Sun Bancorp, Inc. Announces Second Quarter Net Income of $1.5 Million, or $0.08 per Diluted Share; Board of Directors Declares Quarterly Dividend of $0.01

MOUNT LAUREL, N.J., July 26, 2017 /PRNewswire/ --

Second Quarter Highlights:

• On June 30, 2017, Sun Bancorp, Inc. announced an agreement to be acquired by OceanFirst Financial Corp. in a stock and cash merger with an aggregate value of approximately $487 million at the time of the announcement.
• Second quarter 2017 net income of $1.5 million, or $0.08 per diluted share, compared to net income of $1.4 million, or $0.07 per diluted share, in first quarter of 2017.
• The Company completed the previously announced redemptions of $15 million and $25 million of trust preferred securities on June 30, 2017 and July 23, 2017, respectively.
• Net interest margin increased by three basis points to 2.96% in the second quarter of 2017 as compared to the first quarter of 2017; The acceleration of $415 thousand of deferred issuance costs for the early trust preferred security redemptions reduced net interest margin by nine basis points.
• Operating expense control continued with quarterly operating expenses of $16.3 million in the second quarter, which includes $400 thousand of merger-related costs as compared to $17.1 million in the prior-year quarter.
• Continuation of solid asset quality trends with non-performing loans of $4.4 million at June 30, 2017, which is 0.28% of gross loans and net recoveries of $59 thousand in the second quarter; Recorded a negative provision for loan losses of $831 thousand in the second quarter.
• Board of Directors declared a dividend of $0.01 per share to holders of record of the common stock of Sun Bancorp, Inc. as of August 22, 2017, payable on September 6, 2017.

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 June 30, 2017, compared to net income of $1.4 million, or $0.07 per diluted share, for the quarter ended March 31, 2017, and net income of $3.0 million, or $0.16 per diluted share, for the quarter ended June 30, 2016.

On June 30, 2017, the Company entered into a definitive agreement with OceanFirst Financial Corp. (NASDAQ: OCFC) ("OceanFirst"), pursuant to which the Company will merge with and into OceanFirst with OceanFirst as the surviving entity (the "Merger").  The Merger is expected to close in the first quarter of 2018, subject to each company receiving the required approval of its shareholders, receipt of all required regulatory approvals and other customary closing conditions.

"This quarter was particularly noteworthy for our continued success in managing non-interest expense and our cost of funds, as well as realizing the predicted improvement in the net interest margin," said Thomas M. O'Brien, President & CEO.  "This represents our tenth consecutive profitable quarter, as well as our fifth consecutive quarterly dividend declaration.  This trend of consistently improving our financial performance ultimately culminated with the announcement of the merger agreement with OceanFirst at the end of the quarter.  This strategic partnership represents a milestone for the Company, and recognizes the significant achievements we have made in the last three years.  OceanFirst is an ideal partner whose focus on the community bank business model, geographic markets and business strategies complement those of the Company.  We believe that combining our institutions will create a premier New Jersey community bank that will provide significant value for our shareholders, while also benefiting our customers and the communities that we serve." 

Discussion of Results:

Balance Sheet

Total assets decreased to $2.22 billion at June 31, 2017, as compared to $2.26 billion at both March 31, 2017 and December 31, 2016. Cash and cash equivalents totaled $127.8 million at June 30, 2017, as compared to $128.9 million at March 31, 2017 and $134.2 million at December 31, 2016.  The decrease in cash and cash equivalents during the first six months of 2017 was primarily due to a reduction in brokered and subscription deposits and the redemption of $15 million of trust preferred securities, partially offset by decreases in net loans receivable and investment securities.

Investment securities decreased by $15.6 million to $300.0 million at June 30, 2017 from $315.6 million in the prior linked quarter primarily due to pay downs of $28.9 million and the sale of the remaining collateralized lending obligations portfolio of $13.5 million, partially offset by $26.2 million in purchases of primarily variable rate mortgage-backed securities.

