MOUNT LAUREL, N.J., July 27, 2015 /PRNewswire/ --

Second Quarter Highlights

• Net income of $2.8 million, or $0.15 per share, for the quarter ended June 30, 2015, and $5.6 million, or $0.30 per share, for first half of 2015.
• Net loan growth of $95 million, or 6.5%, in second quarter.
• Solid capital foundation in place as tangible equity to assets improves from 6.6% in at June 30, 2014 to 9.2% at June 30, 2015.
• Asset quality metrics remain strong with non-performing assets down 68% since June 30, 2014 to $6.2 million, or 0.3% of total assets at June 30, 2015.
• Excess liquidity has declined, but remains elevated: average interest bearing cash totaled $329 million in the second quarter as liquidity deployment efforts increased, as compared to $475 million in the first quarter.
• Quarterly operating expenses fall to $18.4 million with successful achievement of cost reduction goals representing an impressive 43% reduction when compared to the 2013 quarterly average.

Sun Bancorp, Inc. (NASDAQ: SNBC) (the "Company"), the holding company for Sun National Bank (the "Bank"), is reporting net income of $2.8 million, or $0.15 per diluted share, for the quarter ended June 30, 2015, compared to net income of $2.8 million, or $0.15 per diluted share, for the quarter ended March 31, 2015 and a net loss of $24.2 million, or a loss of $1.39 per diluted share, for the quarter ended June 30, 2014. 

"We are generally pleased with the results of the second quarter and even more so with the underlying trends," said Thomas M. O'Brien, President & CEO.  "The major restructuring announced at this time last year represented an aggressive multi-pronged attack on several legacy conditions which were creating unacceptable operating losses year after year.  In a few short quarters, we have successfully executed on the restructuring plan as evidenced by this quarter's results.  Most impressively, operating expenses which had been running at $32.5 million per quarter in 2013 have been reduced by 43% to $18.4 million while capital ratios are much improved and net interest margin has begun to rebound.  Additionally, the Company's asset quality measures which had been deficient for many years are now among the strongest in the region.  We knew that it would be a challenge to execute on so many initiatives while preparing to build back revenues in our new, more narrowly focused commercial banking strategies.  This renewed focus on growth combined with our ongoing efforts to improve cost efficiency and operate in a safe and sound manner has set the stage for creating shareholder value." 

Discussion of Results:

Balance Sheet

Total assets decreased to $2.38 billion at June 30, 2015, as compared to $2.43 billion at March 31, 2015 and $2.72 billion at December 31, 2014.  The decrease was due primarily to a decrease in cash and cash equivalents, partially offset by loan growth.  The Bank's liquidity levels remain elevated, although cash and cash equivalents decreased to $278.9 million at June 30, 2015, as compared to $388.0 million at March 31, 2015 and $548.4 million at December 31, 2014. The overall decrease in cash and cash equivalents over the recent three and six month periods was primarily due to increases in loan originations, purchases of several multifamily loan participations and the completion of the sale of seven Bank locations in the first quarter of 2015.

Gross loans held-for-investment totaled $1.59 billion at June 30, 2015, as compared to $1.46 billion at March 31, 2015 and $1.49 billion at December 31, 2014.  The increase during the second quarter of 2015 was due primarily to the Bank funding approximately $48 million of 50% participation interest in multi-family loans residing in our market area, while organic loan originations totaled $137 million, including approximately $113 million in commercial real estate and $24 million in commercial and industrial loans.

Deposits were $1.88 billion at June 30, 2015, as compared to $1.96 billion at March 31, 2015 and $2.09 billion at December 31, 2014. The Bank continues to experience deposit reductions as a result of managed run-off of higher yielding municipal accounts and pricing of certain retail deposits. 

The Bank designated $4.6 million in loans, $34.7 million in deposits, $580 thousand of cash and $375 thousand of fixed assets into held-for-sale at June 30, 2015 related to the pending sale of its Hammonton branch location to Cape Bank, which is scheduled to close in the third quarter of 2015. The Bank expects to record a gain on the sale of this location at closing.

