Sun Bancorp (SNBC) 10-Q 2014 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number: 0 - 20957

SUN BANCORP, INC.

(Exact name of registrant as specified in its charter)

New Jersey	52-1382541
(State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)

226 Landis Avenue, Vineland, New Jersey	08360
(Address of principal executive offices)	(Zip Code)

(856) 691-7700

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act).    Yes  ¨    No  x

Common Stock, $1.00 Par Value – 87,076,823 Shares Outstanding at May 5, 2014

TABLE OF CONTENTS

	Page Number
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition at March 31, 2014 and December 31, 2013	3
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013	4
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013	5
Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2014 and 2013	6
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013	7
Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3. Quantitative and Qualitative Disclosures about Market Risk	53
Item 4. Controls and Procedures	54
PART II—OTHER INFORMATION	55
Item 1. Legal Proceedings	55
Item 1A. Risk Factors	55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3. Defaults Upon Senior Securities	55
Item 4. Mine Safety Disclosures	55
Item 5. Other Information	55
Item 6. Exhibits	55
Signatures	56

Exhibits:

Exhibit 3.1 Amended and Restated Certificate of Incorporation of Sun Bancorp, Inc.

Exhibit 3.2 Certificate of Amendment to Restated Certificate of Incorporation

Exhibit 3.3 Amended and Restated Bylaws of Sun Bancorp, Inc.

Exhibit 4.1 Common Security Specimen

Exhibit 31(a) Section 302 Certification of CEO

Exhibit 31(b) Section 302 Certification of Chief Financial Officer

Exhibit 32 Section 906 Certifications

Exhibit 101.INS XBRL Instance Document

Exhibit 101.SCH XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF XBRL Taxonomy Definition Linkbase Document

2

SUN BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except par value amounts)

	March 31, 2014			December 31, 2013
ASSETS
Cash and due from banks	$	49,850		$	38,075
Interest-earning bank balances		232,245			229,687
Cash and cash equivalents		282,095			267,762
Restricted cash		26,000			26,000
Investment securities available for sale (amortized cost of $442,681 and $452,023 at March 31, 2014 and December 31, 2013, respectively)		439,405			440,097
Investment securities held to maturity (estimated fair value of $664 and $692 at March 31, 2014 and December 31, 2013, respectively)		655			681
Loans receivable (net of allowance for loan losses of $33,768 and $35,537 at March 31, 2014 and December 31, 2013, respectively)		2,050,312			2,102,167
Loans held-for-sale, at fair value		16,048			20,662
Restricted equity investments, at cost		16,664			17,019
Bank properties and equipment, net		48,008			49,095
Real estate owned, net		2,728			2,503
Accrued interest receivable		6,889			7,112
Goodwill		38,188			38,188
Intangible assets, net		521			805
Deferred taxes, net		682			4,575
Bank owned life insurance (BOLI)		77,697			77,236
Other assets		32,575			33,651
Total assets	$	3,038,467		$	3,087,553
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	2,573,445		$	2,621,571
Securities sold under agreements to repurchase – customers		471			478
Advances from the Federal Home Loan Bank of New York (FHLBNY)		60,915			60,956
Obligations under capital lease		7,259			7,331
Junior subordinated debentures		92,786			92,786
Other liabilities		54,693			59,094
Total liabilities		2,789,569			2,842,216
Commitments and contingencies (see Note 10)
Shareholders’ equity:
Preferred stock, $1 par value, 1,000,000 shares authorized; none issued		—			—
Common stock, $1 par value, 200,000,000 shares authorized; 88,709,281 shares issued and 86,766,358 shares outstanding at March 31, 2014; 88,711,035 shares issued and 86,714,414 shares outstanding at December 31, 2013		88,709			88,711
Additional paid-in capital		506,101			506,719
Retained deficit		(319,860	)		(317,954	)
Accumulated other comprehensive loss		(1,938	)		(7,055	)
Deferred compensation plan trust		(502	)		(522	)
Treasury stock at cost, 1,942,923 shares at March 31, 2014; and 1,996,621 December 31, 2013		(23,612	)		(24,562	)
Total shareholders’ equity		248,898			245,337
Total liabilities and shareholders’ equity	$	3,038,467		$	3,087,553

See Notes to Unaudited Condensed Consolidated Financial Statements.

3

SUN BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share amounts)

	For the Three Months Ended March 31,
	2014			2013
INTEREST INCOME
Interest and fees on loans	$	21,849		$	24,899
Interest on taxable investment securities		2,250			1,544
Interest on non-taxable investment securities		309			394
Dividends on restricted equity investments		232			246
Total interest income		24,640			27,083
INTEREST EXPENSE
Interest on deposits		2,281			3,015
Interest on funds borrowed		436			443
Interest on junior subordinated debentures		531			547
Total interest expense		3,248			4,005
Net interest income		21,392			23,078
PROVISION FOR LOAN LOSSES		—			171
Net interest income after provision for loan losses		21,392			22,907
NON-INTEREST INCOME
Service charges on deposit accounts		2,151			2,229
Mortgage banking revenue, net		635			3,404
Gain on sale of investment securities		—			3,487
Investment products income		617			679
BOLI income		461			448
Derivative credit valuation adjustment		(38	)		(504	)
Other		1,123			1,139
Total non-interest income		4,949			10,882
NON-INTEREST EXPENSE
Salaries and employee benefits		12,884			14,292
Commission expense		897			2,041
Occupancy expense		4,266			3,576
Equipment expense		1,749			1,859
Data processing expense		1,197			999
Amortization of intangible assets		284			921
Insurance expense		1,467			1,430
Professional fees		1,486			2,647
Advertising expense		586			553
Problem loan expense		632			799
Real estate owned expense, net		144			234
Office supplies expense		251			229
Other		2,045			1,756
Total non-interest expense		27,888			31,336
(LOSS) INCOME BEFORE INCOME TAXES		(1,547	)		2,453
INCOME TAX EXPENSE		359			—
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	(1,906	)	$	2,453
Basic (loss) earnings per share	$	(0.02	)	$	0.03
Diluted (loss) earnings per share	$	(0.02	)	$	0.03
Weighted average shares – basic		86,740,847			86,245,121
Weighted average shares – diluted		86,740,847			86,370,435

See Notes to Unaudited Condensed Consolidated Financial Statements.

4

SUN BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	For the Three Months Ended
	March 31,
	2014			2013
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	(1,906	)	$	2,453
Other Comprehensive Income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period	$	5,117		$	1,078
Less: reclassification adjustment for gains included in net income		—			(2,064	)
Other comprehensive income (loss)		5,117			(986	)
COMPREHENSIVE INCOME	$	3,211		$	1,467

See Notes to Unaudited Condensed Consolidated Financial Statements.

5

SUN BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in thousands)

	Preferred Stock		Common Stock			Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Deferred Compensation			Treasury Stock			Total
BALANCE, JANUARY 1, 2013	$	—	$	88,301		$	506,537		$	(308,011	)	$	2,186		$	(256	)	$	(26,162	)	$	262,595
Net income		—		—			—			2,453			—			—			—			2,453
Other comprehensive income		—		—			—			—			(986	)		—			—			(986	)
Issuance of common stock		—		58			142			—			—			(59	)		—			141
Stock-based compensation		—		44			94			—			—			—			—			138
BALANCE, March 31, 2013	$	—	$	88,403		$	506,773		$	(305,558	)	$	1,200		$	(315	)	$	(26,162	)	$	264,341
BALANCE, JANUARY 1, 2014	$	—	$	88,711		$	506,719		$	(317,954	)	$	(7,055	)	$	(522	)	$	(24,562	)	$	245,337
Net loss		—		—			—			(1,906	)		—			—			—			(1,906	)
Other comprehensive income		—		—			—			—			5,117			—			—			5,117
Issuance of common stock		—		(2	)		(748	)		—			—			20			950			220
Stock-based compensation		—		—			130			—			—			—			—			130
BALANCE, March 31, 2014	$	—	$	88,709		$	506,101		$	(319,860	)	$	(1,938	)	$	(502	)	$	(23,612	)	$	248,898

See Notes to Unaudited Condensed Consolidated Financial Statements.

6

SUN BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	For the Three Months Ended March 31,
	2014			2013
OPERATING ACTIVITIES
Net (loss) income	$	(1,906	)	$	2,453
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		—			171
Increase in reserve for unfunded commitments		196			108
Depreciation, amortization and accretion		1,415			3,257
Impairment of bank properties and equipment and real estate owned		7			47
Loss on sale of real estate owned		97			94
Net gain on sales and calls of investment securities available-for-sale		—			(3,489	)
Gain on sale of mortgage loans		(743	)		(4,006	)
Gain on bulk sale of jumbo residential mortgage loans, net		—			(856	)
Change in fair value of residential mortgage loans held-for-sale		104			1,243
Increase in fair value of interest rate lock commitments		4			214
Derivative credit valuation adjustments		38			530
Increase in cash surrender value of BOLI		(461	)		(448	)
Deferred income taxes		359			—
Stock-based compensation		130			138
Shares contributed to employee benefit plans		201			200
Mortgage loans originated for sale		(24,901	)		(139,347	)
Proceeds from the sale of mortgage loans		32,163			199,753
Change in assets and liabilities which provided (used) cash:
Accrued interest receivable		223			350
Other assets		(1,543	)		1,479
Other liabilities		(1,400	)		(13,700	)
Net cash provided by operating activities		3,983			48,191
INVESTING ACTIVITIES
Purchases of available-for-sale securities		(3,549	)		(31,776	)
Net redemption of restricted equity securities		355			761
Proceeds from maturities, prepayments or calls of investment securities available for sale		12,767			35,409
Proceeds from maturities, prepayments or calls of investment securities held to maturity		26			30
Proceeds from the sale of investment securities available-for-sale		—			31,359
Proceeds from sale of commercial real estate loans		—			20,771
Proceeds from sale of repossessed assets		57			—
Proceeds from bulk sale of jumbo residential mortgage loans		—			52,328
Return of surrender value of BOLI		—			1,504
Net decrease (increase) in loans		49,390			(27,493	)
Purchases of bank properties and equipment		(515	)		(424	)
Proceeds from sale of real estate owned		126			919
Net cash provided by investing activities		58,657			83,388
FINANCING ACTIVITIES
Net (decrease) increase in deposits		(48,187	)		10,113
Net (redemptions) issuances of securities sold under agreements to repurchase – customer		(7	)		758
Repayments of advances from FHLBNY		(41	)		(338	)
Repayment of obligations under capital leases		(72	)		(68	)
Net cash (used in) provided by financing activities		(48,307	)		10,465
NET INCREASE IN CASH AND CASH EQUIVALENTS		14,333			142,044
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		267,762			143,616
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	282,095		$	285,660
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	3,448		$	7,561
Income taxes paid		—			—
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Trade date receivable from sale of investment securities		—			94,509
Obligations to purchase investment securities		—			10,500
Transfer of loans and bank property to real estate owned		455			2,070

See Notes to Unaudited Condensed Consolidated Financial Statements.

7

SUN BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts presented in the tables, except share and per share amounts, are in thousands)

(1) Summary of Significant Accounting Policies

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, comprehensive income, changes in equity and cash flows in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”).

All normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto included in the Annual Report on Form 10-K of Sun Bancorp, Inc. (the “Company”) for the year ended December 31, 2013. The results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other period. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. The significant estimates include the allowance for loan losses, other-than-temporary impairment on investment securities, goodwill, intangible assets, income taxes, stock-based compensation and the fair value of financial instruments. Actual results may differ from these estimates under different assumptions or conditions.

Prior Period Revision. Previously, the Company presented restricted cash, with respect to amounts held as collateral against letters of credit, in “Cash and due from banks” on the consolidated statements of financial condition. During the fourth quarter of 2013, the Company identified that certain of these balances should be classified as restricted cash. The table below reports the impact of these revisions to the consolidated statements of cash flows for the three months ended March 31, 2013:

Three Months Ended March 31,	Revised 2013		As reported 2013
Cash and cash equivalents, beginning of year	$	143,616	$	169,616
Cash and cash equivalents, end of period		285,660		311,660

Basis of Consolidation. The unaudited condensed consolidated financial statements include, after all intercompany balances and transactions have been eliminated, the accounts of the Company, its principal wholly-owned subsidiary, Sun National Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Sun Financial Services, L.L.C., 2020 Properties, L.L.C., and 4040 Properties, L.L.C. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“FASB ASC”) 810-10,Consolidation, Sun Capital Trust V, Sun Capital Trust VI, Sun Capital Trust VII, Sun Statutory Trust VII, and Sun Capital Trust VIII, collectively, the “Issuing Trusts”, are presented on a deconsolidated basis.

Segment Information. As defined in accordance with FASB ASC 280,Segment Reporting, the Company has one reportable and operating segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and other borrowings and manage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit.

Loans Held-For-Sale. Loans held-for-sale totaled $16.0 million and $20.7 million at March 31, 2014 and December 31, 2013, respectively. The balance at March 31, 2014 and December 31, 2013 includes $9.0 million and $7.0 million, respectively, of residential mortgage loans originated for the portfolio which have subsequently been transferred to held-for-sale and recorded at fair value. The remaining balance at March 31, 2014 and December 31, 2013 included residential mortgages originated with the intent to sell which were recorded at fair value.

8

Allowance for Loan Losses. The allowance for loan losses is determined by management based upon past experience, evaluation of estimated loss and impairment in the loan portfolio, current economic conditions and other pertinent factors. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations.

The provision for loan losses is based upon historical loan loss experience, a series of qualitative factors and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans under FASB ASC 310,Receivables (“FASB ASC 310”). Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and those criticized and classified loans that continue to perform. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired. For this purpose, delays of less than 90 days are considered to be insignificant. Impairment losses are included in the provision for loan losses. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historic loss experience and qualitative factors. Included in these qualitative factors are:

• Levels of past due, classified and non-accrual loans, and troubled debt restructurings;

• Nature, volume, and concentration of loans;

• Historical loss trends;

• Changes in lending policies and procedures, underwriting standards, collections, and for commercial loans, the level of loans being approved with exceptions to policy;

• Experience, ability and depth of management and staff;

• National and local economic and business conditions, including various market segments;

• Quality of the Company’s loan review system and degree of Board oversight; and

• Effect of external factors, including the deterioration of collateral values, on the level of estimated credit losses in the current portfolio.

Commercial loans, including commercial real estate loans, are placed on non-accrual status at the time the loan has been delinquent for 90 days unless the loan is well secured and in the process of collection. Generally, commercial loans and commercial real estate loans are charged-off no later than 180 days after becoming delinquent unless the loan is well secured and in the process of collection, or other extenuating circumstances support collection. Residential real estate loans are typically placed on non-accrual status at the time the loan has been delinquent for 90 days. Other consumer loans are typically charged-off at 180 days delinquent. In all cases, loans must be placed on non-accrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Goodwill and Intangible Assets. Goodwill is the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company tests goodwill for impairment annually as of December 31, unless circumstances indicate that a test is required at an earlier date. The Company elected to not apply the qualitative evaluation option permitted under Accounting Standards Update (“ASU”) 2011-8, Intangibles –Goodwill and Other (Topic 35): Testing Goodwill for Impairment issued in September 2011. Therefore, the Company utilizes the two-step goodwill impairment test outlined in FASB ASC 350,Intangibles – Goodwill and Other (“FASB ASC 350”). Step one, which is used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. A reporting unit is an operating segment, or one level below an operating segment, as defined in FASB ASC 280. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and step two is therefore unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed to measure the amount of the impairment loss, if any. At December 31, 2013, the Company performed its annual goodwill impairment test, and step one of the analysis indicated that the Company’s fair value was greater than its carrying value; therefore, the Company’s goodwill was not impaired at December 31, 2013. Nothing has occurred since that time to suggest that an impairment exists at March 31, 2014. The carrying amount of goodwill totaled $38.2 million at March 31, 2014 and December 31, 2013.

9

Intangible assets, net on the consolidated statements of financial condition, consist of core deposit intangibles, net of accumulated amortization from the Bank’s previous acquisitions. Core deposit intangibles are amortized using the straight-line method based on the characteristics of the particular deposit type and are evaluated annually for impairment.

Bank Owned Life Insurance (“BOLI”).The Company has purchased life insurance policies on certain key employees. These policies are recorded at their cash surrender value, or the amount that can be realized in accordance with FASB ASC 325-30,Investments in Insurance Contracts. At March 31, 2014, the Company had $26.4 million invested in a general account and $51.3 million in a separate account, for a total BOLI cash surrender value of $77.7 million. The BOLI separate account is invested in a mortgage-backed securities fund, which is managed by an independent investment firm. Pricing volatility of these underlying instruments may have an impact on investment income; however, the fluctuations would be partially mitigated by a stable value wrap agreement which is a component of the separate account. Income from these policies and changes in the cash surrender value are recorded in BOLI income of the unaudited condensed consolidated statements of operations.

Income Taxes.The Company accounts for income taxes in accordance with FASB ASC 740,Income Taxes (“FASB ASC 740”). FASB ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the unaudited condensed consolidated statements of operations. Assessment of uncertain tax positions under FASB ASC 740 requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment is applied when addressing the requirements of FASB ASC 740. At March 31, 2014, the Company had a valuation allowance of $119.6 million against its gross deferred tax asset. As the Company remained in a cumulative loss position, the deferred tax valuation allowance is still appropriate at March 31, 2014. The net deferred tax asset of $682 thousand in the unaudited condensed consolidated statements of financial condition at March 31, 2014 represents the tax benefit from unrealized losses on investment securities available-for-sale. The Company intends to hold these securities until maturity or until such time that they are in an unrealized gain position and therefore, the deferred tax asset is considered appropriate.

