**FORM10-Q—QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

 

| **ý****Quarterly Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934**                                                                                                                                                                                            |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **For the quarterly period ended March 31, 2003**                                                                                                                                                                                                                                                 |
| **or**                                                                                                                                                                                                                                                                                            |
| **o****Transition Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                                                                                                                                                |
| **For the transition period  from                     to                     ** |
|                                                                                                                                                                                                                                                                                              |
| **Commission File Number: 0-14745**                                                                                                                                                                                                                                                               |

 

**Sun Bancorp, Inc.**

(Exact name of registrant as 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)                            |
|                                                                                |   |                                  |
| **(570) 523-4330**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |
| **N/A**                                                                             |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.                Yes  ý        No  o

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whetherthe registrant has filed all documents and reports required to be filed bySections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent tothe distribution of securities under a plan confirmed by acourt.              Yes  o        No  o

 

Indicate by check mark whetherthe registrant is an accelerated files (as defined in Rule 12b-2 at theAct).       Yes  ý     No  o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of Common Stock, as of the latestpracticable date.

 

| **Common Stock, No Par Value** |   | **7,253,228**                        |
|--------------------------------|--------|--------------------------------------|
| Class                          |   | Outstanding Shares At April 25, 2003 |

 

 

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SUN BANCORP, INC.FORM 10-QFOR THE QUARTER ENDED MARCH 31, 2003

 

CONTENTS

 
| PART I - FINANCIAL INFORMATION                                                                       |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| Item 1 - Financial Statements:                                                                       |
|                                                                                                 |
|                                                                                                 | Consolidated Balance Sheet as of March 31, 2003 (Unaudited) and  December 31, 2002 |
|                                                                                                 |
|                                                                                                 | Consolidated Statement of Income for the  Three Months Ended March 31, 2003 and March 31, 2002 (Unaudited) |
|                                                                                                 |
|                                                                                                 | Consolidated Statement of Cash Flows for  the Three Months Ended March 31, 2003 and March 31, 2003 (Unaudited) |
|                                                                                                 |
|                                                                                                 | Notes to the Consolidated Financial  Statements (Unaudited) |
|                                                                                                 |
| Item 2 - Management’s Discussion and Analysis  of Financial Condition and Results of Operations |
|                                                                                                 |
| Item 4 - Controls and Procedures                                                                     |
|                                                                                                 |
| PART II - OTHER INFORMATION                                                                          |
|                                                                                                 |
| Item 5 - Other Information                                                                           |
|                                                                                                 |
| Item 6 - Exhibits and Reports on Form 8-K                                                            |
|                                                                                                 |
| SIGNATURES                                                                                           |

 

2

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SUN BANCORP, INC.FORM 10-QPART I

 

Item 1.  Financial Statements

 

SUN BANCORP, INC.CONSOLIDATED BALANCE SHEET

 
| **(In Thousands, Except Share Data)**                                                   |   | **March 31,  2003** |      | **December  31, 2002** |   |
|-----------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                                    |   | **(Unaudited)**     |      |                   |   |
| ASSETS                                                                                  |   |                |      |                   |   |
|                                                                                    |   |                |      |                   |   |
| Cash and due from banks                                                                 |   | $                   | 24,984    |                   | $      | 21,399 |   |
| Interest-bearing deposits in banks                                                      |   | 1,112               |      | 20,170                 |   |
| Total cash and cash equivalents                                                         |   | 26,096              |      | 41,569                 |   |
|                                                                                    |   |                |      |                   |   |
| Investment securities                                                                   |   | 279,167             |      | 219,438                |   |
| Loans, net of allowance for loan and lease  losses of $6,478 in 2003 and $6,206 in 2002 |   | 589,009             |      | 583,519                |   |
| Bank premises and equipment, net                                                        |   | 16,572              |      | 15,809                 |   |
| Goodwill                                                                                |   | 23,345              |      | 22,924                 |   |
| Accrued interest                                                                        |   | 3,607               |      | 3,501                  |   |
| Bank owned life insurance                                                               |   | 31,126              |      | 30,800                 |   |
| Other assets                                                                            |   | 35,831              |      | 33,614                 |   |
| Total assets                                                                            |   | $                   | 1,004,753 |                   | $      | 951,174 |   |

 

3

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| **(In Thousands, Except Share Data)**                                                                                              |   | **March 31,  2003** |      | **December  31, 2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                                                                               |   | **(Unaudited)**     |      |                   |   |
|                                                                                                                               |   |                |      |                   |   |
| LIABILITIES & SHAREHOLDERS’ EQUITY                                                                                        |   |                |      |                   |   |
|                                                                                                                               |   |                |      |                   |   |
| Deposits                                                                                                                           |   |                |      |                   |   |
| Noninterest-bearing                                                                                                                |   | $                   | 57,649    |                   | $      | 59,181 |   |
| Interest-bearing                                                                                                                   |   | 540,418             |      | 528,299                |   |
| Total deposits                                                                                                                     |   | 598,067             |      | 587,480                |   |
|                                                                                                                               |   |                |      |                   |   |
| Short-term borrowings                                                                                                              |   | 66,387              |      | 29,682                 |   |
| Other borrowed funds                                                                                                               |   | 231,900             |      | 222,000                |   |
| Subordinated debentures                                                                                                            |   | 19,655              |      | 19,655                 |   |
| Accrued interest and other liabilities                                                                                             |   | 8,709               |      | 13,110                 |   |
| Total liabilities                                                                                                                  |   | 924,718             |      | 869,927                |   |
|                                                                                                                               |   |                |      |                   |   |
| Shareholders’ equity                                                                                                          |   |                |      |                   |   |
|                                                                                                                               |   |                |      |                   |   |
| Common stock, no par value per share;  20,000,000 authorized shares: issued 7,316,644 shares in 2003 and 7,299,446  shares in 2002 |   | 84,933              |      | 84,591                 |   |
| Retained earnings (deficit)                                                                                                        |   | (4,311              | )         | (5,159                 | )      |
| Accumulated other comprehensive income                                                                                             |   | 1,723               |      | 3,578                  |   |
| Less: Treasury stock, at cost, 149,358  shares in 2002 and 126,717 shares in 2001                                                  |   | (2,310              | )         | (1,763                 | )      |
| Total shareholders’ equity                                                                                                    |   | 80,035              |      | 81,247                 |   |
| Total liabilities and shareholders’ equity                                                                                    |   | $                   | 1,004,753 |                   | $      | 951,174 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

4

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SUN BANCORP, INC.

CONSOLIDATEDSTATEMENT OF INCOME

(UNAUDITED)

 
| **(In Thousands, Except for Per Share Data)**                   |   | **For the  Three Months Ended  March 31,** |   |
|-----------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                            |   | **2003**                                   |   | **2002** |   |
|                                                            |   |                                       |   |   |   |
| Interest and dividend income:                                   |   |                                       |   |   |   |
| Interest and fees on loans                                      |   | $                                          | 9,695  |   | $ | 9,694 |   |
| Income from investment securities:                              |   |                                       |   |   |   |
| Taxable                                                         |   | 2,299                                      |   | 3,549 |   |
| Tax exempt                                                      |   | 231                                        |   | 260 |   |
| Dividends                                                       |   | 111                                        |   | 134 |   |
| Interest on deposits in banks                                   |   | 52                                         |   | 104 |   |
| Total interest and dividend income                              |   | 12,388                                     |   | 13,741 |   |
|                                                            |   |                                       |   |   |   |
| Interest expense:                                               |   |                                       |   |   |   |
| Interest on deposits                                            |   | 3,127                                      |   | 4,000 |   |
| Interest on short-term borrowings                               |   | 107                                        |   | 72 |   |
| Interest on other borrowed funds                                |   | 3,138                                      |   | 3,153 |   |
| Interest on subordinated debentures                             |   | 468                                        |   | 480 |   |
|                                                            |   |                                       |   |   |   |
| Total interest expense                                          |   | 6,840                                      |   | 7,705 |   |
|                                                            |   |                                       |   |   |   |
| Net interest income                                             |   | 5,548                                      |   | 6,036 |   |
|                                                            |   |                                       |   |   |   |
| Provision for loan and lease losses                             |   | 405                                        |   | 405 |   |
|                                                            |   |                                       |   |   |   |
| Net interest income, after provision for  loan and lease losses |   | $                                          | 5,143  |   | $ | 5,631 |   |

 

5

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| **(In Thousands, Except for Per Share Data)**                 |   | **For the  Three Months Ended  March 31,** |   |
|---------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                          |   | **2003**                                   |   | **2002** |   |
| Non-interest income:                                          |   |                                       |   |   |   |
| Service charges on deposit accounts                           |   | $                                          | 845    |   | 520 |   |
| Trust income                                                  |   | 219                                        |   | 154 |   |
| Net security gains                                            |   | 1,496                                      |   | 95 |   |
| Income from investment product sales                          |   | 24                                         |   | 105 |   |
| Bank owned life insurance                                     |   | 325                                        |   | 45 |   |
| Income from insurance subsidiary                              |   | 23                                         |   | 30 |   |
| Gain on sale of loans                                         |   | 261                                        |   | 28 |   |
| Other income                                                  |   | 697                                        |   | 143 |   |
| Total non-interest income                                     |   | 3,890                                      |   | 1,120 |   |
|                                                          |   |                                       |   |   |   |
| Non-interest expense:                                         |   |                                       |   |   |   |
| Salaries and employee benefits                                |   | 3,166                                      |   | 2,804 |   |
| Net occupancy expenses                                        |   | 383                                        |   | 274 |   |
| Furniture and equipment expenses                              |   | 487                                        |   | 397 |   |
| Expenses of insurance subsidiary                              |   | 6                                          |   | 43 |   |
| Other expenses                                                |   | 2,521                                      |   | 1,382 |   |
| Total non-interest expenses                                   |   | 6,563                                      |   | 4,900 |   |
|                                                          |   |                                       |   |   |   |
| Income before income tax provision                            |   | 2,470                                      |   | 1,851 |   |
| Income tax provision                                          |   | 436                                        |   | 299 |   |
| Net income                                                    |   | $                                          | 2,034  |   | $ | 1,552 |   |
|                                                          |   |                                       |   |   |   |
| PER SHARE DATA                                                |   |                                       |   |   |   |
|                                                          |   |                                       |   |   |   |
| Net income per share – Basic                             |   | $                                          | 0.28   |   | $ | 0.22 |   |
|                                                          |   |                                       |   |   |   |
| Weighted average number of shares  outstanding – Basic   |   | 7,182,149                                  |   | 7,142,654 |   |
|                                                          |   |                                       |   |   |   |
| Net income per share – Diluted                           |   | $                                          | 0.28   |   | $ | 0.22 |   |
|                                                          |   |                                       |   |   |   |
| Weighted average number of shares  outstanding – Diluted |   | 7,200,970                                  |   | 7,163,900 |   |
|                                                          |   |                                       |   |   |   |
| Dividends paid                                                |   | $                                          | 0.165  |   | $ | 0.15 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

