**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

** **

**FORM 10-K**

 
| **(Mark  One)**                                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                   | **Annual Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
| **[Fee  Required]**                                                                                                          |
| **For the  fiscal year ended             December  31, 2003**         |
| **or**                                                                                                                       |
| **o**                                                                                                                        | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
| **[No Fee  Required]**                                                                                                       |
| **For the  transition period from        to         ** |
|                                                                                                                         |
| **Commission  File Number        0-14745**                                                |

 

**Sun Bancorp, Inc.**

(Exact name of registrantas specified in its charter)

 

| **Pennsylvania**                                                 |   | **23-2233584**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **155  North 15th Street, Lewisburg, PA**                        |   | **17837**                             |
| (Address of principal  executive offices)                        |   | (Zip Code)                            |
|                                                             |   |                                  |
| Registrant’s telephone  number, including area code         |   | **570-523-4300**                      |
|                                                             |   |                                  |
| Securities registered  pursuant to Section 12(b) of the Act:     |   |                                  |

 

| **Title of each  class** |   | **Name of each  exchange on  which registered** |
|--------------------------|--------|-------------------------------------------------|
| None                     |   | None                                            |

 

| Securities registered  pursuant to Section 12(g) of the Act: |   |   |
|--------------------------------------------------------------|--------|--------|
|                                                         |   |   |
| **Common  Stock, No Par Value**                              |
| (Title of Class)                                             |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   ý Yes   o    No

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section229.405 of this Chapter) is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in PART III of this Form 10-K or anyamendment to this Form 10-K.     ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct)    ý    Yes    o    No

 

As of March 5, 2004, theregistrant had 7,320,325 shares of common stock, no par value,outstanding.  Based on the closing saleprice of $20.13, as reported on the NASDAQ National Market on June 30, 2003,the aggregate market value of the voting stock held by nonaffiliates of theregistrant was $147,358,142.

 

Portions of the 2003Annual Report to Shareholders are incorporated by reference in Parts I, II, andIII.

 

Portions of the definitiveproxy statement for the 2004 Annual Shareholders’ Meeting to be held on April22, 2004 are incorporated by reference in Part III.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**   |                                                                                            |   |
|--------------|-------------------------------------------------------------------------------------------------|--------|
|         |                                                                                            |   |
| Item 1.      | Business                                                                                        |   |
|         |                                                                                            |   |
| Item 2.      | Properties                                                                                      |   |
|         |                                                                                            |   |
| Item 3.      | Legal Proceedings                                                                               |   |
|         |                                                                                            |   |
| Item 4.      | Submission of Matters to a Vote of Security  Holders                                            |   |
|         |                                                                                            |   |
| **PART II**  |                                                                                            |   |
|         |                                                                                            |   |
| Item 5.      | Market for Registrant’s Common Equity and Related Shareholder Matters                      |   |
|         |                                                                                            |   |
| Item 6.      | Selected Financial Data                                                                         |   |
|         |                                                                                            |   |
| Item 7.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations     |   |
|         |                                                                                            |   |
| Item 7A.     | Quantitative and Qualitative Disclosures About Market Risk                                      |   |
|         |                                                                                            |   |
| Item 8.      | Financial Statements and Supplementary Data                                                     |   |
|         |                                                                                            |   |
| Item 9.      | Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure           |   |
|         |                                                                                            |   |
| Item 9A.     | Controls and Procedures                                                                         |   |
|         |                                                                                            |   |
| **PART III** |                                                                                            |   |
|         |                                                                                            |   |
| Item 10.     | Directors and Executive Officers of the  Registrant                                             |   |
|         |                                                                                            |   |
| Item 11.     | Executive Compensation                                                                          |   |
|         |                                                                                            |   |
| Item 12.     | Security Ownership of Certain Beneficial  Owners and Management and Related Shareholder Matters |   |
|         |                                                                                            |   |
| Item 13.     | Certain Relationships and Related  Transactions                                                 |   |
|         |                                                                                            |   |
| Item 14.     | Principal Accountant Fees and Services                                                          |   |
|         |                                                                                            |   |
| **PART IV**  |                                                                                            |   |
|         |                                                                                            |   |
| Item 15.     | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                |   |

 

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PART I

 

ITEM 1 — BUSINESS

 

Sun Bancorp, Inc. (Sun) is a holding companyincorporated under the laws of Pennsylvania and registered under the BankHolding Company Act of 1956, as amended, on November 26, 1982.  In 2003, Sun registered as a financialholding company under the Federal Reserve Act. Sun’s common stock is traded on the NASDAQ National Market under thesymbol “SUBI.”  As of December 31, 2003,Sun had total assets of $1,027,836,000, consolidated net loans and leases of$672,223,000, deposits of $614,550,000 and shareholders’ equity of $79,182,000.

 

As a financial holding company, Sun Bancorp,Inc. manages both banking and non-banking subsidiaries.  Sun’s banking subsidiary, SunBank, is aPennsylvania state-chartered bank that operates under the Guaranty Bank andSunBank trade names.  SunBank providesfull service commercial and retail banking services primarily in northeasternand central Pennsylvania.  SunBankoperates 23 banking offices and one trust services office serving Snyder,Union, Northumberland, Lycoming, Clinton, Dauphin, and Luzerne Counties.  At December 31, 2003, SunBank had totalassets of $1,028,000,000 and total shareholders’ equity of $98,345,000.  SunBank’s net income for 2003 was$8,082,000.

 

SunBank offers a wide range of servicesincluding demand deposit accounts, savings accounts, Christmas and all-purposeclubs, time certificates of deposit, and individual retirement accounts, as wellas commercial loans, consumer loans, mortgage loans, auto leases, equipmentleases, investment products, and safe deposit services.  SunBank also operates a trust departmentthat provides full fiduciary services. Also, 71 Automated Teller Machines (ATMs) and cash dispensing unitsthroughout the service area provide 24-hour banking service.  SunBank’s activities are such that the lossof one single customer or a few customers would not have a material adverseeffect on its operations.  Additionally,SunBank’s business is not seasonal in nature. SunBank does not currently engage in any meaningful foreigntransactions.  The majority of the loanportfolio is comprised of real estate loans (mortgage and commercial) andconsumer loans/leases (predominately automobiles).  SunBank’s deposits are insured by the Federal Deposit InsuranceCorporation (FDIC)to the maximum extent allowed by law.

