**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   September 30, 2002**                                                                                                                                           |
|                                                                                                                                                                                                   |
| **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.) |
|                                                                                |   |                                  |
| **PO Box 57, Selinsgrove, Pennsylvania**                                            |   | **17870**                             |
| (Address of principal executive offices)                                            |   | (Zip code)                            |
|                                                                                |   |                                  |
| **(570) 374-1131**                                                                  |
| (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 BANKRUPTCY

PROCEEDINGS 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 a court.    Yes   o      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 |   | 7,164,580                              |
|----------------------------|--------|----------------------------------------|
| Class                      |   | Outstanding Shares At November 1, 2002 |

 

 

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SUN BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER30, 2002

 

CONTENTS

 
| PART I - FINANCIAL  INFORMATION                                                                      |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |   |
| Item 1 - Financial Statements:                                                                       |
|                                                                                                 |   |
|                                                                                                 | Consolidated Balance Sheet as of September 30, 2002 (Unaudited) and  December 31, 2001 |
|                                                                                                 | Consolidated Statement of Income for the  Three and Nine Months Ended September 30, 2002 and September 30, 2001  (Unaudited) |
|                                                                                                 | Consolidated Statement of Cash Flows for  the Nine Months Ended September 30, 2002 and September 30, 2001 (Unaudited) |
|                                                                                                 |   |
|                                                                                                 | Notes to the Consolidated Financial  Statements (Unaudited) |
|                                                                                                 |   |
| Item 2 - Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                                                                                                 |   |
| 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-Q

PART I

 

Item 1.  Financial Statements

 

SUN BANCORP, INC.

CONSOLIDATEDBALANCE SHEET

 
| **(In  Thousands, Except Share Data)**                                                                                                   |   | **September  30, 2002** |    | **December  31, 2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                                                                                                     |   | **(Unaudited)**         |    |                   |   |
| ASSETS                                                                                                                                   |   |                    |    |                   |   |
|                                                                                                                                     |   |                    |    |                   |   |
| Cash and due from banks                                                                                                                  |   | $                       | 23,794  |                   | $      | 24,125 |   |
| Interest-bearing deposits in banks                                                                                                       |   | 36,673                  |    | 20,858                 |   |
| Total cash and cash equivalents                                                                                                          |   | 60,467                  |    | 44,983                 |   |
|                                                                                                                                     |   |                    |    |                   |   |
| Investment securities                                                                                                                    |   | 228,802                 |    | 305,612                |   |
| Loans, net of allowance for loan and lease  losses of $7,178 in 2002 and $6,204 in 2001                                                  |   | 579,233                 |    | 515,520                |   |
| Bank premises and equipment, net                                                                                                         |   | 14,723                  |    | 14,462                 |   |
| Goodwill and core deposit intangibles                                                                                                    |   | 22,071                  |    | 22,773                 |   |
| Accrued interest                                                                                                                         |   | 4,020                   |    | 5,063                  |   |
| Bank owned life insurance                                                                                                                |   | 15,473                  |    | —                 |   |
| Other assets                                                                                                                             |   | 23,801                  |    | 12,442                 |   |
| Total assets                                                                                                                             |   | $                       | 948,590 |                   | $      | 920,855 |   |
|                                                                                                                                     |   |                    |    |                   |   |
| LIABILITIES & SHAREHOLDERS’ EQUITY                                                                                              |   |                    |    |                   |   |
|                                                                                                                                     |   |                    |    |                   |   |
| Deposits                                                                                                                                 |   |                    |    |                   |   |
| Noninterest-bearing                                                                                                                      |   | $                       | 60,402  |                   | $      | 57,990 |   |
| Interest-bearing                                                                                                                         |   | 541,441                 |    | 515,887                |   |
| Total deposits                                                                                                                           |   | 601,843                 |    | 573,877                |   |
|                                                                                                                                     |   |                    |    |                   |   |
| Short-term borrowings                                                                                                                    |   | 23,338                  |    | 22,138                 |   |
| Other borrowed funds                                                                                                                     |   | 220,000                 |    | 222,000                |   |
| Subordinated debentures                                                                                                                  |   | 19,655                  |    | 20,444                 |   |
| Accrued interest and other liabilities                                                                                                   |   | 2,350                   |    | 4,885                  |   |
| Total liabilities                                                                                                                        |   | 867,186                 |    | 843,344                |   |
|                                                                                                                                     |   |                    |    |                   |   |
| Shareholders’ equity                                                                                                                |   |                    |    |                   |   |
| Common stock, no par value per share;  Authorized 20,000,000 shares: issued   7,276,276 shares in 2002 and 7,236,251 shares in 2001 |   | 84,173                  |    | 83,565                 |   |
| Retained earnings (deficit)                                                                                                              |   | (5,668                  | )       | (6,961                 | )      |
| Accumulated other comprehensive income                                                                                                   |   | 4,374                   |    | 2,069                  |   |
| Less:   Treasury stock, at cost, 111,217 shares in 2002 and 93,417 shares in  2001                                                  |   | (1,475                  | )       | (1,162                 | )      |
| Total shareholders’ equity                                                                                                          |   | 81,404                  |    | 77,511                 |   |
| Total liabilities and shareholders’ equity                                                                                          |   | $                       | 948,590 |                   | $      | 920,855 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