6

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SUN BANCORP, INC.CONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED)

 
| **(In Thousands)**                                                             |   | **For the  Three Months  Ended March 31,** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                           |   | **2003**                                   |   | **2002** |   |
| Cash flows from operating activities:                                          |   |                                       |   |   |   |
| Net income                                                                     |   | $                                          | 2,034  |   | $ | 1,552 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |   |                                       |   |   |   |
| Provision for loan and lease losses                                            |   | 405                                        |   | 405 |   |
| Provision for depreciation                                                     |   | 257                                        |   | 256 |   |
| Amortization and accretion of securities,  net                                 |   | 263                                        |   | 316 |   |
| Net security gains                                                             |   | (1,496                                     | )      | (95 | ) |
| Increase in accrued interest and other  assets                                 |   | (1,454                                     | )      | (19,812 | ) |
| Decrease in accrued interest and other  liabilities                            |   | (4,418                                     | )      | (838 | ) |
| Net cash used in operating activities                                          |   | (4,409                                     | )      | (18,216 | ) |
|                                                                           |   |                                       |   |   |   |
| Cash flows from investing activities:                                          |   |                                       |   |   |   |
| Proceeds from sales of investment  securities                                  |   | 37,782                                     |   | 837 |   |
| Proceeds from maturities of investment  securities                             |   | 24,814                                     |   | 23,766 |   |
| Purchases of investment securities                                             |   | (123,902                                   | )      | (30 | ) |
| Cash paid for acquisitions                                                     |   | (36                                        | )      | — |   |
| Net increase in loans                                                          |   | (6,047                                     | )      | (32,119 | ) |
| Purchases of investments in limited  partnerships                              |   | —                                     |   | (25 | ) |
| Capital expenditures                                                           |   | (974                                       | )      | (167 | ) |
| Net cash (used in) provided by investing  activities                           |   | (68,363                                    | )      | (7,638 | ) |
|                                                                           |   |                                       |   |   |   |
| Cash flows from financing activities:`                                         |   |                                       |   |   |   |
| Net increase in deposits                                                       |   | 10,587                                     |   | 2,877 |   |
| Net increase in short-term borrowings                                          |   | 36,675                                     |   | 98 |   |
| Net increase in long-term borrowings                                           |   | 11,900                                     |   | 98 |   |
| Cash dividends paid                                                            |   | (1,186                                     | )      | (1,070 | ) |
| Proceeds from sale of stock for employee  benefits program                     |   | 221                                        |   | 10 |   |
| Purchase of treasury stock                                                     |   | (898                                       | )      | (100 | ) |
| Net cash provided by financing activities                                      |   | 57,299                                     |   | 1,815 |   |
|                                                                           |   |                                       |   |   |   |
| Net increase in cash and cash equivalents                                      |   | (15,473                                    | )      | (24,139 | ) |
| Cash and cash equivalents at beginning of  period                              |   | 41,569                                     |   | 44,983 |   |
| Cash and cash equivalents at end of period                                     |   | $                                          | 26,096 |   | $ | 20,844 |   |

 

7

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| **(In Thousands)**                                 |   | **For the Three Months  Ended March 31,** |   |
|----------------------------------------------------|--------|-------------------------------------------|--------|
|                                               |   | **2003**                                  |   | **2002** |   |
|                                               |   |                                      |   |   |   |
| Supplemental disclosure of cash flow  information: |   |                                      |   |   |   |
|                                               |   |                                      |   |   |   |
| Cash paid during the period for:                   |   |                                      |   |   |   |
|                                               |   |                                      |   |   |   |
| Interest                                           |   | $                                         | 7,199  |   | $ | 8,358 |   |
|                                               |   |                                      |   |   |   |
| Income taxes                                       |   | $                                         | — |   | $ | 750 |   |

 

Loans with anestimated value of  $147,000 and$154,000 were reclassified to foreclosed assets held for sale during thethree-month periods ended March 31, 2003 and 2002, respectively.

 

Theaccompanying notes are an integral part of these financial statements.

 

8

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SUN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Forward-LookingStatements:

 

Management of the Corporationhas made forward-looking statements in this Form 10-Q.  These forward-looking statements are subjectto risks and uncertainties. Forward-looking statements include information concerning possible orassumed future results of operations of the Corporation and itssubsidiaries.  When words such as“believes,” “expects,” “anticipates” or similar expressions occur in the Form10-Q, management is making forward-looking statements.

 

Readers should note that manyfactors, some of which are discussed elsewhere in this report and in thedocuments that management incorporates by reference, could affect the futurefinancial results of the Corporation and its subsidiaries, both individuallyand collectively, and could cause those results to differ materially from thoseexpressed in the forward-looking statements contained or incorporated byreference in this Form 10-Q.  Thesefactors include:

 

•              operating, legal and regulatoryrisks;

 

•           economic, political and competitive forcesaffecting banking, securities, asset management and credit services businesses;and

 

•           the risk that management’s analysis of theserisks and forces could be incorrect and/or that the strategies developed toaddress them could be unsuccessful.

 

The Corporation undertakes noobligation to publicly revise or update these forward-looking statements toreflect events or circumstances that arise after the date of this report.  Readers should carefully review the riskfactors described in other documents that Sun files periodically with theSecurities and Exchange Commission.

 

Note 1 — Basis of InterimPresentation

 

Theconsolidated financial statements include the accounts of Sun Bancorp, Inc., andits wholly-owned subsidiaries: SunBank, SUBI Investment Company, Beacon LifeInsurance Company, and Sun Bancorp Statutory Trust I.  Sun also holds thirty percent ownership in Sun Abstract andSettlement Services.  The transactionsof Beacon Life Insurance Company and Sun Abstract and Settlement Services arenot material to the consolidated financial statements.  All significant intercompany balances andtransactions have been eliminated in consolidation.

 

Theaccompanying unaudited consolidated financial statements for the interimperiods do not include all of the information and footnotes required bygenerally accepted accounting principles. However, in the opinion of management, all adjustments necessary for a fairpresentation of the results of the interim period have been included.  Operating results for the three months endedMarch 31, 2003 are not necessarily indicative of the results that may beexpected for the year ended December 31, 2003.

 

The accountingpolicies followed in the presentation of interim financial results are the sameas those followed on an annual basis. These policies are presented on pages 18 thru 20 of the 2002 AnnualReport to Shareholders.

 

9

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Note 2 – Net Income PerShare

 

Net income pershare is computed based on the weighted average number of shares of stockoutstanding for each period presented. Statement of Financial Accounting Standards No. 128, “Earnings PerShare,” requires presentation of two amounts, basic and diluted net income pershare.  Basic earnings per sharecalculates net income divided by the average number of shares outstanding forthe period.  Diluted earnings per sharecalculates net income divided by the sum of the average number of sharesoutstanding and the effect that, if all were exercised, the granted stockoptions would have on the number of shares outstanding for the period.

 

The followingdata shows the amounts used in computing net income per share and the weightedaverage number of shares of dilutive stock options for the periods ended March31, 2003 and 2002:

 
|                                |   | **For the  Three Months Ended March 31,** |      |
|-------------------------------------|--------|-------------------------------------------|-----------|
|                                |   | **Income  Numerator**                     |      | **Common  Shares  Denominator** |   | **Net  Income Per  Share** |   |
|                                |   |                                      |      |   |   |   |   |
| 2003                                |   |                                      |      |   |   |   |   |
| Net income per share – Basic   |   | $                                         | 2,034,000 |   | 7,182,149 |   | $ | 0.28 |   |
| Dilutive effect of stock options    |   |                                      |      | 18,821 |   |   |   |
| Net income per share – Diluted |   | $                                         | 2,034,000 |   | 7,200,970 |   | $ | 0.28 |   |
|                                |   |                                      |      |   |   |   |   |
| 2002                                |   |                                      |      |   |   |   |   |
| Net income per share – Basic   |   | $                                         | 1,552,000 |   | 7,142,654 |   | $ | 0.22 |   |
| Dilutive effect of stock options    |   |                                      |      | 21,246 |   |   |   |
| Net income per share – Diluted |   | $                                         | 1,552,000 |   | 7,163,900 |   | $ | 0.22 |   |

 

10

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Note 3 – ConsolidatedStatement of Changes in Shareholder’s Equity

 

The purpose ofreporting comprehensive income is to report a measure of all changes in SunBancorp, Inc.’s equity resulting from economic events other than transactionswith shareholders in their capacity as shareholders.  For Sun Bancorp, Inc., “comprehensive income” includestraditional income statement amounts as well as unrealized gains and losses oncertain investments in debt and equity securities (i.e. available-for-salesecurities).  Unrealized gains andlosses are part of comprehensive income, therefore comprehensive income mayvary substantially between reporting periods due to fluctuations in the marketprices of securities held.

