking income is anticipated to fall to zero in future periods. Going forward, a large percentage of non-interest income is expected to be derived from deposit fees and alternative investment fees which totaled $2.9 million in the third quarter of 2014.

Non-Interest Expense

Non-interest expense for the third quarter of 2014 was $24.1 million, a decrease of $9.3 million from the second quarter of 2014 and $8.8 million from the comparable prior year quarter. Salaries and benefits expense declined by $5.0 million from the second quarter due primarily to the severance charges recorded in the prior quarter as well as the overall impact of the previously announced workforce reduction. The remaining decline in non-interest expense from the linked quarter is primarily due to prior period restructuring costs, loan sale transaction fees and the overall beneficial impact of ongoing expense reduction efforts.

"As we conclude the restructuring and corrective actions by 2015, our quarterly non-interest expense is anticipated to be approximately $20 million," said O'Brien. "While we've seen the initial results of the restructuring initiatives including bulk loan sales, capital raise, branch count reductions, and the exit of healthcare, asset-based lending, and mortgage banking businesses, our expenses still remain elevated in the short term since we are supporting activities tied to the conclusion of our restructuring efforts, including the pending sale of our Cape May locations, which is anticipated to close in the first quarter of 2015, as well as higher compliance-related costs related to our regulatory agreement."

Asset Quality

Asset quality metrics remained strong with low levels of problem loans. The Bank's non-performing loans held-for-investment were essentially flat at $14.1 million at September 30, 2014 as compared to the prior quarter and non-performing loans held-for-investment to total loans were stable at 0.8%.

During the third quarter, the Company completed the sale of $15.8 million of problem consumer loans that were placed into held-for-sale at June 30, 2014 as part of the balance sheet restructuring. During the third quarter of 2014, the Company incurred an additional write down of $707 thousand for the remaining home equity loans in held-for-sale which have a balance of $2.8 million at September 30, 2014. The Company is actively marketing this small portfolio for sale.

There was no provision expense recorded during the third quarter of 2014 compared to $14.8 million of provision expense in the linked quarter. Net charge-offs were $1.9 million in the three months ended September 30, 2014 as compared to $20.2 million in the second quarter of 2014 and net recoveries of $123 thousand in the third quarter of 2013. The impact of the net charge-offs was directly offset by a decrease in required reserves as a result of the overall reduction in loan balances noted above. The allowance for loan losses was $26.5 million, or 1.58% of gross loans held-for-investment, at September 30, 2014, as compared to $28.4 million, or 1.53% of gross loans held-for-investment, at June 30 2014 and $35.5 million, or 1.66% of gross loans held-for-investment, at December 31, 2013.

Capital

In the third quarter, the Company announced the successful completion of a $20 million capital raise. At September 30, 2014, the capital ratios of the Company and the Bank continued to exceed the levels mandated by the Federal Reserve and the Office of the Comptroller of the Currency, respectively. At September 30, 2014, the Bank's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 16.2%, 14.9%, and 9.4%, respectively. At September 30, 2014, the Company's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 17.9%, 15.5%, and 9.8%, respectively. The Company's tangible equity to tangible assets ratio was 7.5% at September 30, 2014, as compared to 6.6% at June 30, 2014.

The Company will hold a conference call on Thursday, October 23, 2014 at 11:00 AM (EST) to discuss results and answer questions from analysts and investors. Participants may listen to or participate in the Company's earnings conference call via the following:

•Toll-free participant dial-in: 800-210-9006

•Conference ID: 2587628

About Sun Bancorp

Sun Bancorp, Inc. (NASDAQ: SNBC) is a $2.82 billion asset bank holding company headquartered in Mount Laurel, New Jersey. Its primary subsidiary is Sun National Bank, a full service commercial bank serving customers throughout 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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