Sun Bancorp (SNBC)

[Enterprising Investor]

SNBC Reports Third Quarter 2012 Results (10/24/12)


VINELAND, N.J., Oct. 24, 2012 /PRNewswire/ -- Sun Bancorp, Inc. (NASDAQ: SNBC) reported today net income available to common shareholders of $1.2 million, or $0.01 per diluted share, for the quarter ended September 30, 2012, compared to net income available to common shareholders of $2.7 million, or $0.03 per diluted share, for the third quarter of 2011.

The following are key items and events that occurred during the third quarter of 2012:

Provision expense totaled $1.9 million as compared to $510 thousand in the second quarter of 2012. The allowance for loan losses equaled $49.0 million at quarter end, a decrease of $2.4 million from June 30, 2012, and an increase of $7.3 million from December 31, 2011. The allowance for loan losses equaled 2.12% of gross loans held for investment and 40.6% of non-performing loans as compared to 2.29% and 49.4% and 1.82% and 38.7%, respectively, at June 30, 2012 and December 31, 2011.

Commercial loan production remained strong at $113 million during the third quarter versus $65 million in the linked quarter as the Company continues to originate strong credits for the portfolio.
The net interest margin equaled 3.41% versus 3.53% in the linked quarter. The current quarter margin was negatively impacted by $507 thousand of interest reversals as well as a decline in commercial loan yields. The interest reversals were due primarily to approximately $24 million in loan balances for two relationships which were moved to non-accrual status. Although these two relationships were current at September 30, 2012 and are well secured, the Company elected to designate these loans as non-accrual because certain agreed upon financial metrics were not met. Excluding these two credits, the Company continued to experience reductions in the portfolio resulting from its ongoing efforts to manage the workout portfolio.

Non-interest income increased $2.1 million to $9.6 million as compared to the linked quarter primarily due to an increase of $2.3 million in gains on the sale of mortgage loans. The Company's residential mortgage platform has continued its strong growth as $240 million in residential mortgage loans were recorded and $120 million sold during the third quarter as compared to $139 million and $86 million, respectively, in the linked quarter.

Total risk-based capital was 14.30% at September 30, 2012, well above the regulatory required level.

"Our parallel efforts to strengthen and grow the company continued through the third quarter of this year," said Thomas X. Geisel, Sun's President and Chief Executive Officer. "We are encouraged by the growth of our residential mortgage platform, and have demonstrated our competitive advantage with strong commercial loan production and a robust pipeline despite the difficult economic environment. We will continue to focus our efforts on asset resolution, business growth and loan origination as we advance our corporate strategy for the balance of 2012."

Discussion of Results:

Balance Sheet
Total assets were $3.18 billion at September 30, 2012 and December 31, 2011 and $3.24 billion at September 30, 2011.
Gross loans held-for-investment were $2.31 billion at September 30, 2012, as compared to $2.29 billion at December 31, 2011 and $2.30 billion at September 30, 2011. This increase is the result of growth in the residential mortgage portfolio.
Deposits increased by $38.8 million from the linked quarter to $2.65 billion at September 30, 2012. The increase was due to seasonal public funds activity.
Borrowings increased by $27.7 million from the linked quarter in order to fund the residential loan growth during the period.

Net Interest Income and Margin
On a tax equivalent basis, net interest income decreased $552 thousand over the linked quarter to $24.5 million. The net interest margin decreased 12 basis points to 3.41% from 3.53% for the linked quarter, and 20 basis points as compared to the same prior year quarter. The average yield on interest-earning assets decreased 17 basis points over the linked quarter from 4.16% to 3.99%. This decrease is due to $547 thousand of interest reversals, primarily related to two credits, recorded during the quarter as well as declining commercial loan yields resulting from legacy loans maturing and/or re-setting at lower rates. The average cost of interest-bearing liabilities decreased seven basis points to 0.73% as interest-bearing deposit costs declined by four basis points and trust preferred debt rates re-set at lower levels. The margin variance from the prior year is due to the continuing pressures in the current interest rate environment.