 

**For theyears ended December 31, 2001, 2002 and the three months ended March 31, 2003**

*(InThousands, Except for Share Data)*

 
|                                                                                                    |   | **Common Stock** |       | **Retained  Earnings  (Deficit)** |       | **Accumulated  Other  Comprehensive  Income(Loss)** |       | **Treasury  Stock** |       | **Total  Shareholders  Equity** |       |
|---------------------------------------------------------------------------------------------------------|--------|------------------|------------|-----------------------------------|------------|-----------------------------------------------------|------------|---------------------|------------|---------------------------------|------------|
|                                                                                                    |   | **Shares**       |       | **Amount**                        |       |                                                |
|                                                                                                    |   |             |       |                              |       |                                                |       |                |       |                            |       |   |   |
| Balance, December 31, 2000                                                                              |   | 7,227            |       | 81,632                            |       | (11,177                                             | )          | (1,591              | )          | (6,337                          | )          | 62,527 |   |
| Comprehensive income:                                                                                   |   |             |       |                              |       |                                                |       |                |       |                            |       |   |   |
| Net income                                                                                              |   | —           |       | —                            |       | 8,350                                               |       | —              |       | —                          |       | 8,350 |   |
| Unrealized gains on securities available  for sale, net of reclassification adjustments and tax effects |   | —           |       | —                            |       | —                                              |       | 3,660               |       | —                          |       | 3,660 |   |
| Total comprehensive income                                                                              |   |             |       |                              |       |                                                |       |                |       |                            |       | 12,010 |   |
|                                                                                                    |   |             |       |                              |       |                                                |       |                |       |                            |       |   |   |
| Stock issued:                                                                                           |   |             |       |                              |       |                                                |       |                |       |                            |       |   |   |
| Employee benefit plans                                                                                  |   | 9                |       | 123                               |       | —                                              |       | —              |       | —                          |       | 123 |   |
| Purchase of Guaranty Bank, N.A. (553,558  treasury shares)                                              |   | —           |       | 1,810                             |       | —                                              |       | —              |       | 6,388                           |       | 8,198 |   |
| Purchase of treasury stock (80,535 shares)                                                              |   | —           |       | —                            |       | —                                              |       | —              |       | (1,213                          | )          | (1,213 | ) |
| Cash dividends declared, $.60 per share                                                                 |   | —           |       | —                            |       | (4,134                                              | )          | —              |       | —                          |       | (4,134 | ) |
| Balance, December 31, 2001                                                                              |   | 7,236            |       | 83,565                            |       | (6,961                                              | )          | 2,069               |       | (1,162                          | )          | 77,511 |   |
| Comprehensive income:                                                                                   |   |             |       |                              |       |                                                |       |                |       |                            |       |   |   |
| Net income                                                                                              |   | —           |       | —                            |       | 6,416                                               |       | —              |       | —                          |       | 6,416 |   |
| Unrealized gains on securities available  for sale, net of reclassification adjustments and tax effects |   | —           |       | —                            |       | —                                              |       | 1,509               |       | —                          |       | 1,509 |   |
| Total comprehensive income                                                                              |   |             |       |                              |       |                                                |       |                |       |                            |       | 7,925 |   |
|                                                                                                    |   |             |       |                              |       |                                                |       |                |       |                            |       |   |   |
| Stock issued:                                                                                           |   |             |       |                              |       |                                                |       |                |       |                            |       |   |   |
| Employee benefit plans                                                                                  |   | 63               |       | 1,007                             |       | —                                              |       | —              |       | —                          |       | 1,007 |   |
| Purchase of treasury stock (33,300 shares)                                                              |   | —           |       | —                            |       | —                                              |       | —              |       | (601                            | )          | (601 | ) |
| Cash dividends declared, $.66 per share                                                                 |   | —           |       | —                            |       | (4,614                                              | )          | —              |       | —                          |       | (4,614 | ) |
| Tax benefit of exercised stock options                                                                  |   | —           |       | 19                                |       | —                                              |       | —              |       | —                          |       | 19 |   |
| Balance, December 31, 2002                                                                              |   | 7,299            |       | 84,591                            |       | (5,159                                              | )          | 3,578               |       | (1,763                          | )          | 81,247 |   |
| **Comprehensive income:**                                                                               |   |             | ** ** |                              | ** ** |                                                | ** ** |                | ** ** |                            | ** ** |   | ** ** |
| Net income                                                                                              |   | **—**       | ** ** | **—**                        | ** ** | **2,034**                                           | ** ** | **—**          | ** ** | **—**                      | ** ** | **2,034** | ** ** |
| Unrealized gains on securities available  for sale, net of reclassification adjustments and tax effects |   | **—**       | ** ** | **—**                        | ** ** | **—**                                          | ** ** | **(1,855**          | **)**      | **—**                      | ** ** | **(1,855** | **)** |
| **Total comprehensive  income**                                                                         |   |             | ** ** |                              | ** ** |                                                | ** ** |                | ** ** |                            | ** ** | **179** | ** ** |
|                                                                                                    |   |             | ** ** |                              | ** ** |                                                | ** ** |                | ** ** |                            | ** ** |   | ** ** |
| Stock issued:                                                                                           |   |             | ** ** |                              | ** ** |                                                | ** ** |                | ** ** |                            | ** ** |   | ** ** |
| Employee benefit plans                                                                                  |   | **18**           | ** ** | **342**                           | ** ** | **—**                                          | ** ** | **—**          | ** ** | **—**                      | ** ** | **342** | ** ** |
| Purchase of treasury stock (47,750 shares)                                                              |   | **—**       | ** ** | **—**                        | ** ** | **—**                                          | ** ** | **—**          | ** ** | **(547**                        | **)**      | **(547** | **)** |
| Cash dividends declared, $.165 per share                                                                |   | **—**       | ** ** | **—**                        | ** ** | **(1,186**                                          | **)**      | **—**          | ** ** | **—**                      | ** ** | **(1,186** | **)** |
| Tax benefit of exercised stock options                                                                  |   | **—**       | ** ** |                              | ** ** | **—**                                          | ** ** | **—**          | ** ** | **—**                      | ** ** | **—** | ** ** |
| **Balance, March 31, 2003**                                                                             |   | **7,317**        | ** ** | **84,933**                        | ** ** | **(4,311**                                          | **)**      | **1,723**           | ** ** | **(2,310**                      | **)**      | **80,035** | ** ** |

 

11

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Note 4 – InvestmentSecurities

 

The amortizedcost and fair value of investment securities at September 30, 2002 and December31, 2002 were as follows:

 
| **(In Thousands)**                               |   | **March 31,  2003** |    |
|--------------------------------------------------|--------|---------------------|---------|
|                                             |   | **Amortized  Cost** |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
|                                             |   |                |    |   |   |   |   |   |   |
|                                             |   |                |    |   |   |   |   |   |   |
| Debt securities:                                 |   |                |    |   |   |   |   |   |   |
| Obligations of U.S. government agencies          |   | $                   | 227,686 |   | $ | 2,976 |   | $ | (1,419 | ) | $ | 229,243 |   |
| Obligations of states and political subdivisions |   | 18,186              |    | 1,095 |   | — |   | 19,281 |   |
| Other corporate                                  |   | 13,467              |    | 59 |   | (113 | ) | 13,413 |   |
| Total debt securities                            |   | $                   | 259,339 |   | $ | 4,130 |   | $ | (1,532 | ) | $ | 261,937 |   |
|                                             |   |                |    |   |   |   |   |   |   |
| Equity securities:                               |   |                |    |   |   |   |   |   |   |
| Marketable equity securities                     |   | $                   | 3,905   |   | $ | 226 |   | $ | (213 | ) | $ | 3,918 |   |
| Restricted equity securities                     |   | 13,312              |    | — |   | — |   | 13,312 |   |
| Total equity securities                          |   | $                   | 17,217  |   | $ | 226 |   | $ | (213 | ) | $ | 17,230 |   |
|                                             |   |                |    |   |   |   |   |   |   |
| Total                                            |   | $                   | 276,556 |   | $ | 4,356 |   | $ | (1,745 | ) | $ | 279,167 |   |

 
|                                              |   | **December 31, 2002** |    |
|---------------------------------------------------|--------|-----------------------|---------|
|                                              |   | **Amortized  Cost**   |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| Debt securities:                                  |   |                  |    |   |   |   |   |   |   |
| Obligations of U.S. government agencies           |   | $                     | 173,552 |   | $ | 4,584 |   | $ | (133 | ) | $ | 178,003 |   |
| Obligations of states and political  subdivisions |   | 19,767                |    | 836 |   | — |   | 20,603 |   |
| Other corporate                                   |   | 5,575                 |    | 388 |   | (75 | ) | 5,888 |   |
| Total debt securities                             |   | 198,894               |    | 5,808 |   | (208 | ) | 204,494 |   |
|                                              |   |                  |    |   |   |   |   |   |   |
| Equity securities:                                |   |                  |    |   |   |   |   |   |   |
| Marketable equity securities                      |   | 3,111                 |    | 136 |   | (315 | ) | 2,932 |   |
| Restricted equity securities                      |   | 12,012                |    | — |   | — |   | 12,012 |   |
| Total equity securities                           |   | 15,123                |    | 136 |   | (315 | ) | 14,944 |   |
|                                              |   |                  |    |   |   |   |   |   |   |
| Total                                             |   | $                     | 214,017 |   | $ | 5,944 |   | $ | (523 | ) | $ | 219,438 |   |

 

12

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Note 5 – Loans

 

The balancesfor principal loan categories are as follows:

 
|                                        |   | **March 31,  2003** |    | **December  31, 2002** |   |
|---------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                        |   |                |    |                   |   |
| Real estate – Mortgage                 |   | $                   | 402,393 |                   | $      | 404,350 |   |
| Real estate - Construction                  |   | 18,231              |    | 17,721                 |   |
| Agricultural                                |   | 172                 |    | 138                    |   |
| Commercial and industrial                   |   | 60,400              |    | 54,624                 |   |
| Lease – Auto                           |   | 35,025              |    | 29,698                 |   |
| Lease - Equipment                           |   | 5,885               |    | 4,955                  |   |
| Individual                                  |   | 81,726              |    | 85,920                 |   |
| Other                                       |   | 589                 |    | 328                    |   |
| Total                                       |   | $                   | 604,421 |                   | $      | 597,734 |   |
|                                        |   |                |    |                   |   |
| Less:                                       |   |                |    |                   |   |
| Unearned income & deferred loan fees    |   | (8,815              | )       | (7,945                 | )      |
| Unamortized net discount on purchased loans |   | (119                | )       | (64                    | )      |
| ALLL                                        |   | (6,478              | )       | (6,206                 | )      |
| Net Loans                                   |   | $                   | 589,009 |                   | $      | 583,519 |   |

 

13

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Note 5 – Stock Options

 

Sun has threecommon stock plans for employees and directors.  The 1998 Stock Incentive Plan, administered by a Board ofDirectors committee of independent directors, allows for 716,625 shares ofcommon stock for key officers and other management employees in the form ofqualified options, non qualified options, stock appreciation rights, orrestrictive stock.  The 1998 IndependentDirectors Stock Option Plan allows 115,763 shares of common stock to be issuedfor non-employee directors.  Optionsunder those plans expire ten years after the grant date.  Both of these plans terminate in 2008.