Mortgage Banking Revenue, Net. Mortgage banking revenue, net includes revenues associated with the sale of residential mortgage loans originated with the intent to sell, net of recourse liability provision as well as gain on bulk sales of jumbo residential mortgage loans. The components of this line item are as follows:

	For the Three Months Ended March 31,
	2014			2013
Gains on the sale of residential mortgage loans	$	769		$	4,106
Gain on bulk sale of jumbo residential mortgage loans		4			856
Market value adjustment on loans held-for-sale		(104	)		(1,244	)
Fair value adjustment on interest rate lock commitments		(4	)		(214	)
Recourse liability provision		(30	)		(100	)
Mortgage banking revenue, net	$	635		$	3,404

10

Accumulated Other Comprehensive Income. The Company classifies items of accumulated comprehensive income by their nature and displays the details of other comprehensive income in the unaudited condensed consolidated statements of comprehensive income. Amounts categorized as comprehensive loss/income represent net unrealized gains or losses on investment securities available for sale, net of tax and the non-credit portion of any other-than-temporary impairment (“OTTI”) loss not recorded in earnings. Reclassifications are made to avoid double counting items which are displayed as part of net income (loss) for the period. These reclassifications for the three months ended March 31, 2014 and 2013 were as follows:

	For the Three Months Ended March 31,
	2014							2013
	Pre-tax		Tax			After-tax		Pre-tax			Tax			After-tax
Unrealized holding gain on securities available for sale during the period	$	8,650	$	(3,533	)	$	5,117	$	1,823		$	(745	)	$	1,078
Reclassification adjustment for net gains included in net income(1)		—		—			—		(3,487	)		1,423			(2,064	)
Net unrealized gain on securities available for sale	$	8,650	$	(3,533	)	$	5,117	$	(1,664	)	$	678		$	(986	)

(1) All amounts are included in gain on sale of investment securities in the unaudited condensed consolidated statements of operations.

Recent Accounting Principles.

In January 2014, the FASB issued ASU 2014-4, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. For public entities, the amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently evaluating the impact of the adoption of this accounting standards update on its financial statements.

In July 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-11,Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update seek to eliminate the diversity in practice in the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists by presenting the unrecognized tax benefit, or a portion of the unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset. To the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward are not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2013. The Company has evaluated the impact of the adoption of this accounting standards update on its financial statements and determined that there currently is no impact on the Company’s presentation.

(2) Stock-Based Compensation

The Company accounts for stock-based compensation issued to employees, and when appropriate, non-employees, in accordance with the fair value recognition provisions of FASB ASC 718,Compensation – Stock Compensation,(“FASB ASC 718”). Under the fair value provisions of FASB ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and it is recognized as expense over the appropriate vesting period using the straight-line method. However, consistent with FASB ASC 718, the amount of stock-based compensation cost recognized at any date must at least equal the portion of the grant date value of the award that is vested at that date and, as a result, it may be necessary to recognize the expense using a ratable method. Although the provisions of FASB ASC 718 should generally be applied to non-employees, FASB ASC 505-50,Equity-Based Payments to Non-Employees, is used in determining the measurement date of the compensation expense for non-employees.

Determining the fair value of stock-based awards at measurement date requires judgment, including estimating the expected term of the stock options and the expected volatility of the Company’s stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on the Company’s unaudited condensed consolidated financial statements.

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The Company’s stock-based incentive plans authorize the issuance of shares of common stock pursuant to awards that may be granted in the form of stock options to purchase common stock (“Options”) and awards of shares of common stock (“Stock Awards”). The purpose of the Company’s stock-based incentive plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors, advisory directors, employees and other persons to promote the success of the Company. Under the Company’s stock-based incentive plans, Options generally expire ten years after the date of grant, unless terminated earlier under the Option’s terms. A committee of non-employee directors has the authority to determine the conditions upon which the Options granted will vest. Options are granted at the then fair market value of the Company’s stock. All or a portion of any Stock Awards earned as compensation by a director may be deferred under the Company’s Directors’ Deferred Fee Plan.

Activity in the stock option plans for the three months ended March 31, 2014 and March 31, 2013 was as follows:

Summary of Options Activity

	Number of Options			Weighted Average Exercise Price		Number of Options Exercisable
January 1, 2014		1,491,538		$	7.36		1,249,267
Granted		216,245			3.35		—
Exercised		—			—		—
Forfeited		(2,472	)		3.66		—
Expired		(439,236	)		8.78		—
March 31, 2014		1,266,075		$	6.19		855,180
Options vested or expected to vest(1)		1,185,801		$	6.37		—

(1) Includes vested shares and nonvested shares after the application of a forfeiture rate, which is based upon historical data.

	Number of Options			Weighted Average Exercise Price		Number of Options Exercisable
January 1, 2013		1,785,157		$	7.35		1,178,775
Granted		83,610			3.57		—
Exercised		—			—		—
Forfeited		(136	)		—		—
Expired		—			—		—
March 31, 2013		1,868,631		$	7.18		1,334,882
Options vested or expected to vest(1)		1,826,424		$	7.26		—

(1) Includes vested shares and nonvested shares after the application of a forfeiture rate, which is based upon historical data.

The weighted average remaining contractual term was approximately 6.6 years for Options outstanding and 5.4 years for Options exercisable as of March 31, 2014.

At March 31, 2014, the aggregate intrinsic value was $48 thousand for Options outstanding and $15 thousand for Options exercisable.

During the three months ended March 31, 2014 and 2013, the Company granted 216,245 Options and 83,610 Options, respectively. In accordance with FASB ASC 718, the fair value of the Options granted are estimated on the date of grant using the Black-Scholes option pricing model which uses the assumptions in the table below. The expected term of an Option is estimated using historical exercise behavior of employees at a particular level of management who were granted Options with a comparable term. The Options have historically been granted with a 10 year term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility is based on the historical volatility of the Company’s stock price.

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Significant weighted average assumptions used to calculate the fair value of the Options for the three months ended March 31, 2014 and 2013 are as follows:

	For the Three Months Ended March 31,
	2014			2013
Weighted average fair value of Options granted	$	1.45		$	1.84
Weighted average risk-free rate of return		1.16	%		0.76	%
Weighted average expected option life in months		49			59
Weighted average expected volatility		55	%		62	%
Expected dividends(1)	$	—		$	—

(1) To date, the Company has not paid cash dividends on its common stock.

A summary of the Company’s nonvested Stock Award activity during the three months ended March 31, 2014 and March 31, 2013 are presented in the following tables:

Summary of Nonvested Stock Award Activity

	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested Stock Awards outstanding, January 1, 2014		431,834	$	3.13
Issued		91,115		3.33
Vested		—		—
Forfeited		—		—
Nonvested Stock Awards outstanding, March 31, 2014		522,949	$	3.16

	Number of Shares			Weighted Average Grant Date Fair Value
Nonvested Stock Awards outstanding, January 1, 2013		639,037		$	3.30
Issued		—			—
Vested		(73,336	)		4.60
Forfeited		—			—
Nonvested Stock Awards outstanding, March 31, 2013		565,701		$	3.13

There were 91,115 shares of nonvested Stock Awards issued during the three months ended March 31, 2014 and no nonvested Stock Awards issued during the three months ended March 31, 2013. The value of these shares is based upon the closing price of the common stock on the date of grant. Compensation expense is recognized on a straight-line basis over the service period for all of the nonvested Stock Awards issued.

Total compensation expense recognized related to Options and nonvested Stock Awards, including that for non-employee directors, during the three months ended March 31, 2014 and 2013 was $130 thousand and $238 thousand, respectively. As of March 31, 2014, there was approximately $498 thousand and $1.1 million of total unrecognized compensation cost related to Options and nonvested Stock Awards, respectively, granted by the Company. The cost of the Options and Stock Awards is expected to be recognized over a weighted average period of 4.0 years and 2.7 years, respectively.

13

(3) Investment Securities

The amortized cost of investment securities and the approximate fair value at March 31, 2014 and December 31, 2013 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2014
Available for sale:
U.S. Treasury securities	$	2,497	$	6	$	—		$	2,503
U.S. Government agency securities		4,970		—		(374	)		4,596
U.S. Government agency mortgage-backed securities		312,420		1,941		(1,827	)		312,534
Other mortgage-backed securities		274		—		—			274
State and municipal securities		29,242		1,554		—			30,796
Trust preferred securities		12,626		—		(4,010	)		8,616
Collateralized loan obligations		79,904		—		(566	)		79,338
Other securities		748		—		—			748
Total available for sale		442,681		3,501		(6,777	)		439,405
Held to maturity:
U.S. Government agency mortgage-backed securities		405		9		—			414
Other securities		250		—		—			250
Total held to maturity		655		9		—			664
Total investment securities	$	443,336	$	3,510	$	(6,777	)	$	440,069
December 31, 2013
Available for sale:
U.S. Treasury securities	$	2,496	$	4	$	—		$	2,500
U.S. Government agency securities		4,969		—		(562	)		4,407
U.S. Government agency mortgage-backed securities		325,316		1,043		(8,295	)		318,064
Other mortgage-backed securities		277		16		—			293
State and municipal obligations		29,240		1,213		—			30,453
Trust preferred securities		12,626		—		(4,659	)		7,967
Collateralized loan obligations		73,915		—		(686	)		73,229
Other securities		3,184		—		—			3,184
Total available for sale		452,023		2,276		(14,202	)		440,097
Held to maturity:
U.S. Government agency mortgage-backed securities		431		11		—			442
Other securities		250		—		—			250
Total held to maturity		681		11		—			692
Total investment securities	$	452,704	$	2,287	$	(14,202	)	$	440,789

The following table provides the gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2014 and December 31, 2013:

Gross Unrealized Losses by Investment Category

	Less than 12 Months					12 Months or Longer					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
March 31, 2014
U.S. Government agency securities	$	—	$	—		$	4,596	$	(374	)	$	4,596	$	(374	)
U.S. Government agency mortgage-backed securities		129,771		(1,249	)		8,128		(578	)		137,899		(1,827	)
Trust preferred securities		—		—			8,616		(4,010	)		8,616		(4,010	)
Collateralized loan obligations		69,338		(566	)		—		—			69,338		(566	)
Total	$	199,109	$	(1,815	)	$	21,340	$	(4,962	)	$	220,449	$	(6,777	)
December 31, 2013
U.S. Government agency securities	$	—	$	—		$	4,407	$	(562	)	$	4,407	$	(562	)
U.S. Government agency mortgage-backed securities		246,348		(7,374	)		7,961		(921	)		254,309		(8,295	)
Trust preferred securities		—		—			7,967		(4,659	)		7,967		(4,659	)
Collateralized Loan Obligations		45,729		(686	)							45,729		(686	)
Total	$	292,077	$	(8,060	)	$	20,335	$	(6,142	)	$	312,412	$	(14,202	)

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The Company determines whether unrealized losses are temporary in accordance with FASB ASC 325-40,Investments – Other, when applicable, and FASB ASC 320-10, Investments – Overall,(“FASB ASC 320-10”). The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of an OTTI condition. These include, but are not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer.

FASB ASC 320-10 requires the Company to assess if an OTTI exists by considering whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If either of these situations applies, the guidance requires the Company to record an OTTI charge to earnings for the difference between the amortized cost basis of the security and the fair value of the security. If neither of these situations applies, the Company is required to assess whether it is expected to recover the entire amortized cost basis of the security. If the Company is not expected to recover the entire amortized cost basis of the security, the guidance requires the Company to bifurcate the identified OTTI into a credit loss component and a component representing loss related to other factors. A discount rate is applied which equals the effective yield of the security. The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss. When a market price is not readily available, the market value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from open market and other sources as appropriate for the security. The difference between the market value and the present value of cash flows expected to be collected is recognized in accumulated other comprehensive loss on the consolidated statements of financial condition. Application of this guidance resulted in no OTTI charges during the three months ended March 31, 2014 and 2013.

The following is a roll-forward for the three months ended March 31, 2014 and 2013 of OTTI charges recognized in earnings as a result of credit losses on investments:

	For the Three Months Ended March 31,
	2014		2013
Cumulative OTTI, beginning of period	$	10,203	$	10,203
Additional increase as a result of net impairment losses recognized on investments		—		—
Decrease as a result of the sale of an investment with net impairment losses		—		—
Cumulative OTTI, end of period	$	10,203	$	10,203

On December 10, 2013, the Board of Governors of the Federal Reserve System (“FRB”), the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, generally to become effective on July 21, 2015. The Volcker Rule prohibits an insured depository institution and its affiliates (referred to as “banking entities”) from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. These prohibitions impact the ability of U.S. banking entities to provide investment management products and services that are competitive with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading.

The final Volcker Rule regulations do provide certain exemptions allowing banking entities to continue underwriting, market-making and hedging activities and trading certain government obligations, as well as various exemptions and exclusions from the definition of “covered funds.” However, the level of required compliance activity depends on the size of the banking entity and the extent of its trading.

On January 14, 2014, the five federal agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if certain qualifications are met. In addition, the agencies released a non-exclusive list of issuers that meet the requirements of the interim final rule. On April 17, 2014 the FRB released guidance stating that it would extend the conformance period for banks holding collateralized loan obligations by two years to July 2017.

U.S. Government Agency Securities. At March 31, 2014, the gross unrealized loss in the category of 12 months or longer of $374 thousand consisted of one agency security with an estimated fair value of $4.6 million issued and guaranteed by a U.S. Government sponsored agency. The Company monitors certain factors such as market rates and possible credit deterioration to determine if an OTTI exists. As of March 31, 2014, management concluded that an OTTI did not exist on the aforementioned security based upon its assessment. Management also concluded that it does not intend to sell the security, and that it is not more likely than not it will be required to sell the security, before its recovery, which may be maturity, and management expects to recover the entire amortized cost basis of this security.

15

U.S. Government Agency Mortgage-Backed Securities. At March 31, 2014, the gross unrealized loss in the category of less than 12 months of $1.2 million consisted of 19 mortgage-backed securities with an estimated fair value of $129.8 million, the gross unrealized loss in the category of 12 months or longer of $578 thousand consisted of two mortgage-backed securities with an estimated fair value of $8.1 million issued and guaranteed by a U.S. Government sponsored agency. The Company monitors certain factors such as market rates and possible credit deterioration to determine if an OTTI exists. As of March 31, 2014, management concluded that an OTTI did not exist on any of the aforementioned securities based upon its assessment. Management also concluded that it does not intend nor will it be required to sell the securities, before their recovery, which may be maturity, and management expects to recover the entire amortized cost basis of these securities.

Collateralized Loan Obligation Securities. At March 31, 2014, the gross unrealized loss in the category of less than 12 months of $566 thousand consisted of six AAA and six AA rated collateralized loan obligation securities with an estimated fair value of $69.3 million. The Company monitors key credit metrics such as delinquencies, defaults, cumulative losses and credit support levels to determine if an OTTI exists. As of March 31, 2014, management concluded that an OTTI did not exist on any of the aforementioned securities based upon its assessment. Management also concluded that it does not intend nor will it be required to sell the securities, before their recovery, which may be maturity, and management expects to recover the entire amortized cost basis of these securities.

At March 31, 2014, the Company had 13 collateralized loan obligation securities with an amortized cost of $79.9 million and an estimated fair value of $79.3 million. These securities are subject to the provisions of the Volcker Rule. However, a final determination has yet to be made whether banks will be required to divest these investments. Discussion has been ongoing among the regulators, Congress and the investors in the collateralized loan obligations. Based on the current status of these discussions and through the Company’s communication with its investment advisors, the Company believes it will either be able to hold these collateralized loan obligation investments in its portfolio or have them modified such that the perceived risk will be adequately eliminated.

Trust Preferred Securities.At March 31, 2014, the gross unrealized loss in the category of 12 months or longer of $4.0 million consisted of two trust preferred securities. The trust preferred securities are comprised of one non-rated single issuer security with an amortized cost of $3.8 million and an estimated fair value of $2.7 million, and one non-investment grade rated pooled security with an amortized cost of $8.8 million and an estimated fair value of $5.9 million.

For the pooled security, the Company monitors each issuer in the collateral pool with respect to financial performance using data from the issuer’s most recent regulatory reports as well as information on issuer deferrals and defaults. Also, the security structure is monitored with respect to collateral coverage and current levels of subordination. Expected future cash flows are projected assuming additional defaults and deferrals based on the performance of the collateral pool. The non-investment grade pooled security is in a senior position in the capital structure. The security had a 2.9 times principal coverage. As of the most recent reporting date, interest has been paid in accordance with the terms of the security. The Company reviews projected cash flow analysis for adverse changes in the present value of projected future cash flows that may result in an other-than-temporary credit impairment to be recognized through earnings. The most recent valuations assumed no recovery on any defaulted collateral, no recovery on any deferring collateral and an additional 3.6% of defaults or deferrals’ every three years with no recovery rate. As of March 31, 2014, management concluded that an OTTI did not exist on the aforementioned security based upon its assessment. Management also concluded that it does not intend to sell the security, and that it is not more likely than not it will be required to sell the security, before its recovery, which may be maturity, and management expects to recover the entire amortized cost basis of this security.

The financial performance of the non-rated single issuer trust preferred security is monitored on a quarterly basis using data from the issuer’s most recent regulatory reports to assess the probability of cash flow impairment. Expected future cash flows are projected by incorporating the contractual cash flow of the security adjusted, if necessary, for potential changes in the amount or timing of cash flows due to the underlying creditworthiness of the issuer and covenants in the security.

In August 2009, the issuer of the non-rated single issuer trust preferred security elected to defer its normal quarterly dividend payment. As contractually permitted, the issuer may defer dividend payments up to five years with accumulated dividends, and interest on those deferred dividends, payable upon the resumption of its scheduled dividend payments. The issuer is currently operating under an agreement with its regulators. The agreement stipulates that the issuer must receive permission from its regulators prior to resuming its scheduled dividend payments. The contractual deferred period for the issuer ends on September 1, 2014.

