Sun Bancorp, Inc. Reports First Quarter 2011 Results

VINELAND, N.J., April 26, 2011 /PRNewswire/ -- Sun Bancorp, Inc. (NASDAQ: SNBC) reported today a net loss available to common shareholders of $67.1 million, or a loss of $1.25 per diluted share, for the quarter ended March 31, 2011, compared to a net loss available to common shareholders of $762,000, or a loss of $0.03 per diluted share, for the quarter ended March 31, 2010.

As part of a continuing strategy to strengthen its balance sheet, the Company signed a definitive agreement to sell $174.3 million of loans, having a book balance of $159.8 million, to a third-party investor for gross proceeds of $99.2 million. The transaction, which is expected to close in the second quarter of 2011, represents a sale price of approximately 57 cents on the dollar and resulted in a net loss of $44.3 million after accounting for loan loss reserves, customer derivative termination costs and other expenses. Accordingly, these loans were transferred to held-for-sale as of March 31, 2011 at fair value. In addition, the Company transferred an additional $20.1 million of loans to held-for-sale at March 31, 2011, at a fair value of $11.3 million, resulting in a loss of $8.8 million. In total, $179.9 million of loans were transferred to held-for sale at a net loss of $53.1 million in the first quarter.

Excluding the loan sale items, the Company incurred a net loss of $14.0 million, or $0.26 per diluted share. The loss was primarily driven by $10.2 million of additional loan loss reserves related to two commercial relationships and $4.3 million in fair value credit adjustments on one customer derivative account.

In addition, as previously announced, the Company successfully closed on a public offering of 28,750,000 shares of its common stock at an offering price of $3.00 per share, which included the full exercise of the over-allotment option granted to the underwriters to purchase an additional 3,750,000 shares of common stock. After deducting the underwriting discount and estimated offering expenses payable by the Company, the net proceeds received during the first quarter were $81.4 million. During the second quarter of 2011, the Company closed on an additional $10.8 million in stock proceeds and expects to close on an additional $3.8 million in stock proceeds pursuant to the exercise of gross-up provisions contained in security purchase agreements with four major investors. Upon completion of the final gross-up, the total net proceeds from the stock offering are expected to be $96.0 million.

Other items of note in the results for the first quarter of 2011 were as follows:

• Loan loss provision of $60.3 million as compared to $9.6 million for the comparable prior year period, inclusive of $48.2 million of the loss recorded on the aforementioned transfer of loans to held-for-sale.

• A $1.0 million loss on the sale of one private label mortgage-backed security.

• Other-than-temporary impairment ("OTTI") charge of $250,000 related to one single-issuer trust preferred security.

"The actions taken in the first quarter of 2011 advance the strategy that we set in motion in 2010 to strengthen Sun and grow the franchise," remarked Thomas X. Geisel, Sun's President and Chief Executive Officer. "This quarter's successful capital raise demonstrates investors' continued confidence in the Company to profitably grow in our marketplace. The loan sale, our second in as many quarters, affirms management's commitment to accelerate problem credit resolution and strengthen the balance sheet. We believe this quarter's actions firmly position Sun for future growth".

Discussion of Results:

Balance Sheet

• Total assets were $3.33 billion at March 31, 2011, as compared to $3.42 billion at December 31, 2010 and $3.53 billion at March 31, 2010.

• Gross loans held-for-investment were $2.27 billion at March 31, 2011, as compared to $2.52 billion at December 31, 2010 and $2.69 billion at March 31, 2010. Compared to the linked quarter, commercial loans decreased by $240.6 million, or 11.4%, primarily driven by the movement of $177.0 million of commercial loans to held-for-sale. The remaining decrease in commercial loans was due to continued charge-off activity and pay downs on commercial real estate loans. In addition, home equity loans decreased by $7.4 million from December 31, 2010 as portfolio pay downs exceeded new originations.    

• Total deposits at March 31, 2011 equaled $2.85 billion, as compared to $2.94 billion at December 31, 2010 and $2.92 billion at March 31, 2010. The decrease of $93.0 million, or 3.2%, over the linked quarter is primarily due to a decrease of $79.4 million in certificates of deposit, $38.4 million of which was brokered and jumbo CDs and the remaining $41.0 million due to runoff in CDs less than $100,000. In addition, non-interest checking balances declined by $12.5 million primarily as a result of declines in small business and commercial checking balances.  

Net Interest Income and Margin

• On a tax equivalent basis, net interest income decreased $2.1 million over the linked quarter to $25.5 million primarily due to a decrease of 20 basis points in the yield on interest-earning assets from 4.35% to 4.15%. The cost of interest-bearing liabilities decreased 13 basis points over the linked quarter from 1.22% to 1.09%. The net interest margin was 3.26% for the first quarter as compared to 3.37% for the linked quarter and 3.56% for the comparable prior year quarter.

• Non-accrual interest reversals of $867,000 were recorded in the March 31, 2011 quarter as compared to $736,000 in the linked quarter.  The Company's net interest margin, as adjusted for non-accrual interest reversals, was 3.37% for the first quarter of 2011 as compared to an adjusted 3.46% for the linked quarter.