 

The 1998Employee Stock Purchase Plan, which permits all employees to purchase commonstock at an option price per share not less than 85% of the market value on theexercise date was allocated 248,063 shares. Options granted to date have been awarded at 90% of the market value onthe exercise date.  Each option underthe 1998 Employee Stock Purchase Plan expires no later than 5 years from thegrant date.  This plan terminates in2008.

 

Sun appliesAccounting Principles Board Opinion 25 and related interpretations to accountfor its common stock plans. Accordingly, Sun has not recognized compensation expense for theplans.  Had compensation cost beendetermined based on fair values at the grant dates (pursuant to SFAS 123),Sun’s net income and earnings per share for the three months ended March 31,2003 and 2002

 

|                       |   | **2002** |      | **2001** |   |
|----------------------------|--------|----------|-----------|----------|--------|
| Net Income:                |   |     |      |     |   |
| As reported                |   | $        | 2,034,000 |     | $      | 1,552,000 |   |
| Pro forma                  |   | $        | 2,031,000 |     | $      | 1,419,000 |   |
|                       |   |     |      |     |   |
| Earnings per share - Basic |   |     |      |     |   |
| As reported                |   | $        | 0.28      |     | $      | 0.22 |   |
| Pro forma                  |   | $        | 0.28      |     | $      | 0.20 |   |

 

14

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

(in thousands,except per share amounts)

 

The followingis management’s discussion and analysis of the significant changes in theresults of operations, capital resources, and liquidity presented in itsaccompanying consolidated financial statements for Sun Bancorp, Inc., a bankholding company, and its wholly-owned subsidiaries, SunBank, Beacon LifeInsurance Company, and Sun Bancorp Statutory Trust I.  Sun Bancorp, Inc. also holds thirty percent ownership in SunAbstract and Settlement Services.  SunBancorp, Inc.’s consolidated financial condition and results of operationsconsist almost entirely of SunBank’s financial condition and results ofoperations.  This discussion should beread in conjunction with the 2002 Annual Report, which is incorporated hereinby reference.  Current performance doesnot guarantee or assure similar performance in the future, and may not beindicative of future results.

 

Results ofOperations – Three Months Ended March 31, 2003 and 2002

 

Sun Bancorp,Inc.’s earnings of $2,034,000 ($0.28 per share basic and diluted) for the threemonths ended March 31, 2003 were $482 ($0.06 per share basic and diluted)higher than the three months ended 2002.

 

Comparativeinformation for the three months ended March 31, 2003 and 2002 is impacted bythe acquisition of Bank Capital Services Corporation in January 2003, whichprovided pre-tax income of $59 for the first quarter of 2003.

 

Net interestincome decreased 8.1% to $5,548 for the three months ended March 31, 2003 ascompared to $6,036 for the same period of 2002.  Total interest and dividend income decreased $1,353 to $12,388for the three months ended March 31, 2003. Interest and fees on loans remained flat at $9,695 for the three monthsended March 31, 2003 as compared to 2002 despite net loan growth of $41,929over the same period.  The stableinterest and fees on loans is due to higher-rate loans prepaying and theirreplacement by predominately lower rate variable loans.  Interest and dividends on the investmentportfolio decreased $1,302 to $2,641 for the three months ended March 31, 2003due to accelerated prepayments as a result of the current low rateenvironment.  Interest on deposits inbanks decreased 50.0% or $52 to $52 for the three months ended March 31, 2003.Total interest expense decreased 11.2% or $865 to $6,840 for the three monthsended March 31, 2003, as compared to 2002. The decrease is the result of management’s focus on growing low-costcore deposits (non-time deposits) and the rate reductions by the FederalReserve during the past year.  Intereston deposits decreased 21.8%, or $873 as a result of the interest rate decreaseswhen comparing the three months ended March 31, 2003 to 2002.

 

The provisionfor loan and lease losses remained constant at $405 for the three months endedMarch 31, 2003.  The provision hasremained constant as loan growth has slowed in comparison to 2002 and Sun’scredit quality continues to remain strong.

 

15

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Results ofOperations – Three Months Ended March 31, 2003 and 2002 (Continued)

 

Non-interestincome, excluding security gains, increased $1,369 or 133.6% to $2,394 for thethree months ended March 31, 2003 as compared to 2002.  Increased service charges on depositsaccounted for $325 of the increase.  Theincrease in service charges was primarily the result of a program implementedduring 2002 involving overdraft protection. The addition of bank owned life insurance during 2002 represented $280of the increase.  The bank owned lifeinsurance was purchased to supplement future increases in employee benefitplans.  During late 2002, Sun began tosell its residential mortgages as they were originated.  This program added $233 in other income forthe three months ended March 31, 2003 as compared to 2002.  Other income increased $554 for therespective period as the addition of Bank Capital Services provided $303 inincome.  Offsetting the increases inother income was a decrease in income from investment product sales of $81 whencomparing the three months ended March 31, 2003 to 2002 as dollars have flowedout of the stock/bond markets and into banks.

 

Non-interestexpenses increased $1,663 or 33.9% to $6,563 for the three months ended March31, 2003 as compared to 2002.  Allcategories of other expenses have been impacted by the acquisition of BankCapital Services Corporation (Bank Capital) during January 2003.  In aggregate, Bank Capital represented $244or 14.7% of the total increase.  Theoutsourcing of operational processing increased expenses $300 or 18.0% of thetotal increase.  Salaries and employeebenefits increased $362 or 12.9% due to Bank Capital and increased employeebenefit costs.  Net occupancy expenseand furniture and equipment expenses increased as Sun undertakes infrastructureimprovements and expanded into its new corporate headquarters.  Other expenses increased 82.4% or $1,139 dueto increases in normal business expenses, Bank Capital, and the outsourcing ofoperational processing and certain other support functions.

 

Balance Sheet– March 31, 2003 and December 31, 2002

 

Total assetswere $1,004,753 at March 31, 2003, an increase of $53,579 from $951,174 atDecember 31, 2002.  Cash and cashequivalents decreased $15,473, or 37.2% from $41,569 at December 31, 2002.  The decrease in cash and cash equivalentswas the result of management using the funds to fund net loan growth of $5,490and investment growth of $59,729 from December 31, 2002.  The investment growth was also funded byshort term borrowings as management purchased investments ahead of scheduledreceipt of principal and interest payments from the investment portfolio.  In addition, the portfolio has beenrealigned to spread the future cash flow over the next 36 months.  Amajority of the portfolio was projected to experience accelerated prepayments,which would have resulted in excess of $100 million in principal payments toSun during 2003.  To combat the accelerated prepayments Sun began aprogram during late 2002 to sell bonds that have a weightedaverage life of less than one year and are experiencing accelerated prepayments..  The reinvestment of the proceeds of the sales has been in CMOs thathave an average life of 3-4 years in a flat rate environment and extension ofanother 3 years in an up 200bp rate environment, which will

 

16

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provide a constant level of cash flow asinterest rates move up the curve.  A byproduct of this strategy to spreadthe future cash flows has been the recognition of $1.496 in gains for the threemonths ended March 31, 2003. The growth in the loan portfolio hasoccurred primarily in the commercial/industrial category.  Bank-owned life insurance of $31,126 wasadded to the balance sheet during 2002 as a vehicle to offset the futureincreases in employee benefit costs.

 

Totalliabilities increased $54,791 to $924,718 at March 31, 2003.  Total deposits increased $10,587 to $598,067as core deposits (non-time deposits) increased $2,200 and time depositsincreased $8,387.  Since December 31,2002, savings and NOW accounts have increased $4,476 and $1,535 respectivally,while money market accounts have decreased $2,279.  Since December 31, 2002, non-interest-bearing deposits havedecreased $1,532 or 2.6%.  Short termborrowings increased $36,705 from December 31, 2002 as management purchasedinvestments in advance of receipt of principal and interest payments.

 

Sun Bancorp,Inc.’s total shareholders’ equity decreased $1,212 from December 31, 2002 toMarch 31, 2003.  The decrease is theresult of several factors.  First, SunBancorp, Inc.’s accumulated other comprehensive income (66% of the change inthe market value of Sun Bancorp, Inc.’s investment portfolio) decreased 51.8%,or $1,855, to $1,723 from $3,578 at December 31, 2002 because of changes in themarket value of Sun Bancorp, Inc.’s investment securities.  Second, net income of $2,034 augmented shareholders’equity, however; this augmentation was offset by an increase in treasury stockof $547 as Sun Bancorp, Inc. purchased 47,750 shares of treasury stock at anaverage cost of $18.79 per share over the first three months of 2003.  The purchase of treasury shares was off setby the issuance of 25,109 shares from treasury for the purchase of Bank CapitalServices Corporation.  Sun Bancorp, Inc.also paid $1,86 in dividends to shareholders during the three months endedMarch 31, 2003.