The pooled security was included in the non-exclusive list of issuers that meet the requirements of the interim final rule release by the agencies and therefore will not be required to be sold by the Company. The single issuer security is not subject to the provisions of the Volcker rule.

16

During the three months ended March 31, 2014, the Company did not record an OTTI credit-related charge related to this deferring single issuer trust preferred security. Based on the Company’s most recent evaluation, the Company does not expect the issuer to default on the security based primarily on the issuer’s subsidiary bank reporting that it meets the minimum regulatory requirements to be considered a “well capitalized” institution. The Company recognizes that the length of time the issuer has been in deferral, the difficult economic environment and some weakened performance measures, while recently improving, increased the probability that a full recovery of principal and anticipated dividends may not be realized. The cumulative OTTI on this security as of March 31, 2014 was $1.2 million. Based upon the current capital position of the issuer and recent improvements in the financial performance of the issuer, the Company concluded that an additional impairment charge was not warranted at March 31, 2014.

The amortized cost and estimated fair value of the investment securities, by contractual maturity, at March 31, 2014 and December 31, 2013 are shown below. Actual maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
March 31, 2014
Due in one year or less	$	748	$	748	$	—	$	—
Due after one year through five years		3,561		3,629		250		250
Due after five years through ten years		49,727		49,996		—		—
Due after ten years		75,951		72,224		—		—
Total investment securities, excluding mortgage-backed securities		129,987		126,597		250		250
U.S. Government agency mortgage-backed securities		312,420		312,534		405		414
Other mortgage-backed securities		274		274		—		—
Total investment securities	$	442,681	$	439,405	$	655	$	664
December 31, 2013
Due in one year or less	$	3,184	$	3,184	$	—	$	—
Due after one year through five years		3,430		3,490		250		250
Due after five years through ten years		35,452		35,460		—		—
Due after ten years		84,364		79,606		—		—
Total investment securities, excluding mortgage-backed securities		126,430		121,740		250		250
U.S. Government agency mortgage-backed securities		325,316		318,064		431		442
Other mortgage-backed securities		277		293		—		—
Total investment securities	$	452,023	$	440,097	$	681	$	692

At March 31, 2014, the Company had $74.6 million, amortized cost, and $75.6 million, estimated fair value, of investment securities pledged to secure public deposits. As of March 31, 2014, the Company had $185.6 million, amortized cost, and $186.1 million, estimated fair value, of investment securities pledged as collateral on secured borrowings.

17

(4) Loans

The components of loans as of March 31, 2014 and December 31, 2013 were as follows:

Loan Components

	March 31, 2014			December 31, 2013
Commercial:
Commercial and industrial	$	437,109		$	478,734
CRE owner occupied		428,944			468,442
CRE non-owner occupied		583,865			576,084
Land and development		70,075			64,306
Consumer:
Home equity lines of credit		184,936			188,478
Home equity term loans		23,312			25,279
Residential real estate		326,945			305,552
Other		28,894			30,829
Total gross loans held-for-investment		2,084,080			2,137,704
Allowance for loan losses		(33,768	)		(35,537	)
Net loans held-for-investment	$	2,050,312		$	2,102,167

Loans on Non-Accrual Status

	March 31, 2014		December 31, 2013
Commercial:
Commercial & industrial	$	1,473	$	2,358
CRE owner occupied		14,099		14,408
CRE non-owner occupied		1,339		1,969
Land and development		1,218		2,158
Consumer:
Home equity lines of credit		5,331		3,749
Home equity term loans		1,044		1,240
Residential real estate		4,253		3,341
Other		630		591
Total non-accrual loans	$	29,387	$	29,814
Troubled debt restructuring, non-accrual	$	8,017	$	8,163

Many of the Company’s commercial and industrial loans have a real estate component as part of the collateral securing the loan. Additionally, the Company makes commercial real estate loans for the acquisition, refinance, improvement and construction of real property. Loans secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company experiences difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where repayment is dependent upon payment of rent by third-party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit.

As of March 31, 2014, the Company had $48.7 million outstanding on 14 residential construction, commercial construction and land development relationships for which the agreements included interest reserves. As of December 31, 2013, the Company had $54.5 million outstanding on 17 residential construction, commercial construction and land development relationships for which the agreements included interest reserves. The total amount available in those reserves to fund interest payments was $3.3 million and $4.3 million at March 31, 2014 and December 31, 2013, respectively. There were no relationships with interest reserves which were on non-accrual status at March 31, 2014 and December 31, 2013. Construction projects are monitored throughout their lives by professional inspectors engaged by the Company. The budgets for loan advances and borrower equity injections are developed at the time of underwriting in conjunction with the review of the plans and specifications for the project being financed. Advances of the Company’s funds are based on the prepared budgets and will not be made unless the project has been inspected by the Company’s professional inspector who must certify that the work related to the advance is in place and properly complete. As it relates to construction project financing, the Company does not extend, renew or restructure terms unless its borrower posts cash collateral in an interest reserve.

Included in the Company’s loan portfolio are modified commercial loans. Per FASB ASC 310-40,Troubled Debt Restructuring, (“FASB ASC 310-40”), a modification is one in which the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider, such as providing a below market interest rate and/or forgiving principal or previously accrued interest; this modification may stem from an agreement or be imposed by law or a court, and may involve a multiple note structure. Generally, prior to the modification, the loans which are modified as a troubled debt restructuring (“TDR”) are already classified as non-performing. These loans may only be returned to performing (i.e. accrual status) after considering the borrower’s sustained repayment performance for a reasonable amount of time, generally six months; this sustained repayment performance may include the period of time just prior to the restructuring.

18

(5) Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

Allowance for Loan Losses and Recorded Investment in Financing Receivables

	For the Three Months Ended March 31, 2014
	Commercial			Home Equity(1)			Residential Real Estate			Other(2)			Total
Allowance for loan losses:
Beginning balance	$	27,828		$	3,375		$	2,898		$	1,436		$	35,537
Charge-offs		(1,180	)		(307	)		(251	)		(357	)		(2,095	)
Recoveries		201			84			2			39			326
Net charge-offs		(979	)		(223	)		(249	)		(318	)		(1,769	)
Provision for loan losses		(1,101	)		143			787			171			—
Ending balance	$	25,748		$	3,295		$	3,436		$	1,289		$	33,768
Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	16		$	16
Ending balance: collectively evaluated for impairment	$	25,748		$	3,295		$	3,436		$	1,273		$	33,752
Financing Receivables:
Ending balance	$	1,519,993		$	208,248		$	326,945		$	28,894		$	2,084,080
Ending balance: individually evaluated for impairment	$	25,874		$	5,630		$	4,164		$	623		$	36,291
Ending balance: collectively evaluated for impairment	$	1,494,119		$	202,618		$	322,781		$	28,271		$	2,047,789

(1) Amount includes both home equity lines of credit and term loans.

(2) Includes the unallocated portion of the allowance for loan losses.

	For the Three Months Ended March 31, 2013
	Commercial			Home Equity(1)			Residential Real Estate			Other(2)			Total
Allowance for loan losses:
Beginning balance	$	33,197		$	2,734		$	3,333		$	6,609		$	45,873
Charge-offs		(2,986	)		(665	)		—			(151	)		(3,802	)
Recoveries		4,758			53			3			68			4,882
Net charge-offs		1,772			(612	)		3			(83	)		1,080
Provision for loan losses		2,482			2,641			(323	)		(4,629	)		171
Ending balance	$	37,451		$	4,763		$	3,013		$	1,897		$	47,124
Ending balance: individually evaluated for impairment	$	2,021		$	—		$	119		$	—		$	2,140
Ending balance: collectively evaluated for impairment	$	35,430		$	4,763		$	2,894		$	1,897		$	44,984
Financing Receivables:
Ending balance	$	1,737,079		$	229,319		$	248,875		$	36,287		$	2,251,560
Ending balance: individually evaluated for impairment	$	61,339		$	5,923		$	5,734		$	618		$	73,614
Ending balance: collectively evaluated for impairment	$	1,675,740		$	223,396		$	243,141		$	35,669		$	2,177,946

(1) Amount includes both home equity lines of credit and term loans

(2) Includes the unallocated portion of the allowance for loan losses.

19

Risk Characteristics

Commercial Loans. Included in this segment is commercial and industrial, commercial real estate owner occupied, commercial real estate non-owner occupied, and land and development. Many of the Company’s commercial and industrial loans have a real estate component as part of the collateral securing the accommodation. Commercial real estate owner occupied loans rely on the cash flow from the successful operation of the borrower’s business to make repayment. If the operating company experiences difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Commercial real estate non-owner occupied loans rely on the payment of rent by third-party tenants. The borrower’s ability to repay the loan or sell the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit. Commercial and industrial loans are primarily secured by assets of the business, such as accounts receivable and inventory. Due to the nature of the collateral securing these loans, the liquidation of these assets may be problematic and costly. Commercial real estate owner occupied and non-owner occupied loans are secured by the underlying properties. The local economy and real estate market affect the appraised value of these properties which may impact the ultimate repayment of these loans. Land and development loans are primarily repaid by the sale of the developed properties or by conversion to a permanent term loan. These loans are dependent upon the completion of the project on time and within budget, which may be impacted by general economic conditions. The Company requires cash collateral in an interest reserve in order to extend credit on construction projects to mitigate the credit risk.

Home Equity Loans. This segment consists of both home equity lines of credit and home equity term loans on single family residences. These loans rely on the personal income of the borrower for repayment which may be impacted by economic conditions, such as unemployment levels, interest rates and the housing market. These loans are primarily secured by second liens on properties. The secondary source of repayment may be impaired by the real estate market and local regulations.

Residential Real Estate Loans. Included in this segment are residential mortgages on single family residences. These loans rely on the personal income of the borrower for repayment which may be impacted by economic conditions, such as unemployment levels, interest rates and the housing market. These loans are primarily secured by liens on the underlying properties. The secondary source of repayment may be impaired by the real estate market and local regulations.

Other Loans. Other loans consist of personal credit lines, mobile home loans and consumer installment loans. These loans rely on the borrowers’ personal income for repayment and are either unsecured or secured by personal use assets and mobile homes. These loans may be impacted by economic conditions such as unemployment levels. The liquidation of the assets securing these loans may be difficult and costly.

The allowance for loan losses was $33.8 million and $35.5 million at March 31, 2014 and December 31, 2013, respectively. The ratio of allowance for loan losses to gross loans held-for-investment was 1.62% at March 31, 2014 and 1.66% at December 31, 2013.

The provision for loan losses charged to expense is based upon historical loan loss and recovery experience, a series of qualitative factors and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans under FASB ASC 310,Receivables (“FASB ASC 310”). Values assigned to the qualitative factors and those developed from historic loss and recovery experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and those criticized and classified loans that continue to perform.

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in a loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. Impairment losses are included in the provision for loan losses in the unaudited condensed consolidated statements of operations. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss and recovery experience and qualitative factors. Such loans generally include consumer loans, residential real estate loans and small business loans. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios, management’s abilities and external factors.

20

The following table presents the Company’s components of impaired loans receivable, segregated by class of loans. Commercial and consumer loans that were collectively evaluated for impairment are not included in the data that follows:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Accrued Interest Income Recognized		Cash Interest Income Recognized
For the Three Months Ended March 31, 2014
With no related allowance:
Commercial:
Commercial & industrial	$	2,726	$	2,801	$	—	$	2,315	$	—	$	—
CRE owner occupied		20,190		29,166		—		20,184		—		—
CRE non-owner occupied		1,339		1,343		—		986		—		—
Land and development		1,620		1,658		—		1,851		—		—
Consumer:
Home equity lines of credit		4,726		6,062		—		3,913		—		—
Home equity term loans		902		1,061		—		912		—		—
Residential real estate		4,164		5,039		—		4,183		—		—
Other		598		1,710		—		448		—		—
With an allowance recorded:
Consumer:
Other		25		27		16		25		—		—
Total commercial	$	25,875	$	34,968	$	—	$	25,336	$	—	$	—
Total consumer	$	10,415	$	13,899	$	16	$	9,481	$	—	$	—
For the Year Ended December 31, 2013
With no related allowance:
Commercial:
Commercial & industrial	$	3,206	$	3,281	$	—	$	1,884	$	—	$	—
CRE owner occupied		18,503		27,367		—		13,528		—		—
CRE non-owner occupied		1,969		2,251		—		66		—		—
Land and development		2,512		2,549		—		2,669		—		—
Consumer:
Residential real estate		2,569		3,135		—		1,689		—		—
Home Equity Lines of Credit		3,749		5,051		—		3,132		—		—
Home Equity Term Loans		1,238		1,456		—		918		—		—
Other		560		1,567		—		481		—		—
With an allowance recorded:
Commercial:
Commercial & industrial	$	423	$	425	$	423	$	73	$	—	$	—
CRE owner occupied		2,164		2,164		494		47		—		—
Consumer:
Other		26		27		17		16		—		—
Total commercial	$	28,777	$	38,037	$	917	$	18,267	$	—	$	—
Total consumer	$	8,142	$	11,236	$	17	$	6,236	$	—	$	—

In accordance with FASB ASC 310, those impaired loans which are collateral dependent do not result in a specific allowance for loan losses. Included in impaired loans at March 31, 2014 were six TDRs, all of which were collateral dependent. In addition, one of the TDRs at March 31, 2014 included a commitment to lend additional funds of $53 thousand as of March 31, 2014.

21

There were no new TDR agreements entered into during the three months ended March 31, 2014. The following table presents an analysis of the Company’s TDR agreements entered into during the three months ended March 31, 2013.

	Troubled Debt Restructurings
	For the Three Months Ended March 31, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential real estate		1	$	199		197

The following tables present information regarding the types of concessions granted on loans that were restructured during the three months ended March 31, 2013:

	Troubled Debt Restructurings
	For the Three Months Ended March 31, 2013
	Number of Contracts		Concession Granted
Residential real estate		1		Modified term debt to interest only for six month period.

During the three months ended March 31, 2014 and March 31, 2013, the Company did not have any TDR agreements that had subsequently defaulted that were entered into within the respective preceding twelve months. All TDRs are currently on non-accrual status.

The following table presents the Company’s distribution of risk ratings within the held-for-investment loan portfolio, segregated by class, as of March 31, 2014 and December 31, 2013:

Credit Quality Indicators by Internally Assigned Grade

	Commercial & industrial		CRE owner occupied		CRE non-owner occupied		Land and development		Home Equity Lines of Credit		Home Equity Term Loans		Residential Real Estate		Other
As of March 31, 2014
Grade:
Pass	$	379,426	$	370,843	$	560,266	$	67,968	$	177,472	$	22,246	$	320,163	$	27,239
Special Mention		32,702		17,356		8,746		489		—		—		—		—
Substandard		24,981		40,745		14,853		1,618		7,464		1,066		6,782		1,630
Doubtful		—		—		—		—		—		—		—		25
Total	$	437,109	$	428,944	$	583,865	$	70,075	$	184,936	$	23,312	$	326,945	$	28,894
As of December 31, 2013
Grade:
Pass	$	415,875	$	407,486	$	550,426	$	61,303	$	181,796	$	24,016	$	299,625	$	29,994
Special Mention		37,064		17,741		9,464		494		—		—		—		—
Substandard		25,372		41,051		16,194		2,509		6,682		1,263		5,927		809
Doubtful		423		2,164		—		—		—		—		—		26
Total	$	478,734	$	468,442	$	576,084	$	64,306	$	188,478	$	25,279	$	305,552	$	30,829

The Company’s primary tool for assessing risk when evaluating a loan in terms of its underwriting, structure, documentation and eventual collectability is a risk rating system where the loan is assigned a numeric value. Behind each numeric category is a defined set of characteristics reflective of the particular level of risk.

The risk rating system is based on a fourteen point grade using a two-digit scale. The upper seven grades are for “pass” categories, the middle grade is for the “criticized” category, while the lower six grades represent “classified” categories which are equivalent to the guidelines utilized by the Office of the OCC.

22

The portfolio manager is responsible for assigning, maintaining, and documenting accurate risk ratings for all commercial loans and commercial real estate loans. The portfolio manager assigns a risk rating at the inception of the loan, reaffirms it annually, and adjusts the rating based on the performance of the loan. As part of the loan review process, a regional credit officer will review risk ratings for accuracy. The portfolio manager’s risk rating will also be reviewed periodically by the loan review department and the Bank’s regulators.

To calculate risk ratings in a consistent fashion, the Company uses a Risk Rating Methodology that assesses quantitative and qualitative components which include elements of its financial condition, abilities of management, position in the market, collateral and guarantor support and the impact of changing conditions. When combined with professional judgment, an overall risk rating is assigned.

