EX-13 2 d443980dex13.htm EX-13 EX-13

Exhibit 13

SUN BANCORP, INC. AND SUBSIDIARIES

SELECTED FINANCIAL DATA

(Dollars in thousands, except per share amounts)

 

At or for the Years Ended December 31,

   2012     2011     2010     2009     2008  

Selected Balance Sheet Data

          

Total assets

   $ 3,224,031      $ 3,183,916      $ 3,417,546      $ 3,578,905      $ 3,622,126   

Cash and investments

     631,596        652,537        680,719        516,312        512,017   

Loans receivable, net of allowance for loan losses

     2,351,222        2,272,647        2,453,457        2,657,694        2,702,516   

Total deposits

     2,713,224        2,667,977        2,940,460        2,909,268        2,896,364   

Borrowings

     70,992        31,269        33,417        146,193        154,097   

Junior subordinated debentures

     92,786        92,786        92,786        92,786        92,786   

Shareholders’ equity

     262,595        309,083        268,242        356,593        358,508   

Selected Results of Operations

          

Interest income

   $ 115,433      $ 126,680      $ 145,603      $ 150,999      $ 174,634   

Net interest income

     97,848        103,528        110,962        100,157        99,661   

Provision for loan losses

     57,215        74,266        101,518        46,666        20,000   

Net interest income after provision for loan losses

     40,633        29,262        9,444        53,491        79,661   

Non-interest income

     29,450        13,468        15,512        17,070        32,299   

Non-interest expense

     120,608        110,225        201,052        104,067        92,640   

Net (loss) income

     (50,491     (67,505     (185,418     (17,131     14,894   

Net (loss) income available to common shareholders

     (50,491     (67,505     (185,418     (22,482     14,894   

Per Share Data (1)

          

(Loss) earnings per common share:

          

Basic

   $ (0.59   $ (0.88 )    $ (6.56   $ (0.97   $ 0.63   

Diluted

     (0.59     (0.88     (6.56     (0.97     0.62   

Book Value

     3.05        3.61        5.33        15.29        15.57   

Selected Ratios

          

Return on average assets

     (1.60 )%      (2.05 )%      (5.20 )%      (0.47 )%      0.44

Return on average equity

     (17.19     (22.57     (56.93     (4.44     4.09   

Ratio of average equity to average assets

     9.31        9.10        9.13        10.69        10.72   

 

(1) Data is adjusted for a 5% stock dividend issued in May 2009.


SUN BANCORP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

ORGANIZATION OF INFORMATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations provides a narrative on the financial condition and results of operations of Sun Bancorp, Inc. (the “Company”) and should be read in conjunction with the accompanying consolidated financial statements. It includes the following sections:

 

   

OVERVIEW

 

   

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

 

   

RECENT ACCOUNTING PRINCIPLES

 

   

RESULTS OF OPERATIONS

 

   

LIQUIDITY AND CAPITAL RESOURCES

 

   

FINANCIAL CONDITION

 

   

FORWARD-LOOKING STATEMENTS

OVERVIEW

General Overview

The Company is a bank holding company headquartered in Vineland, New Jersey, and has an executive office in Mt. Laurel, New Jersey, with its principal subsidiary being Sun National Bank (the “Bank”). At December 31, 2012, the Company had total assets of $3.2 billion, total liabilities of $3.0 billion and total shareholders’ equity of $262.6 million. The Company’s principal business is to serve as a holding company for the Bank. As a registered bank holding company, the Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “FRB”).

Through the Bank, the Company provides commercial and consumer banking services. As of December 31, 2012, the Company had 62 locations throughout New Jersey.

The Company offers a comprehensive array of lending, depository and financial services to its commercial and consumer customers throughout the marketplace. The Company’s lending services to businesses include term loans and lines of credit, mortgage loans, construction loans and equipment leasing. The Company is a Preferred Lender with both the Small Business Administration (“SBA”) and the New Jersey Economic Development Authority. The Company’s commercial deposit services include business checking accounts and cash management services such as electronic banking, sweep accounts, lockbox services, online banking, remote deposit and controlled disbursement services. The Company’s lending services to consumers include residential mortgage loans, residential construction loans, second mortgage loans, home equity loans and installment loans. The Company’s consumer deposit services include checking accounts, savings accounts, money market deposits, certificates of deposit and individual retirement accounts. In addition, the Company offers mutual funds, securities brokerage, annuities and investment advisory services through a third-party arrangement.

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, which is net interest income as a percentage of average interest-earning assets.

The Company also generates revenue through fees earned on the various services and products offered to its customers and through sales of loans, primarily SBA loans and residential mortgages. Offsetting these revenue sources are provisions for credit losses on loans, operating expenses and income taxes.

 

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Market Overview

The economic recovery has been slower than anticipated through most of 2012, but signs of growth have appeared in the fourth quarter of 2012 and continued into 2013. Interest rates have remained near historical lows. The unemployment rate in the U.S. remained stable at 7.8% in December 2012 from September 2012 and decreased from 8.5% in December 2011. According to recently released estimates, the U.S. gross domestic product for the fourth quarter of 2012 decreased at an annual rate of 0.1% as compared to 3.1% growth in the third quarter of 2012. This decrease primarily reflected a decrease in private inventory investment, federal government spending and exports, partially offset by increases in personal consumption and residential fixed investment and a decrease in imports. The increase in job growth which occurred during 2012 coupled with increased spending and some improvement in the housing sector have created some optimism in the markets that an economic recovery may be underway. However, the fiscal cliff talks and the debt crisis, both domestically and in Europe, as well as the continuing weakness in the housing sector have continued to temper that optimism.

At the state level, according to the latest South Jersey Business Survey produced by the Federal Reserve Bank of Philadelphia (the “Federal Reserve”), a modest increase in business activity was reported in the fourth quarter of 2012. Sales have been steady and employment continues to improve. Companies are optimistic about overall business growth over the next six months. 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 at 9.6% as of December 2012.

At its latest meeting in January 2013, 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. In addition, FRB policymakers decided to continue its program to extend the average maturity of its holdings of securities. The FRB policymakers continue to consider providing additional monetary policy accommodations to support the economic recovery.

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 year ended December 31, 2012.

Executive Summary

The Company’s net loss available to common shareholders for 2012 was $50.5 million, or $0.59 per diluted share, compared to a net loss of $67.5 million, or $0.88 per diluted share, in 2011. The following is an overview of key factors affecting the Company’s results for 2012:

 

  As part of a continuing strategy to reduce balance sheet risk, the Company signed a definitive agreement on January 17, 2013 to sell $45.8 million of loans, having a book balance of $35.1 million, to a third-party investor for gross proceeds of $22.0 million. As the formal approval to sell these loans occurred during 2012, the related loans were transferred to held-for-sale as of December 31, 2012 at lower of cost or market, which resulted in a net loss of $7.6 million after accounting for loan loss reserves, customer derivative termination costs, and other expenses. The transaction closed on February 8, 2013. In addition, the Company reached workout settlements with several troubled borrowers, resulting in a loss of $6.7 million in the fourth quarter of 2012.

 

  Provision expense totaled $57.2 million during 2012 as compared to $74.3 million during 2011. The allowance for loan losses equaled $45.9 million at December 31, 2012, an increase of $4.2 million from December 31, 2011. The allowance for loan losses equaled 2.02% of gross loans held-for-investment and 55.3% of non-performing loans held for investment at December 31, 2012 as compared to 1.82% and 38.7%, respectively, at December 31, 2011.

 

  Commercial loan production was $378 million during the year ended December 31, 2012 versus $323 million in the prior year. The Company continues to maintain a disciplined underwriting and pricing strategy in this uncertain economic environment.

 

  The net interest margin equaled 3.43% for 2012 versus 3.50% in 2011. The net interest margin in 2012 was negatively impacted by the maturity of legacy commercial loans as well as the overall low interest rate environment.

 

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Non-interest income increased $16.0 million to $29.5 million during 2012 as compared to 2011 primarily due to a reduction of $10.3 million in negative derivative credit adjustments due to significant swap losses resulting from the loan sale and credit deterioration in the prior year. There also was an increase in gains on the sale of mortgage loans of $7.2 million over the same period. The Company’s residential mortgage operations were strong as $666 million in residential mortgage loans were closed during 2012 as compared to $192 million in 2011. These increases were partially offset by a decrease of $1.0 million in bank-owned life insurance income due to death benefits recognized in 2011.

 

   

Non-interest expense increased $10.4 million from $110.2 million in 2011 to $120.6 million in 2012. This increase was due primarily to an increase of $10.0 million in salaries and employee benefits resulting from the expansion of the Company’s mortgage operations in 2012.

 

   

Total risk-based capital was 13.72% at December 31, 2012, well above 11.50%, the regulatory required level.

Impact of Hurricane Sandy

In late October 2012, many parts of New Jersey were devastated by the impact of Hurricane Sandy. The Company incurred additional expenses as a result of the impact of the storm on its own customers and its business operations. Due to the extent of damages and uninsured losses experienced by some of the Company’s commercial borrowers, additional loan loss reserves of $4.3 million were recorded in the fourth quarter of 2012 to reflect potential losses inherent in the portfolio as a result of Hurricane Sandy. Damages resulting from the storm to some of the Company’s facilities resulted in repair and clean-up costs of approximately $222 thousand which were also recognized in the fourth quarter of 2012.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in conformity with accounting principles generally accepted in the United States of America (“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.

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 indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss 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

 

   

Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries, and for commercial loans, the level of loans being approved with exceptions to policy

 

   

Experience, ability and depth of management and staff

 

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

 

   

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

 

   

Concentrations of credit by industry, geography and collateral type, with a specific emphasis on real estate, and changes in levels of such concentrations

 

   

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

 

   

Hurricane Sandy impact

Additionally, historic loss experience over a three-year loss horizon, based on a rolling 12-quarter migration analysis, is taken into account for commercial loans and historic loss experience over the more conservative of either the trailing four or eight quarters is calculated for non-commercial loans. 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 experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and those deemed impaired (specific allowance). 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 experience and the qualitative factors described above. 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.

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 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 or loan performance deteriorates further from current levels, 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 Office of the Comptroller of the Currency (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 Financial Accounting Standards Board Accounting Standards Codification (“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 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.

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.

 

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Fair Value Measurement. The Company accounts for fair value measurement in accordance with FASB ASC 820, Fair Value Measurements and Disclosures (“FASB ASC 820”). 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 prices 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 amount. 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 (unadjusted) 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 measures financial assets and liabilities at fair value in accordance with FASB ASC 820. These measurements involve various valuation techniques and models, which involve inputs that are observable, when available, and include the following significant financial instruments: investment securities available for sale and derivative financial instruments. The following is a summary of valuation techniques utilized by the Company for its significant financial assets and liabilities which are measured at fair value on a recurring basis.