Net loans decreased by $20.2 million to $1.57 billion at June 30, 2017 as compared to $1.59 billion at each of March 31, 2017 and December 31, 2016, due primarily to the decrease in loan origination and refinancing activity in the Commercial Real Estate ("CRE") business during the second quarter of 2017.  As a result of the reduction in originations and refinancing activity, non-owner occupied CRE loans fell by $18.3 million in the second quarter.  Offsetting this decrease, the Bank experienced continued momentum in its Commercial and Industrial ("C&I") business segment.  The C&I segment, which includes owner-occupied CRE and C&I, grew by $9.2 million in the second quarter and has grown 15% annualized in the first half of 2017, due to an increase of $21 million in C&I loans, offset by a decrease of $11.8 million in owner-occupied CRE loans.  Offsetting this growth was continued reductions in residential and home equity loans which fell by $12.0 million in the second quarter as the Bank continued its strategy of not originating new consumer loans.

"Our stated goal of strategically growing the C&I segment continued in this quarter," stated O'Brien.  "Our C&I lending team continues to build momentum throughout the region.  On the CRE segment, we saw slower activity primarily as a result of both higher interest rates as well as continued uncertainty regarding tax reform."

Total deposits decreased to $1.71 billion at June 30, 2017, as compared to $1.73 billion at March 31, 2017 and $1.74 billion at December 31, 2016 due primarily to planned runoff in brokered deposits and subscription deposits.  The cost of deposits increased by one basis point to 40 basis points compared to the prior linked quarter and increased by six basis points as compared to the six months ended June 30, 2016 due to the impact of the recent increase in market interest rates and growth in retail certificates of deposit.  Non-interest deposits rose by $4.5 million to $409.7 million.

"Our ongoing strategy of growing relationship-based deposits continued in the second quarter," stated O'Brien.  "As we reduced our wholesale brokered and other non-relationship deposit accounts, we saw mild growth in our non-interest deposit base.  Despite increasing rates in the external environment, our cost of deposits remains stable and attractive relative to our peers.  We have worked hard to stabilize and grow our deposit portfolio and the related fee income appropriately derived from it."

Net Interest Income and Margin

Net interest income was $14.9 million for the three months ended June 30, 2017, compared to $14.8 million for the three months ended March 31, 2017, and $14.9 million for the three months ended June 30, 2016. The Company's net interest margin was 2.96% for the three months ended June 30, 2017 as compared to 2.93% for three months ended March 31, 2017 and 2.98% for the three months ended June 30, 2016.  During the second quarter, the Bank accelerated $415 thousand of deferred issuance costs related to two tranches of trust preferred securities, totaling $40 million, which were fully redeemed during June and July of 2017.  This acceleration of costs reduced net interest margin by nine basis points in the second quarter of 2017.  Previous external increases in short-term market interest rates provided a lift to the net interest margin due to the asset-sensitive position in the Company's balance sheet.  The cost of deposits rose by one basis point in the quarter to 0.40% while the loan yield rose by eight basis points to 4.05%.  The Company anticipates $1.2 million of annualized savings due to the trust preferred redemptions.

"In recent years, our elevated cash position has suppressed our net interest margin," said O'Brien.  "We believe that the Company deployed excess liquidity prudently with shorter asset durations and emphasized low cost relationship deposit strategies when interest rates were low.  These tactics are now providing a benefit in the net interest margin after the three moves in short-term interest rates since December of 2016.  Once the Company realizes the full benefit of the trust preferred redemptions, the net interest margin will continue to move in a favorable direction."

Non-Interest Income

Non-interest income was $3.0 million for the quarter ended June 30, 2017, as compared to $3.4 million and $3.8 million for the quarters ended March 31, 2017 and June 30, 2016, respectively.  The decrease in non-interest income from the quarter ended March 31, 2017 is due primarily to two loan related fees totaling $550 thousand that were recorded in the first quarter of 2017.  The decrease from the prior year quarter was due to investment sale gains of $426 thousand in the quarter ended June 30, 2016 and higher deposit service charges and fees and investment products income in the prior year quarter. 