"We began to see the results of our liquidity deployment efforts in the second quarter," said O'Brien.  "Against the backdrop of our new relationship-based business development approach, we enjoyed net loan growth through our commercial platform, and the Bank's non-interest demand deposits increased each month through the second quarter.  Continued relationship-based originations and the pending Hammonton branch sale will help us continue to further optimize our liquidity and right size our balance sheet.  While liquidity remains elevated, we have taken a cautious approach to its deployment in light of conflicting economic conditions."

Net Interest Income and Margin

The net interest margin was 2.79% for the three months ended June 30, 2015 as compared to 2.57% for the three months ended March 31, 2015 and 3.03% for the three months ended June 30, 2014.  The increase in net interest margin for the three months ended June 30, 2015 as compared to the three months ended March 31, 2015 is primarily due to the increase in the average commercial loan balances, which increased by $43.6 million, or 4% over the prior quarter and a reduction in average cash balances.

"Our net interest margin continues to be below its optimal level as a result of our excess liquidity," said O'Brien. "However, we are pleased with the net interest income increase from the first quarter as a result of the growth in our loan portfolio," said O'Brien.  "Once we fully deploy our excess liquidity, we anticipate seeing our margin stabilize in the range of 3.10% to 3.20%.  We also continued to manage our deposit interest expense to more accurately reflect the market and the costs of providing our banking services, which led to a further decrease in deposit interest expense in the second quarter.  We believe our relationship approach to originating loans and gathering deposits is expected to gradually bring our net interest margin to forecasted levels."

Non-Interest Income

Non-interest income was $4.9 million for the quarter ended June 30, 2015, as compared to $13.1 million and $4.0 million for the quarters ended March 31, 2015 and June 30, 2014, respectively. The decrease from the linked quarter was primarily attributable to a $9.2 million gain on the sale of seven Cape May area bank locations that was completed in the first quarter of 2015. Offsetting this decrease was a gain of $1.2 million on the sale of loans in the three months ended June 30, 2015. There were modest declines in deposit service charges and fees of $155 thousand and $614 thousand from the quarters ended March 31, 2015 and June 30, 2014, respectively, due to the overall reduction in accounts as a result of the branch reductions that have occurred over the past year. The three months ended June 30, 2014 included swap termination costs of $1.4 million associated with commercial loan sales recorded as a reduction of other income.  The quarter ended June 30, 2014 also included net mortgage banking revenue of $529 thousand, compared to $0 in the current quarter due to the prior year closure of the Company's mortgage banking operations. 

Non-Interest Expense

Non-interest expense for the second quarter of 2015 was $18.4 million, a decrease of $6.9 million from the first quarter of 2015 and a decrease of $15.3 million from the second quarter of 2014. During the first quarter of 2015, the Company recorded several restructuring charges related to the finalization of the Bank's branch rationalization efforts, including $3.3 million of expenses associated with the pending branch consolidations and the sale of the Hammonton branch location. In the first quarter of 2015, problem loan expense of $988 thousand included $667 thousand of one-time costs associated with loan sales. In the second quarter of 2015, the balance in this category was $38 thousand due to significantly reduced volume. 

"While we are still carrying lingering occupancy costs from our previously-announced branch consolidations, our quarterly expenses fell to $18.4 million, representing an annualized run rate of $73 million, well below our previous annualized level of $130 million in 2013," said O'Brien.  "We are pleased with this substantial decline in operating expenses in the one year since our restructuring announcement, and it has effectively liberated the Bank from the substantial legacy expense burdens that were a consistent impediment to our operating profitability.  As a result, we are now actively investing our resources into relationship revenue generation and business development activities and the fruits of that labor are beginning to pay off.  With the remainder of our branch consolidations and pending Cape Bank sale taking place throughout the third quarter, we anticipate approaching a normalized operating expense run rate in the fourth quarter.  We will however, experience the final $500 thousand residual accelerated depreciation expense on these locations in the upcoming third quarter."

Asset Quality

Non-performing assets continued to decline in the second quarter as the balance declined from $10.7 million at March 31, 2015 to $6.2 million at June 30, 2015 due to the sale of non-performing loans held-for-sale during the second quarter. Non-performing loans held-for-investment to total gross loans held-for-investment remained relatively flat at 0.37% at June 30, 2015 as compared to 0.36% at March 31, 2015 and declined from 0.73% at December 31, 2014. 

