SNBC Sun Bancorp, Inc.

MOUNT LAUREL, N.J., Oct. 31, 2016 /PRNewswire/ -- 

Third Quarter Highlights:

• Seventh consecutive quarter of profitability with net income of $1.6 million, or $0.09 per diluted share, for the quarter ended September 30, 2016, and net income of $5.4 million, or $0.29 per diluted share, for the nine months ended September 30, 2016.
• Lowest quarterly operating expenses since the first quarter of 2003; Quarterly expenses at $15.9 million for the three months ended September 30, 2016 as compared to $17.1 million in the three months ended June 30, 2016 and $19.9 million in the three months ended September 30, 2015.
• Average commercial loans grew during the quarter by 6% annualized.
• Asset quality remained solid with non-performing assets at $6.8 million, or 0.31% of total assets.
• Strong foundation continues with total risk-based capital ratio of 21.2%, tier 1 common ratio of 14.45% and leverage capital ratio of 13.3%.
• Board of Directors declares a dividend of $0.01 per share to holders of record of the common stock of the Company on November 28, 2016, payable on December 12, 2016.

Sun Bancorp, Inc. (NASDAQ: SNBC), (the "Company"), the holding company for Sun National Bank (the "Bank"), today reported net income of $1.6 million, or $0.09 per diluted share, for the quarter ended September 30, 2016, compared to net income of $3.0 million, or $0.16 per diluted share, for the quarter ended June 30, 2016, and net income of $3.2 million, or $0.17 per diluted share, for the quarter ended September 30, 2015. 

"In the third quarter, the Company's now seven-quarter trend of positive earnings was maintained.  We continued to demonstrate steady progress by tightly controlling expenses, carefully managing risk and growing commercial loans," said President & CEO Thomas M. O'Brien.  "Our asset quality and capital metrics continue to demonstrate the strength that has been evident since 2015.  This was a straightforward quarter with virtually no one-time events, serving as further validation that the Company and the Bank are healthy, stable and growing profitability.  Over the next several quarters, we expect to see continued reductions in expenses along with some improved revenue opportunities as several legacy items disappear.  Most importantly, we continue to work to further expand our commercial business development efforts."

Discussion of Results:

Balance Sheet

The balance sheet was stable during the quarter as assets totaled $2.19 billion at September 30, 2016, as compared to $2.19 billion at June 30, 2016 and $2.21 billion at December 31, 2015.  Cash and cash equivalents totaled $156.3 million at September 30, 2016, as compared to $168.8 million at June 30, 2016 and $204.3 million at December 31, 2015.  The decrease in cash and cash equivalents during the third quarter of 2016 was primarily due to the purchase of investment securities. The decrease in cash and cash equivalents from December 31, 2015 resulted primarily from year-to-date loan growth and investment purchases. 

Investments increased by $11.3 million in the third quarter of 2016 to $308.0 million from $296.7 million in the prior linked quarter.  The Bank purchased $20 million of collateralized mortgage obligations and $12 million of mortgage-backed securities with a weighted average life of 3.7 years and weighted average yield of 2.0%. 

Net loans held-for-investment totaled $1.55 billion at September 30, 2016, as compared to $1.55 billion at June 30, 2016 and $1.53 billion at December 31, 2015. Net loans held-for-investment remained relatively flat compared to the prior linked quarter as an increase of $19.2 million in the commercial loan portfolio was mostly offset by a decrease of $17.0 million in the consumer loan portfolio from the prior linked quarter.  The increase in net loans held-for-investment from December 31, 2015 was due to year-to-date commercial loan originations of $261.8 million, partially offset by pay downs of commercial and consumer loans.

"We continue to experience the planned runoff of our residential and consumer loan portfolios," said O'Brien.  "Externally, the competitive marketplace and overall economic uncertainty contribute to fluctuations in both payoff activity and demand.  However, our relationship-based approach and consistent quality loan originations have led to 6% annualized net growth in our commercial loan portfolio, which is our key target market." 

Total deposits were $1.72 billion at September 30, 2016, as compared to $1.71 billion at June 30, 2016 and $1.75 billion at December 31, 2015. The cost of deposits increased by nine basis points to 36 basis points during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 due to the continued rollout of new initiatives in the Bank.  These initiatives are expected to generate growth in deposits over the long-term and emphasize a relationship-based deposit strategy.  The Bank's deposit mix has repositioned during 2016 as single-service, higher-rate money market and DDA accounts were replaced with certificates of deposit.  Since the quarter ended December 31, 2015, certificates of deposit have increased by $55.0 million and money market accounts have increased by $137.5 million while interest-bearing checking accounts decreased by $128.4 million and savings accounts decreased by $34.7 million.