 

Sun also owns the Beacon Life InsuranceCompany, a company that provides credit life and disability insurance.  On October 30, 2000, Sun acquiredseventy-five percent of Sun Abstract and Settlement Services, a company thatprovides title insurance and real estate settlement services, for the sum of$15,000 which represents the total investment. During 2001, Sun’s investment percentage was reduced to thirty percentdue to the addition of additional partners. On January 30, 2001, Sun formed Sun Investment Services, Inc. to offerSun’s customers mutual fund and annuity products.  On December 28, 2002, Sun formed SUBI Investment Company, aDelaware corporation formed to hold certain investments.  On December 19, 2002, Sun formed SUBIServices, LLC, an employee services company, solely owned by SunBank.

 

Sun is a limited partner in six partnershipsthat construct, own and operate an affordable elderly apartment complex withinSun’s market area.  Sun is also apartner in two partnerships that provide office space in areas designated asempowerment zones by the Commonwealth of Pennsylvania.  As part of the partnership agreements, Sun isable to recognize tax credits from these economic development projects.

 

On January 1, 2003, Sun acquired Bank CapitalServices Corporation (Bank Capital) to provide leasing alternatives to Sun’scustomers.  Bank Capital also

 

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services leases for several other financial institutions.  On April 22, 2003, Sun acquired Mid-PennInsurance Associates (Mid-Penn), an independent insurance agency, to diversifythe financial services available to Sun’s customers.  On April 25, 2004 Sun acquired Steelton Bancorp (Steelton), whichwas concurrently merged into SunBank. The Steelton acquisition added two branches, both of which are locatedin the capital region of Harrisburg, Pennsylvania.  Sun acquired Sentry Trust Company (Sentry) on February 27,2004.  Sentry provides trust and wealthmanagement services for clients throughout central Pennsylvania.

 

Market Area

 

The economy of northeastern and centralPennsylvania is diversified with solid manufacturing and service bases.  Conditions within Sun’s market area havebeen stable during 2003.  However, avariety of factors (e.g., any substantial rise in inflation or unemploymentrates, decrease in consumer confidence, war, or political instability), mayaffect the stability of conditions within Sun’s market area.  Sun will continue to explore options tobetter manage funding costs and lending rates. In addition, Sun continues toseek opportunities to generate income (non-interest) apart from lendingrelationships (interest related) by diversifying its product offerings andservices.

 

Supervision and Regulation

 

*General*. As a financial holding company (a “FHC”) registered with the Board ofGovernors of the Federal Reserve System (the “Federal Reserve Board”), SunBancorp, Inc. is subject to regulation under the Bank Holding Company Act of1956, as amended. The Bank Holding Company Act requires prior approval of anacquisition of assets or of ownership or control of voting shares of more than5% of the voting shares of any bank or bank holding company. It also imposesrestrictions, summarized below, on the assets or voting shares of non-bankingcompanies that Sun may acquire.

 

As a Pennsylvania state-chartered Bank,SunBank is subject to regulation and periodic examination by the PennsylvaniaDepartment of Banking and the Federal Deposit Insurance Corporation (the“FDIC”). Sun’s recently acquired subsidiary, Sentry Trust Company, is aPennsylvania non-depository trust company, which is also subject to regulationand periodic examination by the Pennsylvania Department of Banking.  All of Sun’s subsidiaries are subject toexamination by the Federal Reserve Board even if not otherwise regulated by theFederal Reserve Board, subject to certain conditions in the case of “functionallyregulated subsidiaries” such as broker/dealers and registered investmentadvisers.

 

Regulations governing bank subsidiaries placerestrictions on extensions of credit by such institutions to Sun and, with someexceptions, the other Sun affiliates. For these purposes, extensions of creditinclude loans and advances to and guarantees and letters of credit on behalf ofSun and such affiliates. These regulations also restrict investments by Sun’sbank subsidiary in the stock or other securities of Sun and the coveredaffiliates, as well as the acceptance of such stock or other securities ascollateral for loans to any borrower, whether or not related to Sun.

 

SunBank is subject to comprehensive federaland state regulations dealing with a wide variety of subjects, includingreserve requirements, loan limitations, restrictions as to interest rates onloans and deposits, restrictions as to dividend payments, requirementsgoverning the establishment of branches, and numerous other aspects of itsoperations. These regulations generally have been adopted to protect depositorsand creditors rather than shareholders.

 

4

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*Capital Adequacy*. Under applicable risk-based capital requirements, bank holding companiesmust maintain a ratio of total capital to risk-weighted assets (including theasset equivalent of certain off-balance sheet activities such as acceptancesand letters of credit) of not less than 8%, (a ratio equal to at least 10% inorder to meet the definitions of “well-capitalized” under applicableregulations.)  Of this amount, at least4% out of the total capital (6% to be “well capitalized”), must be composed ofcommon stock, related surplus, retained earnings, qualifying perpetualpreferred stock, and minority interests in the equity accounts of certainconsolidated subsidiaries, after deducting goodwill and certain otherintangibles (“Tier 1 capital”). The remainder of total capital (“Tier 2capital”) may consist of perpetual debt securities, mandatory convertible debtsecurities, other hybrid capital instruments and limited amounts ofsubordinated debt, qualifying preferred stock, loan loss allowance andunrealized gains on equity securities.

 

At December 31, 2003, Sun’s Tier 1 capitalratio was 11.1%, and Sun’s total capital (i.e., Tier 1 plus Tier 2) ratio was9.9%.

 

The Federal Reserve Board has alsoestablished minimum leverage ratio guidelines for bank holding companies. Theseguidelines mandate a minimum leverage ratio of tier 1 capital to adjusted quarterlyaverage total assets less certain amounts (“leverage amounts”) equal to 3% forbank holding companies meeting certain criteria (including those having thehighest regulatory rating). All other banking organizations are generallyrequired to maintain a leverage ratio of at least 3% plus an additional cushionof at least 100 basis points and, in some cases, more. The Federal ReserveBoard’s guidelines also provide that bank holding companies experiencinginternal growth or making acquisitions are expected to maintain capitalpositions substantially above the minimum supervisory levels withoutsignificant reliance on intangible assets. Furthermore, the guidelines indicatethat the Federal Reserve Board will continue to consider a “tangible tier 1leverage ratio” (i.e., after deducting all intangibles) in evaluating proposalsfor expansion or new activities. The Federal Reserve Board has not advised Sunof any specific minimum leverage ratio applicable to us. At December 31, 2003,Sun’s leverage ratio was 6.4%.

 

SunBank is subject to similar capitalstandards.  SunBank has not been advisedof any specific minimum leverage ratios applicable to it.