3

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SUN BANCORP, INC.

CONSOLIDATEDSTATEMENT OF INCOME

(UNAUDITED)

 
|                                                                  |   | **For the  Three Months Ended  September 30,** |   | **For the  Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
| **(In  Thousands, Except for Per Share Data)**                        |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Interest and dividend income:                                         |   |                                           |   |                                          |   |   |   |   |   |
| Interest and fees on loans                                            |   | $                                              | 10,364 |                                          | $      | 10,545 |   | $ | 30,262 |   | $ | 28,447 |   |
| Income from investment securities:                                    |   |                                           |   |                                          |   |   |   |   |   |
| Taxable                                                               |   | 2,907                                          |   | 4,521                                         |   | 9,955 |   | 13,045 |   |
| Tax exempt                                                            |   | 250                                            |   | 307                                           |   | 768 |   | 823 |   |
| Dividends                                                             |   | 112                                            |   | 411                                           |   | 358 |   | 1,211 |   |
| Interest on deposits in banks                                         |   | 94                                             |   | 414                                           |   | 269 |   | 1,087 |   |
| Total interest and dividend income                                    |   | 13,727                                         |   | 16,198                                        |   | 41,612 |   | 44,613 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Interest expense:                                                     |   |                                           |   |                                          |   |   |   |   |   |
| Interest on deposits                                                  |   | 3,605                                          |   | 5,778                                         |   | 11,289 |   | 16,238 |   |
| Interest on short-term borrowings                                     |   | 93                                             |   | 121                                           |   | 236 |   | 353 |   |
| Interest on other borrowed funds                                      |   | 3,181                                          |   | 3,223                                         |   | 9,514 |   | 9,564 |   |
| Interest on subordinated debentures                                   |   | 472                                            |   | 471                                           |   | 1,428 |   | 1,098 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Total interest expense                                                |   | 7,351                                          |   | 9,593                                         |   | 22,467 |   | 27,253 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Net interest income                                                   |   | 6,376                                          |   | 6,605                                         |   | 19,145 |   | 17,360 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Provision for loan and lease losses                                   |   | 450                                            |   | 325                                           |   | 1,260 |   | 925 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Net interest income, after provision  For loan and lease losses       |   | $                                              | 5,926  |                                          | $      | 6,280 |   | $ | 17,885 |   | $ | 16,435 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Other operating income:                                               |   |                                           |   |                                          |   |   |   |   |   |
| Service charges on deposit accounts                                   |   | $                                              | 880    |                                          | $      | 551 |   | $ | 2,108 |   | $ | 1,317 |   |
| Trust income                                                          |   | 222                                            |   | 226                                           |   | 563 |   | 726 |   |
| Net security gains                                                    |   | 3                                              |   | 62                                            |   | 143 |   | 898 |   |
| Income from investment product sales                                  |   | 90                                             |   | 132                                           |   | 350 |   | 155 |   |
| Bank owned life insurance                                             |   | 187                                            |   | —                                        |   | 393 |   | — |   |
| Income from insurance subsidiary                                      |   | 14                                             |   | 65                                            |   | 63 |   | 156 |   |
| Other income                                                          |   | 234                                            |   | 261                                           |   | 706 |   | 584 |   |
| Total other operating income                                          |   | 1,630                                          |   | 1,297                                         |   | 4,326 |   | 3,836 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Other operating expense:                                              |   |                                           |   |                                          |   |   |   |   |   |
| Salaries and employee benefits                                        |   | 2,991                                          |   | 2,738                                         |   | 8,624 |   | 7,024 |   |
| Net occupancy expenses                                                |   | 282                                            |   | 268                                           |   | 807 |   | 704 |   |
| Furniture and equipment expenses                                      |   | 451                                            |   | 416                                           |   | 1,266 |   | 1,189 |   |
| Amortization of intangibles                                           |   | 235                                            |   | 515                                           |   | 703 |   | 1,053 |   |
| Expenses of insurance subsidiary                                      |   | 22                                             |   | 59                                            |   | 83 |   | 159 |   |
| Other expenses                                                        |   | 1,905                                          |   | 1,417                                         |   | 5,199 |   | 4,213 |   |
| Total other operating expenses                                        |   | 5,886                                          |   | 5,413                                         |   | 16,682 |   | 14,342 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Income before income tax provision                                    |   | 1,670                                          |   | 2,164                                         |   | 5,529 |   | 5,929 |   |
| Income tax provision                                                  |   | 130                                            |   | 613                                           |   | 805 |   | 1,511 |   |
| Net income                                                            |   | $                                              | 1,540  |                                          | $      | 1,551 |   | $ | 4,724 |   | $ | 4,418 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| PER SHARE DATA                                                        |   |                                           |   |                                          |   |   |   |   |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Net income per share – Basic                                     |   | $                                              | 0.21   |                                          | $      | 0.22 |   | $ | 0.66 |   | $ | 0.64 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Weighted average number of shares  outstanding – Basic |   | 7,164,910                                      |   | 7,151.474                                     |   | 7,149,568 |   | 6,873,596 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Net income per share – Diluted                                   |   | $                                              | 0.21   |                                          | $      | 0.22 |   | $ | 0.66 |   | $ | 0.64 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Weighted average number of shares  outstanding – Diluted         |   | 7,247,982                                      |   | 7,161,758                                     |   | 7,188,113 |   | 6,876,076 |   |
|                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Dividends paid                                                        |   | $                                              | 0.165  |                                          | $      | 0.15 |   | $ | 0.495 |   | $ | 0.45 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

