Sun Bancorp, Inc. Announces Fourth Quarter 2015 Net Income of $1.5 Million; Full Year 2015 Net Income of $10.2 Million

MOUNT LAUREL, N.J., Feb. 1, 2016 /PRNewswire/ --

Fourth Quarter Highlights:

• Net income of $1.5 million, or $0.08 per diluted share, for the quarter ended December 31, 2015.
• Quarterly operating expenses of $16.6 million are the lowest in more than 10 years.
• Annualized commercial loan growth of 12% in the fourth quarter.
• Completed comprehensive restructuring plan in 2015 and recently announced the termination of the formal written agreement with the Office of the Comptroller of the Currency.
• Non-performing loans fell to $3.1 million, or 0.2% of total loans, at December 31, 2015 from $11.0 million, or 0.73% of total loans, at December 31, 2014.
• Solid foundation in place with strong capital ratios and reserve coverage with allowance for loan losses to loans of 1.16% and allowance for loan losses to non-performing loans at 578%.
• Net income of $10.2 million for 2015, or $0.55 per diluted share, represents first annual profit since 2008.

Sun Bancorp, Inc. (NASDAQ: SNBC), (the "Company"), the holding company for Sun National Bank (the "Bank"), today reported net income of $1.5 million, or $0.08 per diluted share, for the quarter ended December 31, 2015, compared to net income of $3.2 million, or $0.17 per diluted share in the quarter ended September 30, 2015, and a $2.8 million net loss, or $0.15 loss per diluted share for the quarter ended December 31, 2014.

"The fourth quarter and full year 2015 results clearly demonstrate that the successful execution of the strategic restructuring undertaken in the last 18 months has led to substantial progress, including reporting profitable operating results in each quarter of 2015," said Thomas M. O'Brien, President and CEO.  "We have been relentless in our efforts to address and remediate the legacy regulatory, operating and financial problems at the Company.  As a result of these successful efforts, our long-standing formal written agreement with the Office of the Comptroller of the Currency (the "OCC") has recently been terminated.  Our goal remains focused on building a franchise that operates in full regulatory compliance while delivering value for our investors."

Discussion of Results:

Balance Sheet

Total assets decreased to $2.21 billion at December 31, 2015, as compared to $2.29 billion at September 30, 2015 and $2.72 billion at December 31, 2014. Cash and cash equivalents decreased to $204.3 million at December 31, 2015 as compared to $287.9 million at September 30, 2015 and $548.4 million at December 31, 2014.  The decrease in cash and cash equivalents for 2015 was primarily due to increases in loan originations, purchases of several multifamily loan participations and deposit reductions from the completion of the sale of eight branch locations throughout 2015.

Gross loans held-for-investment totaled $1.55 billion at December 31, 2015, as compared to $1.53 billion at September 30, 2015 and $1.51 billion at December 31, 2014.  The increase in gross loans held-for-investment during the fourth quarter is due primarily to an increase in commercial loan originations. Commercial loan growth totaled 12% on an annualized basis in the fourth quarter as originations increased from third quarter levels.  For the year, the Bank has experienced net loan growth both through organic originations as well as through purchases of multifamily loan participations and strategically retaining loans where the Bank has the opportunity to build long-term relationships. 

"We now have several quarters of successful originations from our new commercial lending platform which provided an increase in commercial loan originations for the first time in many years," said O'Brien.  "Despite a very competitive commercial loan market, with our highly experienced commercial lending teams firmly in place, we continue to see quality relationship opportunities.  While the bulk of our originations were in commercial real estate, we have enhanced several commercial & industrial loan relationships, and it is our desire to grow in this segment.  Strategically, we continued to reduce our consumer, residential and investment portfolios in 2015 and reinvest the proceeds into commercial loans."

"New commercial loan originations were primarily in the Central and Northern New Jersey markets, as well as the metropolitan New York City area including Long Island," stated O'Brien.  "Our goal has been to position the Bank for organic growth in high-potential markets.  With the Bank's exit from Cape May and Salem Counties in 2015, as well as the previously completed relocation of the Company headquarters to Burlington County and the establishment of our commercial lending hub in Edison, New Jersey, more than 60% of our commercial loan relationships are based out of the New York City, Northern New Jersey, Long Island and Central New Jersey metropolitan statistical areas." 