 

*Prompt Corrective Action.*The Federal Deposit InsuranceCorporation Improvement Act of 1991, or FDICIA, requires federal regulators totake prompt corrective action against any undercapitalized institution. FDICIAestablishes five capital categories: well capitalized, adequately capitalized,undercapitalized, significantly undercapitalized, and critically undercapitalized.Well-capitalized institutions significantly exceed the required minimum levelfor each capital measure (currently, risk-based and leverage). Adequatelycapitalized institutions include depository institutions that meet the requiredminimum level for each capital measure. Undercapitalized institutions consistof those that fail to meet the required minimum level for one or more relevantcapital measures. Significantly undercapitalized characterizes depositoryinstitutions with capital levels significantly below the minimum requirements.Critically undercapitalized refers to depository institutions with minimalcapital and at serious risk for government seizure.

 

At December 31, 2003, SunBank’s Tier 1capital ratio was 9.2%, and Sun’s total capital (i.e., Tier 1 plus Tier 2)ratio was 10.3%.

 

*CommunityReinvestment Act*.  Under the CommunityReinvestment Act, as amended (“CRA”), a bank has a continuing and affirmativeobligation consistent with its safe and sound operation to help meet the creditneeds of its entire community, including low- and moderate-incomeneighborhoods.  The CRA does notestablish specific lending

 

5

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requirements or programs for financialinstitutions nor does it limit an institution’s discretion to develop the typesof products and services that it believes are best suited to its particularcommunity, consistent with the CRA. The CRA requires that the applicableregulatory agency assess an institution’s record of meeting the credit needs ofits community and to take such record into account in its evaluation of certainapplications by such institution.  Aninstitution’s CRA rating is considered in determining whether to grantcharters, branches and other deposit facilities, relocations, mergers,consolidations and acquisitions. Performance less than satisfactory may be thebasis for denying an application.

 

*Source of Strength Doctrine*. Under Federal Reserve Board policy, a bank holding company is expectedto serve as a source of financial strength to each of its subsidiary banks andto stand prepared to commit resources to support each of them. Consistent withthis policy, the Federal Reserve Board has stated that, as a matter of prudentbanking, a bank holding company should generally not maintain a given rate ofcash dividends unless its net income available to common shareholders has beensufficient to fully fund the dividends and the prospective rate of earningsretention appears to be consistent with the organization’s capital needs, assetquality, and overall financial condition.

 

*Additional Activities*. As a FHC under the Gramm-Leach-Bliley Act (the “GLB Act”), Sun ispermitted to engage, directly or through subsidiaries, in a wide variety ofactivities which are financial in nature or are incidental or complementary toa financial activity, in addition to all of the activities otherwiseallowed.  The additional activities inwhich Sun is permitted to engage as a FHC (if management so determines toconduct them) include, among others, insurance and securities underwriting,merchant banking activities, issuing and selling annuities and securitizedinterests in financial assets, and engaging domestically in activities thatbank holding companies previously have been permitted to engage in onlyoverseas.  Sun conducts insuranceactivities through Mid-Penn and Beacon. It is expected that in the future other activities may be added to thepermitted list. All of these listed activities can be conducted, through anacquisition or on a start-up basis, without prior Federal Reserve Boardapproval and with only notice to the Federal Reserve Board afterward.

 

As a FHC, Sun is generally subject to thesame regulation as other bank holding companies, including the reporting,examination, supervision, and consolidated capital requirements of the FederalReserve Board. However, in some respects the regulation is modified as a resultof FHC status. For example, Sun must continue to satisfy certain conditions(discussed below) to preserve its full flexibility as a FHC. However, as a FHC,Sun (unlike traditional bank holding companies) is permitted to undertakeseveral new types of activities and to acquire companies engaged in severaladditional kinds of activities, without prior Federal Reserve Board approvaland with only notice afterward.

 

To preserve Sun’s ability to engage incertain activities or transactions as a FHC, Sun must ensure that all insureddepository institution subsidiaries remain well capitalized and well managedfor regulatory purposes and earn “satisfactory” or better ratings on theirperiodic CRA examinations.  A FHCceasing to meet these standards is subject to a variety of restrictions,depending on the circumstances. If the Federal Reserve Board determines thatany of the FHC’s subsidiary depository institutions are either not wellcapitalized or not well managed, it must notify the FHC. Until compliance isrestored, the Federal Reserve Board has broad discretion to impose appropriatelimitations on the FHC’s activities. If compliance is not restored within 180days, the Federal Reserve Board may ultimately require the FHC to divest itsdepository institutions or, in the alternative, to discontinue or divest anyactivities that are permitted only to FHC bank holding companies.

 

6

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*Privacy. *TitleV of the GLB Act is intended to increase the level of privacy protectionafforded to customers of financial institutions.  Among other things, these provisions require institutions to haveadministrative, technical, and physical safeguards in place to ensure thesecurity and confidentiality of customer records and information, to protectagainst anticipated threats or hazards to the security or integrity of suchrecords, and to protect against unauthorized access to or use of such recordsthat could result in substantial harm or inconvenience to a customer. The GLBalso requires institutions to furnish consumers, at the outset of therelationship and annually thereafter, written disclosures concerning theinstitution’s privacy policies.

 

*Regulation of Non-bank Subsidiaries*. Sun’s primary non-bank subsidiaries include, in addition to Sentry TrustCompany, Mid-Penn Insurance Associates, Inc., Beacon Life Insurance Company,Sun Investment Services, Inc. and Sun Abstract and Settlement Services.  Mid-Penn Insurance Associates, Inc. isorganized under the laws of Pennsylvania and is licensed by the Department ofInsurance, Commonwealth of Pennsylvania. Beacon Life Insurance Company is organized under the laws of Arizona. Itis licensed by the Department of Insurance, State of Arizona.  Sun Investment Services, Inc. is organizedunder the laws of Pennsylvania and is registered with the Securities andExchange Commission (the “SEC”) as an investment adviser under the InvestmentAdvisers Act of 1940.  It is also aregistered broker-dealer, a member of the National Association of SecuritiesDealers (the “NASD”), and is also licensed with the securities commissions ofvarious states.  Sun Abstract and SettlementServices is organized under the laws of Pennsylvania and is regulated by theDepartment of Insurance, Commonwealth of Pennsylvania.