 

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Allowance forLoan and Lease Losses 

 

SunBank’sallowance for loan and lease losses is increased through periodic provisionsfor loan and lease losses, and that provision is reported as an expense incurrent income.  Loan losses are chargedagainst the allowance for loan and lease losses in the period in which they aredetermined to be uncollectible. Recoveries of previously charged off loans are credited to the allowanceas they are received.  Managementmaintains the allowance for loan and lease losses at a level it believes willbe adequate to absorb probable credit losses in the existing loanportfolio.  Management believes theallowance for loan and lease losses is adequate at March 31, 2003.

 

Management’sanalysis incorporates many factors, including current and anticipated economicconditions, loss experience, loan portfolio composition, anticipated losses,and unfunded commitments.  Forsignificant real estate properties, management obtains independent valueappraisals.  SunBank also retainsconsultants to conduct independent, periodic loan quality reviews, whichmanagement incorporates into its allowance for loan and lease losses analysis.

 

Managementdetermines its allowance for loan and lease losses based on criteria andanalysis developed to evaluate credit risk within each loan category.  Each loan category’s unique riskcharacteristics guide management’s analysis and determination of an adequatespecific reserve for that category.  Forreal estate loans, management considers factors that include historical lossrates, past due levels, collateral values, and anticipated economicconditions.  For commercial andindustrial loans, management evaluates several factors including historicalloss experience, current loan grades, expected future cash flows, individualloan reviews, internal and external analysis, and anticipated economicconditions.  For individual (consumer)loans, management evaluates factors such as historical and projected lossrates, past due levels, collateral values, and anticipated economic conditions.

 

SunBank’sallowance for loan and lease losses components is based on loss rates by loangrade, economic trends, and other risk factors.  Management determines estimated loss rates by loan grade based oncurrent loan grade, remaining term, loan type, periodic quantification ofactual losses over a period of time, and other factors.  Management believes its methodologyreasonably measures the credit risk not captured in specific allocations andprovides for an adequate aggregate allowance for loan and lease losses.

 

As managementcontinues to closely monitor the allowance for loan and lease losses, theprovision for these losses remained constant at $405 for the three months endedMarch 31, 2003 and 2002.  The stableprovision was the result of 0.9% loan growth since December 31, 2002 coupledwith net charge-offs of $133 for the three months ended March 31, 2003.  These factors resulted in an allowance forloan and lease losses of 1.09% of total loans and leases at March 31, 2003 ascompared to 1.18% at March 31, 2002 and 1.05% at December 31, 2002.

 

18

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Managementcontinues to enhance its methodology for analyzing the allowance for loan andleases losses and for assigning reserves. However, the allowance for loan and lease losses still only representsmanagement’s estimate of an amount adequate to absorb probable loan losses dueto credit quality.  Management cannotprecisely quantify that amount due to many uncertainties, including futureglobal, national, and local economic conditions and other factors.  As a result, unforeseen developments mayrequire management to increase the allowance for loan and lease losses.  Such developments could include changingeconomic conditions or negative developments with borrowers.  In addition, bank regulators periodicallyassess Sun Bancorp, Inc.’s allowance for loan and lease losses and may,consistent with examination guidelines and current information, require an increasedallowance for loan and lease losses.  Asa result, any number of factors may materially change management’s analysis inthe future.

 

19

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Deposits

 

Sun Bancorp,Inc.’s total deposits increased $10,587 or 1.8%, to $598,067 at March 31, 2003,as compared to $587,480 at December 31, 2002. This increase is the result of Sun focusing on growing low cost coredeposits (all deposits excluding time deposits) and building relationships withlocal municipalities, colleges, and businesses.  This focus has resulted in core deposits increasing 0.7% or$2,333, to $323,167 at March 31, 2003, as compared to $320,834 at December 31,2002.  A majority of the deposit growthis the result of savings accounts increasing $4,609 or 6.0% and time depositsincreasing $8,254 or 3.1% since December 31, 2002.  Over the same time frame, demand deposit accounts have decreased$1,532, or 2.6%, to $57,649 at March 31, 2003.

 
|             |   | **March 31,  2003** |    | **December  31, 2002** |   | **Change** |   |
|------------------|--------|---------------------|---------|------------------------|--------|------------|--------|
|             |   | **Amount**          |    | **%****Total**         |   | **Amount** |   | **%****Total** |   | **Amount** |   | **%** |   |
|             |   |                |    |                   |   |       |   |   |   |   |   |   |   |
| Demand deposits  |   | $                   | 57,649  |                   | 9.6    | %          | $      | 59,181 |   | 10.1 | % | $ | (1,532 | ) | (2.6 | )% |
| NOW accounts     |   | 156,649             |    | 26.2                   | %      | 155,114    |   | 26.4 | % | 1,535 |   | 1.0 | % |
| Insured MMDA     |   | 27,548              |    | 4.6                    | %      | 29,827     |   | 5.1 | % | (2,279 | ) | 7.6 | % |
| Savings deposits |   | 81,321              |    | 13.6                   | %      | 76,712     |   | 13.1 | % | 4,609 |   | 6.0 | % |
| Time deposits    |   | 274,900             |    | 46.0                   | %      | 266,646    |   | 45.3 | % | 8,254 |   | 3.1 | % |
| Total deposits   |   | $                   | 598,067 |                   | 100.0  | %          | $      | 587,480 |   | 100.0 | % | $ | 10,587 |   | 1.8 | % |
|             |   |                |    |                   |   |       |   |   |   |   |   |   |   |
| Core deposits*   |   | $                   | 323,167 |                   | 54.0   | %          | $      | 320,834 |   | 54.6 | % | $ | 2,333 |   | 0.7 | % |

 

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*  Core deposits are defined as total deposits less time deposits

 

Other Funding

 

Sun continuedusing borrowed funds to supplement deposits during 2003 and 2002.  At March 31, 2003, Sun had $231,900 in longterm debt funding.  This fundingconsisted primarily of $220,000 in variable Federal Home Loan Bank (FHLB)borrowings that  have maturities between2008 and 2010.  Sun also had $11,900 inlong term repurchase agreements at March 31, 2003.

 

Sun also had$19,655 in long term subordinated debentures at March 31, 2003.  The debentures consisted of $16,500 in trustpreferred securities with a maturity of February 22, 2031 and initial call ofFebruary 22, 2011.  The remaining $3,155was the result of a note issued for the purchase of Guaranty Bank, N.A. during2001.

 

Other fundingsources of short-term monies include deposit customers’ cash managementaccounts (classified as securities sold under agreements to repurchase),Treasury Tax and Loan Note Option, repurchase agreements, and FHLB overnightborrowings.  At March 31, 2003, Sun wasutilizing its short term funding sources to provide for loan growth andinvestment purchases in

 

20

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advance of receipt of principaland interest payments.  Sun continuallymonitors its borrowed funds positions and market conditions in order tomaintain an effective funding structure. When appropriate, Sun may take future action to modify its borrowedfunds structure.

 

#### **Net Interest Income and Net Interest Margin**

 

Net interestincome, the difference between interest income and interest expense, is thelargest component of Sun’s earnings. Net interest margin (NIM) measures the difference between the interestearning assets yield and the aggregate funding cost.  The NIM is calculated as taxable equivalent net interest incomedivided by average interest earning assets.

 

NIM decreasedby 16 basis points to 2.85% for the three months ended March 31, 2003, ascompared to 3.01% for the same period of 2002. The decrease was primarily the result of decreased yield on the loan andinvestment portfolio, which decreased greater than the cost of funds.  The NIM has stabilized from 2.86% for thefourth quarter of 2002.  Thestabilization of the margin is the result of Sun lowering the deposit rates atnearly the same rate of decline seen in the yield on earning assets.

 

21

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The followingtable sets forth comparative yields and rates paid for interest bearing assetsand liabilities:

 
|                                                            |   | **March 31,  2003**  |    | **March 31,  2002** |   |
|-----------------------------------------------------------------|--------|----------------------|---------|---------------------|--------|
| **Nine Months Ended**

