Sun Bancorp (SNBC)

[Enterprising Investor]

Sun Bancorp, Inc. Reports Second Quarter 2013 Results

Second Quarter Highlights

* Profitable second quarter with net income of $678 thousand and $3.1 million year-to-date

* Continued progress in methodical reductions in problem loans with 41% reduction in non-performing loans in the past three quarters

* Continued workout success resulted in $2.8 million of net recoveries for the second quarter and $3.8 million year-to-date

* Net mortgage banking revenue totaled $5.6 million in the second quarter compared to $3.4 million in the linked quarter and $1.3 million in the comparable prior year quarter

* Well positioned for rising rates with an asset sensitive balance sheet and over 10% of assets in cash

VINELAND, N.J., July 24, 2013 /PRNewswire/ -- Sun Bancorp, Inc. (NASDAQ: SNBC) reported today net income available to common shareholders of $678 thousand, or $0.01 per diluted share, for the quarter ended June 30, 2013, compared to net income available to common shareholders of $1.3 million, or $0.02 per diluted share, for the second quarter of 2012.

The following are key items and events that occurred during the second quarter of 2013:

•Negative provision of $1.9 million recorded in the second quarter as compared to expense of $171 thousand in the first quarter of 2013. The allowance for loan loss equaled $48.0 million at June 30, 2013, an increase of $884 thousand from March 31, 2013. The allowance for loan losses equaled 2.22% of gross loans held-for-investment and 66.93% of non-performing loans held-for-investment at June 30, 2013 as compared to 2.09% and 63.87%, respectively, at March 31, 2013 and 2.02% and 55.33%, respectively, at December 31, 2012.

•Total risk-based capital equaled 14.80% at June 30, 2013, an increase of 59 basis points from 14.21% at March 31, 2013.

•Sold $46.0 million of jumbo residential mortgage loans from the loan portfolio and signed a definitive agreement to sell another $27.3 million in the third quarter of 2013.

"This quarter, we continued to focus on improvement of our asset quality profile, positioning the balance sheet for a rising rate environment, and plans to deploy the excess liquidity we created in this process into stronger earning assets," said Thomas X. Geisel, Sun's President and Chief Executive Officer. "For the remainder of the year, we will sustain ongoing efforts to advance our corporate strategy, achieve opportunistic growth, further reduce risk and provide unsurpassed service to our customers."

Discussion of Results:

Balance Sheet

•Total assets were $3.21 billion at June 30, 2013, as compared to $3.22 billion at March 31, 2013 and December 31, 2012.

•Cash and cash equivalents increased $130.6 million to $442.2 million at June 30, 2013 as compared to the linked quarter, primarily due to an increase in interest earning bank balances as a result of commercial loan paydowns generated from workout strategies and the aforementioned sale of jumbo residential mortgage loans.

•Gross loans held-for-investment were $2.16 billion at June 30, 2013, as compared to $2.25 billion at March 31, 2013 and $2.28 billion at December 31, 2012. Compared to the linked quarter, loans held-for-investment decreased $92.8 million. This was primarily driven by a reduction of $60.9 million in commercial and industrial loans over that period due to the aforementioned paydowns. Also, residential mortgage loans declined by $23.7 million as the sale of $46.0 million of jumbo residential mortgage loans and the transfer of $27.3 million of jumbo residential mortgage loans to loans held-for-sale at June 30, 2013 were partially offset by new originations.

Net Interest Income and Margin

•Net interest income decreased $1.3 million from the linked quarter to $21.8 million for the three months ended June 30, 2013. The net interest margin decreased 20 basis points to 2.96% for the three months ended June 30, 2013 from 3.16% for the linked quarter, and decreased 57 basis points as compared to the same quarter in 2012. The average yield on interest-earning assets decreased 20 basis points to 3.50% for the quarter ended June 30, 2013 from 3.70% for the linked quarter. This decrease was due to a corresponding decline in loan yields and an increase in cash during the current quarter. Sun Bancorp, Inc. had an average cash balance of $378.3 million in the second quarter of 2013, compared to an average cash balance of $252.0 million in the linked quarter. Commercial loan yields declined two basis points in the second quarter as compared to the linked quarter due to lower rates on new originations and residential real estate loan yields declined 47 basis points over the same period due to declines in rates and volume. The margin variance between the quarter ended June 30, 2013 and the comparable prior year period is due to similar factors as noted above.