 

*USA Patriot Act of2001*.  On October 26, 2001, President Bush signedthe Uniting and Strengthening America by Providing Appropriate Tools Requiredto Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USAPATRIOT Act, financial institutions are subject to prohibitions againstspecified financial transactions and account relationships as well as enhanceddue diligence and “know your customer” standards in their dealings with foreignfinancial institutions and foreign customers.

 

Under the USA PATRIOT Act, financialinstitutions were also required to establish anti-money laundering programs byApril 25, 2002.  The USA PATRIOT Act sets forth minimum standards forthese programs.

 

In addition, the USA PATRIOT Act authorizesthe Secretary of the Treasury to adopt rules increasing the cooperation andinformation sharing between financial institutions, regulators, and lawenforcement authorities regarding individuals, entities and organizationsengaged in, or reasonably suspected based on credible evidence of engaging in,terrorist acts or money laundering activities.  Any financial institutionscomplying with these rules will not be deemed to have violated the privacyprovisions of the GLB Act.  Sun does not have any significantinternational banking relationships, and does not anticipate that the USAPATRIOT Act will have a material effect on its business or operations.

 

*Sarbanes-Oxley Act of 2002. * The Sarbanes-Oxley Act represents a comprehensive revision of lawsaffecting corporate governance, accounting obligations and reporting ofinformation under the federal securities laws. In general, the Sarbanes-Oxley Act establishes: (i) new requirements foraudit committees, including independence, expertise, and responsibilities; (ii)additional certification responsibilities regarding financial statements forthe chief executive officer and chief financial officer of the reportingcompany; (iii) new standards for independent auditors and regulation of audits;(iv) enhanced disclosure and reporting obligations for the

 

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reporting company and its directors and executiveofficers; and (v) new and increased civil and criminal penalties for violationsof the securities laws.  Many of the provisions were effective immediatelywhile other provisions become effective over a period of time and are subjectto rulemaking by the SEC. Because Sun’s common stock is registered under theSecurities Exchange Act of 1934, as amended, Sun is currently subject to manyof the provisions of the Sarbanes-Oxley Act.

 

*National MonetaryPolicy*.  In addition to being affected by generaleconomic conditions, Sun’s operations are affected by the policies ofregulatory authorities, including the Federal Reserve Board, the FDIC, the SEC,the NASD, and state agencies. An important function of the Federal ReserveBoard is to regulate the money supply and credit conditions.

 

The monetary policies and regulations of theFederal Reserve Board have had a significant effect on the operating results ofcommercial banks in the past and are expected to continue to do so in thefuture. The effects of such policies upon Sun’s future business, earnings, andgrowth cannot be predicted.

 

*Future Legislation*. Various legislation is from time to time introduced in Congress andstate legislatures with respect to the regulation of financial institutions.Such legislation may change banking statutes and the operating environment insubstantial and unpredictable ways.  Suncannot determine the ultimate effect that potential legislation, if enacted, orany regulations issued to implement it, would have upon its financial conditionor results of operations.

 

Availabilityof Information

 

Sun’s website address iswww.sunbankpa.com.  Sun makes availablefree of charge its annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports as soon asreasonably practicable after it electronically files such reports with theSEC.  Copies of such reports areavailable at no charge by contacting Sun Bancorp, Inc., Shareholder Services,155 North 15th Street, Lewisburg, PA 17837.  The information found on Sun’s website doesnot constitute a part of this or any other report.  The annual report and other company reports are also filedelectronically through the Electronic Data Gathering Analysis and RetrievalSystem (EDGAR) which performs automated collection, validation, indexing,acceptance, and forwarding of submissions to the Securities and ExchangeCommission (SEC) and is accessible by the public, using the Internet addresshttp://www.sec.gov/edgarhp.

 

ITEM 2 — PROPERTIES

 

Sun’s principal office is located inLewisburg, Pennsylvania at its corporate headquarters and training facility,which was purchased in 2002.  Sun ownsall of its properties with the exception of an off-site ATM at 700 North BroadStreet, Selinsgrove, bank offices in Loyalsock, Lewisburg, State College andFrederick Maryland and Mid-Penn offices in Sunbury and Shamokin Dam, each ofwhich is leased.  In 1995, Sun purchasedparcels of land in Liverpool for the purpose of building a branch in thefuture. In 2001, SunBank opened an office in Lewisburg.  In addition, SunBank purchased three MellonBank branches: Lewisburg, Lock Haven, and Mill Hall during 2001.  Sun acquired Guaranty Bank, N.A. in 2001,and after the banks merged, established additional offices in Mountain Top,Pikes Creek, Wilkes-Barre, Glen Lyon, Shamokin, and Nanticoke. During 2003, Sunacquired three properties as part of the Bank Capital and Steeltonacquisitions.  In addition, Mid-Pennacquired in 2003 operates two offices, which are leased.  During 2003, Sun also opened a loanproduction office in State College, Pennsylvania and Frederick, Maryland.  All properties are in good condition andadequate for their intended use.

 

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The following is a list of offices, ATMlocations, their addresses, and a brief description of each office.

 
| **Office** |                     | **Address** |                                                        | **Description** |
|------------|--------------------------|-------------|-------------------------------------------------------------|-----------------|
|       |                     |        |                                                        |            |
| 1.         | Selinsgrove              |        | 2 South Market Street  Selinsgrove, PA  17870          |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 2.         | Shamokin Dam             |        | 200 Susquehanna Trail  Shamokin Dam, PA  17876         |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 3.         | New Berlin               |        | Market & Plum  Streets  New Berlin, PA  17855      |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 4.         | Sunbury                  |        | 11 South Second Street  Sunbury, PA  17801             |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 5.         | Middleburg               |        | Route 522 & Dock  Hill Road  Middleburg, PA  17842 |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 6.         | Trust Division           |        | 100 West Pine Street  Selinsgrove, PA  17870           |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 7.         | Automated Teller Machine |        | 108 West Pine Street  Selinsgrove, PA  17870           |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 8.         | Automated Teller Machine |        | 700 North Broad Street  Selinsgrove, PA  17870         |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 9.         | Watsontown               |        | 300 Main Street  Watsontown, PA  17777                 |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 10.        | Northumberland           |        | 96 Duke Street  Northumberland, PA  17857              |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 11.        | Liverpool                |        | Rts. 11 & 15 South  Liverpool, PA  17045           |            | Land |
|       |                     |        |                                                        |            |   |
| 12.        | Hughesville              |        | 2 South Main Street  Hughesville, PA  17737            |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 13.        | Newberry                 |        | 2131 W. Fourth Street  Williamsport, PA  17701         |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 14.        | Montoursville            |        | 301 Broad Street  Montoursville, PA  17754             |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 15.        | Squire Hays              |        | 3155 Lycoming Creek Road  Williamsport, PA  17701      |            | Stone and frame  structure |
|       |                     |        |                                                        |            |   |
| 16.        | Maynard Street           |        | 90 Maynard Street  Williamsport, PA  17701             |            | Brick structure |
|       |                     |        |                                                        |            |   |
| 17.        | Loyalsock                |        | 814 Westminster Drive  Williamsport, PA  17701         |            | Masonry Block |