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 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 London Interbank Offered Rate (“LIBOR”) swap curve, and are classified within Level 2 of the valuation hierarchy.

Residential mortgage loans held-for-sale. Effective July 1, 2012, the Company’s residential mortgage loans held-for-sale were 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 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 when 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 $2.1 million as of December 31, 2012.

 

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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 70% as of December 31, 2012.

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 impaired loans, commercial loans held-for-sale, SBA servicing assets, restricted equity investments and loans or bank properties transferred into 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. The Company tests goodwill for impairment annually. The Company elected not to apply the qualitative evaluation option permitted under Accounting Standards Update 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. 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 defined in Note 2 of the Notes to Consolidated Financial Statements. If the fair value of a reporting unit exceeds its 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 its fair value, the second step is performed to measure the amount of the impairment loss, if any. An implied loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

The Company performed a goodwill impairment analysis at December 31, 2012. In performing step one of the impairment analysis, the Company estimated the fair value of the Company through the consideration of its quoted market valuation, market earnings multiples of peer companies and market earnings multiples of peer companies adjusted to include a market observed control premium (i.e., its acquisition value relative to its peers). The considerations above are sensitive to both the fluctuation of the Company’s stock price and those of peer companies. The step one impairment test completed at December 31, 2012 indicated that the Company’s fair value was above its carrying value, and therefore the Company did not need to perform a step two analysis. As a result, the Company’s goodwill balance was not considered impaired at December 31, 2012.

However, given the continued turmoil in the capital markets and with bank stocks in general, it is possible that our assumptions and conclusions regarding the valuation of our Company could change adversely in the future and could result in impairment of the Company’s goodwill. While any charge resulting from a partial or full impairment of goodwill would be a non-cash charge and have no impact on the Company’s regulatory capital, the charge could have a material adverse impact on our financial position and results of operations. For more information on goodwill, see Notes 2 and 10 of the Notes to Consolidated Financial Statements.

RECENT ACCOUNTING PRINCIPLES

In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update aim to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. 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 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This amendment provides an entity with the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. This amendment is effective for public entities for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The guidance will have no impact on the Company as it does not have any indefinite-lived intangible assets.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). This amendment results in common offsetting requirements and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRS”). This guidance is not intended to change, but enhance, the application requirements in FASB ASC 210, Balance Sheet (“FASB ASC 210”). This guidance is effective for public entities during interim and annual periods beginning after January 1, 2013. This guidance amends only the disclosure requirements and not the application of the accounting standard. In January 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in this update clarify that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with FASB ASC 815, Derivatives and Hedging (“FASB ASC 815”), including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with FASB ASC 210 or FASB ASC 815 or subject to an enforceable master netting arrangement or similar agreement. This guidance is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The Company is currently evaluating the impact of the adoption of these accounting standards updates on its financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Subsequently in December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This guidance eliminates the presentation option of presenting the component of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, the updates to comprehensive income guidance require all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or two separate but consecutive statements. The Company elected to adopt the two statement approach. In this two statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. These changes apply to both annual and interim financial statements. The Company adopted the new accounting guidance effective January 1, 2012, and applied it retrospectively to fiscal years 2011 and 2010. The adoption added the consolidated statements of comprehensive loss but did not impact the Company’s results of operations, financial position, or cash flows.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, to achieve common fair value measurement and disclosure requirements between U.S. GAAP and international accounting principles. While the overall guidance is consistent with U.S. GAAP, the amendment includes additional fair value disclosure requirements. The amendments in the guidance are effective for interim and annual periods beginning after December 15, 2011. The adoption of this amendment did not have a material effect on the Company’s financial statements; however, the adoption did result in expanded fair value disclosures in Note 24.

RESULTS OF OPERATIONS

The following discussion focuses on the major components of the Company’s operations and presents an overview of the significant changes in the results of operations during the past three fiscal years. This discussion should be reviewed in conjunction with the consolidated financial statements and notes thereto presented elsewhere in this Annual Report. All earnings per share amounts are presented assuming dilution.

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.

 

8


The Company’s net interest margin and interest rate spread in 2012 were 3.43% and 3.27%, respectively, as compared to 3.50% and 3.30%, respectively, for 2011 and 3.50% and 3.28%, respectively, for 2010. The margin decrease from 2011 is due primarily to the decline in the yield on interest-bearing assets of 23 basis points, which was partially offset by a decline of 20 basis points in costs of interest-bearing liabilities. The margin impact of the decline in yield on interest-bearing assets of 31 basis points in 2011 from 2010 was almost directly offset by a decline of 33 basis points in costs of interest-bearing liabilities.

Net interest income (on a tax-equivalent basis) decreased $6.2 million, or 5.9%, to $98.7 million for 2012 compared to $104.9 million for 2011. Net interest income (on a tax-equivalent basis) decreased $7.9 million, or 7.0%, to $104.9 million for 2011 compared to $112.8 million for 2010.

Table 1 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 years ended December 31, 2012, 2011 and 2010. Average balances are derived from daily balances. Table 2 further provides certain information regarding changes in interest income and interest expense of the Company for the years ended December 31, 2012, 2011 and 2010.

TABLE 1: STATEMENTS OF AVERAGE BALANCES, INCOME OR EXPENSE, YIELD OR COST

 

Years Ended December 31,

   2012     2011     2010  
     Average      Income/      Yield/     Average      Income/      Yield/     Average      Income/      Yield/  
     Balance      Expense      Cost     Balance      Expense      Cost     Balance      Expense      Cost  

Interest-earning assets:

                        

Loans receivable (1), (2):

                        

Commercial and industrial

   $ 1,814,626       $ 82,165         4.53   $ 1,954,701       $ 92,107         4.71   $ 2,245,118       $ 105,210         4.69

Home equity

     216,218         8,738         4.04        232,278         9,774         4.21        251,599         11,714         4.66   

Second mortgage

     37,021         2,128         5.75        48,998         2,863         5.84        62,349         3,889         6.24   

Residential real estate

     207,553         8,199         3.95        87,858         4,547         5.18        79,547         4,415         5.55   

Other

     35,636         2,477         6.95        51,041         3,502         6.86        60,874         4,163         6.84   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total loans receivable

     2,311,054         103,707         4.49        2,374,876         112,793         4.75        2,699,487         129,391         4.79   

Investment securities (3)

     537,710         12,529         2.33        505,006         14,940         2.96        452,365         17,846         3.95   

Interest-earning deposits with banks

     28,646         68         0.24        117,830         288         0.24        69,803         166         0.24   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     2,877,410         116,304         4.04        2,997,712         128,021         4.27        3,221,655         147,403         4.58   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Non-interest-earning assets:

                        

Cash and due from banks

     73,000              72,455              47,393         

Bank properties and equipment, net

     52,781              54,589              52,944         

Goodwill and intangible assets, net

     43,280              46,961              95,010         

Other assets

     108,299              114,158              150,558         
  

 

 

         

 

 

         

 

 

       

Total non-interest-earning assets

     277,360              288,163              345,905         
  

 

 

         

 

 

         

 

 

       

Total assets

   $ 3,154,770            $ 3,285,875            $ 3,567,560         
  

 

 

         

 

 

         

 

 

       

Interest-bearing liabilities:

                        

Interest-bearing deposit accounts:

                        

Interest-bearing demand deposits

   $ 1,225,609       $ 4,778         0.39   $ 1,317,816       $ 7,024         0.53   $ 1,312,871       $ 10,692         0.81

Savings deposits

     263,307         900         0.34        271,970         1,412         0.52        295,121         2,283         0.77   

Time deposits

     643,822         7,876         1.22        675,464         10,301         1.53        899,038         15,805         1.76   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposit accounts

     2,132,738         13,554         0.64        2,265,250         18,737         0.83        2,507,030         28,780         1.15   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Short-term borrowings:

                        

Federal funds purchased

     5,437         20         0.37        36         —           —          16,907         89         0.53   

Repurchase agreements with customers

     5,157         7         0.14        6,681         7         0.10        16,069         29         0.18   

Long-term borrowings:

                        

FHLBNY advances (4)

     37,038         898         2.42        18,316         884         4.83        22,710         1,076         4.74   

Obligation under capital lease

     7,737         513         6.63        7,988         527         6.60        8,212         550         6.70   

Junior subordinated debentures

     92,786         2,594         2.80        92,786         2,997         3.23        92,786         4,117         4.44   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total borrowings

     148,155         4,032         2.72        125,807         4,415         3.51        156,684         5,861         3.74   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     2,280,893         17,586         0.77        2,391,057         23,152         0.97        2,663,714         34,641         1.30   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Non-interest-bearing liabilities:

                        

Non-interest-bearing demand deposits

     499,435              509,678              481,757         

Other liabilities

     80,777              86,013              96,420         
  

 

 

         

 

 

         

 

 

       

Total non-interest-bearing liabilities

     580,212              595,691              578,177         
  

 

 

         

 

 

         

 

 

       

Total liabilities

     2,861,105              2,986,748              3,241,891         

Shareholders’ equity

     293,665              299,127              325,669         
  

 

 

         

 

 

         

 

 

       

Total liabilities and shareholders’ equity

   $ 3,154,770            $ 3,285,875            $ 3,567,560         
  

 

 

         

 

 

         

 

 

       

Net interest income (5)

      $ 98,718            $ 104,869            $ 112,762      
     

 

 

         

 

 

         

 

 

    

Interest rate spread

           3.27           3.30           3.28

Net interest margin (6)

           3.43           3.50           3.50

Ratio of average interest-earning assets to average interest- bearing liabilities

           126.15           125.37           120.95

 

9


(1) Average balances include non-accrual loans (see “Non-Performing and Problem Assets”).
(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 adjustment for the years ended December 31, 2012, 2011 and 2010 was $870 thousand, $1.3 million and $1.8 million, respectively.
(4) Amounts include Advances from the Federal Home Loan Bank of New York (“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.