4

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SUN BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CASH FLOWS

(UNAUDITED)

 
| **(In  Thousands)**                                                            |   | **For the  Nine Months  Ended September 30,** |    |
|--------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                           |   | **2002**                                      |    | **2001** |   |
| Cash flows from operating  activities:                                         |   |                                          |    |   |   |
| Net income                                                                     |   | $                                             | 4,724   |   | $ | 4,418 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |   |                                          |    |   |   |
| Provision for loan and lease losses                                            |   | 1,260                                         |    | 925 |   |
| Provision for depreciation                                                     |   | 769                                           |    | 721 |   |
| Amortization of intangibles                                                    |   | 702                                           |    | 1,053 |   |
| Amortization and accretion of securities, net                                  |   | 807                                           |    | 259 |   |
| Net security gains                                                             |   | (143                                          | )       | (898 | ) |
| Increase in accrued interest and other  assets                                 |   | (11,156                                       | )       | (7,227 | ) |
| Gain on sale of bank premises and equipment                                    |   | (6                                            | )       | (71 | ) |
| Decrease in accrued interest and other  liabilities                            |   | (2,535                                        | )       | (957 | ) |
| Net cash used in operating activities                                          |   | (5,578                                        | )       | (1,777 | ) |
|                                                                           |   |                                          |    |   |   |
| Cash flows from investing activities:                                          |   |                                          |    |   |   |
| Proceeds from sales of investment  securities                                  |   | 1,081                                         |    | 42,584 |   |
| Proceeds from maturities of investment  securities                             |   | 89,867                                        |    | 68,896 |   |
| Purchase of bank owned life insurance                                          |   | (15,473                                       | )       | — |   |
| Cash acquired from branch acquisitions                                         |   | —                                        |    | 64,863 |   |
| Cash acquired from Guaranty Bank  acquisition, net of $2,544 cash paid         |   | —                                        |    | 27,988 |   |
| Purchases of investment securities                                             |   | (11,309                                       | )       | (135,463 | ) |
| Net increase in loans                                                          |   | (65,321                                       | )       | (49,809 | ) |
| Purchases of investments in limited  partnerships                              |   | —                                        |    | (1,171 | ) |
| Proceeds from sales of bank premises and  equipment                            |   | 6                                             |    | 222 |   |
| Capital expenditures                                                           |   | (1,030                                        | )       | (1,044 | ) |
| Net cash (used in) provided by investing  activities                           |   | (2,179                                        | )  | 17,066 |   |
|                                                                           |   |                                          |    |   |   |
| Cash flows from financing activities:`                                         |   |                                          |    |   |   |
| Net increase in deposits                                                       |   | 27,966                                        |    | 11,212 |   |
| Net increase in short-term borrowings                                          |   | 1,200                                         |    | 3,153 |   |
| Repayment of other borrowed funds                                              |   | (2,000                                        | )       | — |   |
| Proceeds from issuance of subordinated  debentures                             |   | —                                        |    | 16,500 |   |
| Repayment of subordinated debt                                                 |   | (789                                          | )       | — |   |
| Cash dividends paid                                                            |   | (3,431                                        | )       | (3,063 | ) |
| Proceeds from sale of stock for employee  benefits program                     |   | 608                                           |    | 111 |   |
| Purchase of treasury stock                                                     |   | (313                                          | )       | (1,071 | ) |
| Net cash provided by financing activities                                      |   | 23,241                                        |    | 26,842 |   |
|                                                                           |   |                                          |    |   |   |
| Net increase (decrease) in cash and cash  equivalents                          |   | 15,484                                        |    | 42,131 |   |
| Cash and cash equivalents at beginning of  period                              |   | 44,983                                        |    | 15,277 |   |
| Cash and cash equivalents at end of period                                     |   | $                                             | 60,467  |   | $ | 57,408 |   |
|                                                                           |   |                                          |    |   |   |
| Supplemental disclosure of cash flow  information:                             |   |                                          |    |   |   |
|                                                                           |   |                                          |    |   |   |
| Cash paid during the period for:                                               |   |                                          |    |   |   |
|                                                                           |   |                                          |    |   |   |
| Interest                                                                       |   | $                                             | 23,415  |   | $ | 26,163 |   |
|                                                                           |   |                                          |    |   |   |
| Income taxes                                                                   |   | $                                             | 1,950   |   | $ | 1,850 |   |