 

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| 18.    | Lewisburg     |   | 141 Plaza 15  Lewisburg, PA  17837                              |   | Brick structure                    |
|--------|---------------|--------|----------------------------------------------------------------------|--------|------------------------------------|
|   |          |   |                                                                 |   |                               |
| 19.    | Lewisburg     |   | 311 Market Street  Lewisburg, PA  17837                         |   | Brick and stone  structure         |
|   |          |   |                                                                 |   |                               |
| 20.    | Lock Haven    |   | Bellefonte Ave &  East Church Street  Lock Haven, PA  17745 |   | Frame structure                    |
|   |          |   |                                                                 |   |                               |
| 21.    | Mill Hall     |   | 349 Main Street  Mill Hall, PA  17751                           |   | Brick structure                    |
|   |          |   |                                                                 |   |                               |
| 22.    | Mountain Top  |   | 46 South Mountain  Boulevard  Mountain Top, PA  18707           |   | Frame structure                    |
|   |          |   |                                                                 |   |                               |
| 23.    | Pikes Creek   |   | Routes 118 & 29  Pikes Creek, PA  18621                     |   | Frame structure                    |
|   |          |   |                                                                 |   |                               |
| 24.    | Wilkes-Barre  |   | 639 South Main Street  Wilkes-Barre, PA  18702                  |   | Brick and stone  structure         |
|   |          |   |                                                                 |   |                               |
| 25.    | Glen Lyon     |   | 18 East Main Street  Glen Lyon, PA  18617                       |   | Brick and stone  structure         |
|   |          |   |                                                                 |   |                               |
| 26.    | Shamokin      |   | 10 South Market Street  Shamokin, PA  17872                     |   | Brick structure                    |
|   |          |   |                                                                 |   |                               |
| 27.    | Nanticoke     |   | 35 East Main Street  Nanticoke, PA  18634                       |   | Brick and stone  structure         |
|   |          |   |                                                                 |   |                               |
| 28.    | Middletown    |   | 100 Spring Garden Drive  Middletown, PA  17057                  |   | Brick structure                    |
|   |          |   |                                                                 |   |                               |
| 29.    | Steelton      |   | 51 South Front Street  Steelton, PA  17113                      |   | Brick structure                    |
|   |          |   |                                                                 |   |                               |
| 30.    | Pittston      |   | 1853 Highway 315  Pittston, PA  18640                           |   | Brick structure                    |
|   |          |   |                                                                 |   |                               |
| 30.    | Sunbury       |   | PO Box 899  Sunbury, PA  17801                                  |   | Brick structure                    |
|   |          |   |                                                                 |   |                               |
| 31.    | Shamokin Dam  |   | PO Box 517  Shamokin Dam, PA  17876                             |   | Brick structure                    |
|   |          |   |                                                                 |   |                               |
| 31.    | Frederick     |   | Suite 9  4 South McCain Drive  Frederick, MD  17876             |   | Brick and masonry block  structure |
|   |          |   |                                                                 |   |                               |
| 32.    | State College |   | 2134 Sandy Drive  Suite 3  State College, PA  16803             |   | Brick and masonry block  structure |

 

10

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ITEM 3 — LEGAL PROCEEDINGS

 

Sun is a party to various legal actions thatarise in the normal course of business. In the opinion of management, when the actions that are currentlypending or threatened against Sun are resolved, they should not have a materialadverse effect on its business or financial condition.

 

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

 

No matters were submitted to a vote of theshareholders during the fourth quarter of 2003.

 

11

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PART II

 

ITEM 5 — MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

 

The common stock of Sun Bancorp, Inc. tradeson the NASDAQ national market system under the symbol “SUBI”.  As of March 5, 2004, Sun had approximately2,242 holders of its common stock.  Sunoffers its shareholders a Dividend Reinvestment Plan whereby holders of stockmay have their quarterly cash dividends automatically invested in additionalshares of common stock.

 

The payment of dividends by Sun is made atthe discretion of the Board of Directors and to the extent funds are legallyavailable for that purpose.  Sun may notpay dividends in any year in excess of the total of the current year’s netincome and the retained net income of the prior two years without the approvalof the Federal Reserve Bank. Additionally, bank regulations limit the amount of dividends that may bepaid to Sun by SunBank without prior approval from the regulatory agencies.

 

OnJanuary 1, 2003, Sun issued 25,109 shares of its common stock as part of theconsideration paid by Sun, which was a mix of cash and stock, to the formerowners of Bank Capital in connection with Sun’ s acquisition of BankCapital.  Sun issued 85,936 shares on April 23, 2003 as part of theconsideration paid, a mix of cash and stock, to the former owners of Mid-Pennin connection with Sun’ s acquisition of Mid-Penn.

 

Theshares were issued in transactions exempt from the registration requirements ofthe Securities Act of 1933, as amended, to persons reasonably believed to be“accredited investors” under Regulation D promulgated under the Securities Act.

 

Additional information with respect to Sun’scommon stock is incorporated by reference to “Common Stock Market Prices andDividends Per Share” found on page 66 of the 2003 Annual Report toShareholders.

 

ITEM 6 — SELECTED FINANCIAL DATA

 

This item is incorporated by reference toinformation under the heading “Selected Financial Data” on page 45 of the 2003Annual Report to Shareholders.

 

ITEM 7 — MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This item is incorporated by reference to“Management’s Discussion and Analysis” on pages 46 through 65 of the 2003Annual Report to Shareholders.

 

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

This item is incorporated by reference to“Management’s Discussion and Analysis” on pages 62 through 64 of the 2003Annual Report to Shareholders.

 

A discussionof Sun’s significant accounting policies is included in Note 1 to the consolidated financialstatements on pages 18 through 21 of the 2003 Annual Report to Stockholders.Some of these policies are particularly sensitive

 

12

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requiring significant judgments, estimates and assumptions to be madeby management. Additional information is contained in Management’s Discussionand Analysis for the most sensitive of these issues, including the provisionand allowance for loan and lease losses, which are located on pages 53 and 54,and in Note 6 located on page 25 of the 2003 Annual Report to Shareholders.