Non-Interest Expense

Non-interest expense for the second quarter of 2017 was $16.3 million as compared to $16.1 million for the three months ended March 31, 2017 and $17.1 million for the three months ended June 30, 2016.  The increase in non-interest expense from the prior linked quarter is due primarily to an increase of $580 thousand in professional fees, partially offset by a $300 thousand expense related to an outstanding letter of credit on a previously-sold legacy loan recorded in the first quarter of 2017.  Professional fees in the second quarter of 2017 include $400 thousand of Merger related expenses.  Non-interest expense for the second quarter of 2017 declined by $777 thousand compared to the second quarter of 2016, primarily due to a decrease of $148 thousand in insurance expense as a result of reductions in FDIC assessment rates, a decrease of $367 thousand in salaries and employee benefit expense, a decrease of $117 thousand in problem loan expense, as well as a decrease of $164 thousand in data processing expense due to efficiency gains, partially offset by an increase of $74 thousand related to equipment expenses. The Bank recorded a vacation accrual in the second quarter of 2017 of $461 thousand.  This expense will be reversed in the second half of the year.

"Our ability to manage expenses continues to be a strength at the Company," said O'Brien.  "While we experienced a one-time Merger-related expense in the current quarter of $400 thousand and some other elevated expenses in the second quarter due to a system conversion, we continue to see favorable long-term trends in operating expenses and additional opportunities to reduce operating expenses further in coming quarters."

Asset Quality

Non-performing loans increased by $359 thousand to $4.4 million, or 0.28% of gross loans, at June 30, 2017 from $4.1 million, or 0.25% of gross loans, at March 31, 2017. This increase was primarily due to residential mortgage loans entering non-accrual status during the three months ended June 30, 2017.  Non-performing loans were $5.8 million, or 0.35% of gross loans, at June 30, 2016.

There was a negative provision for loan losses of $831 thousand during the quarter ended June 30, 2017 compared to no provision for loan losses during the quarter ended March 31, 2017 and a negative provision for loan losses of $1.7 million recorded in the second quarter of 2016.  Continued credit strength, limited charge-off activity, net recoveries of $59 thousand and loan pay downs resulted in a reduced reserve need at June 30, 2017.  In the first six months of 2017, the Bank recorded net recoveries of $234 thousand as compared to net charge-offs of $434 thousand in the first six months of 2016.  The allowance for loan losses was $14.9 million, or 0.94% of gross loans at June 30, 2017 as compared to $15.7 million, or 0.98% of gross loans at March 31, 2017 and $16.0 million, or 1.02% of gross loans at June 30, 2016.  The allowance for loan losses was 337% of non-performing loans at June 30, 2017 as compared to 385% of non-performing loans at March 31, 2017 and 289% of non-performing loans at June 30, 2016.

Capital

The Company's capital ratios continue to remain very strong due to positive earnings and a relatively flat balance sheet.  The redemption of trust preferred securities during the second quarter reduced the Company's Tier 2 capital only, and thus only impacted the Company's total risk-based capital ratio.  All capital ratios remain at robust levels and are sufficient to support the Company's strategic plan.  At June 30, 2017, the Bank had a Tier 1 common equity risk-based capital ratio of 18.3%, total risk-based capital ratio of 19.3%, a Tier 1 risk-based capital ratio of 18.3% and a leverage capital ratio of 13.6%. At June 30, 2017, 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 16.2%, 21.4%, 19.7%, and 14.7%, respectively.  The Company's tangible equity to tangible assets ratio was 13.2% at June 30, 2017, as compared to 12.8% at March 31, 2017 and 10.5% at June 30, 2016. 

Dividend Declaration

On July 25, 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 August 22, 2017, payable on September 6, 2017.

"Our primary focus has continued to be delivering value to shareholders," said O'Brien.  "Our regular quarterly dividends reflect our commitment to delivering value to stockholders and our announced transaction with OceanFirst demonstrates our commitment to creating long-term strategic value as well."