TABLE 2: RATE-VOLUME VARIANCE ANALYSIS (1)

 

Years Ended December 31,

   2012 vs. 2011     2011 vs. 2010  
     Increase (Decrease) Due To     Increase (Decrease) Due To  
     Volume     Rate     Net     Volume     Rate     Net  

Interest income:

            

Loans receivable:

            

Commercial and industrial

   $ (6,458   $ (3,484   $ (9,942   $ (13,680   $ 577      $ (13,103

Home equity

     (656     (380     (1,036     (860     (1,080     (1,940

Second mortgage

     (691     (44     (735     (792     (234     (1,026

Residential real estate

     3,568        84        3,652        442        (310     132   

Other

     (1,004     (21     (1,025     (674     13        (661
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans receivable

     (5,241     (3,845     (9,086     (15,564     (1,034     (16,598

Investment securities

     (193     (2,218     (2,411     1,908        (4,814     (2,906

Interest-earning deposits with banks

     (217     (3     (220     117        5        122   

Total interest-earning assets

     (5,651     (6,066     (11,717     (13,539     (5,843     (19,382
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Interest-bearing deposit accounts:

            

Interest-bearing demand deposits

     (470     (1,776     (2,246     40        (3,708     (3,668

Savings deposits

     (44     (468     (512     (167     (704     (871

Time deposits

     (459     (1,966     (2,425     (3,587     (1,917     (5,504
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposit accounts

     (973     (4,210     (5,183     (3,714     (6,329     (10,043
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Short-term borrowings:

            

Federal funds purchased

     20        —          20        (44     (45     (89

Repurchase agreements with customers

     —          —          —          (17     (5     (22

Long-term borrowings:

            

FHLBNY advances (2)

     157        (143     14        82        (274     (192

Obligation under capital lease

     (13     (1     (14     (15     (8     (23

Junior subordinated debentures

     (2     (401     (403     —          (1,120     (1,120
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowings

     162        (545     (383     6        (1,452     (1,446
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (811     (4,755     (5,566     (3,708     (7,781     (11,489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in net interest income

   $ (4,840   $ (1,311   $ (6,151   $ (9,831   $ 1,938      $ (7,893
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 the prior year rate) and (ii) changes in rate (changes in rate multiplied by the prior year 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 the FHLBNY and Securities sold under agreements to repurchase – FHLBNY.

 

10


Interest income (on a tax-equivalent basis) decreased $11.7 million, or 9.2%, to $116.3 million for 2012 compared to $128.0 million in 2011, primarily due to a decrease of 26 basis points in the yield on loans and a decrease of 63 basis points in yield on average investments, as well as a decrease of $63.8 million, or 2.7%, in average loan balances. The rate declines were due to the overall decline in market interest rates during 2012. Significant pressures on loan yields existed through 2012 due to the competitive lending environment.

Interest income (on a tax-equivalent basis) decreased $19.4 million, or 13.1%, to $128.0 million for 2011 compared to $147.4 million in 2010, primarily due to a decrease of $324.6 million, or 12.0% in average loan balances as well as a decrease of four basis points in the yield on loans and a decrease of 99 basis points in yield on average investments. These declines were due to the overall decline in market interest rates during 2011. Interest income on loans decreased $16.6 million as average loans receivable declined $324.6 million, or 12.0%, over the prior year. Interest income on investments decreased $2.9 million even as average investments increased $52.6 million, or 11.6%, over the prior year. During 2011, the Company sold $102.2 million in higher yielding available-for-sale securities.

Interest expense decreased $5.6 million, or 24.0%, to $17.6 million for 2012 compared to $23.2 million in 2011, primarily due to a decrease in the cost of interest-bearing deposits of $5.2 million, or 19 basis points. The Company continued to lower interest rates on its deposit products throughout 2012.

Interest expense decreased $11.5 million, or 33.2%, to $23.2 million for 2011 compared to $34.6 million in 2010, primarily due to a decrease in the cost of interest-bearing deposits of $10.0 million, or 32 basis points.

Provision for Loan Losses. The Company recorded a provision for loan losses of $57.2 million during 2012, as compared to $74.3 million during 2011 and $101.5 million during 2010. The Company’s total loans held-for-investment before allowance for loan losses were $2.27 billion at December 31, 2012, as compared to $2.29 billion at December 31, 2011. The ratio of allowance for loan losses to loans held-for-investment was 2.02% at December 31, 2012 compared to 1.82% at December 31, 2011. Net charge-offs were $52.4 million, or 2.26% of average loans outstanding, for the year ended December 31, 2012 as compared to $114.7 million, or 4.83% of average loans outstanding, and $79.8 million, or 2.95% of average loans outstanding, for the years ended December 31, 2011 and 2010, respectively. Total gross charge-offs in 2012 were $55.6 million, of which $51.3 million related to the commercial portfolio. During 2012, the Company signed a definitive agreement to sell $45.8 million of loans, having a book balance of $38.1 million to a third party investor and the related loans were marked to fair value and moved to loans held-for-sale. The resulting charge-offs totaled $13.1 million. Excluding charge-offs related to the loan sale, commercial charge-offs were largely driven by charge-offs of $23.2 million taken on 10 relationships. The Company’s provision levels remained elevated during the year as delinquency levels and credit trends were still in the process of stabilizing in 2012.

The charge-offs in 2011 included $69.4 million in losses recorded on the sale of $159.8 million in book balance of criticized and classified commercial real estate loans during May 2011. Excluding the charge-offs related to the loan sale, total commercial charge-offs were $43.2 million in 2011. Charge-offs, excluding the loan sale, were primarily driven by three commercial relationships for $25.0 million.

At least quarterly, 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 experience on a quarterly basis.

Non-Interest Income. Non-interest income increased $16.0 million, or 118.7%, to $29.5 million for 2012 as compared to $13.5 million for 2011. The primary drivers of this change were a $7.2 million increase in gains on the sale of residential mortgage loans and a decrease of $10.3 million in derivative credit evaluation adjustment charges as compared to the prior year. The increase in gains on the sale of mortgage loans resulted from the expansion of the Company’s mortgage operations which began in the first quarter of 2012. Derivative credit valuation adjustments were higher in 2011 compared to 2012 due to swap termination costs associated with the May 2011 commercial loan sale.

Non-interest income decreased $2.0 million, or 13.2%, to $13.5 million for 2011 as compared to $15.5 million for 2010. The primary drivers of this change were a $3.1 million decrease in gains on the sale of available-for-sale securities and a decrease of $717 thousand in service charges on deposit accounts as compared to the prior year; partially offset by a decrease of $1.1 million in impairment losses on available-for-sale securities and an increase of $890 thousand in bank-owned life insurance income over the same period from a death benefit recorded in 2011.

 

11


Non-Interest Expense. Non-interest expense increased $10.4 million, or 9.4%, to $120.6 million for 2012 as compared to $110.2 million for 2011. The primary driver of this increase was the increase in salaries and employee benefits of $10.0 million, or 19.0%, from the prior year primarily due to the expansion of the Company’s mortgage operations. In addition, there was an increase of $1.3 million in provision for unfunded commitments as this reserve was reduced by $1.1 million in 2011 due to a reduction in unfunded commitments and mortgage recourse reserves of $775 thousand were recorded in 2012 as compared to $0 in 2011. Partially offsetting these increases was a decrease in problem loan costs of $2.7 million, or 31.9% from 2011 to 2012 due to loan sale related expenses in 2011.

Non-interest expense decreased $90.8 million, or 45.2%, to $110.2 million for 2011 as compared to $201.1 million for 2010. The primary driver of this decrease was the prior year goodwill impairment charge of $89.7 million. Salaries and employee benefits decreased $2.7 million, or 4.9%, from the prior year primarily due to staffing reductions that occurred towards the end of 2010. Problem loan costs increased $3.2 million, or 61.6% from 2010 to 2011 due to loan sale related expenses as well as credit deterioration in the commercial real estate loan portfolio. Other expense decreased by $2.8 million, or 33.1%, for the same period due to positive derivative credit valuation adjustments recorded in 2011.

Income Tax Expense. Income tax expense decreased $44 thousand from $10 thousand for the year ended December 31, 2011 to a tax benefit position of $34 thousand for 2012. As the Company remained in a cumulative loss position at December 31, 2012, a full deferred tax valuation allowance is still considered appropriate. As such, the Company recorded no federal income tax expense in 2012. The tax benefit in 2012 relates to a prior period federal refund owed to the Company.

Income tax expense decreased $9.3 million from $9.3 million for the year ended December 31, 2010 to income tax expense of $10 thousand for 2011. As the Company remained in a cumulative loss position at December 31, 2011, a full deferred tax valuation allowance is considered appropriate. As such, the Company recorded no federal income tax expense in 2011.

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 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, maturities or calls of investment securities, as well as from a variety of wholesale funding sources including, but not limited to, brokered deposits, federal funds purchased, FHLBNY advances, securities sold under agreements to repurchase, and other secured and unsecured borrowings. Additional liquidity can be obtained from loan sales or participations. In a continued effort to balance deposit growth and net interest margin, especially in the current interest rate environment and with highly competitive local deposit pricing, the Company continually evaluates these other funding sources for funding cost efficiencies. During the year, the Company aggressively lowered interest rates on deposits while managing overall funding and liquidity. As a result of this planned reduction in deposit rates, the Company experienced an overall decline in its deposit balances. Core deposits, which exclude all certificates of deposit, decreased $19.1 million to $2.02 billion, or 74.3% of total deposits, at December 31, 2012, as compared to $2.03 billion, or 76.3% of total deposits, at December 31, 2011. The Company has additional secured borrowing capacity with the FRB of approximately $174.4 million and the FHLBNY of approximately $202.5 million. At December 31, 2012, $0 and $61.4 million of the Company’s secured borrowing capacity through the FRB and the FHLBNY was utilized, respectively. The Company has additional unsecured borrowing capacity through lines of credit with other financial institutions of approximately $55.0 million. 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 December 31, 2012, the Company had a par value of $364.4 million and $180.7 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 December 31, 2013 total $437.0 million, or approximately 62.6% 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.

Total loans receivable increased $83.4 million, or 3.6%, during 2012. 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.

 

12


Management currently operates under a capital plan for the Company and the Bank that is expected to allow the Company and the Bank to grow capital internally at levels sufficient for achieving its internal growth projections while managing its operating and financial risks. The principal components of the capital plan are to generate additional capital through retained earnings from internal growth, access the capital markets for external sources of capital, such as common equity and capital securities, when necessary or appropriate, redeem existing capital instruments and refinance such instruments at lower rates when conditions permit, and maintain sufficient capital for safe and sound operations. The Company continues to assess its plan for contingency capital needs, and when appropriate, the Company’s Board of Directors may consider various capital raising alternatives. As part of its assessment, the Company performs stress tests on select balance sheet components, deemed to have inherent risk given relevant economic and regulatory conditions, in an effort to gauge potential exposure on its capital position.

On July 7, 2010, the Company entered into securities purchase agreements with WLR SBI Acquisition Co, LLC, an affiliate of WL Ross & Co. LLC (“WL Ross”), members and affiliates of the Bank’s founding Brown Family (the “Brown Family”), certain affiliates of Siguler Guff & Company, LP (the “Siguler Guff Shareholders”) and certain other institutional and accredited investors (the “Other Investors”). On September 22, 2010, the Company completed the issuance and sale of 4,672,750 shares of its common stock and 88,009 shares of its Mandatorily Convertible Cumulative Non-Voting Perpetual Stock, Series B (the “Series B Preferred Stock”) for net proceeds of $98.5 million. At the Company’s Annual Meeting of Shareholders held on November 1, 2010, its shareholders approved an amendment to our Amended and Restated Certificate of Incorporation allowing for the conversion of the 88,009 shares of Series B Preferred Stock into 22,002,250 shares of common stock at a conversion price of $4.00 per share.