Aging of Receivables

	30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Loans 90 Days Past Due and Accruing
As of March 31, 2014
Commercial:
Commercial & industrial	$	17,873	$	119	$	2,218	$	20,210	$	416,899	$	437,109	$	42
CRE owner occupied		4,422		2,359		3,221		10,002		418,942		428,944		—
CRE non-owner occupied		4,970		437		232		5,639		578,226		583,865		—
Land and development		—		—		1,620		1,620		68,455		70,075		—
Consumer:														—
Home equity lines of credit		2,579		1,437		3,564		7,580		177,356		184,936
Home equity term loans		1,058		165		451		1,674		21,638		23,312		—
Residential real estate		7,505		631		2,846		10,982		315,963		326,945		—
Other		1,514		251		233		1,998		26,896		28,894		—
Total	$	39,921	$	5,399	$	14,385	$	59,705	$	2,024,375	$	2,084,080	$	42
As of December 31, 2013
Commercial:
Commercial & industrial	$	9,149	$	2,726	$	3,452	$	15,327	$	463,407	$	478,734	$	—
CRE owner occupied		4,901		5,865		3,753		14,519		453,923		468,442		—
CRE non-owner occupied		899		4,661		1,070		6,630		569,454		576,084		—
Land and development		—		—		2,512		2,512		61,794		64,306		—
Consumer:
Home equity lines of credit		3,030		1,457		2,324		6,811		181,667		188,478		—
Home equity term loans		1,032		223		825		2,080		23,199		25,279		—
Residential real estate		12,776		1.927		1,086		15,789		289,763		305,552		—
Other		340		202		378		920		29,909		30,829		—
Total	$	32,127	$	17,061	$	15,400	$	64,588	$	2,073,116	$	2,137,704	$	—

(6) Real Estate Owned

Real estate owned at March 31, 2014 and December 31, 2013 was as follows:

	March 31, 2014		December 31, 2013
Commercial properties	$	1,227	$	1,227
Residential properties		1,501		1,276
Bank properties		—		—
Total	$	2,728	$	2,503

23

Summary of Real Estate Owned Activity

	Commercial Properties		Residential Properties			Bank Properties		Total
Beginning balance, January 1, 2014	$	1,227	$	1,276		$	—	$	2,503
Transfers into real estate owned		—		455			—		455
Sale of real estate owned		—		(223	)		—		(223	)
Reserve for losses in real estate owned		—		(7	)		—		(7	)
Ending balance, March 31, 2014	$	1,227		1,501			—		2,728

(7) Derivative Financial Instruments and Hedging Activities

Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures. The Company seeks to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. In general, the derivative transactions entered into by the Company fall into one of two types: a fair value hedge of a specific fixed-rate loan agreement and an economic hedge of a derivative offering to a Bank customer. The Company does not use derivative financial instruments for trading purposes.

Fair Value Hedges – Interest Rate Swaps. The Company utilizes interest rate swap agreements to hedge interest rate risk. The designated hedged items are subordinated notes related to commercial loans that provide a fixed interest receipt for the Company. The interest rate risk is the uncertainty of future interest rate levels and the impact of changes in rates on the fair value of the loans. The hedging of interest rate risk is intended to reduce the volatility of the fair value of the loans due to changes in the interest rate market.

The Company previously entered into interest rate swaps with a counterparty whereby the Company makes payments based on a fixed interest rate and receives payments from the counterparty based on a floating interest rate, both calculated based on the principal amount of the underlying subordinated note, without the exchange of the underlying principal. The Company no longer enters into these interest rate swap transactions, the last of which occurred in August 2007. The interest rate swaps are designated as fair value hedges under FASB ASC 815, Derivatives and Hedging (“FASB ASC 815”). The critical terms assessed by the Company for each hedge of subordinated notes include the notional amounts of the swap compared to the principal amount of the notes, expiration/maturity dates, benchmark interest rate, prepayment terms and cash payment dates. At March 31, 2014 and December 31, 2013, the total outstanding notional amount of these swaps was $20.4 million and $21.2 million, respectively. For each of these swap agreements, the floating rate is based on the one-month London Interbank Offered Rate (“LIBOR”) paid on the first day of the month which matches the interest payment date on each subordinated note. The expiration dates for these swap agreements range from August 1, 2014 to August 1, 2022 and are consistent with the underlying subordinated note maturities and the swaps had a fair value of $0 at inception. At hedge inception and on an ongoing basis, conditions supporting hedge effectiveness are evaluated. The Company believes that all conditions required in paragraph ASC 815-20-25-104 have been met, as all terms of the subordinated note and the interest rate swap match. Because the Company’s evaluations have concluded that the critical terms of the subordinated notes and the interest rate swaps meet the criteria outlined in ASC 815-20-25-104, the “short-cut” method of accounting is applied, which assumes there is no ineffectiveness of a hedging arrangement’s ability to hedge risk as changes in the interest rate component of the swaps’ fair value are expected to exactly offset the corresponding changes in the fair value of the underlying subordinated notes, as described above. Because the hedging arrangement is considered perfectly effective, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in a net impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820, Fair Value Measurements and Disclosures (“FASB ASC 820”). The fair value adjustments related to credit quality were not material as of March 31, 2014 and December 31, 2013.

The following tables provide information pertaining to interest rate swaps designated as fair value hedges under FASB ASC 815 at March 31, 2014 and December 31, 2013:

Summary of Interest Rate Swaps Designated As Fair Value Hedges

	March 31, 2014					December 31, 2013
Balance Sheet Location	Notional		Fair Value			Notional		Fair Value
Other liabilities	$	20,380	$	(1,346	)	$	21,172	$	(1,632	)

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Summary of Interest Rate Swap Components

	March 31, 2014			December 31, 2013
Weighted average pay rate		6.93	%		6.94	%
Weighted average receive rate		2.04	%		2.04	%
Weighted average maturity in years		1.7			1.9

Customer Derivatives – Interest Rate Swaps/Floors.The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure on the variable and fixed components of the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. The Company recognized $38 thousand and $504 thousand in fair value adjustment charges during the three months ended March 31, 2014 and 2013, respectively, which were included in the derivative credit valuation adjustment in the unaudited condensed consolidated statements of operations as a reduction to other income.

	March 31, 2014						December 31, 2013
Balance Sheet Location	Notional			Fair Value			Notional		Fair Value
Other assets	$	239,517		$	20,627		$	251,207	$	23,299
Other liabilities		(239,517	)		(20,908	)		251,207		(23,526	)

In addition, the Company has entered into an interest rate floor sale transaction with one commercial customer. The Company entered into corresponding interest rate floor purchase transactions with a third party in order to offset its exposure on the variable and fixed components of the customer agreements. As the interest rate floors with both the customer and the third party are not designated as hedges under FASB ASC 815, the instruments are marked to market through earnings. As the interest rate floors are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in a net impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There were no fair value adjustments for the interest rate floor transactions for the three months ended March 31, 2014 and 2013. The combined notional amount of the two interest rate floors was $15.0 million and $15.2 million at March 31, 2014 and December 31, 2013, respectively. These transactions are recorded in other assets in the unaudited condensed consolidated statements of financial condition.

Interest rate lock commitments on residential mortgages. As a part of its normal residential mortgage operations, the Bank will enter into an interest rate lock commitment with a potential borrower. The Bank enters into a corresponding commitment to an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings in mortgage banking revenue, net in the unaudited condensed consolidated statements of operations to account for the net change in fair value of these transactions. For the three months ended March 31, 2014 and 2013, the Company recognized $4 thousand and $214 thousand, respectively, in negative fair value adjustments. The interest rate lock commitments are recorded at fair value in other assets in the unaudited condensed consolidated statements of financial condition. The fair value of the interest rate lock commitments was $115 thousand and $119 thousand at March 31, 2014 and December 31, 2013, respectively. The interest rate lock commitments had a total notional amount of $12.2 million for the held-for-sale pipeline at March 31, 2014.

(8) Deposits

Deposits consist of the following major classifications:

	March 31, 2014		December 31, 2013
Interest-bearing demand deposits	$	1,146,368	$	1,179,292
Non-interest-bearing demand deposits		561,578		561,006
Savings deposits		266,137		266,573
Time certificates under $100,000		289,677		300,309
Time certificates $100,000 or more		201,691		206,461
Brokered time deposits		107,994		107,930
Total	$	2,573,445	$	2,621,571

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(9) (Loss) Earnings Per Share

Basic (loss) earnings per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net (loss) income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents, based upon the treasury stock method using an average market price for the period.

(Loss) Earnings Per Share Computation

	For the Three Months Ended March 31,
	2014			2013
Net (loss) income	$	(1,906	)	$	2,453
Average common shares outstanding		86,740,847			86,245,121
Net effect of dilutive common stock equivalents		—		��	125,314
Adjusted average shares outstanding—dilutive		86,740,847			86,370,435
Basic (loss) earnings per share	$	(0.02	)	$	0.03
Diluted (loss) earnings per share	$	(0.02	)	$	0.03

(10) Commitments and Contingent Liabilities

Letters of Credit

In the normal course of business, the Company has various commitments and contingent liabilities, such as customers’ letters of credit (including standby letters of credit of $33.4 million and $34.6 million at March 31, 2014 and December 31, 2013, respectively) which are not reflected in the accompanying unaudited condensed consolidated financial statements. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Reserve for Unfunded Commitments

The Company maintains a reserve for unfunded loan commitments and letters of credit which is reported in other liabilities in the unaudited condensed consolidated statements of financial condition consistent with FASB ASC 825,Financial Instruments. As of March 31, 2014, the Company recorded estimated losses inherent with unfunded loan commitments in accordance with FASB ASC 450,Contingencies,and estimated future obligations under letters of credit in accordance with FASB ASC 460,Guarantees. The methodology used to determine the adequacy of this reserve is integrated in the Company’s process for establishing the allowance for loan losses and considers the probability of future losses and obligations that may be incurred under these off-balance sheet agreements. The reserve for unfunded loan commitments and letters of credit at March 31, 2014 and December 31, 2013 was $650 thousand and $454 thousand, respectively. Management believes this reserve level is sufficient to absorb estimated probable losses related to these commitments.

Reserve for Residential Mortgage Loans Sold with Recourse

The Company maintains a reserve for residential mortgage loans sold with recourse to third-party purchasers which is reported in other liabilities in the unaudited condensed consolidated statements of financial condition. As of March 31, 2014, the Company records estimated losses inherent with residential mortgage loans sold with recourse in accordance with FASB ASC 450,Contingencies. This reserve is determined based upon the probability of future losses which is calculated using historical Company and industry loss data. The reserve for residential mortgage loan recourse as of March 31, 2014 and December 31, 2013 was $608 thousand and $647 thousand, respectively. Management believes this reserve level is sufficient to address potential recourse exposure.

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(11) Fair Value of Financial Instruments

The Company accounts for fair value measurement in accordance with FASB ASC 820. FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820 does not require any new fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. FASB ASC 820 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). FASB ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and also clarifies the application of fair value measurement in a market that is not active.

FASB ASC 820 describes three levels of inputs that may be used to measure fair value:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

FASB ASC 820 requires the Company to disclose the fair value for financial assets on both a recurring and non-recurring basis. The assets and liabilities measured at fair value on a recurring basis are as follows:

				Category Used for Fair Value Measurement
	Total			Level 1		Level 2		Level 3
March 31, 2014
Assets:
Investment securities available for sale:
U.S. Treasury securities	$	2,503		$	2,503	$	—	$	—
U.S. Government agency securities		4,596			—		4,596		—
U.S. Government agency mortgage-backed securities		312,534			—		312,534		—
Other mortgage-backed securities		274			—		274		—
State and municipal securities		30,796			—		30,796		—
Trust preferred securities		8,616			—		—		8,616
Collateralized loan obligations		79,338			—		79,338		—
Other securities		748			748		—		—
Hedged commercial loans		21,804			—		21,804		—
Residential mortgage loans held-for-sale		16,048			—		16,048		—
Interest rate lock commitments on residential mortgages		115	��		—		—		115
Interest rate swaps		20,627			—		20,627		—
Interest rate floor		99			—		99		—
Liabilities:
Fair value interest rate swaps		1,346			—		1,346		—
Interest rate swaps		20,809			—		20,809		—
Interest rate floor		99			—		99		—
December 31, 2013
Assets:
Investment securities available for sale:
U.S. Treasury securities	$	2,500		$	2,500	$	—	$	—
U.S. Government agency securities		4,407			—		4,407		—
U.S. Government agency mortgage-backed securities		318,064			—		318,064		—
Other mortgage-backed securities		293			—		293		—
State and municipal obligations		30,453			—		30,453		—
Trust preferred securities		7,967			—		—		7,967
Collateralized loan obligations		73,229			—		73,229		—
Other securities		3,184			3,184		—		—
Hedged commercial loans		22,435			—		22,435		—
Residential loans held-for-sale		20,662			—		20,662		—
Interest rate lock commitments on residential mortgages		119			—		—		119
Interest rate swaps		23,299			—		23,299		—
Interest rate floor		132			—		132		—
Liabilities:
Fair value interest rate swaps		1,635			—		1,635		—
Interest rate swaps		23,526			—		23,526		—
Interest rate floor		132			—		132		—

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Level 1 Valuation Techniques and Inputs

U.S. Treasury securities. The Company reports U.S. Treasury securities at fair value utilizing Level 1 inputs. These securities are priced using observable quotations for the indicated security.

Other securities. The other securities category is comprised of money market mutual funds. Given the short maturity structure and the expectation that the investment can be redeemed at par value, the fair value of these investments is assumed to be the book value.

Level 2 Valuation Techniques and Inputs

The majority of the Company’s investment securities are reported at fair value utilizing Level 2 inputs. Prices of these securities are obtained through independent, third-party pricing services. Prices obtained through these sources include market derived quotations and matrix pricing and may include both observable and unobservable inputs. Fair market values take into consideration data such as dealer quotes, new issue pricing, trade prices for similar issues, prepayment estimates, cash flows, market credit spreads and other factors. The Company reviews the output from the third-party providers for reasonableness by the pricing consistency among securities with similar characteristics, where available, and by comparing values with other pricing sources available to the Company.

In general, the Level 2 valuation process uses the following significant inputs in determining the fair value of the Company’s different classes of investments:

U.S. Government agency securities. These securities are evaluated based on either a nominal spread basis for non-callable securities or on an option adjusted spread (“OAS”) basis for callable securities. The nominal spread and OAS levels are based on observations of identical or comparable securities actively trading in the markets.

U.S. Government agency mortgage-backed securities. The Company’s agency mortgage-backed securities generally fall into one of two categories, fixed-rate agency mortgage-backed pools or adjustable-rate agency mortgage-backed pools.

Fixed-rate agency mortgage-backed pools are valued based on spreads to actively traded To-Be-Announced (“TBA”) and seasoned securities, the pricing of which is provided by inter-dealer brokers, broker dealers and other contributing firms active in trading the security class. Further delineation is made by weighted average coupon (“WAC”) and weighted average maturity (“WAM”) with spreads on individual securities relative to actively traded securities as determined and quality controlled using OAS valuations.

Adjustable-rate agency mortgage-backed pools are valued on a bond equivalent effective margin (“BEEM”) basis obtained from broker-dealers and other contributing firms active in the market. BEEM levels are established for key sectors using characteristics such as month-to-roll, index, periodic and life caps and index margins and convertibility. Individual securities are then evaluated based on how their characteristics map to the sectors established.

Other mortgage-backed securities. The Company’s other mortgage-backed securities consist of whole loan, non-agency collateralized mortgage obligations (“CMOs,” individually, each a “CMO”). These securities are valued based on generic tranches and generic prepayment speed estimates of various types of collateral from contributing firms and broker/dealers in the whole loan CMO market.

28

State and municipal obligations. These securities are valued using information on identical or similar securities provided by market makers, broker/dealers and buy-side firms, new issue sales and bid-wanted lists. The individual securities are then priced based on mapping the characteristics of the security such as obligation type (general obligation, revenue, etc.), maturity, state discount and premiums, call features, taxability and other considerations.

Collateralized loan obligations. The fair value measurements for collateralized loan obligations are obtained through quotes obtained from broker/dealers based on similar actively traded securities. Those valuations would be classified as Level 2.

Hedged commercial loans. The hedged commercial loans are one component of a declared hedging relationship as defined under FASB ASC 815. The interest rate swap component of the declared hedging relationship is carried at its fair value and the carrying value of the commercial loans included a similar change in fair values. The fair value of these loans is estimated through discounted cash flow analysis which utilizes available credit and interest rate market data on performance of similar loans. This is considered a Level 2 input.

Residential mortgage loans held-for-sale. The Company’s residential mortgage loans held-for-sale are recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. The Company believes the fair value measurement of such loans reduces certain timing differences between related revenue and expense recognition in the Company’s financial statements and better aligns with the management of the portfolio from a business perspective. The fair value option allows the Company to record the mortgage loans held-for-sale portfolio at fair market value as opposed to the lower of cost or market. The Company economically hedges its residential loans held for sale portfolio with forward sale agreements which are reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value which reduces earnings volatility. For loans held-for-sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $209 thousand as of March 31, 2014. Interest income on these loans is recognized in interest and fees on loans in the unaudited condensed consolidated statements of operations. There were no residential mortgage loans held-for-sale that were nonaccrual or 90 or more days past due as of March 31, 2014 or December 31, 2013.

Interest rate swaps. The Company’s interest rate swaps, including fair value interest rate swaps and small exposures in interest rate caps and floors, are reported at fair value utilizing models provided by an independent, third-party and observable market data. When entering into an interest rate swap agreement, the Company is exposed to fair value changes due to interest rate movements, and also the potential nonperformance of our contract counterparty. Interest rate swaps are evaluated based on a zero coupon LIBOR curve created from readily observable data on LIBOR, interest rate futures and the interest rate swap markets. The zero coupon curve is used to discount the projected cash flows on each individual interest rate swap. In addition, the Company has developed a methodology to value the nonperformance risk based on internal credit risk metrics and the unique characteristic of derivative instruments, which include notional exposure rather than principal at risk and interest payment netting. The results of this methodology are used to adjust the base fair value of the instrument for the potential counterparty credit risk. Interest rate caps and floors are evaluated using industry standard options pricing models and observed market data on LIBOR and Eurodollar option and cap/floor volatilities.

Level 3 Valuation Techniques and Inputs

Trust preferred securities. The trust preferred securities are evaluated on a quarterly basis based on whether the security is an obligation of a single issuer or part of a securitization pool. For single issuer obligations, the Company uses discounted cash flow models which incorporate the contractual cash flow for each issue adjusted as necessary for any potential changes in amount or timing of cash flows. The cash flow model of a pooled issue incorporates anticipated loss rates and severities of the underlying collateral as well as credit support provided within the securitization. At least quarterly, the Company’s Treasury personnel reviews the modeling assumptions which include default assumptions, discount and forward rates. Changes in those assumptions could potentially have a significant impact on the fair value of the trust preferred securities.