 

Loans with an estimated valueof  $348,000 and $573,000 were reclassifiedto foreclosed assets held for sale during the nine-month periods endedSeptember 30, 2002 and 2001, respectively.

 

The accompanying notes are an integral partof these financial statements.

 

5

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SUN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

ForwardLooking Statements (FLSs)

 

This report contains FLSs thatreflect Sun Bancorp, Inc’s (Sun) current views regarding future events andfinancial performance for Sun and its subsidiaries.  FLSs may generally, but not always, be identified by words suchas “estimate,” “believe,” “forecast” and other indications of future events andtrends.  FLSs are subject toconsiderable uncertainties and risks, including factors beyond Sun’s controlthat could cause actual results to differ materially from historical oranticipated results.  Such factorsinclude, but are not limited to (1) customer and deposit attrition or revenueloss following announced mergers may be greater than expected; (2) financialindustry competition may increase significantly; (3) changing economic,interest rate, and regulatory environments; (4) announced mergers do notconsummate as anticipated; (5) other factors that may not be identifiable atthis time.  Further, Sun’s historicalperformance does not guarantee and may not indicate future results.

 

The list of important factorsis not complete or exclusive.  Additional information regarding factors that may cause actual resultsto differ materially from those considered by the FLSs is included in Sun’scurrent and subsequent filings with the Securities and Exchange Commission(SEC).  Sun does not update any FLS thatmay be made from time to time by or on behalf of Sun.

 

Note 1 — Basis of InterimPresentation

 

The consolidatedfinancial statements include the accounts of Sun Bancorp, Inc., the parentcompany, and its wholly-owned subsidiaries: SunBank, SUBI Investment Company, Beacon Life Insurance Company, and SunBancorp Statutory Trust I.  Sun alsoholds thirty percent ownership in Sun Abstract and Settlement Services.  The transactions of Beacon Life InsuranceCompany and Sun Abstract and Settlement Services are not material to theconsolidated financial statements.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

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 afair presentation of the results of the interim period have been included.  Operating results for the three and ninemonths ended September 30, 2002 are not necessarily indicative of the resultsthat may be expected for the year ended December 31, 2002.

 

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 and 19 of the 2001 AnnualReport to Shareholders.