On March 22, 2011, the Company completed a public offering of 28,750,000 shares of common stock at a public offering price of $3.00 per share, which included the full exercise of the over-allotment option granted to the underwriters to purchase an additional 3,750,000 shares of common stock. After deducting the underwriting discount and offering expenses payable by the Company, the net proceeds were $81.4 million. The Company’s three largest shareholders, WL Ross, Siguler Guff, and the Brown Family, along with certain officers and directors, purchased an aggregate of 10,193,224 shares in the offering. WL Ross and the Siguler Guff Shareholders maintained their percentage interest in the Company in the offering. Pursuant to the terms of the securities purchase agreements entered into between WL Ross, the Siguler Guff Shareholders, the Brown Family and the Company in connection with the private placement of Company securities in July 2010, each of these investors was entitled to purchase shares in the offering at $2.85 per share which represented the public offering price less the underwriting discount of $0.15 per share paid to the underwriters on the other shares sold.

On April 11, 2011, the Company issued and sold in a private placement transaction an additional 3,802,131 shares at $2.85 per share totaling $10.8 million in additional stock proceeds pursuant to the exercise of gross-up rights contained in the previously executed securities purchase agreements with the three investors noted above. The gross-up rights were triggered by the underwriters’ exercise of the over-allotment option in the public offering. On August 8, 2011, the Company issued in a private placement approximately 2,378,232 additional shares at $2.85 per share totaling $6.8 million in stock proceeds pursuant to the exercise of gross-up rights. The transactions were triggered pursuant to the gross-up rights issued to Anchorage Capital Group, LLC (“Anchorage”), in connection with its purchase of shares in the public offering.

At December 31, 2012, WL Ross beneficially owned approximately 24.7% of our outstanding common stock, the Brown Family beneficially owned approximately 18.1% of our outstanding common stock and the Siguler Guff Shareholders and Anchorage each beneficially owned approximately 9.8% of our outstanding common stock. None of the Other Investors beneficially owned more than 2% of our common stock.

The Company is subject to regulatory capital requirements 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 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 December 31, 2012. 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 December 31, 2012.

 

13


On April 15, 2010, the Bank entered into an Agreement with the OCC (the “OCC Agreement”) which contained requirements to develop and implement a profitability and capital plan that 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. The Company continues to maintain and update appropriate capital and profit plan in accordance with the OCC Agreement.

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. As noted earlier in this section, 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 December 31, 2012, the Bank’s brokered deposits represented 4.0% of its total liabilities.

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 a Tier 1 Capital ratio at least equal to 9.50% of risk-weighted assets and to achieve, by June 30, 2010, and thereafter maintain, a Total Capital ratio at least equal to 11.50% of risk-weighted assets. At December 31, 2012, the Bank exceeded all of the three capital ratio requirements established by the OCC as its Leverage ratio was 9.24%, its Tier 1 Capital ratio was 11.76%, and its Total Capital ratio was 13.02%.

Management is working towards taking all of the necessary actions for the Bank to become fully compliant with all requirements of the OCC Agreement.

TABLE 3: REGULATORY CAPITAL LEVELS

 

     Actual     For Capital
Adequacy Purposes
    To Be  Well-Capitalized
Under Prompt Corrective
Action Provisions (1)
 

December 31, 2012

   Amount      Ratio     Amount      Ratio     Amount             Ratio  

Total Capital (to Risk-Weighted Assets):

                  

Sun Bancorp, Inc.

   $ 340,111         13.72   $ 198,340         8.00        N/A      

Sun National Bank

     322,041         13.02        197,964         8.00      $ 247,455            10.00

Tier I Capital (to Risk-Weighted Assets) (1)

                  

Sun Bancorp, Inc.

     293,008         11.82        99,170         4.00           N/A      

Sun National Bank

     290,922         11.76        98,982         4.00        148,473            6.00   

Leverage Ratio:

                  

Sun Bancorp, Inc.

     293,008         9.30        126,080         4.00           N/A      

Sun National Bank

     290,922         9.24        125,902         4.00        157,377            5.00   

 

(1) Not applicable to bank holding companies.

The Company’s ratio of tangible equity to tangible assets, which is a non-GAAP financial measure of risk, was 6.95% at December 31, 2012, compared with 8.41% at December 31, 2011. Tangible equity and tangible assets are calculated by subtracting identifiable intangible assets and goodwill from shareholders’ equity and total assets, respectively, and may be used by investors to assist them in understanding how much loss, exclusive of intangible assets and goodwill, can be absorbed before shareholders’ equity is depleted. The Company’s and Bank’s regulators also exclude intangible assets and goodwill from shareholders’ equity when assessing capital adequacy of each.

The Company’s capital securities are deconsolidated in accordance with GAAP and 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. In March 2005, the FRB amended its risk-based capital standards to expressly allow the continued limited inclusion of outstanding and prospective issuances of capital securities in a bank holding company’s Tier 1 capital, subject to tightened quantitative limits. The FRB’s amended rule was to become effective March 31, 2009, and would have limited capital securities and other restricted core capital elements to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. On March 16, 2009, the FRB extended for two years the ability for bank holding companies to include restricted core capital elements as Tier 1 capital up to 25% of all core capital elements, including goodwill. The portion that exceeds the 25% capital limitation qualifies as Tier 2, or supplementary capital of the Company. At December 31, 2012, the $74.1 million in capital securities qualify as Tier 1.

 

14


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. Further, per the OCC Agreement, 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. As a result of these restrictions, the amount available for payment of dividends to the Company by the Bank totaled $0 at December 31, 2012.

The Bank’s deposits are insured to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) which was signed into law on July 21, 2010, the maximum deposit insurance limit is $250 thousand.

In addition, the Dodd-Frank Act amended the Federal Deposit Insurance Act to provide for full deposit insurance coverage for noninterest-bearing transaction accounts for a two year period beginning December 31, 2010. This applies to all insured depository institutions with no opt in or opt out requirements. This amendment expired on December 31, 2012.

In May 2009, the FDIC imposed a special assessment equal to five basis points of assets, less Tier 1 capital, as of June 30, 2009, payable on September 30, 2009, and reserved the right to impose additional special assessments. In November 2009, instead of imposing additional special assessments, the FDIC amended the assessment regulations to require all insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30, 2009. For purposes of estimating the future assessments, each institution’s base assessment rate in effect on September 30, 2009 was used, assuming a 5% annual growth rate in the assessment base and a three basis point increase in the assessment rate in 2011 and 2012. The prepaid assessment will be applied against actual quarterly assessments until exhausted. Any funds remaining after June 30, 2013 will be returned to the institution. If the prepayment impairs an institution’s liquidity or otherwise creates significant hardship, it was able to apply for an exemption. Requiring this prepaid assessment does not preclude the FDIC from changing assessment rates or from further revising the risk-based assessment system. On December 30, 2009, the Company paid the FDIC prepaid assessment of $18.3 million which was to be recognized as expense for a three-year period from that date. At December 31, 2012, the remaining balance of the FDIC prepaid assessment was $2.6 million, with $3.9 million being recognized in expense during 2012.

Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver appointed by regulatory authorities. Such priority creditors would include the FDIC.

See Note 23 of the Notes to Consolidated Financial Statements for additional information regarding regulatory matters.

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, which meets at least quarterly, 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 six month and one year maturities.

Table 4 provides the maturity and re-pricing characteristics of the Company’s interest-earning assets and interest-bearing liabilities at December 31, 2012. All amounts are categorized by their actual maturity or re-pricing date with the exception of interest-bearing demand deposits and savings deposits. 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 into categories noted below, based on the estimated duration of those deposits.

 

15


TABLE 4: INTEREST RATE SENSITIVITY SCHEDULE

 

     Maturity/Re-pricing Time Periods  

December 31, 2012

   0-3 Months     4-12 Months     1-5 Years     Over 5 Years     Total  

Interest-earning assets:

          

FHLB interest- bearing deposits

   $ 699      $ —        $ —        $ —        $ 699   

Loans receivable

     1,246,490        335,655        583,283        120,581        2,286,009   

Investment securities

     105,435        97,611        147,431        108,637        459,114   

Federal funds sold

     91,601        —          —          —          91,601   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     1,444,225        433,266        730,714        229,218        2,837,423   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

          

Interest-bearing & non-interest demand deposits

     582,090        161,961        363,242        110,557        1,217,850   

Savings deposits

     74,231        32,751        87,548        69,624        264,154   

Time certificates

     138,417        299,070        259,774        625        697,886   

Federal Home Loan Bank Advances

     334        70        430        60,582        61,416   

Securities sold under agreements to repurchase

     1,968        —          —          —          1,968   

Guaranteed interest in Company’s subordinated debt

     92,779        (20     (104     (419     92,236   

Other Borrowings

     68        210        1,472        5,859        7,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     889,887        494,042        712,362        246,828        2,343,119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Periodic gap

   $ 554,338      $ (60,776   $ 18,352      $ (17,610   $ 494,304   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative gap

   $ 554,338      $ 493,562      $ 511,914      $ 494,304     
  

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative gap as a % of total assets

     17.2     15.3     15.9     15.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

At December 31, 2012, the Company’s gap analysis showed an asset-sensitive position with total interest-bearing assets maturing or re-pricing within one year, exceeding interest-earning liabilities maturing or re-pricing during the same time period by $493.6 million, representing a positive one-year gap ratio of 15.3%. All amounts are categorized by their actual maturity, 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, rate change behaviors, level and composition of new balance sheet activity, and new product lines are incorporated into the simulation model. Net interest income is simulated over a 12-month horizon under a variety of linear yield curve shifts, subject to certain limits agreed to by ALCO.

Net interest income simulation analysis, at December 31, 2012, shows a position that is slightly asset sensitive as rates increase. 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 December 31, 2012. The Company anticipates that strong deposit pricing competition will continue to limit deposit pricing flexibility in an increasing and a decreasing rate environment.

 

16


TABLE 5: SENSITIVITY PROFILE

 

Change in Interest Rates

(Basis Points)

   Percentage Change in
Net Interest Income
Year 1
 

+200

     2.5

+100

     0.8

-100

     -1.8

-200

     -4.1

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 19 of the Notes to Consolidated Financial Statements.

Disclosures about Contractual Obligations and Commercial Commitments. Purchase obligations include significant contractual cash obligations. Table 6 provides the Company’s contractual cash obligations at December 31, 2012. Included in Table 6 are the minimum contractual obligations under legally enforceable contracts with contract terms that are both fixed and determinable. The majority of these amounts are primarily for services, including core processing systems and telecommunications maintenance.

TABLE 6: CONTRACTUAL OBLIGATIONS

 

            Payments Due by Period  

December 31, 2012

   Total      Less Than
1 Year
     1 to 3
Years
     3 to 5
Years
     After 5
Years
 

Time deposits (1)

   $ 697,886       $ 437,006       $ 166,827       $ 93,428       $ 625   

Long-term debt

     154,841         3,928         7,256         7,262         136,394   

Leases

     57,447         4,953         9,610         9,063         33,822   

Purchase obligations (off-balance sheet)

     15,489         5,401         5,969         2,871         1,248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 925,663       $ 451,288       $ 189,663       $ 112,624       $ 172,088   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amount represents the book value of time deposits, including brokered time deposits.

