Sun Bancorp (SNBC)

[Enterprising Investor]

Sun Bancorp, Inc. Reports Third Quarter 2013 Results (10/23/13)

Third Quarter Highlights

* Non-Performing Loans declined $16.3 million during the quarter to $55.4 million

* NPL / Loans decreased to 2.55%; down from 3.32% in prior quarter and 5.23% in the third quarter of 2012

* Excess liquidity grew as interest bearing cash averaged $349.4 million or 10.7% of average assets

VINELAND, N.J., Oct. 23, 2013 /PRNewswire/ -- Sun Bancorp, Inc. (NASDAQ: SNBC) (the "Company") reported today a net loss available to common shareholders of $4.9 million, or a loss of $0.06 per diluted share, for the quarter ended September 30, 2013, compared to net income available to common shareholders of $678 thousand, or $0.01 per diluted share, and $1.2 million, or $0.01 per diluted share, for the second quarter of 2013 and the third quarter of 2012, respectively.


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

•Acceleration of regulatory remediation efforts and mortgage platform enhancements increased professional fees to $5.9 million which is up from $4.8 million in the prior quarter and $713 thousand in the third quarter of 2012

•Provision expense of $724 thousand recorded in the third quarter of 2013 as compared to negative provision of $1.9 million in the second quarter of 2013. The allowance for loan losses equaled $48.9 million at September 30, 2013, an increase of $847 thousand from June 30, 2013. The allowance for loan losses equaled 2.25% of gross loans held-for-investment and 88.19% of non-performing loans held-for-investment at September 30, 2013 as compared to 2.22% and 66.93%, respectively, at June 30, 2013 and 2.02% and 55.33%, respectively, at December 31, 2012.

•Total risk-based capital equaled 14.72% at September 30, 2013, a decrease of 8 basis points from 14.80% at June 30, 2013.

•Increases in interest rates caused a reduction in mortgage banking income. Net mortgage banking income fell $3.5 million compared to the prior quarter. Sun National Bank (the "Bank") reduced expenses early in the fourth quarter to adjust its fixed cost infrastructure to the new lower volume environment by reducing headcount by 19 positions. It is anticipated that these reductions will save approximately $1.3 million annually going forward.

•The Bank deployed approximately $151 million of cash into mortgage backed securities during the quarter but interest bearing cash still ended the quarter at $376.5 million.

"We believe the third quarter reflects the later stages of the Company's transition, as we continue to improve our asset quality profile and invest in risk management infrastructure enhancements," said Thomas X. Geisel, the Company's President and Chief Executive Officer. "We have focused on balancing the impacts of a rising rate environment and reducing risk on the balance sheet with deposit generation, product and service innovations and managed loan growth. As we finish out the year, we expect to maintain this focus and continue executing on our strategy."

Discussion of Results:

Balance Sheet

•Total assets were $3.24 billion at September 30, 2013, as compared to $3.21 billion at June 30, 2013 and $3.22 billion at December 31, 2012.

•Cash and cash equivalents increased $11.3 million and $284.0 million, respectively, to $453.6 million at September 30, 2013 as compared to June 30, 2013 and December 31, 2012, primarily due to an increase in interest earning bank balances as a result of commercial loan pay downs generated from workout strategies and the sales of jumbo residential mortgage loans out of the portfolio.

•Investment securities available for sale were $407.2 million as of September 30, 2013 compared to $343.1 million at June 30, 2013 and $443.2 million at December 31, 2012. The increase of $64.1 million from the prior quarter was due to the purchase of $151.1 million of mortgage backed securities offset by the sale of $71 million of U.S. Treasury securities.

•Gross loans held-for-investment were $2.17 billion at September 30, 2013, as compared to $2.16 billion at June 30, 2013 and $2.28 billion at December 31, 2012. Compared to December 31, 2012, loans held-for-investment decreased $106.6 million, primarily due to pay downs of commercial real estate loans and the sale of jumbo residential mortgages.

Net Interest Income and Margin

•Net interest income increased $1.2 million from the linked quarter to $23.0 million for the three months ended September 30, 2013. The net interest margin increased 14 basis points to 3.10% for the three months ended September 30, 2013 from 2.96% for the linked quarter, and decreased 31 basis points as compared to the third quarter of 2012. The average yield on interest-earning assets increased 11 basis points to 3.61% at September 30, 2013 from 3.50% at June 30, 2013. This increase was due primarily to an increase in commercial loan yields of 27 basis points as compared to the linked quarter resulting from an interest recovery of $1.2 million on the payoff of a nonperforming loan. The margin variance between the quarter ended September 30, 2013 and the comparable prior year period is primarily due to an increase of $328.4 million in average interest-earning bank balances. In addition, there was a 19 basis point decline in the yield on investment securities primarily due to a decrease in average balances resulting from sales of investment securities in 2013. Total average investment securities for the three months ended September 30, 2013 were $414.2 million compared to $534.8 million for the three months ended September 30, 2012.

