(12) Regulatory Matters

The Company is subject to risk-based capital guidelines adopted by the FRB for bank holding companies. The Bank is also subject to similar capital requirements adopted by the OCC. The federal bank regulatory agencies have established quantitative measures to ensure that minimum thresholds for Total Capital, Tier 1 Capital and Leverage (Tier 1 Capital divided by average assets) ratios (set forth in the table below) are maintained.

Under applicable regulatory requirements, the Company and the Bank are required to maintain (1) a minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (2) a minimum capital ratio of 6.0% of risk-weighted assets; (3) a minimum total capital ratio of 8.0% of risk-weighted assets; and (4) a minimum Tier 1 leverage capital ratio of 4.0%.

Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements.

Furthermore, the Company and the Bank are required to maintain a minimum common equity Tier 1 capital conservation buffer (“Conservation Buffer”) to be applied to the common equity Tier 1 capital ratio, the Tier 1 capital ratio and the total capital ratio. The required minimum Conservation Buffer is being phased in incrementally, starting at 0.625% on January 1, 2016, increased to 1.25% on January 1, 2017, and will increase to 1.875% on January 1, 2018 and 2.5% on January 1, 2019. If a bank’s or bank holding company’s Conservation Buffer is less than the required minimum and its net income for the four calendar quarters preceding the applicable calendar quarter, net of any capital distributions and associated tax effects not already reflected in net income (“Eligible Retained Income”) is negative, it would be prohibited from making capital distributions or certain discretionary cash bonus payments to executive officers. As a result, under the applicable capital regulations, should the Company fail to maintain the Conservation Buffer, it would be subject to limits on, and in the event the Company has negative Eligible Retained Income for any four consecutive calendar quarters, we would be prohibited in, our ability to obtain capital distributions from the Bank.

The following table provides both the Company’s and the Bank’s risk-based capital ratios as of March 31, 2017 and December 31, 2016.

Regulatory Capital Levels

	Actual					For Capital Adequacy Purposes					Minimum Capital Requirement with Conservation Buffer⁽¹⁾					To Be Well Capitalized Under Prompt Corrective Action Provision⁽²⁾
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017:
Total risk-based capital (to risk-weighted assets):
Sun Bancorp, Inc.	$	357,177		21.88	%	$	130,618		8.00	%	$	151,027		9.25	%	N/A
Sun National Bank		307,118		18.82			130,548		8.00			150,946		9.25		$	163,186		10.00	%
Tier 1 common equity capital (to risk- weighted assets):
Sun Bancorp, Inc.		257,846		15.79			73,473		4.50			93,882		5.75		N/A
Sun National Bank		290,555		17.81			73,434		4.50			93,832		5.75			106,071		6.50
Tier 1 capital (to risk-weighted assets):
Sun Bancorp, Inc.		313,271		19.19			97,964		6.00			118,373		7.25		N/A
Sun National Bank		290,555		17.81			97,911		6.00			118,309		7.25			130,548		8.00
Leverage capital:
Sun Bancorp, Inc.		313,271		14.46			86,657		4.00		N/A					N/A
Sun National Bank		290,555		13.43			86,518		4.00		N/A						108,147		5.00

December 31, 2016:
Total risk-based capital (to risk-weighted assets):
Sun Bancorp, Inc.	$	354,078		21.63	%	$	130,929		8.00	%	$	141,157		8.625	%	N/A
Sun National Bank		324,196		19.85			130,664		8.00			140,872		8.625		$	163,330		10.00	%
Tier 1 common equity capital (to risk- weighted assets):
Sun Bancorp, Inc.		262,386		16.03			73,647		4.50			83,876		5.125		N/A
Sun National Bank		308,043		18.86			73,498		4.50			83,707		5.125			106,164		6.50
Tier 1 capital (to risk-weighted assets):
Sun Bancorp, Inc.		309,910		18.94			98,196		6.00			108,425		6.625		N/A
Sun National Bank		308,043		18.86			97,998		6.00			108,206		6.625			130,664		8.00
Leverage capital:
Sun Bancorp, Inc.		309,910		14.57			85,092		4.00		N/A					N/A
Sun National Bank		308,043		14.50			84,959		4.00		N/A						106,199		5.00

(1)	Conservation Buffer of 1.25% became effective as of January 1, 2017.