•Mortgage loans sold during the quarter totaled $207.6 million as compared to $243.2 million in the previous quarter and $86 million in the comparable prior year quarter. Of the sales during the second quarter, $46.0 million were long term fixed rate and long duration adjustable rate jumbo mortgage loans from the portfolio, which Sun National Bank sold to reduce interest rate risk. Combining these sales with the sale of $51.5 million of 30 year fixed rate jumbo loans and the sale of $124.8 million of fixed rate investments in the first quarter of 2013, Sun National Bank has sold approximately $222 million of assets in the first six months of the year, with another $27.3 million of fixed rate jumbo residential mortgage loans pending sale in the third quarter. "Interest rates have been abnormally low for an extended period of time and we believe it is prudent to reduce long duration exposures at this time," stated Tom Brugger, Chief Financial Officer. "We will continue to evaluate opportunities to manage our balance sheet to optimize our net interest margin in the coming quarters with a focus on building a quality earning asset portfolio which generates an increasing net interest margin, growing net interest income and low loan losses."

Non-Interest Income

•Non-interest income was $10.2 million for the quarter ended June 30, 2013, compared to $10.9 million for the quarter ended March 31, 2013 and $7.0 million for the comparable prior year quarter. The decrease from the linked quarter was primarily attributable to a loss on the sale of available for sale securities of $47 thousand in the second quarter as compared to a gain of $3.5 million in the linked quarter. This was partially offset by an increase in net mortgage banking revenue of $2.2 million resulting primarily from the $1.5 million gain recognized as a result of the aforementioned sales of jumbo residential mortgage loans. Also, the linked quarter value included a negative derivative credit valuation adjustment of $504 thousand compared to a positive adjustment of $6 thousand in the second quarter.

Non-Interest Expense

•Sun Bancorp, Inc. incurred $33.2 million of non-interest expense in the second quarter of 2013, an increase of $1.9 million over the linked quarter and an increase of $3.2 million over the comparable prior year quarter. Professional fees and real estate owned expenses increased by $2.1 million and $1.0 million, respectively, from the linked quarter. Professional fees have increased due to additional compliance related consulting expenses and real estate owned expenses increased due to the loss of $470 thousand on the sale of eight properties, including three former bank branches, and the write down of $322 thousand on two properties. These increases were partially offset by a decrease in salaries and employee benefits of $1.3 million.

Asset Quality

•During the second quarter, negative provision of $1.9 million was recorded, as compared to expense of $171 thousand in the linked quarter and $510 thousand in the comparable prior year quarter. The allowance for loan losses was $48.0 million at June 30, 2013, or 2.22% of gross loans held-for-investment, as compared to the ratio of the allowance for loan losses to gross loans held-for-investment of 2.09% at March 31, 2013 and 2.02% at December 31, 2012. Recoveries were $4.8 million in the second quarter of 2013, as compared to $4.6 million of recoveries recorded in the linked quarter. Recoveries in the second quarter were primarily driven by the payoff of one commercial real estate loan which resulted in a recovery of $3.0 million. Charge-offs recorded in the second quarter were $2.0 million, as compared to $3.5 million for the linked quarter and $1.8 million for the comparable prior year quarter.

•Total non-performing assets were $78.5 million, or 3.51% of total gross loans held-for-investment, loans held-for-sale and real estate owned at June 30, 2013, as compared to $82.3 million, or 3.57%, and $103.1 million, or 4.18%, respectively, at March 31, 2013 and December 31, 2012. Non-performing loans decreased $2.1 million over the linked quarter to $71.7 million at June 30, 2013 from $73.8 million at March 31, 2013 and decreased $23.9 million from $95.6 million at December 31, 2012. The decrease from the linked quarter was primarily due to a large payoff of a nonperforming loan, which also resulted in the $3.0 million recovery noted above.

Capital

•Shareholders' equity totaled $261.7 million at June 30, 2013 compared to $264.3 million at March 31, 2013 and $262.6 million at December 31, 2012. Sun Bancorp, Inc.'s tangible equity to tangible assets ratio was 7.00% at June 30, 2013, as compared to 7.02% at March 31, 2013 and 6.95% at December 31, 2012. At June 30, 2013, Sun Bancorp, Inc.'s total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 14.80%, 12.91%, and 9.43%, respectively. At June 30, 2013, Sun National Bank's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 14.05%, 12.79%, and 9.33%, respectively.

Sun Bancorp, Inc. will hold its regularly scheduled conference call on Thursday, July 25, 2013, at 11:00 a.m. (ET). Participants may listen to the live web cast through the Sun Bancorp, Inc. 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 Sun Bancorp, Inc. website for two weeks following the call.

Sun Bancorp, Inc. (NASDAQ: SNBC) is a $3.21 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 50-plus locations in New Jersey. Sun National Bank has been named one of Forbes Magazine's "Most Trustworthy Companies" for five years running. 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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