The Company maintains a reserve for unfunded loan commitments and letters of credit, which is reported in other liabilities in the Consolidated Statements of Financial Condition, consistent with FASB ASC 825, Financial Instruments. 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 December 31, 2012 and December 31, 2011 was $613 thousand and $381 thousand, respectively. Management believes this reserve level is sufficient to absorb estimated probable losses related to these commitments.

Table 7 provides the Company’s off balance sheet commitments (see Note 18 of the Notes to Consolidated Financial Statements for additional information) at December 31, 2012.

TABLE 7: OFF BALANCE SHEET COMMITMENTS

 

            Amount of Commitment Expiration Per Period  

December 31, 2012

   Unfunded
Commitments
     Less Than
1 Year
     1 to 3
Years
     3 to 5
Years
     After 5
Years
 

Lines of credit

   $ 543,594       $ 277,208       $ 24,295       $ 6,595       $ 235,496   

Commercial standby letters of credit

     40,541         40,232         309         —           —     

Construction funding

     101,083         26,039         75,044         —           —     

Other commitments

     157,219         157,219         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total off balance sheet commitments

   $ 842,438       $ 500,698       $ 99,648       $ 6,595       $ 235,496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


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 December 31, 2012 was $40.5 million and the portion of the exposure not covered by collateral was approximately $666 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.

Impact of Inflation and Changing Prices. The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with GAAP, which requires the measurement of financial condition and operating results without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Nearly all the assets and liabilities of the Company are monetary. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

FINANCIAL CONDITION

The Company’s assets were $3.22 billion at December 31, 2012 compared to $3.18 billion at December 31, 2011. Gross loans receivable and loans held-for-sale increased $82.8 million, or 3.6%, to $2.40 billion at December 31, 2012 as compared to $2.31 billion at December 31, 2011. The investment portfolio decreased $70.7 million, or 13.3%, to $462.0 million at December 31, 2012 from $532.7 million at December 31, 2011. Deposits increased 1.7% to $2.71 billion at December 31, 2012 as compared to $2.67 billion at December 31, 2011. Excluding junior subordinated debentures, borrowings increased $39.7 million, or 127.0%, to $71.0 million at December 31, 2012.

Loans. Gross loans held-for-investment decreased $15.0 million from the prior year end to $2.28 billion at December 31, 2012 as the Company transferred $33.5 million of book balance loans to loans held-for-sale as of December 31, 2012. The Company’s home equity portfolio, which includes second mortgages, decreased $27.3 million, in comparison to the prior year end. The Company continues to see competition for loans across all products and market segments. During 2012, competitive pressures have increased as interest rates fell to historical lows and loan activity has increased as the economy improves.

The trend of the Company’s lending continues to reflect the geographic and borrower diversification of the commercial loan portfolio. As the Company’s marketplace has expanded within the State of New Jersey, commercial lending activities have grown, especially in the central and northern parts of the state. The recent recession which impacted all aspects of the national and regional economy and the slow pace of recovery have created increased stress in our loan portfolios and have had an adverse effect on the Company’s financial condition and results of operation. At December 31, 2012 and 2011, the Company did not have more than 10% of its total loans outstanding concentrated in any one industry category, including, but not limited to, the hospitality, entertainment and leisure industries, and general office space. The loan categories are based upon borrowers engaged in similar activities who would be similarly impacted by economic or other conditions.

Table 8 provides selected data relating to the composition of the Company’s loan portfolio by type of loan and type of collateral at December 31, 2012, 2011, 2010, 2009 and 2008.

TABLE 8: SUMMARY OF LOAN PORTFOLIO

 

December 31,

  2012     2011     2010     2009     2008  
    Amount     %     Amount     %     Amount     %     Amount     %     Amount     %  

Type of Loan:

                   

Commercial and industrial

  $ 1,725,567        77.37   $ 1,878,026        83.49   $ 2,103,492        85.74   $ 2,249,365        84.64   $ 2,234,202        82.67

Home equity

    207,720        9.31        224,517        9.98        239,729        9.77        258,592        9.73        274,360        10.15   

Second mortgage

    30,842        1.38        41,470        1.84        53,912        2.20        68,592        2.58        84,388        3.12   

Residential real estate

    273,413        12.26        100,438        4.47        79,074        3.22        75,322        2.83        67,473        2.50   

Other

    38,618        1.74        46,671        2.07        58,963        2.40        65,776        2.47        79,402        2.94   

Less: Loan loss allowance

    (45,873     (2.06     (41,667     (1.85     (81,713     (3.33     (59,953     (2.25     (37,309     (1.38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans receivable

  $ 2,230,287        100.00   $ 2,249,455        100.00   $ 2,453,457        100.00   $ 2,657,694        100.00   $ 2,702,516        100.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Type of Collateral:

                   

Residential real estate:

                   

1-4 family

  $ 543,439        24.37   $ 429,106        18.88   $ 426,488        17.38   $ 460,106        17.31   $ 494,828        18.31

Other

    19,425        0.87        15,127        0.67        19,835        0.81        22,992        0.87        24,692        0.91   

Construction and land development:

                   

1-4 family

    6,438        0.29        15,807        0.70        28,816        1.17        43,803        1.65        64,646        2.39   

Other

    50,753        2.28        82,116        3.61        147,909        6.03        187,624        7.06        153,205        5.67   

Commercial real estate

    1,096,982        49.19        1,226,349        53.96        1,385,210        56.46        1,503,301        56.56        1,495,398        55.34   

Commercial business loans

    522,202        23.41        500,301        22.01        466,870        19.03        425,541        16.01        434,097        16.06   

Consumer

    30,536        1.37        37,087        1.63        43,835        1.79        50,827        1.91        56,312        2.08   

Other

    6,385        0.28        8,421        0.37        16,207        0.66        23,453        0.88        16,647        0.62   

Less: Loan loss allowance

    (45,873     (2.06     (41,667     (1.83     (81,713     (3.33     (59,953     (2.25     (37,309     (1.38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans receivable

  $ 2,230,287        100.00   $ 2,272,647        100.00   $ 2,453,457        100.00   $ 2,657,694        100.00   $ 2,702,516        100.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Many of the Company’s commercial and industrial loans have a real estate component as part of the collateral securing the accommodation. 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. At December 31, 2012, commercial and industrial loans secured by commercial real estate properties totaled $1.11 billion of which $527.8 million, or 47.4%, were classified as owner occupied and $584.9 million, or 52.6%, were classified as non-owner occupied. Management considers these loans to be well diversified across multiple industries.

The Company’s home equity loan portfolio, including second mortgages, represents 10.7% of total loans outstanding at December 31, 2012. The home equity loan portfolio decreased $27.3 million, or 10.3%, from December 31, 2011. Usage of home equity lines of credit has remained constant, at approximately 48.4% over the past year with approximately 25.4% of the overall home equity loan portfolio balance being in a first lien position. At December 31, 2012, residential real estate loans represent 12.3% of total loans outstanding and is the largest component of the Company’s non-commercial portfolio. The residential loan portfolio increased $173.0 million, or 172.2%, from December 31, 2011. This increase is due to the Company’s strategy implemented in 2011 to increase its held-for-investment jumbo residential mortgage portfolio.

Table 9 provides the estimated maturity of the Company’s loan portfolio at December 31, 2012. The table does not include potential prepayments or scheduled principal payments. Adjustable-rate mortgage loans are shown based on contractual maturities.

TABLE 9: ESTIMATED MATURITY OF LOAN PORTFOLIO

 

December 31, 2012

   Due Within
1 Year
     Due After
1 Through
5 Years
     Due After
5 Years
     Allowance for
Loan Loss
     Total  

Commercial and industrial

   $ 354,373       $ 1,002,974       $ 368,220       $ 33,197       $ 1,692,370   

Home equity (1)

     308         6,579         231,675         2,734         235,828   

Residential real estate

     1,576         388         271,449         3,333         270,080   

Other

     5,944         4,576         28,098         6,609         32,009   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 362,201       $ 1,014,517       $ 899,442       $ 45,873       $ 2,230,287   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amount includes both home equity and second mortgages.

Table 10 provides the dollar amount of all loans due one year or more after December 31, 2012, which have pre-determined interest rates and which have floating or adjustable interest rates.

TABLE 10: LOANS GREATER THAN 12 MONTHS

 

December 31, 2012

   Fixed-Rates      Floating or
Adjustable

Rates
     Total  

Commercial and industrial

   $ 461,017       $ 910,177       $ 1,371,194   

Home equity (1)

     31,307         206,947         238,254   

Residential real estate

     172,585         99,252         271,837   

Other

     29,412         3,262         32,674   
  

 

 

    

 

 

    

 

 

 

Total

   $ 694,321       $ 1,219,638       $ 1,913,959   
  

 

 

    

 

 

    

 

 

 

 

(1) Amount includes both home equity and second mortgages.

See Notes 5 and 6 of the Notes to Consolidated Financial Statements for additional information on loans.

 

19


Non-Performing and Problem Assets

Loan Delinquencies. The Company’s collection procedures provide for a late charge assessment after a commercial loan is 10 days past due, or a residential mortgage loan is 15 days past due. The Company contacts the borrower and payment is requested. If the delinquency continues, subsequent efforts are made to contact the borrower. If the loan continues to be delinquent for 90 days or more, the Company usually declares the loan to be in default and payment in full is demanded. The Company will initiate collection and foreclosure proceedings and steps will be taken to liquidate any collateral taken as security for the loan unless other repayment arrangements are made. Delinquent loans are reviewed on a case-by-case basis in accordance with the lending policy.

Interest accruals are generally discontinued when a loan becomes 90 days past due or when collection of principal or interest is considered doubtful. When interest accruals are discontinued, interest credited to income in the current year is reversed, and interest accrued in the prior year is charged to the allowance for loan losses. Generally, commercial loans and commercial real estate loans are charged-off no later than 180 days 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 at the time the loan is 90 days delinquent. Other consumer loans are typically charged-off at 180 days delinquent. In all cases, loans must be placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Non-Performing Assets. Total non-performing assets decreased $9.6 million from $112.7 million at December 31, 2011 to $103.1 million at December 31, 2012. This decrease was primarily a result of a decrease in non-accrual loans of $63.7 million due to the May 2011 loan sale. Commercial non-accrual loans were $53.3 million at December 31, 2012. Interest income that would have been recorded on non-accrual loans as of December 31, 2012, under the original terms of such loans, would have totaled approximately $7.7 million for 2012. The ratio of non-performing assets to net loans decreased to 4.62% at December 31, 2012 compared to 4.96% at December 31, 2011.