**(Dollars in thousands)**               |   | **AVERAGE  BALANCE** |    | **INTEREST**        |   | **RATE** |   | **AVERAGE  BALANCE** |   | **INTEREST** |   | **RATE** |   |
| **ASSETS**                                                      |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                        |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                                       |   | $                    | 17,477  |                | $      | 52 |   | 1.21 | % | $ | 16,437 |   | $ | 104 |   | 2.57 | % |
| Loans (net of unearned income)                                  |   | 584,183              |    | 9,939               |   | 6.90 | % | 537,834 |   | 9,827 |   | 7.41 | % |
| Investments:   Taxable                           |   | 219,027              |    | 2,410               |   | 4.40 | % | 272,326 |   | 3,683 |   | 5.41 | % |
| Tax-exempt                                                      |   | 19,306               |    | 351                 |   | 7.26 | % | 21,302 |   | 394 |   | 7.40 | % |
| Total interest-earning assets                                   |   | 839,993              |    | 12,752              |   | 6.14 | % | 847,899 |   | 14,008 |   | 6.67 | % |
|                                                            |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets:                                     |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                         |   | 19,260               |    |                |   |   |   | 20,588 |   |   |   |   |   |
| Bank premises & equipment                                   |   | 16,147               |    |                |   |   |   | 14,448 |   |   |   |   |   |
| Accrued interest and other assets                               |   | 91,552               |    |                |   |   |   | 44,757 |   |   |   |   |   |
| Less:   Allowance for loan losses                          |   | (6,368               | )       |                |   |   |   | (6,450 | ) |   |   |   |   |
| Unamortized loan fees                                           |   | 205                  |    |                |   |   |   | (81 | ) |   |   |   |   |
| Total assets                                                    |   | $                    | 960,789 |                |   |   |   |   | $ | 921,131 |   |   |   |   |   |
|                                                            |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                       |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                   |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| NOW Accounts                                                    |   | 156,497              |    | 378                 |   | 0.98 | % | 144,991 |   | 496 |   | 1.39 | % |
| Insured Money Market Accounts                                   |   | 16,147               |    | 99                  |   | 1.56 | % | 20,305 |   | 99 |   | 1.98 | % |
| Savings deposits                                                |   | 91,552               |    | 192                 |   | 0.99 | % | 73,027 |   | 329 |   | 1.83 | % |
| Time deposits                                                   |   | 275,963              |    | 2,458               |   | 3.61 | % | 280,456 |   | 3,076 |   | 4.45 | % |
| Short-term borrowings                                           |   | 33,245               |    | 107                 |   | 1.31 | % | 21,311 |   | 72 |   | 1.37 | % |
| Subordinated debentures                                         |   | 19,655               |    | 468                 |   | 9.52 | % | 20,444 |   | 480 |   | 9.52 | % |
| Other borrowed funds                                            |   | 223,702              |    | 3,138               |   | 5.69 | % | 222,000 |   | 3,153 |   | 5.76 | % |
| Total interest-bearing liabilities                              |   | 813,743              |    | 6,840               |   | 3.41 | % | 782,534 |   | 7,705 |   | 3.99 | % |
|                                                            |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing liabilities and  shareholders’ equity: |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                 |   | 56,204               |    |                |   |   |   | 55,751 |   |   |   |   |   |
| Accrued interest and other liabilities                          |   | 8,440                |    |                |   |   |   | 4,843 |   |   |   |   |   |
| Shareholders’ equity                                       |   | 82,402               |    |                |   |   |   | 78,003 |   |   |   |   |   |
| Total liabilities and shareholders’ equity                 |   | $                    | 960,789 |                |   |   |   |   | $ | 921,131 |   |   |   |   |   |
|                                                            |   |                 |    |                |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                            |   |                 |    |                |   | 2.73 | % |   |   |   |   | 2.68 | % |
| Net interest income/margin                                      |   |                 |    | $                   | 5,912  |   | 2.85 | % |   |   | $ | 6,303 |   | 3.01 | % |

 

----

* Average loan balances includenon-accrual loans and interest income includes fees on loans

* Yields on tax exempt loansand investments have been adjusted to a fully taxable equivalent basis using a34% federal income tax rate

 

22

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#### **Non-interest Income**

 

Non-interest income, excludingsecurity gains, increased $1,369 or 133.6% to $2,394 for the three months endedMarch 31, 2003 as compared to 2002. Increased service charges on deposits accounted for $325 of theincrease.  The increase in servicecharges was primarily the result of a program implemented during 2002 involvingoverdraft protection.  The addition ofbank owned life insurance during 2002 represented $280 of the increase.  The bank owned life insurance was purchasedto supplement future increases in employee benefit plans.  During late 2002, Sun began to sell itsresidential mortgages as they were originated. This program added $233 in other income for the three months ended March31, 2003 as compared to 2002.  Otherincome increased $554 for the respective periods as the addition of BankCapital Services provided $303 in income. Offsetting the increases in other income was a decrease in income frominvestment product sales of $81 when comparing the three months ended March 31,2003 to 2002 as dollars have flowed out of the stock/bond markets and into banks.

 
| **Three Months Ended**               |   | **March 31, 2003** |   | **March 31, 2002** |   | **Change** |   |
|--------------------------------------|--------|--------------------|--------|--------------------|--------|------------|--------|
|                                 |   | **Amount**         |   | **%****Total**     |   | **Amount** |   | **%****Total** |   | **Amount** |   | **%** |   |
|                                 |   |               |   |               |   |       |   |   |   |   |   |   |   |
| Service charge on deposit accounts   |   | $                  | 845    |               | 21.7   | %          | $      | 520 |   | 46.4 | % | 325 |   | 62.5 | % |
| Trust income                         |   | 219                |   | 5.6                | %      | 154        |   | 13.7 | % | 65 |   | 42.2 | % |
| Net security gains                   |   | 1,496              |   | 38.5               | %      | 95         |   | 8.5 | % | 1,401 |   | 1,474.7 | % |
| Income from investment product sales |   | 24                 |   | 0.6                | %      | 105        |   | 9.4 | % | (81 | ) | (77.1 | )% |
| Bank owned life insurance            |   | 325                |   | 8.4                | %      | 45         |   | 4.0 | % | 280 |   | 622.2 | % |
| Income from insurance subsidiary     |   | 23                 |   | .6                 | %      | 30         |   | 2.7 | % | (7 | ) | (23.3 | )% |
| Gain on sale of loans                |   | 261                |   | 6.7                | %      | 28         |   | 2.5 | % | 233 |   | 832.1 | % |
| Other income                         |   | 697                |   | 17.9               | %      | 143        |   | 12.8 | % | 554 |   | 387.4 | % |
| Total other income                   |   | $                  | 3,890  |               | 100.0  | %          | $      | 1,120 |   | 100.0 | % | $ | 2.770 |   | 247.3 | % |
|                                      |        |                    |        |                    |        |            |        |  |  |  |  |  |  |  |  |  |

 

23

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#### **Non-interest Expenses**

 

Non-interest expenses increased$1,663 or 33.9% to $6,563 for the three months ended March 31, 2003 as comparedto 2002.  All categories of otherexpenses have been impacted by the acquisition of Bank Capital ServicesCorporation (Bank Capital) during January 2003.  In aggregate, Bank Capital represented $244 or 14.7% of the totalincrease.  The outsourcing ofoperational processing increased expenses $300 or 18.0% of the totalincrease.  Salaries and employee benefitsincreased $362 or 12.9% due to the acquisition of Bank Capital and increasedemployee benefit costs.  Net occupancyexpense and furniture and equipment expenses increased as Sun undertakesinfrastructure improvements .  Otherexpenses increased 82.4% or $1,139 due to increases in normal businessexpenses, Bank Capital, and the outsourcing of operational processing andcertain other support functions.

 
| **Three Months Ended**           |   | **March 31,  2003** |   | **March 31,  2002** |   | **Change** |   |
|----------------------------------|--------|---------------------|--------|---------------------|--------|------------|--------|
|                             |   | **Amount**          |   | **%****Total**      |   | **Amount** |   | **%****Total** |   | **Amount** |   | **%** |   |
|                             |   |                |   |                |   |       |   |   |   |   |   |   |   |
| Salaries and employee benefits   |   | $                   | 3,166  |                | 48.2   | %          | $      | 2,804 |   | 57.2 | % | 362 |   | 12.9 | % |
| Net occupancy expense            |   | 383                 |   | 5.8                 | %      | 274        |   | 5.6 | % | 109 |   | 39.8 | % |
| Furniture and equipment expenses |   | 487                 |   | 7.4                 | %      | 397        |   | 8.1 | % | 90 |   | 22.7 | % |
| Amortization of intangibles      |   | —              |   | —              |   | —     |   | — |   | — |   | — |   |
| Expenses of insurance subsidiary |   | 6                   |   | 0.1                 | %      | 43         |   | 0.9 | % | (37 | ) | (86.0 | )% |
| Other expenses                   |   | 2,521               |   | 38.5                | %      | 1,382      |   | 28.2 | % | 1,139 |   | 82.4 | % |
| Total other expenses             |   | $                   | 6,563  |                | 100.0  | %          | $      | 4,900 |   | 100.0 | % | $ | 1,663 |   | 33.9 | % |
|                                  |        |                     |        |                     |        |            |        |  |  |  |  |  |  |  |  |  |

 

24

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#### **Equity Securities Risk**

 

Sun Bancorp,Inc.’s equity securities consist of marketable equities and restrictedstock.  Marketable equities consistentirely of common stock, primarily of bank and bank and financial holdingcompanies.  Restricted stock consistsalmost entirely of Federal Home Loan Bank (FHLB) stock.  Because FHLB stock is redeemable at par,SunBank carries it at cost and periodically evaluates the stock forimpairment.  Possible impairment factorsinclude potential dramatic changes to the housing and residential mortgageindustry or the related regulatory environment.  Management currently does not believe any factors exist tosuggest potential impairment.

 

Bank andfinancial holding company stocks are subject to general industry risks,including competition from non-bank entities, credit risk, interest rate risk,and other factors.  Individual stockscould suffer price decreases due to circumstances at specific banks.  In addition, Sun Bancorp, Inc.’s bank stockinvestments are concentrated in Pennsylvania entities, so these investmentscould decline in value if there were a downturn in the state’s economy.  Other marketable stocks are comprised ofnon-bank, exchange-traded stocks that are subject to typical equity risks.

 
|                                            |   | **March 31,  2003** |   |
|-------------------------------------------------|--------|---------------------|--------|
|                                            |   | **Cost**            |   | **Fair  Value** |   | **Unrealized  Gains (Losses)** |   |
| Banks and bank and financial holding  companies |   | $                   | 3,555  |   | $ | 3,596 |   | 41 |   |
| FHLB stock                                      |   | 13,282              |   | 13,282 |   | — |   |
| Non-bank companies                              |   | 87                  |   | 58 |   | (29 | ) |
| Total                                           |   | $                   | 16,924 |   | $ | 16,936 |   | $ | 12 |   |
|                                                 |        |                     |        |  |  |  |  |  |  |  |

 
|                                            |   | **December 31, 2002** |   |
|-------------------------------------------------|--------|-----------------------|--------|
|                                            |   | **Cost**              |   | **Fair  Value** |   | **Unrealized  Gains (Losses)** |   |
| Banks and bank and financial holding  companies |   | $                     | 3,035  |   | $ | 2,878 |   | $ | (157 | ) |
| FHLB stock                                      |   | 12,012                |   | 12,012 |   | — |   |
| Non-bank companies                              |   | 87                    |   | 65 |   | (22 | ) |
| Total                                           |   | $                     | 15,134 |   | $ | 14,955 |   | $ | (179 | ) |

 

25

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CapitalAdequacy

 

Sun Bancorp,Inc. and SunBank are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements could prompt regulatoryaction that, if undertaken, might materially affect Sun Bancorp, Inc.’sfinancial statements.  Under regulatorycapital adequacy guidelines, Sun Bancorp, Inc. and SunBank must meet specificcapital requirements involving quantitative measures of assets, liabilities,and certain off-balance sheet items (calculated using regulatory accountingpractices).  All related factors aresubject to qualitative judgments by the regulators.

