SNBC Sun Bancorp, Inc.

MOUNT LAUREL, N.J., Jan. 31, 2017 /PRNewswire/ --

Fourth Quarter Highlights:

• Partial deferred tax asset valuation allowance reversal of $53.7 million recorded in the fourth quarter.
• Quarterly net income of $2.3 million, or $0.12 per diluted share, excluding the valuation allowance reversal.
• Further reduced quarterly operating expenses to $15.4 million in the fourth quarter as compared to $15.9 million in the prior linked quarter and $16.6 million in the year ago quarter.
• During the fourth quarter, average commercial loans grew by 8% annualized while average deposits grew by 4% annualized.
• Non-performing loans declined to $3.1 million, or 0.19% of total loans at December 31, 2016 as compared to $6.8 million, or 0.42% of total loans, at September 30, 2016.
• Solid foundation with total risk-based capital ratio of 21.6%, tier 1 common ratio of 15.2% and leverage capital ratio of 14.6% at December 31, 2016.
• Board of Directors declared a dividend of $0.01 per share to holders of record of the common stock of Sun Bancorp, Inc. on February 27, 2017, payable on March 13, 2017.

Sun Bancorp, Inc. (NASDAQ: SNBC), (the "Company"), the holding company for Sun National Bank (the "Bank"), today reported net income of $56.0 million, or $2.94 per diluted share, for the quarter ended December 31, 2016, compared to net income of $1.6 million, or $0.09 per diluted share, for the quarter ended September 30, 2016, and net income of $1.5 million, or $0.08 per diluted share, for the quarter ended December 31, 2015.

"We are pleased to announce our second consecutive year of positive earnings as the Company has reported net income of $17.9 million over the last two years in addition to the deferred tax asset benefit of $53.7 million," stated President & CEO Thomas M. O'Brien.  "This quarter further demonstrates our ability to generate operating earnings as we execute against our business plan.  Commercial loan origination capacity continues to grow, however achieving revenue growth remains challenging due to legacy portfolio runoff. Therefore, we have continued our focus on expense control and asset quality diligence.  In addition to reporting $2.3 million of earnings exclusive of the valuation allowance reversal, the Company also declared its third consecutive quarterly dividend."

Discussion of Results:

Balance Sheet

Total assets increased during the quarter to $2.26 billion at December 31, 2016, as compared to $2.19 billion at September 30, 2016 and $2.21 billion at December 31, 2015. Deferred tax assets, net totaled $51.6 million at December 31, 2016 as compared to a net liability of $3.4 million and $1.5 million, respectively, at September 30, 2016 and December 31, 2015 due primarily to the aforementioned valuation allowance reversal. Cash and cash equivalents totaled $134.2 million at December 30, 2016, as compared to $156.3 million at September 30, 2016 and $204.3 million at December 31, 2015.  The decrease in cash and cash equivalents during the fourth quarter of 2016 was primarily due to commercial loan originations. 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 $3.6 million in the fourth quarter of 2016 to $311.7 million from $308.0 million in the prior linked quarter due to purchases of investment securities, including $19 million of mortgage-backed securities, partially offset by pay downs.

Net loans held-for-investment totaled $1.59 billion at December 31, 2016, as compared to $1.55 billion at September 30, 2016 and $1.53 billion at December 31, 2015. Net loans held-for-investment increased by $43.5 million, or 11% annualized, as compared to the prior linked quarter, primarily due to an increase of $63.4 million, or 21% annualized, in the commercial loan portfolio and a decrease of $20.2 million, or 23% annualized, in the consumer loan portfolio from the prior linked quarter.  Loan closings were focused in the latter half of the quarter.  The Company anticipates that this will provide an increase in average loans and net interest income in the first quarter of 2017.  During the fourth quarter of 2016, commercial loan originations totaled $150.3 million. The increase in net loans held-for-investment from December 31, 2015 was due to year-to-date commercial loan originations of $421.0 million, partially offset by pay downs of commercial and consumer loans.

"Our commercial lending remains robust despite economic and competitive factors.  Our commercial real estate originations continue to be strong and we are starting to see more momentum in our commercial and industrial (C&I) business due to our sustained relationship building efforts," stated O'Brien. "With rising interest rates and the long overdue potential for meaningful economic growth, we are hopeful that our C&I business will continue to provide opportunities. We are optimistic regarding our efforts to increase our overall commercial lending businesses in 2017."