Non-Interest Income
Non-interest income was $9.6 million for the quarter ended September 30, 2012, an increase of $2.1 million from the linked quarter of $7.5 million and $3.8 million above the comparable prior year quarter of $5.8 million. The increase from the linked quarter was primarily attributable to an increase of $2.3 million in gains on the sale of mortgage loans. Included in this increase is a $1.5 million positive mark-to-market adjustment as the Company elected the fair value option on its loans held-for-sale, effective July 1, 2012. The Company also recognized $630 thousand of net gains on forward commitments and interest rate lock commitments within its residential mortgage portfolio. These increases were partially offset by a decrease of $430 thousand in gains on the sale of investment securities from the prior quarter. In addition, there was a decrease of $238 thousand from the linked quarter in income from investment services. The increase from the prior year period is due to an increase of $3.5 million in mortgage gains and a prior year derivative credit valuation loss of $309 thousand.

Non-Interest Expense
The Company incurred $30.9 million of non-interest expense in the third quarter of 2012, an increase of $273 thousand over the linked quarter and an increase of $3.9 million from the comparable prior year quarter. Problem loan costs increased by $880 thousand due to $1.3 million in real estate tax expenses recognized on one non-performing relationship. Excluding this item, the normalized run rate for problem loan costs continues to decline. Salaries and benefits increased $372 thousand due to increased mortgage production. These items were mostly offset by a $544 thousand decline in advertising expense due to prior period Boomerang campaign expenses as well as a $455 thousand decrease in mortgage recourse expense. The increase in non-interest expense from the prior year period is due primarily to additional salaries and benefits expense associated with the mortgage expansion in 2012.

Asset Quality
The provision for loan losses for the third quarter was $1.9 million, as compared to $510 thousand in the linked quarter and $2.3 million in the comparable prior year quarter. The allowance for loan losses was $49.0 million at September 30, 2012, or 2.12% of gross loans held-for-investment, as compared to the allowance for loan losses to gross loans held-for-investment of 1.82% at December 31, 2011 and 2.39% at September 30, 2011. Net charge-offs recorded in the current quarter were $4.2 million, or 0.18% of average loans, as compared to $1.2 million, or 0.06% of average loans for the linked quarter and $5.8 million, or 0.25% of average loans outstanding for the comparable prior year quarter.
Total non-performing assets were $126.4 million, or 5.32% of total gross loans held-for-investment, loans held-for-sale and real estate owned at September 30, 2012, as compared to $110.1 million, or 4.84% and $140.8 million, or 6.04%, respectively, at June 30, 2012 and September 30, 2011. Non-performing loans increased to $120.8 million at September 30, 2012 as compared to $104.0 million at June 30, 2012. This increase is due primarily to the aforementioned transfer of two credit relationships in the aggregate amount of $24 million into non-performing status at September 30, 2012; partially offset by $6.9 million in net paydowns out of the category.

Capital
Stockholders' equity totaled $287.5 million at September 30, 2012 compared to $309.1 million at December 31, 2011. The Company's tangible equity to tangible assets ratio was 7.81% at September 30, 2012, as compared to 8.41% at December 31, 2011. At September 30, 2012, the Company's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 14.30%, 12.73%, and 10.43%, respectively. At September 30, 2012, Sun National Bank's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 13.63%, 12.37%, and 10.12%, respectively.

The Company will hold its regularly scheduled conference call on Thursday, October 25, 2012, at 11:00 a.m. (ET). Participants may listen to the live webcast via the "Investor Relations" section of the Sun Bancorp, Inc. website at www.sunnb.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 Web site for two weeks following the call.

Sun Bancorp, Inc. (Nasdaq: SNBC) is a $3.18 billion asset bank holding company headquartered in Vineland, New Jersey, 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 more than 60 locations in New Jersey. Sun National Bank was named one of Forbes magazine's "Most Trustworthy Companies" for five consecutive years. The 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.sunnb.com.

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