 

Sun Bancorp,Inc. is currently, and has been in the past, designated a well-capitalizedinstitution.  Shareholders’ equityincreased $2,889 to $80,035 at March 31, 2003, from $77,146 at December 31,2002.  Unrealized gains or losses, netof taxes on investment securities, are reported as accumulated othercomprehensive income within shareholders’ equity.

 

Management isnot aware of any events or regulatory restrictions that would have a materialeffect on Sun Bancorp, Inc.’s capital adequacy.

 

Sun Bancorp,Inc.’s strong capital position is evidenced by the following capital ratios,which are well above the regulatory minimum levels.

 
| **(Dollars in thousands)** |   | **Actual** |   | **For  Capital  Adequacy Purposes** |   |
|----------------------------|--------|------------|--------|-------------------------------------|--------|
|                       |   | **Amount** |   | **Ratio**                           |   | **Ratio** |   |
| As of March 31, 2003:      |   |       |   |                                |   |   |   |
| Total Capital              |   |       |   |                                |   |   |   |
| Sun                        |   | $          | 81,097 |                                | 12.1   | % | 8.0 | % |
| Bank                       |   | $          | 77,201 |                                | 11.6   | % | 8.0 | % |
| Tier I Capital             |   |       |   |                                |   |   |   |
| Sun                        |   | $          | 71,464 |                                | 10.7   | % | 4.0 | % |
| Bank                       |   | $          | 70,723 |                                | 10.6   | % | 4.0 | % |
| Leverage Ratio             |   |       |   |                                |   |   |   |
| Sun                        |   | $          | 71,464 |                                | 7.6    | % | 4.0 | % |
| Bank                       |   | $          | 70,723 |                                | 7.6    | % | 4.0 | % |
|                       |   |       |   |                                |   |   |   |
| As of December 31, 2002:   |   |       |   |                                |   |   |   |
| Total Capital              |   |       |   |                                |   |   |   |
| Sun                        |   | $          | 80,484 |                                | 12.6   | % | 8.0 | % |
| Bank                       |   | $          | 77,175 |                                | 12.1   | % | 8.0 | % |
| Tier I Capital             |   |       |   |                                |   |   |   |
| Sun                        |   | $          | 71,123 |                                | 11.1   | % | 4.0 | % |
| Bank                       |   | $          | 70,969 |                                | 11.1   | % | 4.0 | % |
| Leverage Ratio             |   |       |   |                                |   |   |   |
| Sun                        |   | $          | 71,123 |                                | 7.8    | % | 4.0 | % |
| Bank                       |   | $          | 70,969 |                                | 7.9    | % | 4.0 | % |

 

26

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Regulatory andIndustry Merger Activity

 

From time totime, various types of federal and state legislation have been proposed thatcould result in additional regulation of, and restrictions on, the business ofSun Bancorp, Inc. and SunBank.  Itcannot be predicted whether such legislation will be adopted or, if adopted,how such legislation would affect the business of Sun Bancorp, Inc. andSunBank.  As a consequence of theextensive regulation of commercial banking activities in the United States, SunBancorp, Inc.’s and SunBank’s business is particularly susceptible to beingaffected by federal legislation and regulations that may increase the costs ofdoing business.  Except as specificallydescribed above, management believes the effect of the provisions oflegislation on the liquidity, capital resources, and results of operations ofSun Bancorp, Inc. will be immaterial. Future recommendations by regulatoryauthorities or proposed legislation, which if they were implemented, would havea material adverse effect upon the liquidity, capital resources, or results ofoperations, although the general cost of compliance with numerous and multiplefederal and state laws and regulations does have, and in the future may have, anegative impact on Sun Bancorp, Inc.’s results of operations.

 

Further, thebusiness of Sun Bancorp, Inc. is also affected by the state of the financialservices industry in general.  As aresult of legal and industry changes, management predicts the industry willcontinue to experience an increase in consolidations and mergers as thefinancial services industry strives for greater cost efficiencies and marketshare.  Management also expects increaseddiversification of financial products and services offered by SunBank and itscompetitors.  Management believes suchconsolidations and mergers, and diversification of products and services mayenhance its competitive position as a community bank.

 

27

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The following tables set forthSelected Financial Data for each of the past five quarters:

 
|                                               |   | **Quarter Ended (A)** | ** ** |
|----------------------------------------------------|--------|-----------------------|------------|
| **(dollars in  thousands, except per share data)** |   | **3/31/2003**         |       | **12/31/2002** |   | **9/30/2002** |   | **6/30/2002** |   | **3/31/2002** | ** ** |
|                                               |   |                  |       |   |   |   |   |   |   |   |   |
| **Financial  Condition Data:**                     |   |                  |       |   |   |   |   |   |   |   |   |
| **General**                                        |   |                  |       |   |   |   |   |   |   |   |   |
| Total assets                                       |   | $                     | 1,004,753  |   | $ | 951,174 |   | $ | 949,563 |   | $ | 924,091 |   | $ | 923,029 |   |
| Loans, net                                         |   | 589,009               |       | 583,519 |   | 579,233 |   | 575,616 |   | 547,080 |   |
| Goodwill                                           |   | 23,345                |       | 22,924 |   | 22,924 |   | 22,924 |   | 22,924 |   |
| Total deposits                                     |   | 598,067               |       | 587,480 |   | 601,843 |   | 571,371 |   | 576,754 |   |
| Non interest bearing                               |   | 57,649                |       | 59,181 |   | 60,402 |   | 58,981 |   | 57,866 |   |
|                                               |   |                  |       |   |   |   |   |   |   |   |   |
| Savings                                            |   | 81,321                |       | 76,712 |   | 79,588 |   | 79,375 |   | 75,726 |   |
| NOW                                                |   | 156,649               |       | 155,114 |   | 157,806 |   | 143,144 |   | 145,694 |   |
| Money Market                                       |   | 27,548                |       | 29,827 |   | 22,094 |   | 23,056 |   | 21,735 |   |
| Time Deposits                                      |   | 274,900               |       | 266,646 |   | 281,953 |   | 266,815 |   | 275,733 |   |
| Total interest bearing deposits                    |   | 540,418               |       | 528,299 |   | 541,441 |   | 512,390 |   | 518,888 |   |
|                                               |   |                  |       |   |   |   |   |   |   |   |   |
| Core deposits*                                     |   | 323,167               |       | 320,834 |   | 319,890 |   | 304,556 |   | 301,021 |   |
| Trust preferred securities & subordinated debt |   | 19,655                |       | 19,655 |   | 19,655 |   | 19,655 |   | 20,444 |   |
| Shareholders' equity                               |   | 80,035                |       | 81,247 |   | 81,868 |   | 80,408 |   | 77,146 |   |
| Trust assets under management                      |   | 144,014               |       | 151,173 |   | 152,434 |   | 147,682 |   | 136,899 |   |
|                                               |   |                  |       |   |   |   |   |   |   |   |   |
| **Asset  Quality**                                 |   |                  |       |   |   |   |   |   |   |   |   |
|                                               |   |                  |       |   |   |   |   |   |   |   |   |
| Non-performing assets                              |   | $                     | 4,714      |   | $ | 4,115 |   | $ | 4,852 |   | $ | 4,461 |   | $ | 5,017 |   |
| Non-performing assets to total assets              |   | 0.47                  | %          | 0.43 | % | 0.51 | % | 0.48 | % | 0.54 | % |
| Allowance for loan losses                          |   | 6,478                 |       | 6,206 |   | 7,178 |   | 6,790 |   | 6,659 |   |
| Allowance for loan losses to total loans           |   | 1.09                  | %          | 1.05 | % | 1.22 | % | 1.17 | % | 1.18 | % |
| Allowance for loan losses to non-performing loans  |   | 167.04                | %          | 183.56 | % | 170.70 | % | 184.81 | % | 172.80 | % |
| Non-performing loans to total loans                |   | 0.65                  | %          | 0.57 | % | 0.72 | % | 0.63 | % | 0.68 | % |
|                                               |   |                  |       |   |   |   |   |   |   |   |   |
| **Capitalization  - Bancorp**                      |   |                  |       |   |   |   |   |   |   |   |   |
|                                               |   |                  |       |   |   |   |   |   |   |   |   |
| Shareholders' equity to total assets               |   | 7.97                  | %          | 8.54 | % | 8.62 | % | 8.70 | % | 8.36 | % |

 

----

* Core deposits are defined as total deposits less time deposits

(A) 2002 quarters have been adjusted for SFAS No. 147 impact.

