Sun Bancorp, Inc. Announces 2Q 2014 Earnings; One-time Charges for Comprehensive Restructuring Costs; Further Risk Reduction and Capital Improvement

MOUNT LAUREL, N.J., July 31, 2014 /PRNewswire/ --

Second Quarter Highlights

• Announced comprehensive strategic restructuring to improve financial performance, reduce costs, risk and operating complexity.
• One-time charges of approximately $20 million related to restructuring initiatives.
• $71.1 million of problem commercial loans sold and $24.4 million of problem consumer loans moved to held-for-sale at lower of cost or market.
• Sale of problem loans results in non-performing loans ("NPLs") held-for-investment declining by 62% to $14.1 million; NPLs held-for-investment to total loans held-for-investment fell from 1.8% to 0.8%. Classified assets fell from $105.6 million to $38.2 million, a reduction of 64%.
• Negotiated and announced the proposed sale of seven Cape May County area branch offices and the consolidation of four more locations; $28.5 million of loans and $160.8 million of deposits were transferred to held-for-sale. Upon settlement after all accounts are identified for sale, the transaction is anticipated to include approximately $65 million of loans and $180 million of deposits.

Sun Bancorp, Inc. (NASDAQ: SNBC) (the "Company") reported today a net loss available to common shareholders of $24.2 million, or a loss of $0.28 per diluted share, for the quarter ended June 30, 2014, compared to a net loss of $1.9 million, or a loss of $0.02 per diluted share, and net income of $678 thousand, or $0.01 per diluted share, for the first quarter of 2014 and the second quarter of 2013, respectively. The following are key items and events that occurred during the second quarter of 2014:

• Sale of $71.1 million of criticized commercial loans to third-party investors resulting in a net loss of $13.0 million inclusive of swap termination costs and transaction costs.
• Provision for loan losses of $14.8 million was recorded in the second quarter of 2014, primarily due to the commercial loan sales, compared to no provision expense in the first quarter of 2014. The allowance for loan losses equaled $28.4 million at June 30, 2014, a decrease of $5.4 million and $7.1 million from March 31, 2014 and December 31, 2013, respectively. The allowance for loan losses equaled 1.53% of gross loans held-for-investment and 202.04% of non-performing loans held-for-investment at June 30, 2014 as compared to 1.62% and 90.18%, respectively, at March 31, 2014 and 1.66% and 93.6%, respectively, at December 31, 2013.
• Non-performing and higher risk consumer loans totaling $24.4 million were transferred to held-for-sale at lower of cost or market, requiring charge-offs of $4.6 million. The remaining balance of $19.8 million includes $4.0 million of non-performing loans.
• Net interest margin was 3.03% in the second quarter of 2014 compared to 3.07% in the first quarter of 2014 and 2.96% in the second quarter of 2013.

On June 30, 2014, the Board of Directors of the Company and Sun National Bank (the "Bank") approved a comprehensive restructuring plan, which includes, among other things, the Bank exiting Sun Home Loans, its retail consumer mortgage banking origination business, and exiting its healthcare and asset-based lending businesses; the proposed sale of seven branch offices in the Cape May County area;  significant classified asset  and operating expense reductions and  declaration of a 1-for-5 reverse stock split.  The Company also announced the consolidation of four additional branch offices, which are expected to be completed by the fourth quarter of 2014.

Below is a summary of significant balance sheet activity that either occurred or was authorized by the Company during the second quarter of 2014:

*  Dollars in millions

Below is a summary of significant one-time charges during the second quarter of 2014:

*  Dollars in millions

** The payment of severance and other related benefits is subject to prior regulatory approval.

"On July 3rd, 2014, we announced a series of decisive remedial and restructuring initiatives designed  to address the Company's long standing obstacles to earnings, regulatory compliance and overall performance excellence," said President and CEO Thomas M. O'Brien.  "We are forcefully confronting the legacy challenges here with a strong sense of urgency.  The recently announced initiatives, while unfortunately difficult for many stakeholders, have established the foundation needed to bring our efficiency, credit and risk metrics more closely in line with those of our peers.  We are now embarking on the execution of these plans in an effort to achieve goals that are so important to our long-term success.  Notwithstanding the costs of the restructuring initiatives, all of our capital ratios and liquidity positions remain strong.  While there is a lot of work to do in the execution of the plan, members of management and the Board are keenly focused on its successful implementation." 