 

Significant estimates are made by managementin determining the allowance for loan and lease losses.  Consideration is given to a variety offactors in establishing this estimate. In estimating the allowance for loan andlease losses, management considers current economic conditions, diversificationof the loan portfolio, delinquency statistics, results of internal loanreviews, financial and managerial strengths of borrowers, adequacy ofcollateral, if collateral dependent, or present value of future cash flows andother relevant factors.

 

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

This item is incorporated by reference to theConsolidated Financial Statements, Notes to Consolidated Financial Statementsand Independent Auditors’ Report set forth on pages 14 through 44 of the 2003 AnnualReport to Shareholders.

 

PARENTERANDOLPH

*The Power of Ideas*

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Shareholders and Boardof Directorsof Sun Bancorp, Inc.:

 

We have audited theconsolidated statements of income, changes in shareholders’ equity, and cashflows of Sun Bancorp, Inc. and subsidiaries (Sun), for the year ended December31, 2001.  These financial statementsare the responsibility of Sun’s management. Our responsibility is to express an opinion on these financialsstatements based on our audits.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts of disclosures in the financialstatements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and cash flows of Sun Bancorp,Inc. and subsidiaries for the year ended December 31, 2001, in conformity withaccounting principles generally accepted in the United States of America.

 

 
| /s/ Parente  Randolph, PC   |   |
|-----------------------------|--------|
|                        |
| Williamsport,  Pennsylvania |
| March 12,  2004             |

 

13

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ITEM 9 - CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE

 

On May 14, 2002 the Audit Committee dismissedParente Randolph, P.C. as the corporation’s independent accountants and engagedPricewaterhouseCoopers LLP as the corporation’s independent accountants. Theengagement of PricewaterhouseCoopers LLP was ratified by the Board ofDirectors.

 

Neither of PricewaterhouseCoopers LLP’s reportson the financial statements for the past two years contained an adverse opinionor a disclaimer of opinion, or was qualified of modified as to uncertainty,audit scope, or accounting principles.

 

During the two most recent fiscal years priorto their dismissal neither of Parente Randolph P.C.’s reports contained anadverse opinion or a disclaimer of opinion, or was qualified of modified as touncertainty, audit scope, or accounting principles and during such years andthrough May 14, 2002 there were no disagreements with Parente Randolph P.C. onany matter of accounting principles or practices, financial statementdisclosure, or auditing scope or procedure, which disagreement, if not resolvedto the satisfaction of Parente Randolph P.C. , would have caused them to makereference to the subject matter of the disagreement in connection with theirreport.

 

During the two most recent fiscal years priorto their engagement and through May 14, 2002 the corporation did not consultwith PricewaterhouseCoopers LLP regarding the application of accountingprinciples to a specific transaction, either completed or proposed, or the typeof audit opinion that might be rendered on the registrant’s financialstatements or any matter that was either the subject of a disagreement or areportable event as described paragraph 304 (a)(1)(v)

 

ITEM 9A - CONTROLS AND PROCEDURES

 

Under the supervision and with theparticipation of management, including the Chief Executive Officer and ChiefFinancial Officer, the effectiveness of the design and operation of Sun’sdisclosure controls and procedures (as defined in Rule 13a-14(c) under theSecurities Exchange Act of 1934) was evaluated as of the end of the periodcovered by this report (the “Evaluation Date”).  Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that, as of the Evaluation Date, Sun’s disclosurecontrols and procedures were effective in timely alerting them to the materialinformation relating to Sun required to be included in its periodic SECfilings.

 

There has been no change in Sun’s internalcontrol over financial reporting that occurred during the fourth quarter offiscal year 2003 that has materially affected, or is reasonably likely tomaterially affect, Sun’s internal control over financial reporting.

 

14

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PART III

 

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

 

Information concerning directors andexecutive officers of the Registrant is incorporated herein by reference to thesections entitled “Information as to Nominees and Directors” and “AdditionalInformation Regarding the Corporation’s Executive Officers” found on pages 22through 28 of the definitive proxy statement for the 2004 Annual Meeting ofShareholders.

 

The information required by this itemregarding identification of the audit committee and audit committee financialexpert disclosure is incorporated by reference to the section entitled“Committees and Meetings of the Corporation’s Board of Directors” found on pages 7 and 8 of the definitive proxy statementfor the 2004 Annual Meeting of Shareholders.

 

Information regarding Section 16(a)beneficial ownership reporting compliance is incorporated by reference to thesection entitled “Section 16(a) Beneficial Ownership Reporting Compliance”found on page 30 of the definitive proxy statement for the 2004 Annual Meetingof Shareholders.

 

Sun has adopted a Code of Ethics applicableto its directors, officers, including the principal executive officer, principalfinancial officer and principal accounting officer or controller or personsperforming similar functions, and employees. The Code is attached as exhibit 14 to this document.

 

ITEM 11 - EXECUTIVE COMPENSATION

 

This information is incorporated herein by referenceto “Compensation of the Boards of Directors” found on page 8, “Board ofDirectors Report on Executive Compensation” and “Audit Committee andCompensation Committee Interlocks and Insider Participation” found on pages 10and 11, “Executive Compensation” on pages 11 through 20, and “PerformanceGraph” found on pages 31 and 32 of the definitive proxy statement for the 2004Annual Meeting of Shareholders.

 

ITEM 12 - SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

This information is incorporated by referenceto “Beneficial Ownership of Sun Bancorp, Inc.’s Stock Owned by Principal Ownersand Management” on pages 28 through 30 of the definitive proxy statement forthe 2004 Annual Meeting of Shareholders.

 

Information related to the EquityCompensation Plan is incorporated by reference to the Equity Compensation Plantable on page 14 of the definitive proxy statement for the 2004 Annual Meetingof Shareholders.

 

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

This information is incorporated by referenceto footnote 19 on page 37 of the 2003 Annual Report to Shareholders and underthe heading of “Certain Relationships and Related Transactions” on page 20 ofthe definitive proxy statement for the 2004 Annual Meeting of Shareholders.

 

15

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ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

This information is incorporated by referenceunder the heading of “Audit Committee Report” on pages 9 and 10 of the definitiveproxy statement for the 2004 Annual Meeting of Shareholders.