Table 11 provides a summary of non-performing assets at December 31, 2012, 2011, 2010, 2009 and 2008.

TABLE 11: SUMMARY OF NON-PERFORMING ASSETS

 

December 31,

   2012     2011     2010     2009     2008  

Non-performing loans:

          

Loans accounted for on a non-accrual basis:

          

Commercial and industrial

   $ 53,315      $ 81,041      $ 148,517      $ 73,596      $ 37,528   

Commercial and industrial, held-for-sale

     10,224        —          —          —          —     

Home equity lines of credit

     3,714        3,620        4,616        4,737        1,682   

Home equity term loans

     1,226        1,246        1,134        938        130   

Residential real estate

     5,747        2,522        4,243        7,443        2,225   

Other

     658        1,227        916        1,168        668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accruing loans

     74,884        89,656        159,426        87,882        42,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TDR, non-accruing

     18,244        17,875        11,796        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TDR, non-accruing, held-for-sale

     2,499        —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accruing loans that are contractually past due 90 days or more:

          

Commercial and industrial

     —          138        1,167        6,457        4,014   

Home equity lines of credit

     —          —          379        —          286   

Home equity term loans

     —          —          —          891        —     

Residential real estate

     —          —          72        49        162   

Other

     —          16        936        561        125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans 90-days past due

     —          154        2,554        7,958        4,587   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     95,627        107,685        173,776        95,840        46,820   

Real estate owned

     7,473        5,020        3,913        9,527        1,962   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 103,100      $ 112,705      $ 177,689      $ 105,367      $ 48,782   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans to net loans receivable

     4.29     4.74     7.08     3.61     1.73

Total non-performing loans to total assets

     2.97     3.38     5.08     2.68     1.29

Total non-performing assets to net loans receivable

     4.62     4.96     7.24     3.96     1.81

Total non-performing assets to total assets

     3.20     3.54     5.20     2.94     1.35

Total allowance for loan losses to total non-performing

loans

     47.97     38.69     47.02     62.56     79.69

 

20


Potential Problem Loans. At December 31, 2012, there were 18 loan relationships aggregating $9.2 million for which known information exists as to the potential inability of the borrowers to comply with present loan repayment terms and have therefore caused management to place them on its internally monitored loan list. The classification of these loans, however, does not imply that management expects losses, but that it believes a higher level of scrutiny is prudent under the circumstances. These loans were not classified as non-accrual and were not considered non-performing. Depending upon the state of the economy, future events and their impact on these borrowers, these loans and others not currently so identified could be classified as non-performing assets in the future. At December 31, 2012, these loans were current and well collateralized.

Real Estate Owned. Real estate acquired by the Company as a result of foreclosure or deed in lieu and bank property that is not in use is classified as real estate owned until such time as it is sold. The property acquired through foreclosure or deed in lieu is carried at the lower of the related loan balance or fair value of the property based on a current appraisal less estimated cost to dispose. Losses arising from foreclosure are charged against the allowance for loan losses. Bank property is carried at the lower of cost or fair value less estimated cost to dispose. Costs to maintain real estate owned and any subsequent gains or losses are included in the Company’s results of operations. Table 12 provides a summary of real estate owned at December 31, 2012 and 2011.

TABLE 12: SUMMARY OF REAL ESTATE OWNED

 

December 31,

   2012      2011  

Commercial properties

   $ 5,382       $ 1,777   

Residential properties

     696         1,683   

Bank properties

     1,395         1,560   
  

 

 

    

 

 

 

Total

   $ 7,473       $ 5,020   
  

 

 

    

 

 

 

Table 13 provides a summary of real estate owned activity for the year ended December 31, 2012.

TABLE 13: SUMMARY OF REAL ESTATE OWNED ACTIVITY

 

     Underlying Property        

At or for year-ended December 31, 2012

   Commercial     Residential     Bank     Total  

Balance, beginning of year

   $ 1,777      $ 1,683      $ 1,560      $ 5,020   

Transfers into real estate owned

     6,000        315        1,365        7,680   

Transfers into operations

     —          —          —          —     

Sale of real estate owned

     (1,956     (1,153     (797     (3,906

Write down of real estate owned

     (439     (149     (733     (1,321
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of year

   $ 5,382      $ 696      $ 1,395      $ 7,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

Real estate owned increased $2.5 million to $7.5 million at December 31, 2012 as compared to December 31, 2011. During 2012, the Company transferred $7.7 million in book value of loans into real estate owned, including 23 commercial properties aggregating $6.0 million, three bank properties totaling $1.4 million, and four residential properties for $315 thousand. In 2012, the Company recorded $1.4 million of write-downs of real estate owned, including $149 thousand on the carrying value of four residential properties, $733 thousand on the carrying value of six bank properties, and $439 thousand on the carrying value of six commercial properties. There were 11 commercial properties, two bank properties, and six residential properties, with carrying amounts of $2.0 million, $797 thousand and $1.2 million, respectively, sold during the year ended December 31, 2012 resulting in a net gain of $345 thousand, which is included in real estate owned expense, net in the consolidated statements of operations. The Company recognized a reduction of carrying value of $3.9 million on these sales. See Note 9 of the Notes to Consolidated Financial Statements for additional information on real estate owned.

 

21


Allowances for Losses on Loans. The Company’s allowance for losses on loans was $45.9 million, or 2.02% of gross loans held-for-investment, at December 31, 2012 compared to $41.7 million, or 1.82% of gross loans held-for-investment, at December 31, 2011. The provision for loan losses was $57.2 million for 2012, $74.3 million for 2011 and $101.5 million for 2010. The decrease in the provision for loan losses is due to the impact of the prior year loan sale as well as a decrease in non-accrual loans and criticized and classified loans and stabilizing delinquencies. Net charge-offs were $53.0 million for the year ended December 31, 2012 as compared to $114.7 million for the year ended December 31, 2011. The decrease in net charge-offs during 2012 was primarily due to $69.4 million of losses recorded on the sale of commercial real estate loans in the prior year. For the credit related charge-offs, management has been monitoring the performance, economic climate and future cash flow potential of these relationships for some time and strongly believes all of these borrowers have been profoundly impacted by the severity of the recession and the seemingly prolonged return to stable economic conditions. During 2012, the Company signed a definitive agreement to sell $45.8 million of loans having a book balance of $35.1 million to a third party investor and the related loans were moved to loans held-for-sale and recorded at lower of cost or market. The resulting charge-offs totaled $13.1 million. Excluding charge-offs related to the loan sale, the remaining net charge-offs in 2012 are primarily due to 10 commercial relationships totaling $23.2 million. The decrease in 2012 net charge-offs resulted in a decrease in net charge-offs to average outstanding loans to 2.29% for 2012 as compared to 4.83% for 2011 and 2.95% for 2010. Non-performing loans also decreased $12.1 million to $95.6 million at December 31, 2012 as compared to $107.7 million at December 31, 2011 as a result of problem loan resolution strategies implemented in 2012. During 2012, the Company entered into three troubled debt restructuring agreements (“TDR”), which were on non-accrual status and had a carrying amount of $9.1 million at December 31, 2012.

Table 14 provides information with respect to changes in the Company’s allowance for loan losses for the years ended December 31, 2012, 2011, 2010, 2009, and 2008.

TABLE 14: ALLOWANCE FOR LOAN LOSSES

 

At or for the Years Ended December 31,

   2012     2011     2010     2009     2008  

Allowance for loan losses, beginning of year

   $ 41,667      $ 81,713      $ 59,953      $ 37,309      $ 27,002   

Charge-offs:

          

Commercial and industrial

     (51,265     (112,108     (74,014     (19,898     (6,520

Home equity

     (2,222     (3,038     (3,435     (1,795     (1,012

Second mortgage

     (267     (299     (761     (81     (81

Residential real estate

     (249     (1,064     (1,085     (360 )     (346 )

Other

     (1,610     (1,303     (1,507     (2,614     (2,769
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (55,613     (117,812     (80,802     (24,748     (10,728
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

          

Commercial and industrial

     1,950        2,459        482        334        619   

Home equity

     422        60        60        67        24   

Second mortgage

     28        28        26        4        1   

Residential real estate

     14        43        199        5        5   

Other

     190        523        277        316        386   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     2,604        3,113        1,044        726        1,035   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (53,009     (114,699     (79,758     (24,022     (9,693

Provision for loan losses

     57,215        74,266        101,518        46,666        20,000   

Reserves transferred

     —          387        —          —          —     

Allowance for loan losses, end of year

   $ 45,873      $ 41,667      $ 81,713      $ 59,953      $ 37,309   

Net loans charged-off as a percent of average loans outstanding

     2.29     4.83     2.95     0.88     0.37

Allowance for loan losses as a percent of total gross loans outstanding

     2.02     1.80     3.22     2.21     1.36

Table 15 provides the allocation of the Company’s allowance for loan losses by loan category and the percent of loans in each category to loans receivable at December 31, 2012, 2011, 2010, 2009, and 2008. The portion of the allowance for loan losses allocated to each loan category does not represent the total available for future losses that may occur within the loan category since the allowance for loan losses is a valuation reserve applicable to the entire loan portfolio.

TABLE 15: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 

December 31,

   2012     2011     2010     2009     2008  
     Amount      %     Amount      %     Amount      %     Amount      %     Amount      %  

Allowance for loan losses:

                         

Commercial and industrial

   $ 33,197         72.37   $ 34,227         82.14   $ 76,759         82.97   $ 55,359         82.77   $ 33,342         81.55

Residential real estate

     3,333         7.27        903         2.17        661         3.12        494         2.77        375         2.46   

Home equity (1)

     2,734         5.96        2,566         6.16        3,084         11.58        3,034         12.04        2,738         13.09   

Other

     6,609         14.41        3,971         9.53        1,209         2.33        1,066         2.42        854         2.90   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allowance for loan losses

   $ 45,873         100.0   $ 41,667         100.0   $ 81,713         100.0   $ 59,953         100.00   $ 37,309         100.00
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Amount includes both home equity and second mortgages.

 

22


See Note 6 of the Notes to Consolidated Financial Statements for additional information on the allowance for loan losses.

Investment Securities. Investment securities available for sale and held to maturity decreased $72.8 million, or 14.1%, from $516.9 million at December 31, 2011 to $444.1 million at December 31, 2012. For the year ended December 31, 2012, the Company’s investment impairment review did not identify any credit losses. During 2011, the Company realized OTTI charges of $250 thousand on a single issuer trust preferred security with a par value of $5.0 million. The cumulative OTTI on the single issuer trust preferred security is $1.2 million. The estimated average life of the investment portfolio at December 31, 2012 was 3.3 years with an estimated modified duration of 2.5 years. The reinvestment strategy for 2013 is expected to maintain the average life, duration and portfolio size at approximately the same levels as December 31, 2012.