The cash flow model for the pooled issue owned by the Company at March 31, 2014 assumes no recovery on defaulted collateral, no recovery on securities in deferral and an additional 3.6% future default rate assumption on the remaining performing collateral every three years with no recovery rate.

For trust preferred securities, projected cash flows are discounted at a rate based on a trading group of similar securities quoted on the New York Stock Exchange (“NYSE”) or over-the-counter markets which is reviewed for market data points such as credit rating, maturity, price and liquidity. The Company indexes the securities to a comparable maturity interest rate swap to determine the market spread, which is then used as the discount rate in the cash flow models. As of the reporting date, the market spreads were 4.5% for the pooled security and 7.5% for the single issuer that is currently deferring interest payments. An increase or decrease of 3% in the discount rate on the pooled issue would result in a decrease of $1.6 million or an increase of $2.3 million in the security fair value, respectively. An increase or decrease of 3% in the discount on the single issuer would result in a decrease of $570 thousand or an increase of $913 thousand in the security fair value, respectively.

29

The following provides details of the Level 3 fair value measurement activity for the three months ended March 31, 2014 and 2013:

Fair Value Measurements Using Significant Unobservable Inputs-Level 3

Investment Securities

	For the Three Months Ended March 31,
	2014		2013
Balance, beginning of period	$	7,967	$	5,882
Total gains, realized/unrealized:
Included in earnings		—		—
Included in accumulated other comprehensive income		649		421
Purchases		—		10,500
Maturities		—		—
Prepayments		—		—
Calls		—		—
Transfers into Level 3		—		—
Balance, end of period	$	8,616	$	16,803

There were no transfers between the three levels for the three months ended March 31, 2014 and 2013. The Company evaluates its hierarchy on a quarterly basis to ensure proper classification.

Interest rate lock commitments on residential mortgages. The determination of the fair value of interest rate lock commitments is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The pull through percentage, which is based upon historical experience, was 75% as of March 31, 2014 and December 31, 2013, respectively. An increase or decrease of 20% in the pull through assumption would result in a positive or negative change of $31 thousand in the fair value of interest rate lock commitments at March 31, 2014. The fair value of interest rate lock commitments was $115 thousand at March 31, 2014 and $119 thousand at December 31, 2013.

Fair Value Measurements Using Significant Unobservable Inputs-Level 3

Interest Rate Lock Commitments on Residential Mortgages

	For the Three Months Ended March 31,
	2014			2013
Balance, beginning of period	$	119		$	847
Total gains, realized/unrealized:
Included in earnings(1)		(4	)		(214	)
Included in accumulated other comprehensive income		—			—
Purchases		—			—
Maturities		—			—
Prepayments		—			—
Calls		—			—
Transfers into Level 3		—			—
Balance, end of period	$	115		$	633

(1) Amount included in mortgage banking revenue, net on the consolidated statements of operations.

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Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans, Small Business Administration (“SBA”) servicing assets, restricted equity investments, goodwill and loans or bank properties transferred into other real estate owned at fair value on a non-recurring basis. At March 31, 2014 and 2013, these assets were valued in accordance with GAAP and, except for impaired loans and real estate owned included in the following table, did not require fair value disclosure under the provisions of FASB ASC 820. The related changes in fair value for the three months ended March 31, 2014 and 2013 are as follows:

			Category Used for Fair Value Measurement						Total Losses Or Changes in Net Assets
	Total		Level 1		Level 2		Level 3
March 31, 2014
Assets:
Impaired loans	$	3,882	$	—	$	—	$	3,882	$	(997	)
Real estate owned		376		—		—		376		(7	)
March 31, 2013
Assets:
Impaired loans	$	55,560	$	—	$	—	$	55,560	$	(3,896	)
Real estate owned		154		—		—		154		(58	)

Under FASB ASC 310, the fair value of collateral dependent impaired loans is based on the fair value of the underlying collateral, typically real estate, which is based on valuations. It is the policy of the Company to obtain a current appraisal or evaluation when a loan has been identified as non-performing. The type of appraisal obtained will be commensurate with the size and complexity of the loan. The resulting value will be adjusted for the potential cost of liquidation and decline of values in the market. New appraisals will be obtained on an annual basis until the loan is repaid in full, liquidated, or returns to performing status.

While the loan policy dictates that a loan be assigned to the special assets department when it is placed on non-accrual status, there is a need for loan officers to consistently and accurately determine collateral values when a loan is initially designated as criticized or classified. The most effective means of determining the fair value of real estate collateral at a point in time is by obtaining a current appraisal or evaluation of the property. In anticipation of the receipt of a current appraisal or evaluation, the Company has provided for an alternative and interim means of determining the fair value of the real estate collateral.

The most recent appraisal or reported value of the collateral securing a loan, net of a discount for the estimated cost of liquidation, is the Company’s basis for determining fair value.

The following table summarizes the Company’s appraisal approach based upon loan category.

Loan Category Used for Impairment Review	Method of Determining the Value
Loans less than $1 million	Evaluation report or restricted use appraisal
Loans $1 million or greater
Existing appraisal 18 months or less	Restricted use appraisal
Existing appraisal greater than 18 months	Summary form appraisal
Commercial loans secured primarily by residential real estate
Loans less than $1 million	Automated valuation model
Loans $1 million or greater	Summary form appraisal
Non-commercial loans secured primarily by residential real estate
Loans less than $250 thousand	Automated valuation model or summary form appraisal
Loans $250 thousand or greater	Summary form appraisal

An evaluation report, as defined by the OCC, is a written report prepared by an appraiser that describes the real estate collateral, its condition, current and projected uses and sources of information used in the analysis, and provides an estimate of value in situations when an appraisal is not required.

A restricted use appraisal is defined as a written report prepared under the Uniform Standards of Professional Appraisal Practice (“USPAP”). A restricted use appraisal is for the Company’s use only and should contain a brief statement of information significant to the determination of the value of the collateral under review. This report can be used for ongoing collateral monitoring.

A summary form appraisal is defined as a written report prepared under the USPAP which contains a detailed summary of all information significant to the determination of the collateral valuation. This report is more detailed than a restricted use report and provides sufficient information to enable the user to understand the rationale for the opinions and conclusions in the report.

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An automated valuation model is an internal computer program that estimates a property’s market value based on market, economic, and demographic factors.

On a quarterly basis, or more frequently as necessary, the Company will review the circumstances of each collateral dependent loan and real estate owned property. A collateral dependent loan is defined as one that relies solely on the operation or the sale of the collateral for repayment. Adjustments to any specific reserve relating to a collateral shortfall, as compared to the outstanding loan balance, will be made if justified by appraisals, market conditions or current events concerning the loan.

All appraisals received which are utilized to determine valuations for criticized and classified loans or properties placed in real estate owned are provided under an “as is” value. Partially charged off loans are measured for impairment upon receipt of an updated appraisal based on the relationship between the remaining balance of the charged down loan and the discounted appraised value. Such loans will remain on non-accrual status unless performance by the borrower warrants a return to accrual status. Recognition of non-accrual status occurs at the time a loan can no longer support principal and interest payments in accordance with the original terms and conditions of the loan documents. When impairment is determined, a specific reserve reflecting any calculated shortfall between the value of the collateral and the outstanding balance of the loan is recorded. Subsequent adjustments, prior to receipt of a new appraisal, to any related specific reserve will be made if justified by market conditions or current events concerning the loan. If an internal discount-based evaluation is being used, the discount percentage may be adjusted to reflect market changes, changes to the collateral value of similar loans or circumstances of the individual loan itself. The amount of the charge-off is determined by calculating the difference between the current loan balance and the current collateral valuation, plus estimated cost to liquidate.

Impaired loan fair value measurements are based upon unobservable inputs, and therefore, are categorized as a Level 3 measurement. Impaired loans with an aggregate gross carrying amount of $25 thousand and $14.6 million at March 31, 2014 and 2013, respectively, included specific reserves in the allowance for loan losses of $16 thousand and $1.5 million as the collateral underlying these loans had a fair value of $8 thousand and $13.1 million at March 31, 2014 and 2013, respectively. Charge-offs of $419 thousand were recorded on impaired loans with a specific reserve during the three months ended March 31, 2014, all of which related to loans which were fully charged off. There were no charge-offs for impaired loans with specific reserves during the three months ended March 31, 2013. Impaired loans with an aggregate carrying amount of $3.9 million and $42.4 million at March 31, 2014 and 2013, respectively, did not include specific reserves as the value of the underlying collateral was not below the carrying amount. However, these loans did include charge-offs of $578 thousand, of which $174 thousand related to loans that were fully charged off at March 31, 2014 and $2.4 million, of which $509 thousand related to loans which were fully charged off at March 31, 2013.

Once a loan is determined to be uncollectible, the underlying collateral is repossessed and reclassified as other real estate owned. The balance of other real estate owned also includes bank properties transferred from operations. These assets are carried at lower of cost or fair value of the collateral, less cost to sell. In some cases, adjustments are made to the appraised values for various factors including age of the appraisal, age of comparable properties included in the appraisal, and known changes in the market and the collateral. During the three months ended March 31, 2014 and 2013, the Company recorded a decrease in fair value on commercial properties of $7 thousand and $58 thousand, respectively. These adjustments were based upon unobservable inputs, and therefore categorized as Level 3 measurements.

32

Carrying Amounts and Estimated Fair Values of Financial Assets and Liabilities

	March 31, 2014				December 31, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and due from banks	$	49,850	$	49,850	$	38,075	$	38,075
Interest-earning bank balances		232,245		232,245		229,687		229,687
Restricted cash		26,000		26,000		26,000		26,000
Investment securities available for sale		439,405		439,405		440,097		440,097
Investment securities held to maturity		655		664		681		692
Loans receivable, net		2,028,508		1,925,661		2,079,732		1,964,856
Loans held-for-sale		16,048		16,048		20,662		20,662
Hedged commercial loans(1)		22,396		22,396		22,435		22,435
Restricted equity investments		16,664		16,664		17,019		17,019
Interest rate lock commitments on residential mortgages		115		115		119		119
Interest rate swaps		20,627		20,627		23,299		23,299
Interest rate floor		99		99		132		132
Liabilities:
Demand deposits		1,707,946		1,762,240		1,740,298		1,795,685
Savings deposits		266,137		271,797		266,573		272,264
Time deposits		599,362		599,631		614,700		615,735
Securities sold under agreements to repurchase – customers		471		471		478		478
Advances from FHLBNY		60,915		61,021		60,956		61,072
Junior subordinated debentures		92,786		63,904		92,786		63,747
Fair value interest rate swaps		1,348		1,348		1,632		1,632
Interest rate swaps		20,809		20,809		23,526		23,526
Interest rate floor		99		99		132		132

(1) Includes positive market value adjustment of $1.3 million and $1.6 million at March 31, 2014 and December 31, 2013, respectively, which is equal to the change in value of related interest rate swaps designated as fair value hedges of these hedged loans in accordance with FASB ASC 815.

Cash and cash equivalents. For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. This is a Level 1 fair value input.

Restricted cash. For restricted cash, the carrying amount is a reasonable estimate of fair value. This is a Level 1 fair value input.

Investment securities. For investment securities, fair values are based on a combination of quoted prices for identical assets in active markets, quoted prices for similar assets in markets that are either actively or not actively traded and price models, discounted cash flow methodologies, or similar techniques that may contain unobservable inputs that are supported by little or no market activity and require significant judgment. The fair value of available-for-sale securities is measured utilizing Level 1, Level 2, and Level 3 inputs. The fair value of held-to-maturity securities is measured utilizing Level 2 inputs.

Loans receivable. The fair value of loans receivable is estimated using discounted cash flow analysis. Projected future cash flows are calculated using loan characteristics, and assumptions of voluntary and involuntary prepayment speeds. For performing loans, Level 2 inputs are utilized as the cash flow analysis is performed using available market data on the performance of similar loans. Projected cash flows are prepared using discount rates believed to represent current market rates. For non-performing loans, the cash flow assumptions are considered Level 3 inputs as market data is not readily available.

Loans held-for-sale. Loans held-for-sale generally includes residential mortgage loans that are originated with the intent to sell. These loans are recorded at fair value under FASB ASC 825. The fair value of loans held-for-sale is valued using the quoted market price of such loans, which is a Level 2 input.

Hedged commercial loans. The hedged commercial loans are one component of a declared hedging relationship as defined under FASB ASC 815. The interest rate swap component of the declared hedging relationship is carried at its fair value and the carrying value of the commercial loans includes a similar change in fair values. The fair value of these loans is measured utilizing Level 2 inputs.

Restricted equity securities. Ownership in equity securities of Federal Reserve Bank of Philadelphia (the “Federal Reserve Bank”), FHLBNY and Atlantic Central Bankers Bank is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value. As these securities are not readily marketable, the fair value is based on Level 2 inputs.

Interest rate lock commitments on residential mortgages. The fair value of interest rate lock commitments is estimated using pricing from existing purchase commitments on each loan in the pipeline. This value is adjusted for a pull through estimate which is determined based on historical experience with loan deliveries from the residential mortgage pipeline. As this estimate is unobservable and can result in significant fluctuation in the fair value determination, this is considered a Level 3 input under the fair value hierarchy.

Interest rate swaps/floors and fair value interest rate swaps. The Company’s derivative financial instruments are not exchange-traded and therefore are valued utilizing models with the primary input being readily observable market parameters, specifically the LIBOR swap curve. In addition, the Company incorporates a qualitative fair value adjustment related to credit quality variations between counterparties as required by FASB ASC 820. This is a level 2 input.

33

Demand deposits, savings deposits and time deposits. The fair value of demand deposits and savings deposits is determined by projecting future cash flows using an estimated economic life based on account characteristics, a Level 2 input. The resulting cash flow is discounted using rates available on alternative funding sources. The fair value of time deposits is estimated using the rate and maturity characteristics of the deposits to estimate their cash flow. This cash flow is discounted at rates for similar term wholesale funding.

Securities sold under agreements to repurchase – customer.The fair value is estimated to be the amount payable at the reporting date. This is considered a Level 2 input.

Securities sold under agreements to repurchase – FHLBNY advances. The fair value is estimated through Level 2 inputs by determining the cost or benefit for early termination of the individual borrowing.

Junior subordinated debentures.The fair value was estimated by discounting approximate cash flows of the borrowings by yields estimating the fair value of similar issues. The valuation model considers current market spreads, known and anticipated credit issues of the underlying collateral, term and reinvestment period and market transactions of similar issues, if available. This is a Level 3 input under the fair value hierarchy.

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2014 and December 31, 2013. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amount presented herein.

(12) Regulatory Matters

The Company is subject to risk-based capital guidelines adopted by the FRB for bank holding companies. The Bank is also subject to similar capital requirements adopted by the OCC. Under the requirements the federal bank regulatory agencies have established quantitative measures to ensure that minimum thresholds for Total Capital, Tier 1 Capital and Leverage (Tier 1 Capital divided by average assets) ratios (set forth in the table below) are maintained. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets and certain off-balance sheet items as calculated under regulatory practices.

The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the federal bank regulators about components, risk weightings and other factors. The Company’s and the Bank’s risk-based capital ratios have been computed in accordance with regulatory practices. The Company and the Bank were in compliance with these regulatory capital requirements of the FRB and the OCC as of March 31, 2014. As discussed below and elsewhere herein, additional capital requirements have been imposed on the Bank by the OCC, which the Bank was also in full compliance with as of March 31, 2014 and December 31, 2013.

On April 15, 2010, the Bank entered into a written agreement with the OCC (the “OCC Agreement”) which contained requirements to develop and implement a profitability and capital plan which provides for the maintenance of adequate capital to support the Bank’s risk profile in the current economic environment. The capital plan was also required to contain a dividend policy allowing dividends only if the Bank is in compliance with the capital plan, and obtains prior approval from the OCC. During the second quarter of 2010, the Company delivered its profit and capital plans to the OCC. Updated profit and capital plans were subsequently submitted as required.

The Bank also agreed to: (a) implement a program to protect the Bank’s interest in criticized or classified assets, (b) review and revise the Bank’s loan review program; (c) implement a program for the maintenance of an adequate allowance for loan losses; and (d) revise the Bank’s credit administration policies. During the second quarter of 2010, the Company revised and implemented changes to policies and procedures pursuant to the OCC Agreement. The Bank also agreed that its brokered deposits will not exceed 3.5% of its total liabilities unless approved by the OCC. Effective October 18, 2012, the OCC approved an increase of this limit to 6.0%. Management does not expect this restriction will limit its access to liquidity as the Bank does not rely on brokered deposits as a major source of funding. As of March 31, 2014, the Bank’s brokered deposits represented 3.9% of its total liabilities.

In addition, the Company is required to seek the prior approval of the Federal Reserve Bank before paying interest, principal or other sums on trust preferred securities or any related subordinated debentures, declaring or paying cash dividends or taking dividends from the Bank, repurchasing outstanding stock or incurring indebtedness. The Company is also required to take certain remedial steps and submit plans and progress reports to the Federal Reserve Bank.

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The Bank is also subject to individual minimum capital ratios established by the OCC requiring the Bank to continue to maintain a Leverage ratio at least equal to 8.50% of adjusted total assets, to continue to maintain Tier 1 Capital ratio at least equal to 9.50% of risk-weighted assets and to maintain a Total Capital ratio at least equal to 11.50% of risk-weighted assets. At March 31, 2014, the Bank met all of the three capital ratios established by the OCC as its Leverage ratio was 9.45%, its Tier 1 Capital ratio was 12.83%, and its Total Capital ratio was 14.08%.

The following table provides both the Company’s and the Bank’s risk-based capital ratios as of March 31, 2014 and December 31, 2013.