Total deposits were $1.74 billion at December 31, 2016, as compared to $1.72 billion at September 30, 2016 and $1.75 billion at December 31, 2015. The cost of deposits was stable at 38 basis points compared to the prior linked quarter and increased by 11 basis points as compared to the three months ended December 31, 2015 due to the impact of the recent increase in market interest rates and growth in retail certificates of deposit.  The Bank continues to roll out new initiatives which are designed to generate growth in deposits and relationships over the long term.  The Bank's deposit mix shifted during 2016 as single-service, higher-rate money market and small demand deposit accounts were replaced with certificates of deposit.  The Bank has also seen a shift from interest bearing demand deposit accounts to money market accounts due to product reconfiguration efforts.  Since December 31, 2015, certificates of deposit have increased by $66.1 million and money market accounts have increased by $149.6 million while interest-bearing checking accounts decreased by $119.1 million and savings accounts decreased by $37.7 million.

"In 2016, we achieved our stated goals of deepening both the profitability and engagement among deposit relationships," said O'Brien.  "We calibrated our deposit portfolio to better reflect customer needs.  This is evidenced by increased direct deposit and online banking penetration among households, increases in savings-related products, and larger overall average household balances.  Investments in platform upgrades for debit cards as well as business banking and cash management technology in the second half of 2016 will better provide our deposit customers with more robust convenience and transactional capabilities in 2017."

Net Interest Income and Margin

Net interest income was $14.8 million for the quarter ended December 31, 2016, compared to $14.7 million for the quarter ended September 30, 2016 and $14.8 million for the quarter ended December 31, 2015.  The increase from the prior linked quarter primarily reflects an increase in prepayment fees on loans.  Net interest income remained relatively flat compared to the quarter ended December 31, 2015.  The Company's net interest margin was 2.93% for the three months ended December 31, 2016 as compared to 2.94% for the linked quarter ended September 30, 2016 and 2.81% in the quarter ended December 31, 2015.  The 12 basis point increase in net interest margin from the quarter ended December 31, 2015 is due primarily to commercial loan growth along with a reduction in low-yielding interest-earning bank balances as the Company continued to deploy its excess cash in 2016. On average, the Bank had approximately $105 million of excess cash during the fourth quarter which depressed the net interest margin.

"We have been diligent in our approach to deploying excess liquidity over the last year," stated O'Brien.  "The quarter-end growth in commercial loan balances has us better-positioned to achieve our target net interest margins in 2017."

Non-Interest Income

Non-interest income was $3.3 million for the quarter ended December 31, 2016, as compared to $3.1 million and $3.2 million for the quarters ended September 30, 2016 and December 31, 2015, respectively.  The increase in non-interest income from the linked third quarter is due primarily to the reversal of a contingent liability of $199 thousand in the fourth quarter and the gain on the sale of $137 thousand of excess land at a branch location recorded in the three months ended December 31, 2016. These items were partially offset by a decrease in revenue from investment product sales. 

"We are pleased that our deposit fee income levels are now relatively stable after multiple quarters of product reconfiguration efforts and we expect fees to grow in future quarters as we build our relationships," stated O'Brien.

Non-Interest Expense

Non-interest expense for the fourth quarter of 2016 was $15.4 million as compared to $15.9 million for the three months ended September 30, 2016 and $16.6 million for the three months ended December 31, 2015.  The decrease in non-interest expense from the prior linked quarter is due primarily to a decrease of $723 thousand in salaries and benefits as a result of the timing of accrual adjustments and reductions in employee headcount.  Other expense increased by $538 thousand from the prior linked quarter due primarily to a $220 thousand increase in recourse reserves, loan sale-related broker fees and other miscellaneous charges in the fourth quarter of 2016.  Non-interest expense for the fourth quarter of 2016 declined by $1.2 million from the fourth quarter of 2015, primarily due to a decrease of $681 thousand in insurance expense due to reductions in FDIC assessment rates, a decrease of $671 thousand in other expense resulting primarily from a reduction in recourse reserve accruals and a decrease of $337 thousand in professional fees.  These decreases were partially offset by an increase of $711 thousand in occupancy expenses due to lease vacancy expense reversals recorded in the fourth quarter of 2015 upon the execution of three sub-lease agreements for vacant office space.

"In the fourth quarter, we achieved our lowest quarterly expense levels in more than 13 years," said O'Brien.  "We enjoyed the benefits of substantial reductions related to several legacy costs.  Our greatly-improved risk management and regulatory standing have allowed us to continue to bring our expense levels more in line with peers.  However, our efficiency ratio remains elevated and reducing it remains a focus for 2017 on both the expense and revenue fronts."

Asset Quality

Non-performing loans as a percentage of total gross loans decreased to 0.19% at December 31, 2016 as compared to 0.42% at September 30, 2016 primarily due to the removal of $2.2 million of commercial real estate and $1.3 million of residential mortgage loans from non-accrual status during the three months ended December 31, 2016.  The Bank sold $1.0 million of non-performing consumer loans during the fourth quarter of 2016, which resulted in $398 thousand of charge-offs. Non-performing loans as compared to total gross loans was 0.20% at December 31, 2015. 