Conference Call

The Company will hold a conference call on Wednesday, July 26, 2017 at 11:00 a.m. (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: 888-466-4462
• Conference ID: 9943940

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 $2.22 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.  This press release may also contain forward-looking statements about the benefits of the Merger with OceanFirst, including future financial and operating results of OceanFirst, the Company or the combined institution following the Merger, the combined institution's plans, objectives, expectations and intentions, the expected timing of the completion of the Merger, the likelihood of success and other statements 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) delays in closing the Merger and the ability of the Company or OceanFirst to obtain regulatory approvals and meet other closing conditions to the Merger, including receipt of approval from each company's shareholders, (ii) the potential impact of announcement or consummation of the Merger on relationships with third parties, including customers, employees, and competitors, (iii) business disruption following the Merger, (iv) difficulties and delays in integrating the OceanFirst and Company businesses or fully realizing cost savings and other benefits, (v) OceanFirst's potential exposure to unknown or contingent liabilities of the Company, (vi) the Company's ability to attract and retain key management and staff; (vii) changes in business strategy or an inability to successfully execute strategy due to the occurrence of unanticipated events; (viii) the ability to attract deposits and other sources of liquidity; (ix) changes in the financial performance and/or condition of the Bank's borrowers; (x) changes in consumer spending, borrowing and saving habits; (xi) the ability to increase market share and control expenses; (xii) changes in estimates of future loan loss reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (xiii) local, regional and national economic conditions and events and the impact they may have on the Company and its customers; (xiv) volatility in the credit and equity markets and its effect on the general economy; (xv) the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs; (xvi) the overall quality of the composition of the Company's loan and securities portfolios; (xvii) inflation, interest rate, securities market and monetary fluctuations;(xviii) 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; (xix) 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; (xx) competition among providers of financial services; and (xxi) 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, 2016 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.

Additional Information about the Merger and Where to Find it

In connection with the Merger, OceanFirst intends to file a registration statement on Form S-4 with the Securities and Exchange Commission ("SEC"), which includes a joint proxy statement of the Company and OceanFirst and a prospectus of OceanFirst, and each party has and will file other documents regarding the Merger with the SEC.  When available, copies of the definitive joint proxy statement/prospectus will also be sent to Company stockholders seeking any required stockholder approvals.  Before making any voting or investment decision, investors and security holders of the Company are urged to carefully read the entire registration statement and joint proxy statement/prospectus, when they become available, as well as any amendments or supplements to these documents, because they will contain important information about the proposed transaction. The documents filed by OceanFirst and the Company with the SEC may be obtained free of charge at the SEC's website at www.sec.gov. In addition, the documents filed by OceanFirst may be obtained free of charge at OceanFirst's website at www.oceanfirstonline.com and the documents filed by the Company may be obtained free of charge at the Company's website at www.sunnationalbank.com.  Alternatively, these documents, when available, can be obtained free of charge from OceanFirst upon written request to OceanFirst Financial Corp., Attn: Christopher D. Maher, 975 Hooper Avenue, Toms River, New Jersey 08753, or upon written request to Sun Bancorp, Inc., Attn: Janice M. Clark, Corporate Secretary, 350 Fellowship Road, Suite 101, Mount Laurel, NJ 08054.

OceanFirst, the Company, their directors, executive officers and certain other persons may be deemed to be participants in the solicitation of proxies from OceanFirst's and the Company's stockholders in favor of the approval of the Merger. Information about the directors and executive officers of OceanFirst and their ownership of OceanFirst common stock is set forth in the proxy statement for OceanFirst's 2017 annual meeting of stockholders, as previously filed with the SEC on April 26, 2017.  Information about the directors and executive officers of the Company and their ownership of Company common stock is set forth in the Company's proxy statement for the Company's 2017 annual meeting of stockholder as previously filed with the SEC on March 30, 2017.  Stockholders may obtain additional information regarding the interests of such participants in the Merger by reading the registration statement and the proxy statement/prospectus when they become available.

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, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016.

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, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016.