Regulatory Capital Levels

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provision(1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2014
Total capital (to risk-weighted assets):
Sun Bancorp, Inc.	$	329,930		14.87	%	$	177,526		8.00	%		N/A
Sun National Bank		311,694		14.08			177,075		8.00		$	221,344		10.00	%
Tier I capital (to risk-weighted assets):
Sun Bancorp, Inc.		282,992		12.75			88,763		4.00			N/A
Sun National Bank		283,943		12.83			88,538		4.00			132,807		6.00
Leverage ratio:
Sun Bancorp, Inc.		282,992		9.40			120,434		4.00			N/A
Sun National Bank		283,943		9.45			120,223		4.00			150,279		5.00
December 31, 2013
Total capital (to risk-weighted assets):
Sun Bancorp, Inc.	$	332,295		14.41	%	$	184,494		8.00	%		N/A
Sun National Bank		314,107		13.65			184,070		8.00		$	230,088		10.00	%
Tier I capital (to risk-weighted assets):
Sun Bancorp, Inc.		284,781		12.34			92,247		4.00			N/A
Sun National Bank		285,257		12.40			92,035		4.00			138,053		6.00
Leverage ratio:
Sun Bancorp, Inc.		284,781		8.99			126,682		4.00			N/A
Sun National Bank		285,257		9.02			126,479		4.00			158,099		5.00

(1) Not applicable for bank holding companies.

At March 31, 2014 and December 31, 2013, although the Company and the Bank exceeded the regulatory minimum ratios for classification as “well capitalized,” due to the fact that it was subject to the OCC Agreement, it cannot be deemed “well capitalized.”

On July 2, 2013, the federal banking regulatory agencies, including the FRB and the OCC, approved the final Basel III capital rules for U.S. banking institutions. For further information regarding the Basel III capital rules, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Basel III Capital Rules,” which information is incorporated in this Note 12 in its entirety.

The ability of the Bank to pay dividends to the Company is controlled by certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits and a national bank may not declare any dividends if such declaration would leave the bank inadequately capitalized. Therefore, the ability of the Bank to declare dividends will depend on its future net income and capital requirements. Also, banking regulators have indicated that national banks should generally pay dividends only out of current operating earnings. Following this guidance, the Bank would not be able to pay a dividend to the Company at March 31, 2014. Moreover, per the OCC Agreement and the Federal Reserve Bank requirements referenced above, a dividend may only be declared if it is in accordance with the approved capital plan, the Bank remains in compliance with the capital plan following the payment of the dividend and the dividend is approved by the OCC and the Federal Reserve Bank.

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The Bank’s deposits are insured to applicable limits by the FDIC. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the Federal Deposit Insurance Act was amended to increase the maximum deposit insurance amount from $100,000 to $250,000.

FDIC assessment expense of $1.0 million was recognized during the three months ended March 31, 2014 and 2013, respectively.

The Company’s capital securities qualify as Tier 1 capital under federal regulatory guidelines. These instruments are subject to a 25% capital limitation under risk-based capital guidelines developed by the FRB. Under FRB rules, restricted core capital elements, which are qualifying trust preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. However, under the Dodd-Frank Act, bank holding companies are prohibited from including in their Tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such instruments issued before May 19, 2010 by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion as of December 31, 2009, may continue to be included as Tier 1 capital (subject to the 25% limitation). The portion that exceeds the 25 percent capital limitation qualifies as Tier 2, or supplementary capital of the Company. At March 31, 2014, $70.9 million of a total of $90.0 million in capital securities qualified as Tier 1 with $19.1 million qualifying as Tier 2.

On December 10, 2013, the FRB, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule, which prohibits an insured depository institution and its affiliates from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds. On January 14, 2014, these five federal agencies approved a related interim final rule pertaining to the ability of banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities. For further information regarding the Volcker Rule, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Volcker Rule,” which information is incorporated in this Note 12 in its entirety.

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Forward-Looking Statements

This Quarterly Report on Form 10-Q of the Company and the documents incorporated by reference herein may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We are including this statement for the purpose of invoking those safe harbor provisions. Forward-looking statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These forward-looking statements may include, among other things:

• statements and assumptions relating to financial performance;

• statements relating to the anticipated effects on results of operations or financial condition from recent or future developments or events;

• statements relating to our business and growth strategies and our regulatory capital levels;

• statements relating to potential sales of our criticized and classified assets; and

• any other statements, projections or assumptions that are not historical facts.

Actual future results may differ materially from our forward-looking statements, and we qualify all forward-looking statements by various risks and uncertainties we face, some of which are beyond our control, as well as the assumptions underlying the statements, including, among others, the following factors:

• the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

• market volatility;

• the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs;

• the overall quality of the composition of our loan and securities portfolios;

• the market for criticized and classified assets that we may sell;

• legislative and regulatory changes, including the Dodd-Frank Act and impending regulations, changes in banking, securities and tax laws and regulations and their application by our regulators and changes in the scope and cost of FDIC insurance and other coverages;

• the effects of, and changes in, monetary and fiscal policies and laws, including interest rate policies of the FRB;

• inflation, interest rate, market and monetary fluctuations;

• fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

• the effect of and our compliance with the terms of the OCC Agreement and the Federal Reserve Bank requirements as well as compliance with the individual minimum capital ratios established for the Bank by the OCC;

• the results of examinations of us by the Federal Reserve Bank and of the Bank by the OCC, including the possibility that the OCC may, among other things, require the Bank to increase its allowance for loan losses or to write-down assets;

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• our ability to control operating costs and expenses;

• our ability to manage delinquency rates;

• our ability to retain key members of our senior management team;

• the costs of litigation, including settlements and judgments;

• the increased competitive pressures among financial services companies;

• the timely development of and acceptance of new products and services and the perceived overall value of these products and services by businesses and consumers, including the features, pricing and quality compared to our competitors’ products and services;

• technological changes;

• acquisitions;

• changes in consumer and business spending, borrowing and saving habits and demand for financial services in our market area;

• adverse changes in securities markets;

• the inability of key third-party providers to perform their obligations to us;

• changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Financial Accounting Standards Board;

• war or terrorist activities;

• other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere herein or in the documents incorporated by reference herein and our other filings with the SEC; and

• our success at managing the risks involved in the foregoing.

Some of these and other factors are discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 , under “Item 1A Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” as such sections may be amended or supplemented herein or in other filings pursuant to the Exchange Act. The development of any or all of these factors could have an adverse impact on our financial position and results of operations.

Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference herein or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, unless otherwise required to do so by law or regulation. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed herein or in the documents incorporated by reference herein might not occur, and you should not put undue reliance on any forward-looking statements.

NON-GAAP FINANCIAL MEASURES

This Quarterly Report on Form 10-Q of the Company contains financial information prepared pursuant to methods other than in accordance with GAAP. Management uses these “non-GAAP” measures in their analysis of the Company’s performance. Management believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Management uses these measures to evaluate the underlying performance and efficiency of operations. Management believes these measures reflect core trends of the business.

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Tax Equivalent Net Interest Income:

This Quarterly Report on Form 10-Q references tax-equivalent interest income. Tax-equivalent interest income is a non-GAAP financial measure. Tax-equivalent interest income assumes a 35% marginal federal tax rate for all periods. The fully taxable equivalent adjustments for the three months ended March 31, 2014 and 2013 were $166 thousand and $212 thousand, respectively. Tax-equivalent net interest income is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities. The following table provides a reconciliation of tax equivalent net interest income to GAAP net interest income using a 35% tax rate:

For the Three Months Ended:

March 31,	2014		2013
Net interest income, as presented	$	21,392	$	23,078
Effect of tax-exempt income		166		212
Net interest income, tax equivalent	$	21,558	$	23,290

Core Deposits:

Core deposits is calculated by excluding time deposits and brokered deposits from total deposits. The following table provides a reconciliation of core deposits to GAAP total deposits at March 31, 2014 and December 31, 2013:

	March 31, 2014		December 31, 2013
Total deposits	$	2,573,445	$	2,621,571
Less: Time deposits		491,368		506,770
Less: Brokered deposits		107,994		107,930
Core deposits	$	1,974,083	$	2,006,871

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(All dollar amounts presented in the tables are in thousands)

Overview

The Company is a bank holding company with an executive office in Mt. Laurel, New Jersey. The Bank is the Company’s principal subsidiary. Through the Bank, the Company provides commercial and consumer banking services. The Company offers a comprehensive array of lending, depository and financial services to its commercial and consumer customers throughout the marketplace. The Company funds its lending activities primarily through retail and brokered deposits, the scheduled maturities of its investment portfolio and other wholesale funding sources. As a financial institution with a primary focus on traditional banking activities, the Company generates the majority of its revenue through net interest income, which is defined as the difference between interest income earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon the Company’s ability to prudently manage the balance sheet for growth, combined with how successfully it maintains or increases net interest margin. The Company also generates revenue through fees earned on the various services and products offered to its customers and through sales of loans, primarily residential mortgages. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and income taxes.

At March 31, 2014, the Company had total assets of $3.04 billion, total liabilities of $2.79 billion and total shareholders’ equity of $248.9 million. The Company reported a net loss available to common shareholders of $1.9 million, or a loss of $0.02 per diluted share, for the quarter ended March 31, 2014.

The economic recovery has been slower than anticipated. Although interest rates have begun to rise slightly, they remained near historical lows. The unemployment rate in the U.S. declined to 6.3% in April 2014 from 6.7% in December 2013. Based upon initial estimates, the U.S. gross domestic product for the first quarter of 2014 increased at an annual rate of only 0.1% as compared to 2.6% growth in the fourth quarter of 2013. While consumer spending increased significantly due to increases in healthcare and utilities consumption, the slowing overall growth in the gross domestic product reflected a downturn in non-residential fixed investments as well as lower state and local government spending. The severe winter weather is believed to be the primary reason for this decline. At the state level, according to the latest South Jersey Business Survey produced by the Federal Reserve Bank, growth in business activity was flat in the first quarter of 2014 due primarily to the extraordinary winter weather. While employment showed no growth in the first quarter of 2014, optimism remains about increased hiring in the future. In Northern New Jersey, business activity is expected to continue to increase at a slow pace. Overall, New Jersey’s unemployment rate remains one of the highest in the U.S. but has declined sharply in the past year to 7.2% as of March 2014 from 9.0% as of December 2012.

At its latest meeting in April 2014, the FRB decided to keep the Federal Funds target rate unchanged in a continued effort to help stimulate economic growth. Since December 2008, the FRB has kept the Federal Funds rate, a key indicator of short-term rates such as credit card rates and HELOC rates, at a range of 0.00%-0.25% with the intent of encouraging consumers and businesses to borrow and spend to help jump start the economy. The FRB expects to maintain the current target range through late 2014. However, some FRB officials have discussed the possibility of increasing rates as soon as 2015. While the FRB had previously considered a reduction in unemployment to 6.5% to be a signal to increase rates, that viewpoint has changed because a significant amount of the decrease in unemployment is associated with individuals exiting the workforce. In January 2014, the FRB’s tapering of its quantitative easing program began as monthly bond purchases were reduced by $10 billion to $75 billion per month. While recent indicators have suggested a weakening in the economy, it is still anticipated that this tapering will continue.

The continued uncertainty with the economy, together with the challenging regulatory environment, will continue to affect the Company and the markets in which it does business and may adversely impact the Company’s results in the future. The following discussion provides further detail on the financial condition and results of operations of the Company at and for the quarter ended March 31, 2014.

Critical Accounting Policies, Judgments and Estimates

The discussion and analysis of the financial condition and results of operations are based on the unaudited condensed consolidated financial statements, which are prepared in conformity with GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Management evaluates these estimates and assumptions on an ongoing basis, including those related to the allowance for loan losses, goodwill, intangible assets, income taxes, stock-based compensation and the fair value of financial instruments. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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Allowance for Loan Losses. Through the Bank, the Company originates loans that it intends to hold for the foreseeable future or until maturity or repayment. The Company may not be able to collect all principal and interest due on these loans. The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. The determination of the allowance for loan losses requires management to make significant estimates with respect to the amounts and timing of losses and market and economic conditions. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. A provision for loan losses is charged to operations based on management’s evaluation of the estimated losses that have been incurred in the Company’s loan portfolio. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to classified loans.

Management monitors its allowance for loan losses on a monthly basis and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors warrant. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss and recovery experience allow for timely reaction to emerging conditions and trends. In this context, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:

• Levels of past due, classified and non-accrual loans, troubled debt restructurings and modifications;

• Nature and volume of loans;

• Historical loss trends;

• Changes in lending policies and procedures, underwriting standards, collections, and for commercial loans, the level of loans being approved with exceptions to policy;

• Experience, ability and depth of management and staff;

• National and local economic and business conditions, including various market segments;

• Quality of the Company’s loan review system and degree of Board oversight; and

• Effect of external factors, including the deterioration of collateral values, on the level of estimated credit losses in the current portfolio.

Additionally, for the commercial loan portfolio, historic loss and recovery experience over a three-year horizon, based on a rolling 12-quarter migration analysis, is taken into account for the quantitative factor component. For the non-commercial loan quantitative component, the average historic loss and recovery experience over a 12-quarter time period is utilized for the allowance calculation. In determining the allowance for loan losses, management has established both specific and general pooled allowances. Values assigned to the qualitative factors and those developed from historic loss and recovery experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans and those criticized and classified loans through the use of both a general pooled allowance and a specific allowance. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically measured against actual loss experience. A specific allowance is calculated on individually identified impaired loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historic loss and recovery experience and the qualitative factors described above.

As changes in the Company’s operating environment occur and as recent loss experience fluctuates, the factors for each category of loan based on type and risk rating will change to reflect current circumstances and the quality of the loan portfolio. Given that the components of the allowance are based partially on historical losses, recoveries and on risk rating changes in response to recent events, required reserves may trail the emergence of any unforeseen deterioration in credit quality.

Although the Company maintains its allowance for loan losses at levels considered adequate to provide for the inherent risk of loss in its loan portfolio, if economic conditions differ substantially from the assumptions used in making the evaluations, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. Accordingly, the current state of the national economy and local economies of the areas in which the loans are concentrated and their slow recovery from a severe recession could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. In addition, the Company’s determination as to the amount of its allowance for loan losses is subject to review by the Bank’s primary regulator, the OCC, as part of its examination process, which may result in the establishment of an additional allowance based upon the judgment of the OCC after a review of the information available at the time of the OCC examination.

Accounting for Income Taxes. The Company accounts for income taxes in accordance with FASB ASC 740,Income Taxes. (“FASB ASC 740”).FASB ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the unaudited condensed consolidated statements of operations. Assessment of uncertain tax positions under FASB ASC 740 requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in applying the requirements of FASB ASC 740.

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Management expects that the Company’s adherence to FASB ASC 740 may result in increased volatility in quarterly and annual effective income tax rates, as FASB ASC 740 requires that any change in judgment or change in measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.

Fair Value Measurement.The Company accounts for fair value measurement in accordance with FASB ASC 820,Fair Value Measurements and Disclosures. FASB ASC 820 establishes a framework for measuring fair value. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, emphasizing that fair value is a market-based measurement and not an entity-specific measurement. FASB ASC 820 clarifies the application of fair value measurement in a market that is not active. FASB ASC 820 also includes additional factors for determining whether there has been a significant decrease in market activity, affirms the objective of fair value when a market is not active, eliminates the presumption that all transactions are not orderly unless proven otherwise, and requires an entity to disclose inputs and valuation techniques, and changes therein, used to measure fair value. FASB ASC 820 addresses the valuation techniques used to measure fair value. These valuation techniques include the market approach, income approach and cost approach. The market approach uses price or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves converting future amounts to a single present value. The measurement is valued based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.

FASB ASC 820 establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The Company’s policy is to recognize transfers that occur between the fair value hierarchy, Levels 1, 2 and 3, at the beginning of the quarter of when the transfer occurred.

Investment securities available for sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows based on observable market inputs and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Level 3 market value measurements include an internally developed discounted cash flow model combined with using market data points of similar securities with comparable credit ratings in addition to market yield curves with similar maturities in determining the discount rate. In addition, significant estimates and unobservable inputs are required in the determination of Level 3 market value measurements. If actual results differ significantly from the estimates and inputs applied, it could have a material effect on the Company’s unaudited condensed consolidated financial statements.

Derivative financial instruments. The Company’s derivative financial instruments are not exchange-traded and therefore are valued utilizing models that use as their basis readily observable market parameters, specifically the LIBOR swap curve, and are classified within Level 2 of the valuation hierarchy.

Residential mortgage loans held-for-sale. The Company’s residential mortgage loans held-for-sale are recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans.

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The Company adopted the fair value option on these loans which allows the Company to record the mortgage loans held-for-sale portfolio at fair market value as opposed to the lower of cost or market. The Company economically hedges its residential loans held-for-sale portfolio with forward sale agreements which are reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value which reduces earnings volatility as the amounts more closely offset, particularly in environments in which interest rates are declining. For loans held-for-sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $209 thousand as of March 31, 2014 and $312 thousand at December 31, 2013.

Interest rate lock commitments on residential mortgages. The Company enters into interest rate lock commitments on its residential mortgage loans originated for sale. The determination of the fair value of interest rate lock commitments is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The pull through percentage, which is based upon historical experience, was 75% as of March 31, 2014.

In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures loans held-for-sale, impaired loans, SBA servicing assets, restricted equity investments and loans or bank properties transferred in other real estate owned at fair value on a non-recurring basis.

Valuation techniques and models utilized for measuring financial assets and liabilities are reviewed and validated by the Company at least quarterly.