Discussion of Results:

Balance Sheet

The Bank has been reducing the size of its balance sheet over the past few quarters as it focuses internally on risk reduction and capital ratio improvement.  During the quarter, total assets fell $143.8 million due primarily to the commercial problem loan sales of $71.1 million and continued runoff in the commercial loan portfolio.  Total assets were $2.89 billion at June 30, 2014, as compared to $3.04 billion at March 31, 2014 and $3.09 billion at December 31, 2013.

The Bank continues to maintain a high level of liquidity, which enabled it to reduce the size of its balance sheet during the quarter.  Even with the reduction in total assets, cash and cash equivalents rose to $330.4 million at June 30, 2014, as compared to $282.1 million at March 31, 2014 and $267.8 million at December 31, 2013. The increase of $48.3 million in the second quarter of 2014 as compared to the prior quarter was primarily due to the aforementioned commercial loan sales and commercial loan pay-downs, partially offset by a decrease in deposits as public funds balances declined.

Gross loans held-for-investment totaled $1.86 billion at June 30, 2014, as compared to $2.08 billion at March 31, 2014 and $2.14 billion at December 31, 2013.  The significant decline is due to the aforementioned commercial loan sales, the sale of $46 million of portfolio jumbo residential mortgage loans, the transfer of consumer loans to held-for-sale and commercial loan pay-downs.  The Bank is proactively engaging with its commercial borrowers to build on its existing relationships with top borrowers in industry segments where we believe we can excel.  As the Bank builds deeper relationships with its best borrowers, acceptable runoff is occurring in segments where we choose not to compete or lower our credit standards.  This runoff is expected to continue over the next few quarters.

Given the high level of liquidity throughout 2013 and 2014, the Bank has intensified its efforts to return to profitability and build its deposit portfolio mix.  The Bank re-priced interest rates on certain deposit accounts in order to more accurately reflect the current sustained low level of interest rates.  The Bank also experienced planned maturity run-off in brokered CDs and other jumbo CDs.  These efforts caused some attrition in deposit balances in the past few quarters but the overall mix and profitability has substantially improved.  Deposits were $2.27 billion at June 30, 2014, as compared to $2.57 billion at March 31, 2014 and $2.62 billion at December 31, 2013. In addition to reclassifying $160.8 million of deposits to held-for-sale for the planned branch sale, the Bank has experienced a decline in public funds deposit balances. The total quarterly cost of deposits fell by three basis points to 0.35% in the past two quarters and the non-interest demand deposit account ("DDA") mix has risen from 21.4% to 23.7%.

Net Interest Income and Margin

Net interest income decreased $780 thousand from the linked quarter to $20.6 million for the three months ended June 30, 2014. The net interest margin decreased four basis points to 3.03% for the three months ended June 30, 2014, from 3.07% for the linked quarter. As compared to the linked quarter, the average yield on loans was flat at 4.11%, while total interest-earning assets decreased five basis points to 3.49% for the three months ended June 30, 2014. The decrease from the linked quarter is due primarily to an increase in the mix of interest earning cash balances as well as a five basis point decline in yields on investment securities. 

Non-Interest Income

Non-interest income was $4.0 million for the quarter ended June 30, 2014, as compared to $4.9 million for the quarter ended March 31, 2014. The decrease from the linked quarter of $971 thousand was primarily attributable to a $1.1 million increase in the negative derivative credit valuation adjustments from the prior quarter. This change was primarily due to swap termination fees of $1.4 million recorded in the second quarter of 2014, associated with the commercial loan sales. 