 

28

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|                                               |   | **Quarter Ended (A)** |   |
|----------------------------------------------------|--------|-----------------------|--------|
| **(dollars in  thousands, except per share data)** |   | **3/31/2003**         |   | **12/31/2002** |   | **9/30/2002** |   | **6/30/2002** |   | **3/31/2002** |   |
|                                               |   |                  |   |   |   |   |   |   |   |   |   |
| **Operating Data**                                 |   |                  |   |   |   |   |   |   |   |   |   |
|                                               |   |                  |   |   |   |   |   |   |   |   |   |
| Net income/(loss)                                  |   | $                     | 2,034  |   | $ | 1,228 |   | $ | 1,695 |   | $ | 1,941 |   | $ | 1,552 |   |
| Net interest income                                |   | 5,548                 |   | 5,750 |   | 6,376 |   | 6,733 |   | 6,036 |   |
| Provision for loan losses                          |   | 405                   |   | 200 |   | 450 |   | 405 |   | 405 |   |
| Other operating income                             |   | 3,890                 |   | 2,342 |   | 1,630 |   | 1,576 |   | 1,120 |   |
| Other operating expense                            |   | 6,563                 |   | 6,643 |   | 5,651 |   | 5,428 |   | 4,900 |   |
|                                               |   |                  |   |   |   |   |   |   |   |   |   |
| **Performance Statistics**                         |   |                  |   |   |   |   |   |   |   |   |   |
|                                               |   |                  |   |   |   |   |   |   |   |   |   |
| Net interest margin                                |   | 2.85                  | %      | 2.86 | % | 3.12 | % | 3.35 | % | 3.01 | % |
| Return on average assets                           |   | 0.84                  | %      | 0.51 | % | 0.73 | % | 0.85 | % | 0.67 | % |
| Return on average equity                           |   | 9.87                  | %      | 6.04 | % | 8.34 | % | 9.74 | % | 7.96 | % |
| Annualized net loan charge-offs to avg loans       |   | 0.13                  | %      | 0.87 | % | 0.04 | % | 0.11 | % | 0.05 | % |
| Net charge-offs                                    |   | 133                   |   | 1,266 |   | 62 |   | 152 |   | 72 |   |
| Efficiency ratio                                   |   | 82.6                  |   | 87.2 |   | 70.6 |   | 65.7 |   | 69.4 |   |
| Net income per employee                            |   | 7                     |   | 4 |   | 6 |   | 7 |   | 5 |   |
|                                               |   |                  |   |   |   |   |   |   |   |   |   |
| **Per Share Data**                                 |   |                  |   |   |   |   |   |   |   |   |   |
|                                               |   |                  |   |   |   |   |   |   |   |   |   |
| Basic earnings per share                           |   | $                     | 0.28   |   | $ | 0.17 |   | $ | 0.24 |   | $ | 0.27 |   | $ | 0.22 |   |
| Diluted earnings per share                         |   | 0.28                  |   | 0.17 |   | 0.23 |   | 0.27 |   | 0.22 |   |
| Dividend declared per share                        |   | 0.165                 |   | 0.165 |   | 0.165 |   | 0.165 |   | 0.150 |   |
| Book value                                         |   | 11.17                 |   | 11.33 |   | 11.43 |   | 11.24 |   | 10.81 |   |
| Common stock price:                                |   |                  |   |   |   |   |   |   |   |   |   |
| High                                               |   | 20.50                 |   | 23.20 |   | 23.98 |   | 24.49 |   | 18.05 |   |
| Low                                                |   | 18.01                 |   | 17.84 |   | 21.85 |   | 17.65 |   | 16.28 |   |
| Close                                              |   | 19.51                 |   | 18.26 |   | 22.48 |   | 24.49 |   | 17.70 |   |
| Weighted average common shares:                    |   |                  |   |   |   |   |   |   |   |   |   |
| Basic                                              |   | 7,182                 |   | 7,168 |   | 7,165 |   | 7,141 |   | 7,143 |   |
| Fully Diluted                                      |   | 7,201                 |   | 7,238 |   | 7,248 |   | 7,164 |   | 7,164 |   |
| End-of-period common shares:                       |   |                  |   |   |   |   |   |   |   |   |   |
| Issued                                             |   | 7,317                 |   | 7,299 |   | 7,276 |   | 7,266 |   | 7,237 |   |
| Treasury                                           |   | 149                   |   | 127 |   | 111 |   | 111 |   | 99 |   |

 

----

(A) 2002 quarters have been adjusted for SFASNo. 147 impact.

 

29

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Item 4 — Controls and Procedures

 

Management maintains a system of controls and procedures designed toprovide reasonable assurance as to the reliability of the financial statementsand other disclosures included in this report, as well as to safeguard assetsfrom unauthorized use or disposition. Management evaluated the effectiveness ofthe design and operation of management’s disclosure controls and proceduresunder the supervision and with the participation of management, including ourChief Executive Officer and Chief Financial Officer, within 90 days prior tothe filing date of this report. Based upon that evaluation, Sun Bancorp, Inc.’sChief Executive Officer and Chief Financial Officer concluded that management’sdisclosure controls and procedures are effective in timely alerting them tomaterial information required to be included in Sun Bancorp, Inc.’s periodicSecurities and Exchange Commission filings. No significant changes were made toSun Bancorp, Inc.’s internal controls or other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

30

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PART II

 

Items 1, 2, 3, 4, and 5 —Omitted pursuant to instructions to Part II

 

Item 6 — Exhibitsand Reports on Form 8-K

 

a.                                 On January 3, 2003,Sun filed a Current Report on Form 8-K announcing the completion of theacquisition of Bank Capital Services Corporation.

 

b.                                On January 29, 2003,Sun filed a Current Report on Form 8-K announcing the declaration the firstquarter cash dividend of $0.165 per share. In addition, Sun announced the resignation of Thomas Hebble from theboard due to a recent promotion with F.N.B. Corporation and his correspondingrelocation to Florida.

 

c.                                 On March 20, 2003, Sunfiled a Current Report on Form 8-K tofile its Articles of Incorporation as amended and restated; its amended andrestated Bylaws; an Employment Agreement between Robert J. McCormack, theRegistrant and Sun Bank, dated October 31, 2002; an Employment Agreementbetween Thomas W. Bixler, the Registrant and Sun Bank, dated November 3,2002; an Employment Agreement between Sandra Miller, the Registrant and SunBank, dated October 24, 2002; a Change of Control Agreement betweenMaureen M. Bufalino, the Registrant and Sun Bank, dated May 31, 2001.

 

d.                                Exhibits

 

3(i)                         The Articles of Incorporation ofthe Corporation.  (Incorporated byreference to Exhibit 3(i) to the Registrant’s Current Report on Form 8-K filedwith the Commission on March 20, 2003).

 

3(ii)                      The By-Laws, as amended andrestated., are incorporated herein by reference to Exhibit 3 to theCorporation’s Current Report on Form 8-K filed with the Securities and ExchangeCommission on March 20, 2003.

 

10.1                     Employment Agreement between RobertJ. McCormack, Sun Bancorp, Inc. and SunBank dated October 31, 2002.  (Incorporated by reference to Exhibit 10.1to the Registrant’s Current Report on Form 8-K filed with the Commission onMarch 20, 2003).

 

10.2                     Employment Agreement between ThomasW. Bixler, Sun Bancorp, Inc. and Sun Bank, dated November 3, 2002.  (Incorporated by reference to Exhibit 10.2to the Registrant’s Current Report on Form 8-K filed with the Commission onMarch 20, 2003).

 

10.3                     Employment Agreement between SandraMiller, the Registrant and Sun Bank, dated October 24, 2002.  (Incorporated by reference to Exhibit 10.3to the Registrant’s Current Report on Form 8-K filed with the Commission onMarch 20, 2003).

 

10.4                     Change of Control Agreement betweenMaureen M. Bufalino, the Registrant and Sun Bank, dated May 31, 2001.  (Incorporated by reference to Exhibit10.3  to the Registrant’s Current Reporton Form 8-K filed with the Commission on March 20, 2003).

 

10.5                     1998 Stock Incentive Plan.  (Incorporated by reference to Exhibit 4.3 ofRegistration Statement No. 333-61237 on Form S-8 filed with the Commission onAugust 12, 1998).

 

10.6                     1998 Independent Directors StockOption Plan.  (Incorporated by referenceto Exhibit 4.3 of Registration Statement No. 333-61241 on Form S-8 filed withthe Commission on August 12, 1998).

 

10.7                     1998 Employee Stock PurchasePlan.  (Incorporated by reference toExhibit 4.3 of Registration Statement No. 333-61249 on Form S-8 filed with theCommission on August 12, 1998).

 

11                              Statement re: Computation ofEarnings Per Share can be referenced in Note 2 of the Consolidated Statementsin this Report.

 

99.1                     Certification of principalexecutive officer or principal financial officer pursuant to 18U.S.C. Section1350.

 

99.2                     Certification of principalexecutive officer or principal financial officer pursuant to 18U.S.C. Section1350.

 

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SIGNATURES

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | Sun Bancorp, Inc.                                                    |
|--------|----------------------------------------------------------------------|
|   |                                                                 |
| Date   | May 15, 2003                                                         |   | /s/  Robert J. McCormack |
|   | Robert J. McCormack                                                  |
|   | President and Chief Executive Officer  (Principal Executive Officer) |
|   |                                                                 |
|   |                                                                 |
|   | /s/  Wilmer D. Leinbach                                         |
|   | Wilmer D. Leinbach                                                   |
|   | Chief Financial Officer  (Principal Financial Officer)               |
|        |                                                                      |  |  |

 

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**CERTIFICATION**

 

I, Robert J. McCormack, President and Chief Executive Officer,certify, that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Sun Bancorp, Inc.

 

2.                                       Basedon my knowledge, the quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport.

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate.

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  allsignificant deficiencies in the design or operation of the internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls.

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or in other factors that couldsignificantly affect the internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | May 15, 2003                             |   | By: | /s/ Robert  J. McCormack |
|--------|------------------------------------------|--------|-----|--------------------------|
|   | President  & Chief Executive Officer |

 

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**CERTIFICATION**

 

I, Wilmer D. Leinbach, Executive Vice President and Chief FinancialOfficer, certify, that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Sun Bancorp, Inc.

 

2.                                       Basedon my knowledge, the quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport.

 

3.                                       Basedon my knowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report.

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate.

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  allsignificant deficiencies in the design or operation of the internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls.

 

8.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or in other factors that couldsignificantly affect the internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | May 15, 2003 |                                                  | By: | /s/ Wilmer  D. Leinbach |   |
|--------|--------------|-------------------------------------------------------|-----|-------------------------|--------|
|   |         | Executive Vice President and  Chief Financial Officer |

 

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