Goodwill. Goodwill is the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. FASB ASC 350-20-35,Intangibles – Goodwill and Other – Goodwill, outlines a two-step goodwill impairment test. Significant judgment is applied when goodwill is assessed for impairment. Step one, which is used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. As defined in FASB ASC 280, Segment Reporting, a reporting unit is an operating segment or one level below an operating segment. The Company has one reportable operating segment, “Community Banking”, as noted in Note 1 of the notes to the unaudited condensed consolidated financial statements. If the fair value of a reporting unit exceeds it carrying value, goodwill of the reporting unit is considered not impaired and step two is therefore unnecessary. If the carrying amount of the reporting unit exceeds it implied fair value, the second step is performed to measure the amount of the impairment loss, if any. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company typically evaluates its goodwill for impairment annually at December 31, unless circumstances indicate that a test is required at an earlier date.

Recent Accounting Principles.

In January 2014, the FASB issued ASU 2014-4, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. For public entities, the amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently evaluating the impact of the adoption of this accounting standards update on its financial statements.

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In July 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update seek to eliminate the diversity in practice in the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists by presenting the unrecognized tax benefit, or a portion of the unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset. To the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward are not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2013. The Company has evaluated the impact of the adoption of this accounting standards update on its financial statements and determined that there currently is no impact to the Company’s presentation.

Financial Condition

Total assets were $3.04 billion at March 31, 2014 as compared to $3.09 billion at December 31, 2013. Loans receivable, net of allowance for loan losses, decreased $51.9 million to $2.05 billion at March 31, 2014 as compared to $2.10 billion at December 31, 2013. This was driven by a decrease of $67.6 million in commercial loans due primarily to commercial loan paydowns partially offset by consumer loan growth of $13.9 million, primarily residential real estate. Commercial loan production has been slow due to a competitive environment and the Company maintaining a very selective approach to new loan relationships. The Company has positioned itself to take advantage of a rising interest rate environment with an asset sensitive balance sheet.

Total liabilities decreased $52.6 million, or 1.9%, to $2.79 billion at March 31, 2014 compared to $2.84 billion at December 31, 2013. The decrease in total liabilities is primarily attributable to a decrease of $48.1 million in deposits. Shareholders’ equity increased $3.6 million, or 1.5%, to $248.9 million at March 31, 2014 as compared to $245.3 million at December 31, 2013, with the increase primarily attributable to a decrease in other comprehensive loss for the three months ended March 31, 2014 of $5.1 million and a decrease in treasury stock of $950 thousand due to common stock issuances out of treasury. These increases were partially offset by a net loss for the three months ended March 31, 2014 of $1.9 million and a decrease in additional paid-in capital of $618 thousand compared to December 31, 2013.

As of March 31, 2014, the Company had $48.7 million outstanding on 14 residential construction, commercial construction and land development relationships for which the agreements included interest reserves. As of December 31, 2013, the Company had $54.5 million outstanding on 17 residential construction, commercial construction and land development relationships for which the agreements included interest reserves. The total amount available in those reserves to fund interest payments was $3.3 million and $4.3 million at March 31, 2014 and December 31, 2013. There were no relationships with interest reserves which were on non-accrual status at March 31, 2014 and December 31, 2013. Construction projects are monitored throughout their lives by professional inspectors engaged by the Company. The budgets for loan advances and borrower equity injections are developed at the time of underwriting in conjunction with the review of the plans and specifications for the project being financed. Advances of the Company’s funds are based on the prepared budgets and will not be made unless the project has been inspected by the Company’s professional inspector who must certify that the work related to the advance is in place and properly complete. As it relates to construction project financing, the Company does not extend, renew or restructure terms unless its borrower posts cash collateral in an interest reserve.

Table 1 provides detail regarding the Company’s non-performing assets and TDRs at March 31, 2014 and December 31, 2013.

Table 1: Summary of Non-performing Assets and TDRs

	March 31, 2014		December 31, 2013
Non-performing assets:
Non-accrual loans	$	29,387	$	29,814
Troubled debt restructuring, non-accruing		8,017		8,163
Loans past due 90 days and accruing		42		—
Real estate owned, net		2,728		2,503
Total non-performing assets	$	40,174	$	40,480

The Company’s allowance for losses on loans decreased to $33.8 million, or 1.62% of gross loans held-for-investment, at March 31, 2014 from $35.5 million, or 1.66% of gross loans held-for-investment, at December 31, 2013. No provision for loan losses was recorded during the three months ended March 31, 2014 compared to provision of $171 thousand for the same period in 2013. The decrease in reserve balances is due to net charge-offs of $1.8 million. The charge-offs were primarily driven by two commercial and industrial loan relationships and one construction loan relationship resulting in $1.1 million of charge-offs. Across the commercial and consumer loan portfolio, the Company continues to closely monitor areas of weakness and take expedient and appropriate action as necessary to ensure adequate reserves are in place to absorb losses inherent in the loan portfolio.

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Total non-performing loans decreased $531 thousand to $37.4 million at March 31, 2014 from $38.0 million at December 31, 2013. Total non-accruing TDRs at March 31, 2014 were $8.0 million, a decrease of $149 thousand from December 31, 2013.

Real estate owned increased $225 thousand to $2.7 million at March 31, 2014 as compared to $2.5 million at December 31, 2013. During the three months ended March 31, 2014, the Company transferred three residential properties totaling $455 thousand from loans into real estate owned. During the same period, the Company recorded $7 thousand of write-downs of real estate owned relating to two residential properties. There were two residential properties with a total carrying amount of $223 thousand sold resulting in a net loss of $45 thousand. At March 31, 2014, the Company had 16 properties in the real estate owned portfolio.

The net deferred tax asset decreased $3.9 million from December 31, 2013 to a net deferred tax asset of $682 thousand at March 31, 2014 due to a decrease in the unrealized losses on investment securities. The Company maintains a valuation allowance of $119.6 million against the remaining portion of the gross deferred tax asset as the Company is a three-year cumulative loss company and it is more likely than not that the full deferred tax asset will not be realized.

Investment securities available for sale decreased $692 thousand, or 0.2%, from $440.1 million at December 31, 2013 to $439.4 million at March 31, 2014 due to principal paydowns and normal amortization, partially offset by the purchase of $6.0 million of collateralized loan obligations. Investment securities held to maturity decreased $26 thousand, or 3.8%, from $681 thousand at December 31, 2013 to $655 thousand at March 31, 2014.

Other assets decreased $1.1 million, or 3.2%, to $32.6 million at March 31, 2014 from $33.7 million at December 31, 2013. This decrease was primarily the result of $2.4 million in market value adjustments on swap transactions recorded during the three months ended March 31, 2014. For more information on the Company’s financial derivative instruments, see Note 7 of the notes to unaudited condensed consolidated financial statements.

Total borrowings, excluding debentures held by trusts, decreased $120 thousand from $68.8 million at December 31, 2013 to $68.6 million at March 31, 2014.

Other liabilities decreased $4.4 million, or 7.4%, to $54.7 million at March 31, 2014 from $59.1 million at December 31, 2013. The decrease was primarily due to a decrease of $2.9 million in market value adjustments on swap transactions since December 31, 2013 and a decrease of $1.9 million relating to normal cash settlements with the Federal Reserve Bank.

Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

Overview. The Company’s net loss available to shareholders for the three months ended March 31, 2014 was $1.9 million, or a loss of $0.02 per common share, compared to net income of $2.5 million, or $0.03 per common share, for the same period in 2013. During the three months ended March 31, 2014 and 2013, the Company recorded mortgage banking revenue of $635 thousand and $3.4 million, respectively. This decrease was due to lower production volume during the three months ended March 31, 2014, in a higher interest rate environment.

Net Interest Income. Net interest income is the most significant component of the Company’s income from operations. Net interest income is the difference between interest earned on total interest-earning assets (primarily loans and investment securities), on a fully taxable equivalent basis, where appropriate, and interest paid on total interest-bearing liabilities (primarily deposits and borrowed funds). Fully taxable equivalent basis represents income on total interest-earning assets that is either tax-exempt or taxed at a reduced rate, adjusted to give effect to the prevailing incremental federal tax rate, and adjusted for nondeductible carrying costs and state income taxes, where applicable. Yield calculations, where appropriate, include these adjustments. Net interest income depends on the volume and interest rate earned on interest-earning assets and the volume and interest rate paid on interest-bearing liabilities.

Net interest income, on a tax-equivalent basis, decreased $1.7 million to $21.6 million for the three months ended March 31, 2014, from $23.3 million for the same period in 2013.

Tax equivalent interest income decreased $2.5 million, or 9.12%, from $27.3 million for the three months ended March 31, 2013, to $24.8 million for the three months ended March 31, 2014. Compared to the comparable prior year quarter, average total loans receivable decreased $211.7 million, which resulted in a decrease in interest income of $2.3 million and yield on total loans decreased 15 basis points, which resulted in a decrease in interest income of $776 thousand. This decrease was partially offset by an increase of $533 thousand in interest income from investments which was primarily due to an increase of 32 basis points in yield from the three months ended March 31, 2013 to the three months ended March 31, 2014.

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Interest expense decreased $757 thousand, or 18.9%, for the three months ended March 31, 2014, as compared to the same period in 2013. The decrease was primarily rate driven. The cost of interest-bearing deposit accounts decreased 10 basis points compared to the prior year period resulting in a decrease in interest expense of $734 thousand.

The interest rate spread and net interest margin for the three months ended March 31, 2014 were 2.95% and 3.07%, respectively, compared to 3.02% and 3.16%, respectively, for the same period in 2013.

Table 2 provides detail regarding the Company’s average daily balances with corresponding interest income (on a tax-equivalent basis) and interest expense as well as yield and cost information for the three months ended March 31, 2014 and 2013. Average balances are derived from daily balances.

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Table 2: Average Balance Sheets

SUN BANCORP, INC. AND SUBSIDIARIES

AVERAGE BALANCE SHEETS (Unaudited)

(Dollars in thousands)

	For the Three Months Ended March 31,
	2014								2013
	Average		Income/			Yield/			Average		Income/		Yield/
	Balance		Expense			Cost			Balance		Expense		Cost
Interest-earning assets:
Loans receivable(1),(2):					��
Commercial and industrial	$	1,560,442	$	16,349			4.19	%	$	1,744,553	$	18,959		4.35	%
Home equity		187,052		1,762			3.77			204,311		1,906		3.73
Second mortgage		24,863		357			5.74			30,347		428		5.64
Residential real estate		331,443		2,958			3.57			330,916		3,071		3.71
Other		25,014		423			6.76			30,410		535		7.04
Total loans receivable		2,128,804		21,849			4.11			2,340,537		24,899		4.26
Investment securities(3)		457,737		2,818			2.46			428,024		2,285		2.14
Interest-earning bank balances		220,113		139			0.25			179,260		111		0.25
Total interest-earning assets		2,806,654		24,806			3.54			2,947,821		27,295		3.70
Non-interest earning assets:
Cash and due from banks		41,342								46,775
Restricted cash		26,000								26,000
Bank properties and equipment, net		48,605								50,363
Goodwill and intangible assets, net		38,852								40,983
Other assets		87,868								94,594
Total non-interest-earning assets		242,667								258,715
Total assets	$	3,049,321							$	3,206,536
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits	$	1,149,460	$	808			0.28	%	$	1,241,861		1,111		0.36	%
Savings deposits		267,305		108			0.27			265,391		215		0.32
Time deposits		608,217		1,293			0.85			689,187		1,689		0.98
Total interest-bearing deposit accounts		2,024,982		2,281			0.45			2,196,439		3,015		0.55
Short-term borrowings:
Securities sold under agreements to repurchase—customers		404		—			—			2,926		1		0.14
Long-term borrowings:
FHLBNY advances(4)		60,929		313			2.05			61,160		316		2.07
Obligations under capital lease		7,293		123			6.75			7,572		126		6.66
Junior subordinated debentures		92,786		531			2.29			92,786		547		2.36
Total borrowings		161,412		967			2.40			164,444		990		2.41
Total interest-bearing liabilities		2,186,394		3,248			0.59			2,360,883		4,005		0.68
Non-interest bearing liabilities:
Non-interest-bearing demand deposits		559,606								506,600
Other liabilities		52,375								75,983
Total non-interest bearing liabilities		611,981								582,583
Total liabilities		2,798,375								2,943,466
Shareholders’ equity		250,946								263,070
Total liabilities and shareholders’ equity	$	3,049,321							$	3,206,536
Net interest income			$	21,558							$	23,290
Interest rate spread(5)							2.95	%						3.02	%
Net interest margin(6)							3.07	%						3.16	%
Ratio of average interest-earning assets to average interest-bearing liabilities							128.37	%						124.86	%

(1) Average balances include non-accrual loans and loans held-for-sale.

(2) Loan fees are included in interest income and the amount is not material for this analysis.

(3) Interest earned on non-taxable investment securities is shown on a tax-equivalent basis assuming a 35% marginal federal tax rate for all periods. The fully taxable equivalent adjustments for the three months ended March 31, 2014 and 2013 were $166 thousand and $212 thousand, respectively.

(4) Amounts include Advances from FHLBNY and Securities sold under agreements to repurchase—FHLBNY.

(5) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.

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Table 3: Rate/Volume⁽¹⁾

	For the Three Months Ended March 31, 2014 vs. 2013
	Increase (Decrease) Due To
	Volume			Rate			Net
Interest income:
Loans receivable:
Commercial and industrial	$	(1,947	)	$	(663	)	$	(2,610	)
Home equity lines of credit		(162	)		18			(144	)
Home equity term loan		(78	)		7			(71	)
Residential real estate		5			(118	)		(113	)
Other		(92	)		(20	)		(112	)
Total loans receivable		(2,274	)		(776	)		(3,050	)
Investment securities		166			367			533
Interest-earning deposits with banks		26			2			28
Total interest-earning assets		(2,082	)		(407	)		(2,489	)
Interest expense:
Interest-bearing deposit accounts:
Interest-bearing demand deposits		(78	)		(225	)		(303	)
Savings deposits		1			(36	)		(35	)
Time deposits		(186	)		(210	)		(396	)
Total interest-bearing deposit accounts		(263	)		(471	)		(734	)
Short-term borrowings:
Securities sold under agreements to repurchase—customers		(1	)		—			(1	)
Long-term borrowings:
FHLBNY advances(2)		(1	)		(2	)		(3	)
Obligations under capital lease		(5	)		2			(3	)
Junior subordinated debentures		—			(15	)		(15	)
Total borrowings		(7	)		(15	)		(22	)
Total interest-bearing liabilities		(270	)		(486	)		(756	)
Net change in net interest income	$	(1,812	)	$	79		$	(1,733	)

(1) For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rate (changes in rate multiplied by old average volume). The combined effect of changes in both volume and rate has been allocated to volume or rate changes in proportion to the absolute dollar amounts of the change in each.

(2) Amounts include Advances from FHLBNY and Securities sold under agreements to repurchase – FHLBNY.

Provision for Loan Losses.The Company recorded no provision expense for loan losses during the three months ended March 31, 2014, as compared to provision expense of $171 thousand for the same period in 2013. The Company’s total loans receivable before allowance for loan losses, or gross loans receivable, decreased $53.6 million, or 2.5%, to $2.08 billion at March 31, 2014 as compared to $2.4 billion at December 31, 2013. In addition, total non-performing loans decreased $531 thousand from $38.0 million at December 31, 2013 to $37.4 million at March 31, 2014. The ratio of allowance for loan losses to gross loans held-for-investment was 1.62% at March 31, 2014 as compared to 1.66% at December 31, 2013. Net charge-offs for the three months ended March 31, 2014 were $1.8 million as compared to net recoveries of $1.1 million during the same period in 2013.

The provision recorded is the amount deemed appropriate by management based on the current risk profile of the portfolio to absorb losses existing at the balance sheet date. At least monthly, management performs an analysis to identify the inherent risk of loss in the Company’s loan portfolio. This analysis includes a qualitative evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio (including loans being specifically monitored by management), estimated fair value of underlying collateral, delinquencies, and other factors. Additionally, management updates the migration analysis and historic loss and recovery experience on a quarterly basis.

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Non-Interest Income.Non-interest income decreased $5.9 million to $4.9 million for the three months ended March 31, 2014, as compared to $10.9 million for the same period in 2013. This decrease was primarily attributable to a decrease in mortgage banking revenue, net of $2.8 million due to a decline in residential mortgage production volume resulting from rising interest rates as well as a $3.5 million decline in the gain on sale of available for sale securities as no investments were sold in the three months ended March 31, 2014.

Non-Interest Expense. Non-interest expense decreased $3.4 million to $27.9 million for the three months ended March 31, 2014 as compared to $31.3 million for the same period in 2013. This decrease was primarily due to a decrease in salaries and employee benefits expense of $1.4 million combined with decreases in commission expense of $1.1 million and professional fees of $1.2 million.

Liquidity and Capital Resources

The liquidity of the Company is the ability to maintain cash flows that are adequate to fund operations and meet its other obligations on a timely and cost-effective basis in various market conditions. The ability of the Company to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate assets and the availability of alternative sources of funds. To meet the needs of the clients and manage the risk of the Company, the Company engages in liquidity planning and management.

The major source of the Company’s funding on a consolidated basis is deposits, which management believes will be sufficient to meet the Company’s daily and long-term operating liquidity needs. The ability of the Company to retain and attract new deposits is dependent upon the variety and effectiveness of its customer account products, customer service and convenience, and rates paid to customers. The Company also obtains funds from the repayment and maturities of loans, loan sales or participations and maturities or calls of investment securities. Additional liquidity can be obtained in a variety of wholesale funding sources as well, including, but not limited to, federal funds purchased, FHLBNY advances, securities sold under agreements to repurchase, and other securities and unsecured borrowings. Through the Bank, the Company also purchases brokered deposits for funding purposes; however, this funding source is currently limited to 6.0% of the Bank’s total liabilities in accordance with a written agreement between the Bank and the OCC and the OCC’s subsequent approved increase in the limit, as discussed later in this section. In a continued effort to balance deposit growth and net interest margin, especially in the current interest rate environment and with competitive local deposit pricing, the Company continually evaluates these other funding sources for funding cost efficiencies. Deposit rates continued to decrease in 2014, but at a rate slower than in previous quarters. Core deposits, which exclude all certificates of deposit, decreased by $66.4 million to $1.97 billion, or 76.7% of total deposits at March 31, 2014, as compared to $2.01 billion, or 76.6% of total deposits at December 31, 2013. The Company has additional secured borrowing capacity with the Federal Reserve Bank of approximately $153.2 million, of which none was utilized, and the FHLBNY of approximately $189.6 million, of which $60.9 million was utilized. In addition to secured borrowings, the Company also has unsecured borrowing capacity through lines of credit with other financial institutions of $35.0 million, of which none were utilized as of March 31, 2014. Management continues to monitor the Company’s liquidity and has taken measures to increase its borrowing capacity by providing additional collateral through the pledging of loans. As of March 31, 2014, the Company had a par value of $223.1 million and $182.1 million in loans and securities, respectively, pledged as collateral on secured borrowings.