Service charges on deposit accounts and investment products income bounced back in the second quarter after seasonal and weather-related weakness in these categories in the first quarter.  These fees rose to $2.9 million in the quarter, which is an increase of 5.8% sequentially.  Net mortgage banking revenue fell $106 thousand to $529 thousand for the quarter ended June 30, 2014, as originations and closings remained weak.  This revenue will be eliminated over time as the Company is closing its mortgage banking operations. 

Non-Interest Expense

Non-interest expense was $33.7 million in the second quarter of 2014, an increase of $5.8 million compared to the linked quarter. Restructuring-related expenses in the quarter were $3.3 million, including $2.7 million of severance and benefit costs, $380 thousand of fixed asset disposal costs and $285 thousand of lease exit costs.  In comparison to the linked quarter, increases in salaries and employee benefits, equipment expense, professional fees, other real estate owned, and other expense of $3.1 million, $607 thousand, $867 thousand, $558 thousand, and $1.6 million, respectively, were partially offset by a decrease of $714 thousand in occupancy expense.  Salaries and employee benefits increased primarily as a result of the accrual of severance and benefit costs associated with the Company's restructuring noted above.  Other expense increased $1.6 million due to loan sale-related transaction costs.  Occupancy expense decreased during the quarter ended June 30, 2014 after elevated spending in the first quarter due to unusual winter weather related costs, which was partially offset by restructuring-related lease termination costs. 

Asset Quality

Asset quality improved significantly during the quarter due to the sale of $71.1 million of problem commercial loans, the movement of $24.4 million of problem consumer loans to held-for-sale at lower of cost or market and continued workout success.  Total non-performing assets fell 52% and were $19.5 million, or 0.67% of total assets, at June 30, 2014, as compared to $40.2 million, or 1.32% of total assets, at March 31, 2014 and $40.5 million, or 1.31% of total assets, at December 31, 2013. Non-performing loans held-for-investment decreased $23.4 million to $14.1 million at June 30, 2014, from $37.4 million at March 31, 2014, due primarily to the aforementioned problem loan sales.

During the second quarter of 2014, there was $14.8 million of provision expense recorded, as compared to no provision expense in the linked quarter.  The allowance for loan losses was $28.4 million, or 1.53% of gross loans held-for-investment, at June 30, 2014, as compared to $33.8 million, or 1.62% of gross loans held-for-investment, at March 31, 2014 and $35.5 million, or 1.66% of gross loans held-for-investment, at December 31, 2013.  Net charge-offs were $20.2 million in the second quarter of 2014, as compared to net charge-offs in the linked quarter of $1.8 million and net recoveries of $2.8 million in the second quarter of 2013.  Second quarter gross charge-offs related to loan sale activity totaled $19.0 million.  "The level of non-accrual and classified loan relationships remained stubbornly high as we ended the first quarter. The result of these loan sales is better clarity surrounding our credit risk profile," stated Mr. O'Brien.  "From an asset quality perspective, we can now begin to function in a more traditional operating environment."

Capital

Shareholders' equity totaled $227.7 million at June 30, 2014, compared to $248.9 million at March 31, 2014 and $245.3 million at December 31, 2013. At June 30, 2014, the Bank's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 14.5%, 13.2%, and 9.1%, respectively.  The Company's tangible equity to tangible assets ratio was 6.6% at June 30, 2014, as compared to 7.0% at March 31, 2014 and 6.8% at December 31, 2013.  At June 30, 2014, the Company's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 15.0%, 12.4%, and 8.6%, respectively. 

The Company will hold its regularly scheduled conference call on Thursday, July 31, 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 on the Company's website for two weeks following the call.

About Sun Bancorp

Sun Bancorp, Inc. (NASDAQ: SNBC) is a $2.89 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.  