"As a result of the 2015 branch realignment, the Bank experienced the planned exit of one large, high-priced single service municipal deposit relationship in the third quarter," said O'Brien.  "However, our overall relationship-based deposit strategy is making sustained progress.  We believe in the importance of long-term customer relationships and the mutual value that comes with it.  Our sales, marketing and service approach is situated to deliver deposit, credit and technology solutions to consumers and small businesses in our region." 

Net Interest Income and Margin

Net interest income was $14.7 million for the quarter ended September 30, 2016, compared to $14.9 million for the quarter ended June 30, 2016 and $15.2 million for the quarter ended September 30, 2015.  The decrease from the prior linked quarter primarily reflects a decrease in prepayment fees on loans.  The decrease from the prior year quarter was driven by a reduction in interest income on investments and an increase in interest expense on interest-bearing liabilities.   The Company's net interest margin was 2.94% for the three months ended September 30, 2016 as compared to 2.98% for the linked quarter ended June 30, 2016 and 2.81% in the quarter ended September 30, 2015.  Loan fees totaled $576 thousand in the third quarter, a decrease of $175 thousand from the previous quarter, due primarily to a decrease in prepayment penalty fees.  The 13 basis point increase in net interest margin from the quarter ended September 30, 2015 is due primarily to the reduction of $160.3 million in low-yielding interest-earning bank balances as the Company continued to deploy its excess cash in 2016.

"We continue to prudently deploy our liquidity so that our margin will continue to improve over time," said O'Brien.  "In addition, our deposit relationship repricing strategy is allowing us to increase our liability duration, which we believe will better position the Bank in a rising interest rate environment."

Non-Interest Income

Non-interest income was $3.1 million for the quarter ended September 30, 2016, as compared to $3.8 million and $6.5 million for the quarters ended June 30, 2016 and September 30, 2015, respectively.  The decrease in non-interest income from the linked second quarter is due primarily to the gain on the sale of investment securities of $426 thousand recorded in the three months ended June 30, 2016.  Revenues from Prosperis Financial Solutions, LLC, the Bank's securities brokerage subsidiary, were $505 thousand in the third quarter of 2016, decreasing from $538 thousand in the second quarter of 2016.  The decrease in non-interest income from the comparable prior year quarter was primarily attributable to a $1.5 million gain on the sale of investment securities and a $1.3 million gain on sale of Bank branches recorded in the three months ended September 30, 2015.

"We are pleased that our customers continue to deepen their relationships with the Bank, which is resulting in higher average account balances and sustained growth in deposit fee income," said O'Brien.  "However, our Prosperis Financial Services revenue continues to fluctuate as a result of external capital market conditions as retail investors are more hesitant in this volatile political and economic environment."

Non-Interest Expense

Non-interest expense for the third quarter of 2016 was $15.9 million as compared to $17.1 million for the three months ended June 30, 2016 and $19.9 million for the three months ended September 30, 2015.  The decrease in non-interest expense from the prior linked quarter is due to a decrease of $684 thousand in salaries and benefits due primarily to reductions in employee headcount and a decrease of $902 thousand in other expenses for the three months ended September 30, 2016.  These decreases were partly offset by an increase in equipment expense of $235 thousand to $1.3 million in the third quarter as compared to the prior linked quarter.  Non-interest expense for the third quarter of 2016 declined by $3.9 million from the third quarter of 2015, primarily due to a decrease of $2.0 million related to insurance expense, salaries and employee benefits and other expenses and a decline of $1.8 million in occupancy, equipment and data processing expenses as a result of the comprehensive restructuring plan completed in 2015.

"We continue to focus on disciplined expense management given the difficult revenue growth environment," said O'Brien.  "In the quarter, we benefited from additional cost savings in occupancy and technology expenses, insurance premiums, and professional fees.  This quarter's operating expenses of $15.9 million are at the lowest level since the first quarter of 2003, which is a strong measure of how we have successfully addressed the challenge of long-term, deeply-embedded expenses over the last two years."

Asset Quality

Non-performing loans held-for-investment as a percentage of total gross loans held-for-investment increased to 0.42% at September 30, 2016 as compared to 0.35% at June 30, 2016 primarily due to $528 thousand of commercial real estate and $748 thousand of residential mortgage loan relationships entering non-accrual status during the three months ended September 30, 2016.  Non-performing loans held-for-investment to total gross loans held-for-investment was 0.20% at December 31, 2015. 

There was no provision for loan losses during the quarter ended September 30, 2016 compared to a negative provision for loan losses of $1.7 million recorded during the second quarter of 2016 and a negative provision for loan losses of $1.8 million in the third quarter of 2015.  In the third quarter of 2016, the Bank recorded net charge-offs of $65 thousand as compared to net charge-offs of $378 thousand in the second quarter of 2016 and net recoveries of $344 thousand in the third quarter of 2015.  The Bank transferred a $1.5 million commercial real estate loan to held-for-sale status during the third quarter which resulted in a charge-off of $242 thousand.  The allowance for loan losses was $15.8 million, or 1.01% of gross loans held-for-investment at September 30, 2016 as compared to $15.9 million, or 1.02% of gross loans held-for-investment at June 30, 2016 and $18.9 million, or 1.24% of gross loans held-for-investment at September 30, 2015.  The allowance for loan losses was 238% of non-performing loans held-for-investment at September 30, 2016 as compared to 289% at June 30, 2016 and 517% at September 30, 2015.