 

16

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PART IV

 

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM8-K

 
|      (a) (1) The  following consolidated financial statements and independent auditors report  of Sun Bancorp, Inc. and subsidiaries                                                                                                                                                                                       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| included in the Annual Report to  Shareholders for the year ended December 31, 2003 are incorporated by  reference in Part II, Item 8:                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                |
| Consolidated Balance  Sheets - December 31, 2003 and 2002                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                |
| Consolidated Statements  of Income - Years Ended December 31, 2003, 2002, and 2001                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                |
| Consolidated Statements  of Changes in Shareholders’ Equity - Years Ended December 31, 2003, 2002, and  2001                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                |
| Consolidated Statements  of Cash Flows - Years Ended December 31, 2003, 2002, and 2001                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                |
| Notes to Consolidated  Financial Statements                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                |
| Independent Auditors  Report                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                |
|           (2)  All schedules applicable to the Registrant are shown in the respective  financial statements or the notes thereto.   Financial statement schedules not included are omitted because the  information is not required under the related instructions or it is not  applicable. |
|                                                                                                                                                                                                                                                                                                                                                |
|           (3)  Exhibits                                                                                                                                                                                                                                                                           |

 
| 3.1     |   | The Articles of  Incorporation of the Corporation are incorporated herein by reference to  Exhibit 3 to the Corporation’s Registration Statement on Form S-8 filed with  the Securities and Exchange Commission on August 12, 1998 (Commission File  Number 0-14745). |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                       |
| 3.2     |   | The By-Laws, as amended  and restated, are incorporated herein by reference to Exhibit 3 to the  Corporation’s Annual Report on Form 10-K for the year ended December 31, 1993  (Commission File Number 0-14745).                                                     |
|    |   |                                                                                                                                                                                                                                                                       |
| 10.1(*) |   | Employment agreement  between Robert J. McCormack and Sun Bancorp, Inc. and SunBank dated October  31, 2002 is incorporated by reference to Form 8-K filed March 20, 2003  (Commission File Number 0-14745).                                                               |
|    |   |                                                                                                                                                                                                                                                                       |
| 10.2(*) |   | Employment agreement  between Sandra Miller and Sun Bancorp, Inc. and SunBank dated October 24,  2002 is incorporated by reference to Form 8-K filed March 20, 2003  (Commission File Number 0-14745).                                                                     |
|    |   |                                                                                                                                                                                                                                                                       |
| 10.3(*) |   | Employment agreement  between Thomas W. Bixler and Sun Bancorp, Inc. and SunBank dated November 3,  2002 is incorporated by reference to Form 8-K filed March 20, 2003  (Commission File Number 0-14745).                                                                  |
|    |   |                                                                                                                                                                                                                                                                       |
| 10.4(*) |   | Employment agreement  between Maureen M. Bufalino and Sun Bancorp, Inc. and SunBank dated May 31,  2001, is incorporated by reference to Form 8-K filed March 20, 2003  (Commission File Number 0-14745).                                                                  |

 

17

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| 10.5(*)  |   | Employment agreement  between Wilmer D. Leinbach and Sun Bancorp, Inc., SunBank, and SUBI Services,  LLC dated January 28, 2003 is incorporated by reference to Form 8-K filed  July 1, 2003 (Commission File Number 0-14745).                                                                                                                                                               |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6(*)  |   | Employment agreement  between David M. Diffenderffer and Sun Bancorp, Inc., SunBank, and SUBI  Services, LLC dated January 12, 2004.                                                                                                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7(*)  |   | Employment agreement  between James P. Radick and Sun Bancorp, Inc., SunBank, and SUBI Services,  LLC dated January 12, 2004.                                                                                                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8(*)  |   | Employment agreement  between Byron M. Mertz III and Sun Bancorp, Inc., SunBank, and SUBI Services,  LLC dated January 12, 2004.                                                                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.9(*)  |   | Employment agreement  between Gary Cook and Sun Bancorp, Inc., SunBank, and Bank Capital Services  Corporation dated December 17, 2002.                                                                                                                                                                                                                                                      |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10(*) |   | Employment agreement  between Carol Phillips and Sun Bancorp, Inc., SunBank, and Bank Capital  Services Corporation dated December 17, 2002.                                                                                                                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11(*) |   | Employment agreement between  Christopher J. Fellon and Sun Bancorp, Inc., SunBank, and Mid-Penn Insurance  Associates, Inc. dated December 23, 2002.                                                                                                                                                                                                                                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12(*) |   | Employment agreement  between Cheryl A. Zellers and Sun Bancorp, Inc., SunBank, and Mid-Penn  Insurance Associates, Inc. dated December 23, 2002.                                                                                                                                                                                                                                            |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.13(*) |   | Employment agreement  between Daniel R. Geise and Sun Bancorp, Inc., SunBank, and Mid-Penn  Insurance Associates, Inc. dated December 23, 2002.                                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.14(*) |   | Employment Agreement  by and among Sun Bancorp, Inc., Sun Bank, SUBI Services, LLC, Sentry Trust  Company and Charles E. Nelson, dated as of April 23, 2003 is  incorporated herein by reference to Exhibit 10.1 to Sun’s Registration  Statement on Form S-4 filed with the Securities and Exchange Commission on  January 23, 2004 (Registration Statement No. 333-107944). |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.15(*) |   | Employment Agreement  by and among Sun Bancorp, Inc., Sun Bank, SUBI Services, LLC, Sentry Trust  Company and Carole L. Crist, dated as of April 23, 2003 is incorporated  herein by reference to Exhibit 10.1 to Sun’s Registration Statement on Form  S-4 filed with the Securities and Exchange Commission on January 23, 2004  (Registration Statement No. 333-107944).        |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.16(*) |   | Employment Agreement  by and among Sun Bancorp, Inc., Sun Bank, SUBI Services, LLC, Sentry Trust  Company and Randy L. Martin, dated as of April 23, 2003 is incorporated  herein by reference to Exhibit 10.1 to Sun’s Registration Statement on Form  S-4 filed with the Securities and Exchange Commission on January 23, 2004 (Registration  Statement No. 333-107944).        |

 