 

6

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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 endedSeptember 30, 2002 and 2001:

 
|                                |   | **For the  Three Months Ended September 30,** |      |
|-------------------------------------|--------|-----------------------------------------------|-----------|
|                                |   | **Income  Numerator**                         |      | **Common  Shares  Denominator** |   | **Net  Income Per  Share** |   |
| 2002                                |   |                                          |      |   |   |   |   |
| Net income per share – Basic   |   | $                                             | 1,540,000 |   | 7,164,910 |   | $ | 0.21 |   |
| Dilutive effect of stock options    |   |                                          |      | 83,072 |   |   |   |
| Net income per share – Diluted |   | $                                             | 1,540,000 |   | 7,247,982 |   | $ | 0.21 |   |
|                                |   |                                          |      |   |   |   |   |
| 2001                                |   |                                          |      |   |   |   |   |
| Net income per share – Basic   |   | $                                             | 1,551,000 |   | 7,151,474 |   | $ | 0.22 |   |
| Dilutive effect of stock options    |   |                                          |      | 10,284 |   |   |   |
| Net income per share – Diluted |   | $                                             | 1,551,000 |   | 7,161,758 |   | $ | 0.22 |   |

 

 
|                                |   | **For the  Nine Months Ended September 30,** |      |
|-------------------------------------|--------|----------------------------------------------|-----------|
|                                |   | **Income  Numerator**                        |      | **Common  Shares  Denominator** |   | **Net  Income Per  Share** |   |
| 2002                                |   |                                         |      |   |   |   |   |
| Net income per share – Basic   |   | $                                            | 4,724,000 |   | 7,149,568 |   | $ | 0.66 |   |
| Dilutive effect of stock options    |   |                                         |      | 38,545 |   |   |   |
| Net income per share – Diluted |   | $                                            | 4,724,000 |   | 7,188,113 |   | $ | 0.66 |   |
|                                |   |                                         |      |   |   |   |   |
| 2001                                |   |                                         |      |   |   |   |   |
| Net income per share – Basic   |   | $                                            | 4,418,000 |   | 6,873,596 |   | $ | 0.64 |   |
| Dilutive effect of stock options    |   |                                         |      | 2,480 |   |   |   |
| Net income per share – Diluted |   | $                                            | 4,418,000 |   | 6,876,076 |   | $ | 0.64 |   |

 

7

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Note 3 – ConsolidatedStatement of Comprehensive Income

 

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 the  Three Months  Ended September 30,** |   | **For the  Nine Months  Ended September 30,** |   |
|---------------------------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
| **(In  Thousands)**                                                       |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
|                                                                      |   |                                           |   |                                          |   |   |   |   |   |
| Net income                                                                |   | $                                              | 1,540  |                                          | $      | 1,551 |   | $ | 4,724 |   | $ | 4,418 |   |
|                                                                      |   |                                           |   |                                          |   |   |   |   |   |
| Other comprehensive income:                                               |   |                                           |   |                                          |   |   |   |   |   |
| Unrealized holding gains on available for  sale securities:               |   |                                           |   |                                          |   |   |   |   |   |
| Gains arising during the period                                           |   | 1,170                                          |   | 6,068                                         |   | 3,635 |   | 9,184 |   |
| Reclassification adjustment – realized  gains included in net income |   | (3                                             | )      | (62                                           | )      | (143 | ) | (898 | ) |
|                                                                      |   |                                           |   |                                          |   |   |   |   |   |
| Other comprehensive income before income  taxes                           |   | 1,167                                          |   | 6,006                                         |   | 3,492 |   | 8,286 |   |
| Income tax expense related to Other  comprehensive income                 |   | (397                                           | )      | (2,042                                        | )      | (1,187 | ) | (2,817 | ) |
|                                                                      |   |                                           |   |                                          |   |   |   |   |   |
| Other comprehensive income                                                |   | 770                                            |   | 3,964                                         |   | 2,305 |   | 5,469 |   |
|                                                                      |   |                                           |   |                                          |   |   |   |   |   |
| Comprehensive income                                                      |   | $                                              | 2,310  |                                          | $      | 5,515 |   | $ | 7,029 |   | $ | 9,887 |   |

 

8

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Note 4 – InvestmentSecurities

 