(2)	Not applicable for bank holding companies.

At March 31, 2017 and 2016, the Company and the Bank exceeded the required ratios for classification as “well capitalized.”

On April 15, 2010, the Bank entered into a written agreement with the OCC (the “OCC Agreement”), which contained requirements to develop and implement a profitability and capital plan that would provide for the maintenance of adequate capital to support the Bank’s risk profile.

The Bank also agreed to: (a) adopt and 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) adopt and implement a program for the maintenance of an adequate allowance for loan losses; and (d) revise the Bank’s credit administration policies. The Bank also agreed that its brokered deposits will not exceed 6.0% of its total deposits unless approved by the OCC. Effective January 21, 2016, the OCC terminated the OCC Agreement and the individual minimum capital requirement to which the Bank was subject and the requirements noted above were eliminated.

Separately, on January 21, 2016, without admitting or denying any wrongdoing, the Bank entered into a Consent Order with the OCC to pay a $25,000 civil money penalty in connection with various deficiencies identified by the OCC in the mortgage banking practices of Sun Home Loans, a former division of the Bank which was closed in July 2014 when the Bank exited the residential mortgage lending business as part of a comprehensive strategic restructuring. The identified deficiencies occurred from July 2011 through September 2013.

In addition, the Company was required to seek the prior approval of the Federal Reserve Bank before paying interest, principal or other sums on trust preferred securities or any related subordinated debentures, declaring or paying cash dividends or receiving dividends from the Bank, repurchasing outstanding stock or incurring indebtedness. The Company also was required to submit, and periodically update, a capital plan, a profit plan and cash flow projections, as well as other progress reports to the Federal Reserve Bank. The foregoing requirements were terminated by the Federal Reserve Bank in October 2016.

The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. All national banks are limited in the payment of dividends without the approval of the OCC of a total amount not to exceed the net income for that year to date plus the retained income for the preceding two years. Federal law also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Due to the Bank’s history of losses and retained deficit as of March 31, 2017, the Bank may not pay dividends; however, federal law permits the Bank to distribute cash or other assets to the Company through a reduction of capital, subject to approval by the OCC. At such time as the retained deficit is eliminated, any proposed dividends from the Bank to the Company are subject to regulatory approval until such time as net income for the current year combined with the prior two years is sufficient. Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), an insured depository institution such as the Bank is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the FDICIA). Payment of dividends by the Bank also may be restricted at any time at the discretion of the OCC if it deems the payment to constitute an unsafe and unsound banking practice. In the first quarter of 2017, the Bank applied for and received approval from the OCC to distribute $20 million to the Company as a return and reduction of capital. This distribution was completed in the first quarter of 2017.

Federal Deposit Insurance Corporation (“FDIC”) assessment expense of $162 thousand and $460 thousand was recognized during the three months ended March 31, 2017 and 2016, respectively.

The Company’s capital securities qualify as Tier 1 capital under federal regulatory guidelines. These instruments are subject to a 25% capital limitation under risk-based capital guidelines developed by the FRB. Under FRB rules, restricted core capital elements, which are qualifying trust preferred securities, qualifying cumulative perpetual preferred stock (and related surplus) and certain minority interests in consolidated subsidiaries, are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. However, under the Dodd-Frank Act, bank holding companies are prohibited from including in their Tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such instruments issued before May 19, 2010 by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion as of December 31, 2009, may continue to be included as Tier 1 capital (subject to the 25% limitation). The portion that exceeds the 25 percent capital limitation qualifies as Tier 2, or supplementary capital of the Company. At March 31, 2017, $62.7 million of a total of $90.0 million in capital securities qualified as Tier 1 with $27.3 million qualifying as Tier 2 capital.