Non-Interest Income

• Non-interest income for the quarter ended March 31, 2011 amounted to a loss of $4.1 million, a decrease of $11.9 million over the linked quarter and $9.8 million over the comparable prior year quarter. The decrease over the linked quarter was primarily attributable to $8.4 million of fair value credit adjustments taken on the Company's derivative portfolio and a loss of $1.0 million on the sale of a private-label mortgage-backed security. The increase in fair value credit adjustments was largely due to the recognition of losses to be incurred through the unwinding of swap agreements that are related to loans included in the aforementioned loan sale. In addition, the Company recognized a pre-tax OTTI charge during the first quarter of $250,000 related to a single issuer trust preferred security due to continued extension of the interest deferral period by the issuer as well as the underlying fundamentals of the issuer. The Company had recognized a pre-tax OTTI charge of $950,000 on the same security during the prior year.

• Excluding the fair value credit adjustments, the gain/loss on the sale of the securities and OTTI charges, non-interest income was $5.6 million in the current quarter as compared to $6.3 million in the linked quarter.  The decrease of $720 thousand is due primarily to a reduction of $399 thousand in the gain on sale of mortgage loans resulting from decreased volume.

Non-Interest Expense

• The Company incurred $27.8 million of non-interest expense in the first quarter of 2011, a decrease of $167,000 over the linked quarter and an increase of $1.7 million over the comparable prior year quarter. First quarter results included problem loan costs of $3.1 million of which $1.1 million related to delinquent real estate taxes associated with those loans transferred to held-for-sale. Excluding problem loan costs, non-interest expense totaled $24.7 million during the current quarter as compared to $26.0 million for the linked quarter. This decrease of $1.3 million was due primarily to a reduction of $919,000 in the Company's unfunded loan reserves in the current quarter.

Asset Quality

• Provision for loan losses for the first quarter was $60.3 million, an increase of $24.8 million, or 69.8%, over the linked quarter, and an increase of $50.7 million over the comparable prior year quarter, and included $48.2 million related to the transfer of loans to held-for-sale. The allowance for loan losses was $58.5 million at March 31, 2011, or 2.58% of gross loans held-for-investment, as compared to the allowance for loan losses to gross loans held-for-investment of 3.24% at December 31, 2010 and 2.35% at March 31, 2010.  Net charge-offs during the first quarter were $83.5 million, or 3.35% of average loans, as compared to $28.4 million, or 1.08% of average loans for the linked quarter and $6.3 million, or 0.23% of average loans outstanding for the comparable prior year quarter. Net charge-offs for the quarter included $69.4 million related to the fair value adjustment on the loans transferred to held-for-sale.

• Total non-performing assets were $192.3 million, or 8.05% of total gross loans held-for-investment, loans held-for-sale and real estate owned at March 31, 2011, as compared to $177.7 million, or 7.00% and $89.8 million, or 3.32%, respectively, at December 31, 2010 and March 31, 2010. Non-performing assets at March 31, 2011 included $71.8 million of loans held-for-sale. Non-performing loans increased $14.0 million over the linked quarter to $187.8 million at March 31, 2011 from $173.8 million at December 31, 2010. This increase was primarily due to the addition of approximately $60 million in commercial relationships into non-accrual status, offset by approximately $45 million in charge-offs related to the transfer of loans to held-for-sale.

Capital

• Stockholders' equity totaled $286.7 million at March 31, 2011 compared to $268.2 million at December 31, 2010.  During the first quarter, the Company closed on its public offering of 28,750,000 shares of common stock at a public offering price of $3.00 per share. The Company had approximately 79.2 million shares issued and outstanding at March 31, 2011. The Company's tangible equity to tangible assets ratio was 7.27% at March 31, 2011, as compared to 6.51% at December 31, 2010 and 6.34% at March 31, 2010.  At March 31, 2011, the Company's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 13.73%, 12.11%, and 9.62%, respectively.  At March 31, 2011, Sun National Bank's total risk-based capital ratio, Tier 1 capital ratio and leverage capital ratio were approximately 12.65%, 11.38%, and 9.05%, respectively. These ratios do not include the impact of the additional stock proceeds to be generated in the second quarter of 2011 pursuant to the exercise of the gross-up provisions contained in the security purchase agreements with four major investors.

The Company will hold its regularly scheduled conference call on Wednesday, April 27, 2011, at 11:00 a.m. (ET).  Participants may listen to the live web cast through the Sun Bancorp, Inc. web site 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 $3.33 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 65 locations in New Jersey. Sun National Bank has been named one of Forbes Magazine's "Most Trustworthy Companies" for five years running.  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.  

The foregoing material contains forward-looking statements concerning the financial condition, results of operations and business of the Company. We caution that such statements are subject to a number of uncertainties and actual results could differ materially, and, 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

This release references adjusted net interest margin. Adjusted net interest margin is derived from GAAP net interest income adjusted by adding back interest income that would have been earned had the loans been on accrual status.  We believe the presentation of adjusted net interest margin provides additional transparency of underlying trends.  Adjusted net interest margin for the quarters ending March 31, 2011 and December 31, 2010 is calculated by adding $867,000 and $736,000, respectively, of non-accrual interest reversals, annualized, to net interest income of $25.5 million and $27.7 million, respectively, and dividing the balance by average interest-earning assets of $3.13 billion and $3.28 billion, respectively.  Tax-equivalent interest income is also 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 March 31, 2011 and 2010 were $409,000 and $540,000, respectively. The fully taxable equivalent adjustment for the three months ended December 31, 2010 was $382,000.

SOURCE Sun Bancorp, Inc.