Deposits were $1.74 billion at December 31, 2015, as compared to $1.82 billion at September 30, 2015 and $2.09 billion at December 31, 2014. The Bank experienced deposit reductions in the fourth quarter due to runoff from previously consolidated branches, a planned loss of one high balance non-transactional commercial deposit relationship and mild runoff of multiple low balance, non-relationship accounts due to the implementation of a revised relationship-based retail deposit and pricing strategy. 

"Our deposit strategy is to lessen volatility and costs associated with excessive low-balance single product accounts," said O'Brien.  "We anticipate deposit growth in future periods and our general target is a loan-to-deposit ratio in the 95% range.  Our overall deposit strategy continues to be growing core relationship balances while reducing high-cost or rate-sensitive balances."

Net Interest Income and Margin

The net interest margin of 2.81% for the quarter ended December 31, 2015 was unchanged from the linked third quarter.  Net interest income fell by $0.4 million to $14.8 million in the fourth quarter, compared to the linked third quarter, due to a reduction in interest-earning assets.  Average loans fell during the fourth quarter due mainly to high commercial loan payoffs late in the third quarter and originations primarily occurring late in the fourth quarter.  Average investments fell in the fourth quarter due to the third quarter sale of the municipal bond portfolio, normal amortization and limited reinvestment.  Average cash was approximately $308 million during the fourth quarter which continued to depress the net interest margin. 

"With the restructuring completed and the recent termination of the formal written agreement with the OCC, we will continue to enhance our efforts around liquidity deployment," said O'Brien.  "Once our liquidity is fully deployed, we anticipate a net interest margin between 3.1% and 3.2%.  We expect that recent movement in short-term interest rates will benefit our margins mildly as the Bank continues to maintain an asset sensitive position." 

Non-Interest Income

Non-interest income totaled $3.2 million for the quarter ended December 31, 2015, as compared to $6.5 million and $4.1 million for the quarters ended September 30, 2015 and December 31, 2014, respectively.  The decrease in non-interest income for the fourth quarter of 2015 as compared to the linked third quarter was primarily attributable to a $1.5 million gain on the sale of investment securities and a $1.3 million gain on the sale of the Hammonton branch location, which both occurred in the third quarter of 2015.  The decrease from the comparable prior year quarter was primarily due to a decline of $1.0 million in deposit service charges and fees.  This decline was substantially due to the branch sale transactions and branch office consolidations that were completed throughout 2015 and changes in the retail deposit strategy.   

"As we began to implement our relationship product and pricing strategies in the second half of 2015, the overall composition of our deposit-related fee income began to shift," said O'Brien.  "We are beginning to generate increased recurring transactional fee income as a result of our customers deepening their relationship with us.  As we make this transition, we anticipate that our deposit-related fee income may fluctuate through the first part of 2016." 

Non-Interest Expense

Non-interest expense for the fourth quarter of 2015 was $16.6 million, a decrease of $3.3 million from the third quarter of 2015 and a decrease of $7.1 million from the fourth quarter of 2014.  In the fourth quarter of 2015, expenses from salaries and employee benefits declined by $1.7 million, compared to the third quarter of 2015, as a result of the consolidation and sale of ten branch locations that were completed in the third quarter and an incentive accrual reversal of $0.5 million in the fourth quarter of 2015 as certain executives will receive deferred compensation in lieu of cash compensation.  Occupancy expense decreased by $1.8 million in the fourth quarter of 2015, compared to the third quarter of 2015, as the Company recorded $0.4 million in expenses related to lease vacancies during the third quarter of 2015 and recorded approximately $0.6 million of lease vacancy expense reversals in the fourth quarter of 2015 due to the execution of three new sub-lease agreements for vacant office space.  There was an overall reduction in occupancy expense due to the reduction in branch locations.  In the three months ended December 31, 2015, other expense included $0.7 million of expenses for recourse reserves on certain SBA loans sold several years previously.  In comparison to the comparable prior year quarter, occupancy expense and expenses from salaries and employee benefits decreased by $3.9 million and $1.6 million, respectively, due to a significant reduction in branch locations.  Other expenses in the comparable prior year quarter included a $0.8 million write down on one other real estate owned property.