"We continue to believe that proactive identification of problem loans and their quick resolution through selling or restructuring continues to be the best strategy, as evidenced by the substantial reduction in balance sheet risk over the past two years," stated O'Brien.  

Capital

The Company's capital ratios improved further due to positive earnings. At September 30, 2016, the Bank's Tier 1 common equity risk-based capital ratio, total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage capital ratio were 18.3%, 19.3%, 18.3% and 13.4%, respectively. At September 30, 2016, the Company's Tier 1 common equity risk-based capital ratio, total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage capital ratio were 14.4%, 21.2%, 18.1%, and 13.3%, respectively. The Company's tangible equity to tangible assets ratio was 10.6% at September 30, 2016, as compared to 10.5% at June 30, 2016 and 9.7% at September 30, 2015. 

Dividend Declaration

As previously announced on October 27, 2016, after review and discussion, the Board of Directors of the Company has declared a dividend of $0.01 per share to holders of record of the common stock of the Company as of November 28, 2016, payable on December 12, 2016.

"Given the continued strong capital position of the Company and the prospect for consistently improving earnings, the Board of Directors has declared our second quarterly cash dividend, evidencing their confidence in the Company's future," said O'Brien.

Conference Call

The Company's management will hold a conference call on Monday, October 31, 2016 at 11:00 AM (EDT) to discuss results and answer questions from analysts and investors.  Participants may listen to or participate in the Company's earnings conference call via the following:

• Participants toll-free number: 877-548-7901
• Conference ID: 1213212

A transcript of the conference call will be available at the Investor Relations section of www.sunnationalbank.com following the call.

About Sun Bancorp, Inc.

Sun Bancorp, Inc. (NASDAQ: SNBC) is a $2.19 billion asset bank holding company headquartered in Mount Laurel, New Jersey. Its primary subsidiary is Sun National Bank, a community bank serving customers throughout New Jersey, and the metro New York region. Sun National Bank is an Equal Housing Lender and its deposits are insured up to the legal maximum by the 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, which may be identified by the use of such words as "allow," "anticipate," "believe," "continues," "could," "estimate," "expect," "intend," "may," "opportunity," "outlook," "plan,"   "potential," "predict," "project," "reflects," "should," "typically," "usually," "view," "will," "would," and similar terms and phrases, including references to assumptions.  Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of the Company and the Bank, the banking industry, the economy in general, expectations of the business environment in which the Company operates, projections of future performance and other statements contained herein that are not historical facts.  These remarks are based upon current management expectations, and may, therefore, involve risks and uncertainties that cannot be predicted or quantified and are beyond the Company's control and are subject to a variety of uncertainties that could cause future results to vary materially from the Company's historical performance, or from current expectations.  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) the Company's ability to attract and retain key management and staff; (ii) changes in business strategy or an inability to successfully execute strategy due to the occurrence of unanticipated events; (iii) the ability to attract deposits and other sources of liquidity; (iv) changes in the financial performance and/or condition of the Bank's borrowers; (v) changes in consumer spending, borrowing and saving habits; (vi) the ability to increase market share and control expenses; (vii) changes in estimates of future loan loss reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (viii) local, regional and national economic conditions and events and the impact they may have on the Company and its customers; (ix) volatility in the credit and equity markets and its effect on the general economy; (x) the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs; (xi) the overall quality of the composition of the Company's loan and securities portfolios; (xii) inflation, interest rate, securities market and monetary fluctuations;(xiii) legislative and regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations, changes in banking, securities and tax laws and regulations and their application by regulators and changes in the scope and cost of the Federal Deposit Insurance Corporation insurance and other coverages; (xiv) the effects of, and changes in, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (xv) competition among providers of financial services; (xvi) other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services and the other risks 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, 2015 and in other filings made pursuant to the Securities Exchange Act of 1934, as amended.  No undue reliance should be placed 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 such 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 tangible book value per common share and return on average tangible equity, which are non-GAAP financial measures. Management believes that tangible book value per common share and return on average tangible equity are meaningful financial measures because they are two of the measures we use to assess capital adequacy.

Tangible book value per common share (dollars in thousands)

The following reconciles shareholders' equity to tangible equity by reducing shareholders' equity by the intangible asset balance at September 30, 2016, June 30, 2016, March 31, 2016, December 31, 2015 and September 30, 2015.

Return on Average Tangible Equity (dollars in thousands)

The following provides the calculation of return on tangible equity for the three months ended September 30, 2016, June 30, 2016, March 31, 2016, December 31, 2015 and September 30, 2015.