The Company’s investment policy is established by senior management and approved by the Board of Directors. It is based on asset and liability management goals, and is designed to provide a portfolio of high quality investments that optimizes interest income within acceptable limits of risk and liquidity.

Table 16 provides the estimated fair value and amortized cost of the Company’s portfolio of investment securities at December 31, 2012, 2011, and 2010. For all debt securities classified as available for sale, the carrying value is the estimated fair value.

TABLE 16: SUMMARY OF INVESTMENT SECURITIES

 

December 31,

  2012     2011     2010  
    Amortized
Cost
    Net
Unrealized
Gains
(Losses)
    Estimated
Fair
Value
    Amortized
Cost
    Net
Unrealized
Gains
(Losses)
    Estimated
Fair
Value
    Amortized
Cost
    Net
Unrealized
Gains
(Losses)
    Estimated
Fair
Value
 

Available for sale:

                 

U.S. Treasury obligations

  $ 9,998      $ 13      $ 10,011      $ 11,999      $ 80      $ 12,079      $ 47,017      $ 2      $ 47,019   

U.S. Government agencies

    4,966        (17     4,949        —          —          —          —          —          —     

U.S. Government agency mortgage-backed securities

    348,854        6,124        354,978        423,269        5,635        428,904        329,973        (1,486     328,487   

Other mortgage-backed securities

    287        (1     286        323        (27     296        7,472        (1,335     6,137   

State and municipal obligations

    36,848        3,322        40,170        45,424        3,361        48,785        82,744        (347     82,397   

Trust preferred securities

    12,622        (6,740     5,882        12,619        (7,711     4,908        12,867        (7,225     5,642   

Corporate Bonds

    24,449        993        25,442        19,689        (281     19,408        —          —          —     

Other

    1,464        —          1,464        1,165        —          1,165        3,182        —          3,182   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale investment securities

  $ 439,488      $ 3,694      $ 443,182      $ 514,488      $ 1,057      $ 515,545      $ 483,255      $ (10,391   $ 472,864   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held to maturity:

                 

U.S. Government agency mortgage-backed securities

  $ 662      $ 48      $ 710      $ 1,344      $ 69      $ 1,413      $ 2,887      $ 116      $ 3,003   

Other mortgage-backed securities

    250        —          250        —          —          —          152        —          152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity investment securities

  $ 912      $ 48      $ 960      $ 1,344      $ 69      $ 1,413      $ 3,039      $ 166      $ 3,155   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Table 17 provides the gross unrealized losses and fair value at December 31, 2012, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.

TABLE 17: ANALYSIS OF GROSS UNREALIZED LOSSES BY INVESTMENT CATEGORY

 

     Less than 12 Months     12 Months or Longer     Total  

December 31, 2012

   Estimated
Fair  Value
     Gross
Unrealized
Losses
    Estimated
Fair  Value
     Gross
Unrealized
Losses
    Estimated
Fair  Value
     Gross
Unrealized
Losses
 

U.S. Government agencies

   $ 4,949       $ (17   $ —         $ —        $ 4,949       $ (17

U.S. Government agency mortgage-backed securities

     69,145         (980     —           —          69,145         (980

Other mortgage-backed securities

     286         (1 )     —           —          286         (1

Trust preferred securities

     —           —          5,882         (6,740     5,882         (6,740
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 74,380       $ (998   $ 5,882       $ (6,740   $ 80,262       $ (7,738
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

23


The Company determines whether the unrealized losses are temporary in accordance with FASB ASC 325, Investments-Other.- and FASB ASC 320, Investments-Debt and Equity Securities. 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 facts and circumstances that may be indicative of an OTTI condition. This includes, but is 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.

For the year ended December 31, 2012, the Company reviewed its unrealized losses on securities to determine whether such losses were considered to be OTTI. As previously discussed, this review indicated no such unrealized losses were due to deterioration in credit of the underlying securities.

U.S. Government Agencies. At December 31, 2012, the gross unrealized loss in the category of less than 12 months of $17 thousand consisted of one agency security with an estimated fair value of $4.9 million issued and guaranteed by a U.S. Government sponsored agency. The Company monitors key credit metrics such as delinquencies, defaults, cumulative losses and credit support levels to determine if an OTTI exists. As of December 31, 2012, 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 their recovery, which may be maturity, and management expects to recover the entire amortized cost basis of this security.

U.S. Government Agency Mortgage-Backed Securities At December 31, 2012, the gross unrealized loss in the category of less than 12 months of $980 thousand consisted of nine mortgage-backed securities with an estimated fair value of $69.1 million issued and guaranteed by a U.S. Government sponsored agency. The Company monitors key credit metrics such as delinquencies, defaults, cumulative losses and credit support levels to determine if an OTTI exists. As of December 31, 2012, 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 to sell the securities and that it is not more likely than not it will 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.

Other Mortgage-Backed Securities – At December 31, 2012, the gross unrealized loss in the category of 12 months or longer of $1 thousand consisted of one non-agency mortgage-backed security with an estimated fair value of $286 thousand. This security was rated “AA” by at least one nationally recognized rating agency. The Company monitors key credit metrics such as delinquencies, defaults, cumulative losses and credit support levels to determine if an OTTI exists. As of December 31, 2012, management concluded that an OTTI did not exist on the this security and believes the unrealized loss is due to increases in market interest rates since the time the underlying security was purchased.

Trust Preferred Securities  At December 31, 2012, the gross unrealized loss in the category of 12 months or longer of $6.7 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 $1.9 million, and one non-investment grade rated pooled security with an amortized cost of $8.8 million and estimated fair value of $3.9 million. The non-investment grade pooled security is a senior position in the capital structure with approximately 1.93 times principal coverage as of the last reporting date.

In August 2009, the issuer of the 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 the issuer must receive permission from its regulators prior to resuming its scheduled dividend payments.

During the year ended December 31, 2012, the Company did not record a credit related OTTI 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 the length of time the issue has been in deferral, the difficult economic environment and some weakened performance measures, while recently improving, increases the probability that a full recovery of principal and anticipated dividends may not be realized. However, the Company concluded that an additional impairment charge was not warranted at December 31, 2012.

Expected maturities of individual securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Table 18 provides an estimated maturity summary with the carrying values and weighted average yields on the Company’s portfolio of investment securities at December 31, 2012. The investment securities are presented in the table based on current prepayment assumptions. Yields on tax-exempt obligations have been calculated on a tax-equivalent basis.

 

24


TABLE 18: MATURITY DISTRIBUTION OF INVESTMENT SECURITIES

 

     1 Year or Less     1 to 5 Years     5 to 10 Years     More than 10 Years     Total  

December 31, 2012

   Carrying
Value
     Yield     Carrying
Value
     Yield     Carrying
Value
     Yield     Carrying
Value
     Yield     Carrying
Value
     Yield  

Available for sale:

                         

U.S. Treasury obligations

   $ 10,011         0.78   $ —           —     $ —           —     $ —           —     $ 10,011         0.78

U.S. Government agencies

     —           —          —           —          4,949         2.08        —           —          4,949         2.08   

U.S. Government agency mortgage-backed securities

     —           —          9,320         1.41        21,668         2.57        323,990         1.81        354,978         1.84   

Other mortgage-backed securities

     —           —          —           —          —           —          286         2.82        286         2.82   

State and municipal obligations

     225         5.23        —           —          8,786         4.19        31,159         4.23        40,170         4.23   

Corporate bonds

     —           —          25,442         2.20        —           —          —           —          25,442         2.20   

Trust preferred securities

     —           —          —           —          —           —          5,882         1.24        5,882         1.24   

Other securities

     1,216         0.01        248         1.00        —           —          —           —          1,464         0.18   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale investment securities

   $ 11,452         0.78   $ 35,010         1.98   $ 35,403         2.90   $ 361,317         2.01   $ 443,182         2.05
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held to maturity:

                         

U.S. Government agency mortgage-backed

securities

   $ —           —     $ —           0   $ 662         3.82   $ —           —     $ 662         3.82

Other mortgage-backed securities

     —           —          250         0.89        —           —          —           —          250         0.89   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity investment securities

   $ —           —     $ 250         0.89   $ 662         3.82   $ —           —     $ 912         3.01
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

See Note 4 of the Notes to Consolidated Financial Statements for additional information on investment securities.

Restricted Equity Investments. During 2012, restricted equity investments increased $2.1 million to $17.9 million at December 31, 2012 from $15.8 million at December 31, 2011. The Company, through the Bank, is a member of the Federal Reserve, the Federal Home Loan Bank of New York (“FHLBNY”) and Atlantic Central Bankers Bank, and is required to maintain an investment in the capital stock of each. The FRB, FHLBNY and the Atlantic Central Bankers Bank stock are restricted in that they can only be redeemed by the issuer at par value. These securities are carried at cost and the Company did not identify any events or changes in circumstances that may have had an adverse effect on the value of the investment in accordance with FASB ASC 942, Financial Services—Depository and Lending. As of December 31, 2012, management does not believe that an OTTI of these holdings exists and expects to recover the entire cost of these securities.

Bank Owned Life Insurance. During 2012, bank owned life insurance (“BOLI”) increased $2.0 million to $76.9 million at December 31, 2012. Of the $76.9 million BOLI cash surrender value, the Company had $25.4 million invested in a general account and $51.5 million in a separate account at December 31, 2012. 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 investments may have an impact on investment income; however, these fluctuations would be partially mitigated by a stable value wrap agreement which is a component of the separate account. While generally protected by the stable value wrap, significant declines in fair value may result in charges in future periods for values outside the wrap coverage.

Cash and Cash Equivalents. Cash and cash equivalents increased $49.8 million to $169.6 million at December 31, 2012 from $119.8 million at December 31, 2011. This increase is primarily due to the decrease of $70.7 million in investment securities in 2012 and the increase of $45.2 million in deposits partially offset by an increase of $83.3 million in gross loans receivable during the same period.

Goodwill. The goodwill balance was $38.2 million at December 31, 2012 and 2011. See the Critical Accounting Policies, Judgments and Estimates section for additional detail.

Deferred Taxes, net. Deferred taxes, net, increased $1.1 million from $432 thousand at December 31, 2011 to $1.5 million at December 31, 2012 due to an increase in unrealized gains on investment securities.

 

25


Deposits. Deposits at December 31, 2012 totaled $2.7 billion, an increase of $45.2 million, or 1.7%, from December 31, 2011. Core deposits, which exclude all certificates of deposit, decreased $19.1 million to $2.02 billion, or 74.3% of total deposits, at December 31, 2012 as compared to $2.03 billion, or 76.3% of total deposits, at December 31, 2011.

Table 19 provides a summary of deposits at December 31, 2012, 2011, and 2010.