 Cautionary Note Regarding Forward-Looking Statements

The foregoing material contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, concerning the financial condition, results of operations and business of the Company.  Forward-looking statements are statements that include projections, predictions, expectations or beliefs about events or results or otherwise are not statements of historical facts, including statements about the successful implementation of our comprehensive strategic restructuring plan to improve financial performance and capital, reduce costs, risk and operating complexity, and the timing of the completion of the transactions contemplated thereby, addressing the Company's long standing obstacles to earnings, regulatory compliance and overall performance excellence, having established the foundation needed to bring our efficiency, credit and risk metrics in line with those of our peers, building on our existing relationships with top borrowers, returning to profitability, building the Bank's deposit portfolio mix and reducing classified assets and expenses.  Actual results and trends could differ materially from those set forth in such statements and there can be no assurances that our strategic restructuring plan will improve our financial performance, future capital levels, reduce our costs, reduce our risks or reduce our operating complexity; that our strategic restructuring plan will be completed as and in the time frames anticipated; that we will adequately address long standing obstacles to earnings, regulatory compliance and overall performance excellence; that we will build the foundation necessary to bring our efficiency, credit and risk metrics in line with those of our peers; that we will build on existing relationships with top borrowers and build the Bank's deposit portfolio mix; or that we will return to profitability or further reduce classified assets or expenses. We caution that such statements are subject to a number of uncertainties.  Factors that could cause actual results to differ from those expressed or implied by such forward-looking statements include, but are not limited to: (i) competition among providers of financial services; (ii) changes in laws and regulations, including without limitation changes in capital requirements under the federal prompt corrective action regulations; (iii) changes in business strategy or an inability to execute strategy due to the occurrence of unanticipated events; (iv) the failure to complete any or all of the transactions contemplated in the Company's comprehensive strategic restructuring plan on the terms currently contemplated; (v) local, regional and national economic conditions and events and the impact they may have on the Company, the Bank and its customers; (vi) the ability to attract deposits and other sources of liquidity; (vii) changes in the financial performance and/or condition of Bank's borrowers; (viii) changes in the level of non-performing and classified assets and charge-offs; (ix) changes in estimates of future loan loss reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (x) inflation, interest rate, securities market and monetary fluctuations; (xi) changes in consumer spending, borrowing and saving habits; (xii) the ability to increase market share and control expenses; (xiii) volatility in the credit and equity markets and its effect on the general economy; (xiv) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; and (xv) those detailed under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Form 10-K for the fiscal year ended December 31, 2013, the Company's Form 10-Q for the three months ended March 31, 2014, and in other filings made pursuant to the Securities Exchange Act of 1934, as amended.  Therefore, readers should not place undue reliance on any forward-looking statements.  The Company does not undertake, and specifically disclaims, any obligation to publicly release the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.  

Non-GAAP Financial Measures (Unaudited)

This news release references tax-equivalent interest income. Tax-equivalent interest income is a non-GAAP financial measure. Tax-equivalent interest income assumes a 35% marginal federal tax rate for all periods. The fully taxable equivalent adjustments for the three months ended June 30, 2014, March 31, 2014, December 31, 2013, September 30, 2013, and June 30, 2013, were $166 thousand, $166 thousand, $167 thousand, $167 thousand, and $175 thousand, respectively. This release also references tangible book value per common share. Tangible book value per common share is a non-GAAP financial measure.  Tangible book value per common share is a ratio of tangible equity, shareholders' equity less intangible assets, to outstanding common shares. Intangible assets at June 30, 2014, March 31, 2014, December 31, 2013, September 30, 2013, and June 30, 2013, were $38.4 million, $38.7 million, $39.0 million, $39.4 million, and $40.0 million, respectively.

Tax-equivalent interest income

The following reconciles net interest income to net interest income on a fully taxable equivalent basis using a 35% tax rate for the three months ended June 30, 2014, March 31, 2014, December 31, 2013, September 30, 2013, and June 30, 2013.

Tangible book value per common share

The following reconciles shareholders' equity to tangible equity by reducing shareholders' equity by the intangible asset balance at June 30, 2014, March 31, 2014, December, 31, 2013, September 30, 2013, and June 30, 2013.

SOURCE Sun Bancorp, Inc.