The Company’s primary uses of funds are the origination of loans, the funding of the Company’s maturing certificates of deposit, deposit withdrawals, the repayment of borrowings and general operating expenses. Certificates of deposit scheduled to mature during the 12 months ending March 31, 2015 total $368.6 million, or approximately 61.51% of total certificates of deposit. The Company continues to operate with a core deposit relationship strategy that values a long-term stable customer relationship. This strategy employs a pricing strategy that rewards customers that establish core accounts and maintain a certain minimum threshold account balance. Based on market conditions and other liquidity considerations, the Company may also avail itself to the secondary borrowings discussed above.

The Company anticipates that deposits, cash and cash equivalents on hand, the cash flow from assets, as well as other sources of funds will provide adequate liquidity for the Company’s future operating, investing and financing needs.

The Bank’s deposits are insured to applicable limits by the FDIC. Pursuant to the Dodd-Frank Act, the Federal Deposit Insurance Act was amended to increase the maximum deposit insurance amount from $100,000 to $250,000.

On April 15, 2010, the Bank entered into the OCC Agreement which contained requirements to develop and implement a profitability and capital plan which provides for the maintenance of adequate capital to support the Bank’s risk profile in the current economic environment. The capital plan was required to contain a dividend policy allowing dividends only if the Bank is in compliance with the capital plan, and obtains prior approval from the OCC. In addition, we are required to seek the prior approval of the Federal Reserve Bank before paying interest, principal or other sums on trust preferred securities or any related subordinated debentures, declaring or paying cash dividends or taking dividends from the Bank, repurchasing outstanding stock or incurring indebtedness. The Company is also required to take certain remedial steps and submit plans and progress reports to the Federal Reserve Bank.

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The Bank also agreed to: (a) implement a program to protect the Bank’s interest in criticized or classified assets, (b) review and revise the Bank’s loan review program; (c) implement a program for the maintenance of an adequate allowance for loan losses; and (d) revise the Bank’s credit administration policies. The Bank also agreed that its brokered deposits will not exceed 3.5% of its total liabilities unless approved by the OCC. Effective October 18, 2012, the OCC approved an increase of this limit to 6.0%. Management does not expect this restriction will limit its access to liquidity as the Bank does not rely on brokered deposits as a major source of funding. At March 31, 2014, the Bank’s brokered deposits represented 3.9% of its total liabilities.

Management is taking all necessary actions to ensure the Bank becomes fully compliant with all requirements of the OCC Agreement and the Federal Reserve Bank requirements discussed above.

The Bank is also subject to individual minimum capital ratios established by the OCC for the Bank requiring the Bank to continue to maintain a Leverage ratio at least equal to 8.50% of adjusted total assets, to continue to maintain a Tier 1 Capital ratio at least equal to 9.50% of risk-weighted assets and maintain a Total Capital ratio at least equal to 11.50% of risk-weighted assets. At March 31, 2014, the Bank met all of the three capital ratios established by the OCC as its Leverage ratio was 9.45%, Tier 1 Capital ratio was 12.83%, and Total Capital ratio was 14.08%.

The following table provides both the Company’s and the Bank’s regulatory capital ratios as of March 31, 2014:

Table 4: Regulatory Capital Levels

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action  Provision(1)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2014
Total capital (to risk-weighted assets):
Sun Bancorp, Inc.	$	329,930		14.87	%	$	177,526		8.00	%		N/A
Sun National Bank		311,694		14.08			177,075		8.00		$	221,344		10.00	%
Tier I capital (to risk-weighted assets):
Sun Bancorp, Inc.		282,992		12.75			88,763		4.00			N/A
Sun National Bank		283,943		12.83			88,538		4.00			132,807		6.00
Leverage ratio:
Sun Bancorp, Inc.		282,992		9.40			120,434		4.00			N/A
Sun National Bank		283,943		9.45			120,223		4.00			150,279		5.00

(1) Not applicable for bank holding companies.

The Company’s capital securities qualify as Tier 1 capital under federal regulatory guidelines. These instruments are subject to a 25% capital limitation under risk-based capital guidelines developed by the FRB. Under FRB rules, restricted core capital elements, which are qualifying trust preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. However, under the Dodd-Frank Act, bank holding companies are prohibited from including in their Tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such instruments issued before May 19, 2010 by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion as of December 31, 2009, may continue to be included as Tier 1 capital (subject to the 25% limitation). The portion that exceeds the 25 percent capital limitation qualifies as Tier 2, or supplementary capital of the Company. At March 31, 2014, $70.9 million of a total of $90.0 million in capital securities qualified as Tier 1 with $19.1 million qualifying as Tier 2.

Basel III Capital Rules

Regulatory reforms have recently been instituted, which will also impose restrictions on our current business practices. Recent items affecting us include the final Basel III rule.

On July 2, 2013, the federal banking regulators, including the FRB and the OCC, approved the final Basel III capital rules for U.S. banking organizations. The final rules establish an integrated regulatory capital framework and will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the final rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets that will apply to all covered financial institution holding companies and all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4 percent for all banking organizations. These new minimum capital ratios will become effective for us on January 1, 2015 and will be fully phased-in on January 1, 2019 and are separate from the individual minimum capital ratios established by the OCC.

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In addition, the final rule will impose limits on capital distributions by, and discretionary bonus payments to executive officers of, banking organizations that do not maintain a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer will be phased-in over a transition period from January 1, 2016 to January 1, 2019.

The final rule emphasizes common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The final rule also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Banks and regulators use risk weighting to assign different levels of risk to different classes of assets.

The chart below contains the Basel III regulatory capital levels that we must satisfy during the applicable transition period, from January 1, 2015 until January 1, 2019, which are in addition to and separate from the individual minimum capital ratios established by the OCC.

	Basel III Regulatory Capital Levels
	January 1, 2015			January 1, 2016			January 1, 2017			January 1, 2018			January 1, 2019
Tier 1 common equity		4.5	%		5.125	%		5.75	%		6.375	%		7.0	%
Tier 1 risk-based capital ratio		6.0	%		6.625	%		7.25	%		7.875	%		8.5	%
Total risk-based capital ratio		8.0	%		8.625	%		9.25	%		9.875	%		10.5	%

The Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a common equity tier 1 capital ratio requirement at each level (other than critically undercapitalized), with the required common equity tier 1 capital ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%), and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any prompt corrective action category.

We currently anticipate that our capital ratios, on a Basel III basis, will exceed the regulatory minimum requirements to be considered well-capitalized. However, we are evaluating options to mitigate the capital impact of the final rule prior to its effective implementation date.

Dividend Restrictions

The ability of the Bank to pay dividends to the Company is governed by certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits and a national bank may not declare any dividends if such declaration would leave the bank inadequately capitalized. Therefore, the ability of the Bank to declare dividends will depend on its future net income and capital requirements. Also, banking regulators have indicated that national banks should generally pay dividends only out of current operating earnings. Following this guidance, the Bank was not able to pay a dividend to the Company at March 31, 2014. Moreover, per the OCC Agreement and the Federal Reserve Bank requirements, a dividend may only be declared if it is in accordance with the approved capital plan, the Bank remains in compliance with the capital plan following the payment of the dividend and the dividend is approved by the OCC and the Federal Reserve Bank.

Volcker Rule

On December 10, 2013, the FRB, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule contained in section 619 of the Dodd-Frank Act, generally to become effective on July 21, 2015. The Volcker Rule prohibits an insured depository institution and its affiliates (referred to as “banking entities”) from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. These prohibitions impact the ability of U.S. banking entities to provide investment management products and services that are competitive with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. The rule also effectively prohibits short-term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading.

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The final Volcker Rule regulations do provide certain exemptions allowing banking entities to continue underwriting, market-making and hedging activities and trading certain government obligations, as well as various exemptions and exclusions from the definition of “covered funds.” However, the level of required compliance activity depends on the size of the banking entity and the extent of its trading.

On January 14, 2014, the five federal agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of the Volcker Rule. Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if certain qualifications are met. In addition, the agencies released a non-exclusive list of issuers that meet the requirements of the interim final rule. At March 31, 2014, the Company had an investment in one pool of trust preferred securities with an amortized cost of $8.8 million and estimated fair value of $5.9 million. This pool was included in the non-exclusive list of issuers that meet the requirements of the interim final rule released by the agencies. On April 17, 2014 the FRB released guidance stating that it would extend the conformance period for banks holding collateralized loan obligations by two years to July 2017.

At March 31, 2014, the Bank had 13 collateralized loan obligation securities with an amortized cost of $79.9 million and an estimated fair value of $79.3 million. These securities are subject to the provisions of the Volcker Rule. However, a final determination has yet to be made on whether banks will be required to divest these investments. Discussion has been ongoing among the regulators, Congress and the investors in collateralized loan obligations. Based on the current status of these discussions and through the Bank’s communication with its investment advisors, the Bank’s management believes it will either be able to hold these collateralized loan obligation investments in its portfolio or have them modified such that the perceived risk will be adequately eliminated.

At March 31, 2014, the Bank had one non-rated single issuer security with an amortized cost of $3.8 million and an estimated fair value of $2.7 million. This security is not subject to the provisions of the Volcker Rule.

See Note 12 of the notes to unaudited condensed consolidated financial statements for additional information regarding regulatory matters.

Disclosures about Commitments

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company takes various forms of collateral, such as real estate assets and customer business assets, to secure the commitment. Additionally, all letters of credit are supported by indemnification agreements executed by the customer. The maximum undiscounted exposure related to these commitments at March 31, 2014 was $33.4 million and the portion of the exposure not covered by collateral was approximately $722 thousand. We believe that the utilization rate of these letters of credit will continue to be substantially less than the amount of these commitments, as has been our experience to date.

The Company maintains a reserve for unfunded loan commitments and letters of credit, which is reported in other liabilities in the unaudited condensed consolidated statements of financial condition, consistent with FASB ASC 825. As of the balance sheet date, the Company records estimated losses inherent with unfunded loan commitments in accordance with FASB ASC 450,Contingencies,and estimated future obligations under letters of credit in accordance with FASB ASC 460,Guarantees.The methodology used to determine the adequacy of this reserve is integrated in the Company’s process for establishing the allowance for loan losses and considers the probability of future losses and obligations that may be incurred under these off-balance sheet agreements. The reserve for unfunded loan commitments and letters of credit at March 31, 2014 and December 31, 2013 was $650 thousand and $454 thousand, respectively. Management believes this reserve level is sufficient to absorb estimated probable losses related to these commitments.

The Company maintains a reserve for residential mortgage loans sold with recourse to third-party purchasers which is reported in other liabilities in the unaudited condensed consolidated statements of financial condition. As of March 31, 2014, the Company records estimated losses inherent with residential mortgage loans sold with recourse in accordance with FASB ASC 460,Guarantees. This reserve is determined based upon the probability of future losses which is calculated using historical Company and industry loss data. The reserve for residential mortgage loan recourse as of March 31, 2014 and December 31, 2013 was $608 thousand and $647 thousand, respectively. Management believes this reserve level is sufficient to address potential recourse exposure.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Asset and Liability Management

Interest rate, credit and operational risks are among the most significant market risks impacting the performance of the Company. The Company has an Asset Liability Committee (“ALCO”), composed of senior management representatives from a variety of areas within the Company. ALCO devises strategies and tactics to maintain the net interest income of the Company within acceptable ranges over a variety of interest rate scenarios. Should the Company’s risk modeling indicate an undesired exposure to changes in interest rates, there are a number of remedial options available including changing the investment portfolio characteristics, and changing loan and deposit pricing strategies. Two of the tools used in monitoring the Company’s sensitivity to interest rate changes are gap analysis and net interest income simulation.

Gap Analysis. Banks are concerned with the extent to which they are able to match maturities or re-pricing characteristics of interest-earning assets and interest-bearing liabilities. Such matching is facilitated by examining the extent to which such assets and liabilities are interest-rate sensitive and by monitoring the bank’s interest rate sensitivity gap. Gap analysis measures the volume of interest-earning assets that will mature or re-price within a specific time period, compared to the interest-bearing liabilities maturing or re-pricing within that same time period. On a monthly basis the Company and the Bank monitor their gap, primarily cumulative through both nine months and one year maturities.

At March 31, 2014, the Company’s gap analysis showed an asset sensitive position with total interest-earning assets maturing or re-pricing within one year exceeding interest-bearing liabilities maturing or re-pricing during the same time period by $470.8 million representing a positive one-year gap ratio of 15.49%. All amounts are categorized by their actual maturity or anticipated call or re-pricing date with the exception of interest-bearing demand deposits and savings deposits. Though the rates on interest-bearing demand and savings deposits generally trend with open market rates, they often do not fully adjust to open market rates and frequently adjust with a time lag. As a result of prior experience during periods of rate volatility and management’s estimate of future rate sensitivities, the Company allocates the interest-bearing demand deposits and savings deposits based on an estimated decay rate for those deposits.

Net Interest Income Simulation. Due to the inherent limitations of gap analysis, the Company also uses simulation models to measure the impact of changing interest rates on its operations. The simulation model attempts to capture the cash flow and re-pricing characteristics of the current assets and liabilities on the Company’s balance sheet. Assumptions regarding such things as prepayments and rate change behaviors are incorporated into the simulation model. Net interest income is simulated over a twelve month horizon under a variety of linear yield curve shifts, subject to certain limits agreed to by ALCO.

Net interest income simulation analysis at March 31, 2014 shows a position that is relatively neutral to interest rates with a more negative bias as rates decrease. The net income simulation results are impacted by an expected continuation of deposit pricing competition which may limit deposit pricing flexibility in both increasing and decreasing rate environments, floating-rate loan floors initially limiting loan rate increases and a relatively short liability maturity structure including retail certificates of deposit.

Actual results may differ from the simulated results due to such factors as the timing, magnitude and frequency of interest rate changes, changes in market conditions, management strategies and differences in actual versus forecasted balance sheet composition and activity. Table 5 provides the Company’s estimated earnings sensitivity profile versus the most likely rate forecast as of March 31, 2014. The Company anticipates that strong deposit pricing competition will continue to limit deposit pricing flexibility in an increasing and a decreasing rate environment.

Table 5: Sensitivity Profile

Change in Interest Rates (Basis Points)	Percentage Change in Net Interest Income Year 1
+200		4.6	%
+100		2.1	%
-100		(1.1	)%
-200		(2.4	)%

Derivative Financial Instruments. The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. In general, the derivative transactions entered into by the Company fall into one of two types: a fair value hedge of a specific fixed-rate loan agreement and an economic hedge of a derivative offering to a Bank customer. Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures. The Company seeks to minimize counterparty credit risk by establishing credit limits and collateral agreements. The Company does not use derivative financial instruments for trading purposes. For more information on the Company’s financial derivative instruments, please see Note 7 of the notes to unaudited condensed consolidated financial statements.

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Item 4. Controls and Procedures

(a)Evaluation of disclosure controls and procedures. Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, such disclosure controls and procedures were designed and functioning effectively to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

(b)Changes in internal control over financial reporting. During the quarter under report, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company and the Bank are periodically involved in various claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, and claims involving the making and servicing of real property loans. While the ultimate outcome of these proceedings cannot be predicted with certainty, management, after consultation with counsel representing the Company in these proceedings, does not expect that the resolution of these proceedings will have a material effect on the Company’s financial condition, results of operations or cash flows.

Item 1A. Risk Factors

Management of the Company does not believe there have been any material changes to the Risk Factors previously disclosed under Item 1A of the Company’s Form 10-K for the year ended December 31, 2013 previously filed with the Securities and Exchange Commission.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information

Not Applicable

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Item 6. Exhibits

Exhibit 3.1	Amended and Restated Certificate of Incorporation of Sun Bancorp, Inc. (1)
Exhibit 3.2	Certificate of Amendment to Restated Certificate of Incorporation (2)
Exhibit 3.3	Amended and Restated Bylaws of Sun Bancorp, Inc. (3)
Exhibit 4.1	Common Security Specimen (4)
Exhibit 31(a)	Certification of Principal Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31(b)	Certification of Principal Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS	XBRL Instance Document
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF	XBRL Taxonomy Definition Linkbase Document

(1) Incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-3 filed on February 6, 2009 (Registration Number 333-157131).

(2) Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 27, 2011 (File No. 0-20957).

(3) Incorporated by reference to the exhibits to the Company’s Current Report on Form 8-K filed on October 24, 2007 (File No. 0-20957).

(4) Incorporated by reference to the registrant’s Registration Statement on Form S-1 filed with the Commission on February 14, 1997 (File No. 333-21903).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Sun Bancorp, Inc.
	Registrant
Date: May 09, 2014	/s/ Sidney R. Brown
	Sidney R. Brown
	Chairman, Interim President and Chief Executive Officer
	(Duly Authorized Representative)
Date: May 09, 2014	/s/ Thomas R. Brugger
	Thomas R. Brugger
	Executive Vice President and
	Chief Financial Officer
	(Duly Authorized Representative)

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