•Excluding bulk sales, residential mortgage loans sold during the quarter totaled $127.4 million as compared to $161.6 million in the previous quarter and $119.7 million in the comparable prior year quarter. The locked sale pipeline has decreased to $27 million from $84 million at June 30, 2013. The increasing interest rate environment has caused a decrease in residential mortgage production. Despite this production decline, closed loans for the nine months ended September 30, 2013 totaled $595 million, a 39% increase from the same prior year period.

Non-Interest Income

•Non-interest income was $5.8 million for the quarter ended September 30, 2013, as compared to $10.2 million for the quarter ended June 30, 2013 and $9.5 million for the comparable prior year quarter. The decrease from the linked quarter was primarily attributable to the decrease in net mortgage banking revenue of $4.0 million resulting primarily from a decline in production volume due to rising rates as well as a $1.5 million gain recognized on the sales of jumbo residential mortgage loans in the second quarter. The results of operations for the three months ended September 30, 2013 also includes a negative derivative credit valuation adjustment recorded of $380 thousand compared to a positive derivative credit valuation adjustment of $6 thousand recorded during the three months ended June 30, 2013.

Non-Interest Expense

•Non-interest expense was $33.0 million in the third quarter of 2013, a decrease of $229 thousand compared to the linked quarter and an increase of $2.2 million over the comparable prior year quarter. In comparison to the linked quarter, decreases in real estate owned expense, net, commission expense and salaries and employee benefits of $1.0 million, $555 thousand and $363 thousand, respectively, were partially offset by an increase of $1.2 million in professional fees. Professional fees increased by $5.2 million from the same prior year quarter due to regulatory compliance and mortgage risk related consulting services and platform enhancements performed in the first nine months of 2013. This increase was partially offset by decreases in problem loan expense and salaries and employee benefits of $1.3 million and $1.0 million, respectively, compared to the third quarter in 2012.

Asset Quality

•During the third quarter of 2013, provision expense of $724 thousand was recorded, as compared to negative provision of $1.9 million in the linked quarter and expense of $1.9 million in the comparable prior year quarter. The allowance for loan losses was $48.9 million at September 30, 2013, or 2.25% of gross loans held-for-investment, as compared to 2.22% at June 30, 2013 and 2.02% at December 31, 2012. Recoveries were $1.8 million in the third quarter of 2013, as compared to $4.8 million of recoveries recorded in the linked quarter, $3.0 million of which was related to the payoff of one commercial real estate loan. Charge-offs recorded during the three months ended September 30, 2013 were $1.7 million, as compared to $2.0 million for the linked quarter and $5.0 million for the comparable prior year quarter.
•Total non-performing assets were $60.5 million, or 2.76% of total gross loans held-for-investment, loans held-for-sale and real estate owned at September 30, 2013, as compared to $78.5 million, or 3.51%, and $103.1 million, or 4.18%, respectively, at June 30, 2013 and December 31, 2012. Non-performing loans decreased $16.3 million over the linked quarter to $55.4 million at September 30, 2013 from $71.7 million at June 30, 2013 and decreased $40.2 million from $95.6 million at December 31, 2012. The decrease from the linked quarter was primarily due to the payoff of three nonperforming commercial loans totaling $15.5 million. For the year, ten nonperforming commercial loans totaling $33.9 million have been paid off as a result of the Company's workout strategies.

Capital

•Shareholders' equity totaled $257.1 million at September 30, 2013 compared to $261.7 million at June 30, 2013 and $262.6 million at December 31, 2012. The Company's tangible equity to tangible assets ratio was 6.81% at September 30, 2013, as compared to 7.00% at June 30, 2013 and 6.95% at December 31, 2012. At September 30, 2013, the Company's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 14.72%, 12.76%, and 9.13%, respectively. At September 30, 2013, the Bank's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 13.96%, 12.70%, and 9.09%, respectively.

The Company will hold its regularly scheduled conference call on Thursday October 24, 2013, at 11:00 a.m. (ET). Participants may listen to the live web cast 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 $3.24 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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