The amortizedcost and fair value of investment securities at September 30, 2002 and December31, 2001 were as follows:

 
|                                              |   | **September  30, 2002** |    |
|---------------------------------------------------|--------|-------------------------|---------|
| **(In  Thousands)**                               |   | **Amortized  Cost**     |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| Debt securities:                                  |   |                    |    |   |   |   |   |   |   |
| Obligations of U.S. government agencies           |   | $                       | 179,953 |   | $ | 5,965 |   | $ | (161 | ) | $ | 185,757 |   |
| Obligations of states and political  subdivisions |   | 20,173                  |    | 1,110 |   | (25 | ) | 21,258 |   |
| Other corporate                                   |   | 7,246                   |    | 555 |   | (202 | ) | 7,599 |   |
| Total debt securities                             |   | $                       | 207,372 |   | $ | 7,630 |   | (388 | ) | $ | 214,614 |   |
|                                              |   |                    |    |   |   |   |   |   |   |
| Equity securities:                                |   |                    |    |   |   |   |   |   |   |
| Marketable equity securities                      |   | $                       | 3,208   |   | $ | 65 |   | $ | (678 | ) | $ | 2,595 |   |
| Restricted equity securities                      |   | 11,593                  |    | — |   | — |   | 11,593 |   |
| Total equity securities                           |   | 14,801                  |    | 65 |   | (678 | ) | 14,188 |   |
|                                              |   |                    |    |   |   |   |   |   |   |
| Total                                             |   | $                       | 222,173 |   | $ | 7,695 |   | $ | (1,066 | ) | $ | 228,802 |   |

 
|                                              |   | **December  31, 2001** |    |
|---------------------------------------------------|--------|------------------------|---------|
|                                              |   | **Amortized  Cost**    |    | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
| Debt securities:                                  |   |                   |    |   |   |   |   |   |   |
| Obligations of U.S. government agencies           |   | $                      | 258,234 |   | $ | 3,982 |   | $ | (557 | ) | $ | 261,659 |   |
| Obligations of states and political  subdivisions |   | 22,054                 |    | 312 |   | (161 | ) | 22,205 |   |
| Other corporate                                   |   | 7,239                  |    | 253 |   | (40 | ) | 7,452 |   |
| Total debt securities                             |   | 287,527                |    | 4,547 |   | (758 | ) | 291,316 |   |
|                                              |   |                   |    |   |   |   |   |   |   |
| Equity securities:                                |   |                   |    |   |   |   |   |   |   |
| Marketable equity securities                      |   | 3,836                  |    | 13 |   | (667 | ) | 3,182 |   |
| Restricted equity securities                      |   | 11,114                 |    | — |   | — |   | 11,114 |   |
| Total equity securities                           |   | 14,950                 |    | 13 |   | (667 | ) | 14,296 |   |
|                                              |   |                   |    |   |   |   |   |   |   |
| Total                                             |   | $                      | 302,477 |   | $ | 4,560 |   | $ | (1,425 | ) | $ | 305,612 |   |

 

9

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Note 5 – Loans

 

The balancesfor principal loan categories are as follows:

 
|                                        |   | **September  30, 2002** |    | **December  31, 2001** |   |
|---------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                        |   |                    |    |                   |   |
| Real estate – Mortgage                 |   | $                       | 220,657 |                   | $      | 261,310 |   |
| Real estate – Construction             |   | 14,364                  |    | 6,912                  |   |
| Agricultural                                |   | 152                     |    | 503                    |   |
| Commercial and industrial                   |   | 237,182                 |    | 151,181                |   |
| Lease – Auto                           |   | 27,141                  |    | 8,489                  |   |
| Lease – Equipment                      |   | 4,689                   |    | 2,287                  |   |
| Individual                                  |   | 89,112                  |    | 92,649                 |   |
| Other                                       |   | 729                     |    | 1,619                  |   |
| Total                                       |   | $                       | 594,026 |                   | $      | 524,950 |   |
|                                        |   |                    |    |                   |   |
| Less:                                       |   |                    |    |                   |   |
| Unearned income & deferred loan fees    |   | (7,533                  | )       | (3,089                 | )      |
| Unamortized net discount on purchased loans |   | (82                     | )       | (137                   | )      |
| ALLL                                        |   | (7,178                  | )       | (6,204                 | )      |
| Net Loans                                   |   | $                       | 579,233 |                   | $      | 515,520 |   |

 

10

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Note 6 – Change in Accounting

 