"With the recent termination of the long-standing formal written agreement with the OCC, we anticipate further expense reductions as costs directly attributable to the order cease," said O'Brien.  "Specifically, we anticipate expense reductions in FDIC insurance, exam and regulatory fees, and professional fees.  With our quarterly operating expenses approaching a more appropriate level, we will focus on reducing our historically high efficiency ratio through continued expense discipline and revenue growth initiatives.  For the last several years, the Company's efficiency ratio was consistently well over 100%.  While the Company's efficiency ratio fell to 92% for the fourth quarter of 2015, it remains unacceptably high and a target for our continued focus.  We anticipate more progress on future reductions through improved revenue generation as well as careful expense management."

Asset Quality

Asset quality continues to be strong as the Bank aggressively monitors and minimizes the risks in its loan portfolio.  Non-performing loans held-for-investment decreased to $3.1 million at December 31, 2015 from $3.7 million at September 30, 2015 and $11.0 million at December 31, 2014.  Non-performing loans held-for-investment to total gross loans held-for-investment declined to 0.20% at December 31, 2015 as compared to 0.24% at September 30, 2015 and 0.73% at December 31, 2014. 

There was a negative provision for loan losses of $0.3 million during the fourth quarter of 2015 compared to a negative provision for loan losses of $1.8 million in the third quarter of 2015 and no provision for loan losses in the fourth quarter of 2014.  In the fourth quarter of 2015, the Bank recorded net charge-offs of $0.6 million as compared to net recoveries of $0.3 million in the third quarter of 2015, and net charge-offs of $3.3 million in the fourth quarter of 2014.  During the fourth quarter of 2015, the Bank sold $1.3 million of problem consumer residential loans from its held-for-investment portfolio resulting in charge-offs of approximately $700 thousand with respect to the sale.  The allowance for loan losses was $18.0 million, or 1.16% of gross loans held-for-investment, at December 31, 2015, as compared to $18.9 million, or 1.24% of gross loans held-for-investment, at September 30, 2015 and $23.2 million, or 1.54% of gross loans held-for-investment, at December 31, 2014. The allowance for loan losses was 578% of non-performing loans held-for-investment at December 31, 2015 as compared to 210% at December 31, 2014.

Capital

The capital ratios of the Bank and the Company remain strong.  At December 31, 2015, 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 17.9%, 19.1%, 17.9% and 12.4%, respectively.  At December 31, 2015, 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 14.1%, 21.0%, 17.6%, and 12.2%, respectively.  The Company's tangible equity to tangible assets ratio was 10.0% at December 31, 2015, as compared to 9.7% at September 30, 2015 and 7.7% at December 31, 2014. 

"The Company and the Bank continue to enjoy a very solid capital base with ratios that significantly exceed all of the "well capitalized" regulatory standards," said O'Brien.  "With the formal written agreement now terminated by the OCC, these healthy capital ratios will allow the Company to begin to evaluate a variety of capital management options.  The Company expects to continue its focus on organic growth opportunities as it looks to build a record of consistent profitability.  The work ahead of us is much different than the major restructuring undertaken over the past 18 months.  As we embark on 2016, our attention will be directed to improving both the quality and quantity of our earnings in each quarter of the year."

Conference Call

The Company will hold a conference call on Monday, February 1, 2016 at 11:00 a.m. (EST) 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: 800-753-0487
• Conference ID: 2576746

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 $2.21 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 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, 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, 2014, the Company's Form 10-Q for the quarters ended March 31, 2015, June 30, 2015 and September 30, 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 December 31, 2015, September 30, 2015, June 30, 2015, March, 31, 2015 and December 31, 2014.

Return on Average Tangible Equity (dollars in thousands)

The following provides the calculation of return on tangible equity for the three months ended December 31, 2015, September 30, 2015, June 30, 2015, March 31, 2015 and December 31, 2014.