There was no provision for loan losses during the quarters ended December 31, 2016 and September 30, 2016 and a negative provision for loan losses of $300 thousand in the fourth quarter of 2015.  In the fourth quarter of 2016, the Bank recorded net charge-offs of $285 thousand as compared to net charge-offs of $65 thousand in the third quarter of 2016 and net charge-offs of $605 thousand in the fourth quarter of 2015.  The allowance for loan losses was $15.5 million, or 0.97% of gross loans held-for-investment at December 31, 2016 as compared to $15.8 million, or 1.01% of gross loans held-for-investment at September 30, 2016 and $18.0 million, or 1.16% of gross loans held-for-investment at December 30, 2015.  The allowance for loan losses was 501% of non-performing loans held-for-investment at December 30, 2016 as compared to 238% at September 30, 2016 and 578% at December 31, 2015.

"We continue to execute against our philosophy of maintaining enviable credit quality measures," stated O'Brien.  "This not only ensures that our quality metrics remain strong, but it also avoids the significant expense drag related to managing substandard credits."

Capital

The Company's capital ratios improved further due to positive earnings. At December 31, 2016, the Bank's Tier 1 common equity risk-based capital ratio was 18.9%, total risk-based capital ratio 19.8%, Tier 1 risk-based capital ratio 18.9% and leverage capital ratio 14.5%. At December 31, 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 15.1%, 21.6%, 18.9%, and 14.6%, respectively. The Company's tangible equity to tangible assets ratio was 12.7% at December 31, 2016, as compared to 10.6% at September 30, 2016 and 10.0% at December 31, 2015.  Regulatory capital increased by only $17 million due to the valuation allowance reversal.  Deferred tax assets related to net operating losses are disallowed in the calculation of regulatory capital.

"We will continue to prudently deploy capital throughout 2017 and remain alert for signs of overheated credit or economic activity," stated O'Brien.  "We are optimistic that these early signs of financial market optimism will create conditions and policies that support sustainable economic growth, increased labor activity, and prosperity."

Deferred Tax Asset

The Company's fourth quarter financial results include the reversal of a portion of the valuation allowance recorded against the deferred tax assets of the Company. This reversal resulted in the recognition of a one-time income tax benefit in the fourth quarter of 2016 of $53.7 million, or $2.82 per diluted share. The Company has performed a continuing evaluation of its deferred tax asset valuation allowance on a quarterly basis. The Company has now concluded that, as of December 31, 2016, it is more likely than not that the Company will generate sufficient taxable income within the applicable net operating loss carry-forward periods to realize a portion of its deferred tax assets. This conclusion, and the resulting partial reversal of the deferred tax asset valuation allowance, is based upon consideration of a number of factors, including the Company's completion of eight consecutive quarters of profitability, its demonstrated ability to meet or exceed budgets, and its forecast of future profitability.

The Bank did not factor in any growth in earnings to forecast its future profitability given the stable results in previous quarters.  If the Bank successfully demonstrates earnings growth in future periods, additional reversals in the valuation allowance may be recorded.  After recognizing the partial reversal, the Company's net deferred tax asset totaled $51.6 million at December 31, 2016, net of a valuation allowance of $73.2 million. The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance will be evaluated on a quarterly basis to determine if there are significant events that would affect the Company's ability to utilize these deferred tax assets.  As a result of this reversal, the Company will begin recording federal and state tax expense on its earnings beginning in the first quarter of 2017.

The Company determined the amount of the valuation allowance reversal utilizing its current federal tax rate of 35% and its effective state tax rate of 5.85%.  President Donald Trump campaigned on, and his new administration has publicly discussed, various plans to recommend to Congress that it enact legislation for significant reductions in corporate Federal income tax rates.  Any change in the Federal corporate tax rate could significantly impact the amount of the deferred tax asset the Company may recognize. The potential impact of various changes to the corporate tax rate on the Company's deferred tax asset as of December 31, 2016 is summarized below (dollars in thousands):

Dividend Declaration

On January 30, 2017, the Board of Directors of the Company declared a dividend of $0.01 per share to holders of record of the common stock of the Company as of February 27, 2017, payable on March 13, 2017.

"We are pleased to announce our third consecutive quarterly dividend," stated O'Brien.  "The support of the Company's shareholders has been vitally important to our progress.  The 2016 achievements of continued operating profitability, the third dividend declaration, and the $53.7 million reversal of the deferred tax asset are a further testament to the enormous progress that the Company has made in a short period of time.  With those successes in mind, we head into 2017 in a very strong and energized position to further capitalize on our opportunities."

Conference Call

The Company's management will hold a conference call on Tuesday, January 31, 2017 at 11:00 AM (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: 877-856-1969
• Conference ID: 9197438

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 $2.26 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 December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016 and December 31, 2015.

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, 2016, September 30, 2016, June 30, 2016, March 31, 2016, and December 31, 2015.