There was negative provision for loan losses of $1.2 million recorded during the second quarter of 2015 compared to no provision for loan losses in the first quarter of 2015 and $14.8 million of provision for loan losses in the second quarter of 2014. In the second quarter of 2015, the Bank recorded gross recoveries of $2.1 million and recorded gross charge-offs of $1.1 million related to the transfer of problem loans to held-for-sale. The Bank recorded net recoveries of $615 thousand in the second quarter of 2015 as compared to net charge-offs of $2.3 million in the first quarter of 2015 and net charge-offs of $20.2 million in the second quarter of 2014. The allowance for loan losses was $20.3 million, or 1.29% of gross loans held-for-investment, at June 30, 2015, as compared to $20.9 million, or 1.41% of gross loans held-for-investment, at March 31, 2015 and $23.2 million, or 1.54% of gross loans held-for-investment, at December 31, 2014. The allowance for loan losses was 347% of non-performing loans held-for-investment at June 30, 2015 as compared to 383% at March 31, 2015 and 210% at December 31, 2014.

"Our asset quality metrics continue to be strong," said O'Brien.  "Now that we have reduced our classified loans to very low levels, we are focused on proactively managing the risk in the existing portfolio and underwriting new deals conservatively to ensure that our risk profile remains safe and sound.  We are extremely pleased with the progress we have made in improving the quality of our portfolio."

Capital

At June 30, 2015, the capital ratios of the Company and the Bank increased due to planned balance sheet runoff and net income of $2.8 million in the second quarter of 2015. At June 30, 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 approximately 17.5%, 18.8%, 17.5% and 11.5%, respectively. At June 30, 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 approximately 13.8%, 20.8%, 17.2%, and 11.3%, respectively. The Company's tangible equity to tangible assets ratio was 9.2% at June 30, 2015, as compared to 8.8% at March 31, 2015 and 7.7% at December 31, 2014. 

"With two consecutive profitable quarters, we have been able to internally generate $5.6 million in capital through the first six months of 2015," said O'Brien. "That, along with declining total assets and a further reduction in risk-weighted assets improved our solid regulatory capital ratios.  Our asset quality and capital metrics are near the top of our peer group.  This solid foundation gives us the capacity to now prudently grow our loan portfolio and revenues.  This quarter, we began to make progress in reducing our stubbornly-elevated efficiency ratio.  While we continue to have work ahead of us in growing revenue, managing expenses, controlling risk and building a brand, our goal remains to consistently create shareholder value and obtain the removal of our regulatory order.  This quarter is another significant step forward and it demonstrated our ability to generate earnings and operate with safe and sound practices."

Conference Call

The Company will hold a conference call on Monday, July 27, 2015 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: 888-765-5574
• Conference ID: 5330628

About Sun Bancorp, Inc.

Sun Bancorp, Inc. (NASDAQ: SNBC) is a $2.38 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. 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 Sun Bancorp, Inc. (the "Company") and its wholly-owned subsidiary Sun National Bank (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 ability of the Bank to comply with its written agreement with the Office of the Comptroller of the Currency (the "OCC") or the individual minimum capital ratio for the Bank established by the OCC; (ii) the Company's ability to attract and retain key management and staff; (iii) changes in business strategy or an inability to execute strategy due to the occurrence of unanticipated events; (iv) the ability to complete any or all of the transactions contemplated in the Company's comprehensive strategic restructuring plan on the terms currently contemplated; (v) the ability to attract deposits and other sources of liquidity; (vi) changes in the financial performance and/or condition of the Bank's borrowers; (vii) changes in consumer spending, borrowing and saving habits; (viii) the ability to increase market share and control expenses; (ix) changes in estimates of future loan loss reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (x) local, regional and national economic conditions and events and the impact they may have on the Company and its customers; (xi) volatility in the credit and equity markets and its effect on the general economy; (xii) the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs; (xii) the overall quality of the composition of the Company's loan and securities portfolios; (xiv) inflation, interest rate, securities market and monetary fluctuations;(xv) legislative and regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and impending 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; (xvi) 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; (xvii) competition among providers of financial services; (xviii) 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 quarter ended March 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 June 30, 2015, March 31, 2015, December 31, 2014, September 30, 2014, and June 30, 2014.

Return on Average Tangible Equity (dollars in thousands)

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