EffectiveJanuary 1, 2002, Sun Bancorp, Inc. adopted the provisions of FinancialAccounting Standards Board Statement No. 142, “Goodwill and Other IntangibleAssets” (SFAS 142).  As of January 1,2002, Sun Bancorp, Inc. had $14,018 in unamortized goodwill from previousacquisitions.  SFAS 142 requires atransitional impairment test be performed. The initial valuation of Sun Bancorp, Inc.’s goodwill pursuant to thispronouncement resulted in no write-downs for impairment.  Additionally, SFAS 142 requires areconciliation of previously reported net income and earnings per share,adjusted for changes pursuant to this statement.  Following is the pro forma effect of adoption of SFAS 142 on thethree and nine-month periods ended September 30, 2002 and 2001:

 
|                                           |   | **For the Three Months  Ended September 30** |   | **For the Nine Months  Ended September 30** |   |
|------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
| **(In  Thousands, Except for Per Share Data)** |   | **2002**                                     |   | **2001**                                    |   | **2002** |   | **2001** |   |
|                                           |   |                                         |   |                                        |   |   |   |   |   |
| Net income:                                    |   |                                         |   |                                        |   |   |   |   |   |
| Reported net income                            |   | $                                            | 1,540  |                                        | $      | 1,551 |   | $ | 4,724 |   | $ | 4,418 |   |
| Add back: goodwill amortization                |   | —                                       |   | 276                                         |   | — |   | 680 |   |
| Adjusted net income                            |   | $                                            | 1,540  |                                        | $      | 1,827 |   | $ | 4,724 |   | $ | 5,098 |   |
|                                           |   |                                         |   |                                        |   |   |   |   |   |
| Basic earnings per share:                      |   |                                         |   |                                        |   |   |   |   |   |
| Reported net income                            |   | $                                            | 0.21   |                                        | $      | 0.22 |   | $ | 0.66 |   | $ | 0.64 |   |
| Add back: goodwill amortization, net of tax    |   | —                                       |   | $                                           | .03    |   | $ | 0.21 |   | $ | .10 |   |
| Adjusted net income                            |   | $                                            | 0.21   |                                        | $      | 0.25 |   | $ | 0.66 |   | $ | 0.74 |   |
|                                           |   |                                         |   |                                        |   |   |   |   |   |
| Diluted earnings per share:                    |   |                                         |   |                                        |   |   |   |   |   |
| Reported net income                            |   | $                                            | 0.21   |                                        | $      | 0.22 |   | $ | 0.66 |   | $ | 0.64 |   |
| Add back: goodwill amortization, net of tax    |   | —                                       |   | $                                           | .03    |   | $ | 0.21 |   | $ | .10 |   |
| Adjusted net income                            |   | $                                            | 0.21   |                                        | $      | 0.25 |   | $ | 0.66 |   | $ | 0.74 |   |

 

11

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Item 2.    Management’s Discussion and Analysis ofFinancial 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 2001 Annual Report, which is incorporated hereinby reference.  Current performance doesnot guarantee or assure similar performance in the future, and may not be indicativeof future results.

 

Results ofOperations – Three Months Ended September 30, 2002 and 2001

 

Sun Bancorp,Inc.’s earnings of $1,540,000 ($0.21 per share basic and diluted) for the threemonths ended September 30, 2002 were $11,000 ($0.01 per share basic anddiluted) lower than the three months ended 2001.

 

Comparative information for the nine months ended September 30, 2002and 2001 is impacted by the acquisition of Guaranty Bank (six branches) andthree Mellon branches during the first nine months of 2001. In addition inDecember of 2001 two branches were sold.

 

Net interestincome decreased 3.5% to $6,376 for the three months ended September 30, 2002as compared to $6,605 for the same period of 2001.  Total interest and dividend income decreased $2,471 to $13,727for the three months ended September 30, 2002. The decrease is due to higher-rate loans prepaying and being replaced bypredominately lower rate variable loans. In addition, higher coupon bonds have been prepaying and SunBank hasaccumulated the cash as investment alternatives were analyzed.  Interest and fees on loans decreased to$10,364 for the three months ended September 30, 2002 as compared to $10,545for the three months ended September 30, 2001. Interest on deposits in banks has decreased 77.3% or $320 to $94 for thethree months ended September 30, 2002 as management funds loan growth by usingcash on deposit in banks and cash flow from the investment portfolio.  Total interest expense decreased 23.4% or$2,242 to $7,351 for the three months ended September 30, 2002, as compared to2001.  The decrease is the result ofmanagement’s focus on growing low-cost core deposits (non-time deposits) andthe rate reductions by the Federal Reserve during the past year.  Interest on deposits decreased 37.6%, or$2,173 as a result of the interest rate decreases when comparing the threemonths ended September 30, 2002 to 2001.