18

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| 10.17(*) |   | 1998 Stock Incentive  Plan is incorporated by reference to Exhibit 4.3 of Sun’s Registration  Statement on Form S-8 filed with the Securities and Exchange Commission  on August 12, 1998 (Registration Statement No. 333-61237).                                                                                                                             |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.18(*) |   | 1998 Independent  Directors Stock Option Plan is incorporated by reference to Exhibit 4.3  of Sun’s Registration Statement on Form S-8 filed with the Securities  and Exchange Commission on August 12, 1998) (Registration Statement No.  333-61241).                                                                                                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.19(*) |   | 1998 Employee Stock  Purchase Plan is incorporated by reference to Exhibit 4.3 of Sun’s  Registration Statement on Form S-8 filed with the Securities and  Exchange Commission on August 12, 1998 (Registration Statement No.  333-61249).                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 10.20(*) |   | Consulting Agreement between Sun Bancorp, Inc. and Sidney M. Palmer,  dated as of April 23, 2003 is incorporated herein by reference to Exhibit  10.2. to Sun’s Registration Statement on Form S-4 filed with the Securities  and Exchange Commission on January 23, 2004 (Registration Statement No.  333-107944).                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 13.1     |   | Annual Report to  Shareholders of Sun Bancorp, Inc. for the year ended December 31, 2003 is  filed herewith.  The report, except for  those portions thereof which are expressly incorporated by reference herein,  is furnished for information of the Securities and Exchange Commission only  and it is not considered “filed” as part of the Form 10-K filing. |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 14.1     |   | Code of Ethics.                                                                                                                                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 21.1     |   | Subsidiaries of the  Registrant.                                                                                                                                                                                                                                                                                                                                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 23.1     |   | Consent of  PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                                                           |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 23.2     |   | Consent of Parente  Randolph, PC.                                                                                                                                                                                                                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 31.1     |   | Certification of the president and chief executive officer pursuant  to section 302 of the Sarbanes-Oxley Act of 2002 for the year ended December  31, 2003.                                                                                                                                                                                                                      |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 31.2     |   | Certification of the executive  vice-president and chief financial officer pursuant to section 302 of the  Sarbanes-Oxley Act of 2002 for the year ended December 31, 2003.                                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 32.1     |   | Certification of the president and chief executive officer pursuant  to section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December  31, 2003.                                                                                                                                                                                                                      |
|     |   |                                                                                                                                                                                                                                                                                                                                                                              |
| 32.2     |   | Certification of the executive vice-president and chief financial  officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 for the  year ended December 31, 2003.                                                                                                                                                                                                       |

 

(b)                                 On October 31, 2003 Sun filed aForm 8-K regarding the declaration of the fourth quarter dividend toshareholders.

 

19

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On October 21, 2003 Sun fileda Form 8-K regarding the financial performance of Sun for the three andnine-month periods ended September 30, 2003.

 

(c)                                  Exhibits - the required exhibitsare included under Item 15(a) (3) of the Form 10-K.

 

(d)                                 Financial statement schedules areomitted because the required information is not applicable or is includedelsewhere herein.

 

----

(*) Management contract orcompensatory plan or arrangment.

 

20

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SunBancorp, Inc. has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   | Sun Bancorp, Inc. |                                                                |
|--------|-------------------|---------------------------------------------------------------------|
|   | (Registrant)      |                                                                |
|   |              |
| Date:  | 3/12/04           |                                                                | By: | /s/ Robert J. McCormack |
|   |              | Robert J. McCormack                                                 |
|   |              | President and Chief  Executive Officer(Principal Executive Officer) |
|   |              |                                                                |
| Date:  | 3/12/04           |                                                                | By: | /s/ Wilmer D. Leinbach |
|   |              | Wilmer D. Leinbach                                                  |
|   |              | Exec. VP, Chief  Financial Officer                                  |
|   |              | (Principal  Financial Officer and  Principal Accounting Officer)    |
|        |                   |                                                                     |  |  |  |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned on behalf of the Registrant and in the capacities and on the datesindicated.

 

21

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| **Name**                                                |   |   | **Date** |
|---------------------------------------------------------|--------|--------|----------|
|                                                    |   |   |     |
|  /s/ Robert A.  Hormell                            |   |   | 3/12/04  |
|  Robert A. Hormell                                 |   |   |     |
|  Chairman of the  Board                            |   |   |     |
|                                                    |   |   |     |
|  /s/ Robert J.  McCormack                          |   |   | 3/12/04  |
|  Robert J.  McCormack                              |   |   |     |
|  President, Chief  Executive Officer, and Director |   |   |     |
|                                                    |   |   |     |
|  /s/ Martha A.  Barrick                            |   |   | 3/12/04  |
|  Martha A. Barrick,  Director                      |   |   |     |
|                                                    |   |   |     |
|  /s/ Max E.  Bingaman                              |   |   | 3/12/04  |
|  Max E. Bingaman,  Director                        |   |   |     |
|                                                    |   |   |     |
|  /s/ Maureen M.  Bufalino                          |   |   | 3/12/04  |
|  Maureen M.  Bufalino, Director                    |   |   |     |
|                                                    |   |   |     |
|  /s/ David R. Dieck                                |   |   | 3/12/04  |
|  David R. Dieck,  Director                         |   |   |     |
|                                                    |   |   |     |
|  /s/ Louis A. Eaton                                |   |   | 3/12/04  |
| Louis A. Eaton, Director                                |   |   |     |
|                                                    |   |   |     |
|  /s/ M. Mitchell  Fetterolf                        |   |   | 3/12/04  |
|  M. Mitchell  Fetterolf, Director                  |   |   |     |
|                                                    |   |   |     |
|  /s/ Daniel R.  Geise                              |   |   | 3/12/04  |
|  Daniel R. Geise,  Director                        |   |   |     |
|                                                    |   |   |     |
|  /s/ Stephen J.  Gurgovits                         |   |   | 3/12/04  |
|  Stephen J.  Gurgovits, Director                   |   |   |     |
|                                                    |   |   |     |
|  /s/ George F.  Keller                             |   |   | 3/12/04  |
|  George F. Keller,  Director                       |   |   |     |
|                                                    |   |   |     |
|  /s/ George E.  Logue, Jr.                         |   |   | 3/12/04  |
|  George E. Logue,  Jr., Director                   |   |   |     |
|                                                    |   |   |     |
|  /s/ H. David  Padden                              |   |   | 3/12/04  |
|  H. David Padden,  Director                        |   |   |     |

 

22

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|  /s/ John W. Rose            |   |   | 3/12/04 |
|-----------------------------------|--------|--------|---------|
|  John W. Rose,  Director     |   |   |    |
|                              |   |   |    |
|  /s/ Marlin T.  Sierer       |   |   | 3/12/04 |
|  Marlin T. Sierer,  Director |   |   |    |
|                              |   |   |    |
|  /s/ Dennis J. Van           |   |   | 3/12/04 |
|  Dennis J. Van,  Director    |   |   |    |

 

23

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