TABLE 19: SUMMARY OF DEPOSITS

 

December 31,

   2012      2011      2010  

Demand deposits

   $ 1,751,183       $ 1,772,386       $ 1,862,940   

Savings deposits

     264,155         262,044         279,086   

Time deposits under $100,000

     323,768         376,369         480,993   

Time deposits $100,000 or more

     256,725         177,747         228,121   

Brokered time deposits

     117,393         79,431         89,320   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,713,224       $ 2,667,977       $ 2,940,460   
  

 

 

    

 

 

    

 

 

 

Consumer and commercial deposits are attracted principally from within the Company’s primary market area through a wide complement of deposit products that include checking, savings, money market, certificates of deposits and individual retirement accounts. The Company continues to operate with a core deposit relationship strategy that values the importance of building a long-term stable relationship with each and every customer. The relationship pricing strategy rewards customers that establish core accounts and maintain a certain minimum threshold account balance. Management regularly meets to evaluate internal cost of funds, to analyze the competition, to review the Company’s cash flow requirements for lending and liquidity, and executes any appropriate pricing changes when necessary.

Table 20 provides the distribution of total deposits between core and non-core at December 31, 2012, 2011, and 2010.

TABLE 20: DISTRIBUTION OF DEPOSITS

 

December 31,

   2012     2011     2010  
     Amount      %     Amount      %     Amount      %  

Core deposits

   $ 2,015,338         74.28   $ 2,034,430         76.3   $ 2,142,026         72.8

Non-core deposits

     697,886         25.72        633,547         23.7        798,434         27.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 2,713,224         100.0   $ 2,667,977         100.0   $ 2,940,460         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Table 21 provides a summary of certificates of deposit of $100,000 or more by remaining maturity at December 31, 2012.

TABLE 21: CERTIFICATES OF DEPOSIT OF $100,000 OR MORE

 

December 31, 2012

   Amount  

Three months or less

   $ 48,681   

Over three through six months

     38,031   

Over six through twelve months

     70,761   

Over twelve months

     99,252   
  

 

 

 

Total

   $ 256,725   
  

 

 

 

See Note 11 of the Notes to Consolidated Financial Statements for additional information on deposits.

Borrowings. Borrowed funds, excluding debentures held by trusts, increased $40.0 million to $63.4 million at December 31, 2012, from $23.4 million at December 31, 2011.

Table 22 provides the maximum month end amount of borrowings by type during the years ended December 31, 2012 and 2011.

 

26


TABLE 22: SUMMARY OF MAXIMUM MONTH END BORROWINGS

 

Years Ended December 31,

   2012      2011  

FHLBNY advances

   $ 2,625       $ 3,895   

FHLBNY repurchase agreements

     45,000         15,000   

FHLBNY overnight line of credit

     37,000         —     

Repurchase agreements with customers

     7,278         8,249   

Table 23 provides information regarding FHLBNY advances and FHLBNY repurchase agreements, interest rates, approximate weighted average amounts outstanding and their approximate weighted average rates at or for the years ended December 31, 2012, 2011, and 2010.

TABLE 23: SUMMARY OF FHLBNY BORROWINGS

 

At or for the Years Ended December 31,

   2012     2011     2010  

FHLBNY term amortizing advances outstanding at year end

   $ 1,415      $ 2,733      $ 3,999   

Weighted average interest rate at year end

     5.43     4.75     4.51

Approximate average amount outstanding during the year

   $ 2,023      $ 3,317      $ 4,561   

Approximate weighted average rate during the year

     5.00     4.62     4.45

FHLBNY term non-amortizing advances outstanding at year end

   $ 60,000      $ —        $ —     

Weighted average interest rate at year end

     2.02     —       —  

Approximate average amount outstanding during the year

   $ 16,250      $ —        $ 2,500   

Approximate weighted average rate during the year

     1.99        —       5.80

FHLBNY repurchase agreements outstanding at year end

   $ —        $ 15,000      $ 15,000   

Weighted average interest rate at year end

     —       4.84     4.84

Approximate average amount outstanding during the year

   $ 18,333      $ 15,000      $ 15,000   

Approximate weighted average rate during the year

     2.30     4.91     4.91

Table 24 provides information regarding securities sold under agreements to repurchase with customers, interest rates, approximate average amounts outstanding and their approximate weighted average rates at December 31, 2012, 2011, and 2010.

TABLE 24: SUMMARY OF SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE WITH CUSTOMERS

 

At or for the Years Ended December 31,

   2012     2011     2010  

Balance at year end

   $ 1,968      $ 5,668      $ 6,307   

Weighted average interest rate at year end

     0.17     0.08     0.21

Approximate average amount outstanding during the year

   $ 4,859      $ 6,659      $ 15,243   

Approximate weighted average rate during the year

     0.15     0.10     0.19

Deposits are the primary source of funds for the Company’s lending activities, investment activities and general business purposes. Should the need arise, the Company has the ability to access lines of credit from various sources including the FRB, the FHLBNY and various other correspondent banks. In addition, on an overnight basis, the Company has the ability to sell securities under agreements to repurchase.

See Notes 12 and 13 of the Notes to Consolidated Financial Statements for additional information on borrowings.

Junior Subordinated Debentures Held by Trusts that Issued Capital Debt. Table 25 provides a summary of the outstanding capital securities issued by each Issuer Trust and the junior subordinated debenture issued by the Company to each Issuer Trust as of December 31, 2012.

TABLE 25: SUMMARY OF CAPITAL SECURITIES AND JUNIOR SUBORDINATED DEBENTURES

 

December 31, 2012

   Capital Securities   Junior Subordinated Debentures  

Issuer Trust

   Issuance Date      Stated Value      Distribution Rate   Principal Amount      Maturity      Redeemable Beginning  

Sun Capital Trust V

     December 18, 2003       $ 15,000       3-mo LIBOR plus 2.80%   $ 15,464         December 30, 2033         December 30, 2008   

Sun Capital Trust VI

     December 19, 2003         25,000       3-mo LIBOR plus 2.80%     25,774         January 23, 2034         January 23, 2009   

Sun Statutory Trust VII

     January 17, 2006         30,000       3-mo LIBOR plus 1.35%     30,928         March 15, 2036         March 15, 2011   

Sun Capital Trust VII

     April 19, 2007         10,000       6.428% Fixed     10,310         June 30, 2037         June 30, 2012   

Sun Capital Trust VIII

     July 5, 2007         10,000       3-mo LIBOR plus 1.39%     10,310         October 1, 2037         October 1, 2012   
     

 

 

      

 

 

       
      $ 90,000         $ 92,786         
     

 

 

      

 

 

       

 

27


On January 23, 2009 and December 30, 2008, the capital securities of Sun Capital Trust VI and Sun Capital Trust V, respectively, became eligible for redemption. As a result of the current interest environment, the Company has elected not to call these securities; however, the Company maintains the right to call these securities in the future on the respective payment anniversary dates.

The Company has customarily relied on dividend payments from the Bank to fund junior subordinated debenture interest obligations. The amount available for payment of dividends to the Company by the Bank was $0 as of December 31, 2012 and no dividends may be paid by the Bank without OCC approval. Per the OCC Agreement, 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. The Company believes it is capable of funding its junior subordinated debenture interest obligations through available cash balances maintained at the bank holding company for the period of time necessary until earnings are expected to support a dividend from the Bank. See Note 23 of the Notes to Consolidated Financial Statements for additional information on dividend limitations.

Other Liabilities. Other liabilities totaled $82.9 million at December 31, 2012 and $82.4 million at December 31, 2011. Derivative liabilities are the primary component of other liabilities. See Note 19 of the Notes to Consolidated Financial Statements for additional information on derivative instruments.

 

28


FORWARD-LOOKING STATEMENTS

The Company may from time to time make written or oral “forward-looking statements,” including statements contained in the company’s filings with the securities and exchange commission, in its reports to shareholders and in other communications by the Company, which are made in good faith by the company pursuant to the “safe harbor” provisions of the private securities litigation reform act of 1995. 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,” “could.”

 

   

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 Wall Street Reform and Consumer Protection Act (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 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 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;

 

   

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 Securities and Exchange Commission (“SEC”); and

 

29


   

our success at managing the risks involved in the foregoing.

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 Annual Report on Form 10-K of the Company contains financial information by methods other than in accordance with Generally Accepted Accounting Principles in the United States of America (“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. Reconciliations of these ratios to GAAP are presented below.

Tangible Equity to Tangible Assets Ratio:

Tangible equity and tangible assets are calculated by subtracting identifiable intangible assets and goodwill from shareholders’ equity and total assets, respectively, and may be used by investors to assist them in understanding how much loss, exclusive of intangible assets and goodwill, can be absorbed before shareholders’ equity is depleted. The Company’s and the Bank’s regulators also exclude intangible assets and goodwill from shareholders’ equity when assessing capital adequacy of each.

The following table reconciles this non-GAAP performance measure to the GAAP performance measure for the periods indicated:

 

Years Ended December 31,

   2012     2011     2010  

Total assets

   $ 3,224,031      $ 3,183,926      $ 3,417,546   

Less: Intangible assets

     3,262        6,947        10,631   

Less: Goodwill

     38,188        38,188        38,188   
  

 

 

   

 

 

   

 

 

 

Tangible assets

   $ 3,182,581      $ 3,138,791      $ 3,368,727   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 262,595      $ 309,083      $ 268,242   

Less: Intangible assets

     3,262        6,947        10,631   

Less Goodwill

     38,188        38,188        38,188   
  

 

 

   

 

 

   

 

 

 

Tangible stockholders’ equity

   $ 221,145      $ 263,948      $ 219,423   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity to total assets ratio

     8.14     9.71     7.85

Tangible common equity to tangible assets ratio

     6.95     8.41     6.51

Tax Equivalent Net Interest Income:

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:

 

Years Ended December 31,

   2012      2011      2010  

Net interest income, as presented

   $ 97,848       $ 103,528       $ 110,962   

Effect of tax-exempt income

     870         1,341         1,800   
  

 

 

    

 

 

    

 

 

 

Net interest income, tax equivalent

   $ 98,718       $ 104,869       $ 112,762   
  

 

 

    

 

 

    

 

 

 

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:

 

Years Ended December 31,

   2012      2011  

Total deposits

   $ 2,713,224       $ 2,667,977   

Less: Time deposits

     580,493         554,116   

Less: Brokered deposits

     117,393         79,431   
  

 

 

    

 

 

 

Core deposits

   $ 2,015,338       $ 2,034,430   
  

 

 

    

 

 

 

 

30


MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13(a)-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Management, including the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment was also conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment of the Company’s internal control over financial reporting also included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for Consolidated Reports of Condition and Income for Schedules RC, RI, RI-A. Based on our evaluation under the framework in Internal Control—Integrated Framework, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012.

Deloitte & Touche LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report and has issued a report on the effectiveness of our internal control over financial reporting. Their reports follow this statement.

 

31


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Sun Bancorp, Inc.

Vineland, New Jersey

We have audited the internal control over financial reporting of Sun Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income for Schedules RC, RI, RI-A. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of inte