 

The provisionfor loan and lease losses increased 38.5% to $450 for the three months endedSeptember 30, 2002.  The increase is theresult of continued growth in the loan portfolio of $52,388 since September 30,2001 and $64,687 since December 31, 2001 and the inherent risks associated withany loan.

 

12

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Total otheroperating income increased for the three months ending September 30, 2002 by$333, or 25.7%, when compared to the same period of 2001.  Service charges on deposit accountsincreased 59.7% to $880 for the three months ended September 30, 2002.  A majority of the increase is the result ofthe implementation of a new overdraft honor program.  Income from the sale of investment products decreased by $42, or31.8% for the three months ended September 30, 2002 as compared to the sameperiod in 2001.  In March of 2002,management made an investment in Bank Owned Life Insurance to offset futureincreases in employee benefit costs. The income generated from this investment was $187 for the three monthsended September 30, 2002.  Other incomedecreased by $27, or 10.3%, for the three months ended September 30, 2002 ascompared to $261 for the three months ended September 30, 2001.

 

Otheroperating expenses increased 8.7% to $5,886 for the three months endedSeptember 30, 2002, as compared to $5,413 for the same period of 2001.  The principal reason for the $473 increasein other operating expenses when comparing the quarters ended September 30,2002 and 2001 is expansion of the branch network.  During the first six months of 2001, Sun Bancorp, Inc., acquiredthree Mellon branches and Guaranty bank, N.A., which consisted of sixbranches.  Salaries and employeebenefits increased 9.2% to $2,991 for the three months ended September 30,2002, as management continues to attract new employees to expand SunBank’smarket area coverage.  In addition,SunBank has undergone a bank-wide training program related to new systemsimplementations.  This training hasresulted in high levels of overtime pay. Net occupancy and furniture and equipment expenses increased 5.2% and8.4%, respectively, as compared to the three months ended September 30,2001.  Other expenses increased $488 to$1,905 for the three months ended September 30, 2002.  This is the result of increased normal business activities(including the Pennsylvania Shares Tax and FDIC assessment) and the costsassociated with SunBank outsourcing its daily processing.  The associated cost savings to thisoutsourcing will begin to appear during the fourth quarter as parallel systemsare phased out.

 

Results ofOperations – Nine Months Ended September 30, 2002 and 2001

 

Sun Bancorp,Inc.’s earnings of $4,724 ($0.64 per share basic and diluted) for the ninemonths ended September 30, 2002 were $306,000 ($0.02 per share basic anddiluted) higher than the nine months ended 2001.

 

Comparative information for the nine months ended September 30, 2002and 2001 is impacted by the acquisition of Guaranty Bank (six branches) andthree Mellon branches during the first nine months of 2001. In addition inDecember of 2001 two branches were sold.

 

The earningsresulted in annualized return on average assets for the nine months endedSeptember 30, 2002 of 0.70% as compared to 0.66% for the nine months endedSeptember 30, 2001.  Annualized returnon average equity for the nine months ended September 30, 2002 was 8.17% ascompared to 8.72% for the nine months ended September 30, 2001.

 

13

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Net interestincome increased to $19,145 for the nine months ended September 30, 2002, ascompared to $17,360 for the same period of 2001.  Total interest and dividend income decreased $3,001 or 6.7% to$41,612 for the nine months ended September 30, 2002, as compared to 2001.  The decrease in interest income is primarilythe result of SunBank decreasing the investment portfolio by $76,810 sinceDecember 31, 2001. This decrease is the result of higher coupon bonds prepayingand management’s use of the cash flow to fund loan growth.  Accordingly, since December 31, 2001, netloans have increased $63,713 with the funding for the loan growth coming fromrunoff in the investment portfolio. This increase in net loan balances resulted in interest and fees onloans increasing $1,815 or 6.4% to $30,262 for the nine months ended September30, 2002.  Total interest expensedecreased $4,786, or 17.6%, for the nine months ended September 30, 2002, ascompared to 2001.  The decrease is theresult of interest on deposits decreasing $4,949, or 30.5%, to $11,289 for thenine-months ended September 30, 2002. The significant decrease is the result of SunBank focusing on coredeposit growth (non-time deposits) coupled with the Federal Reserve rate cutsover the past year.  The provision forloan and lease losses increased 36.2% to $1,260 for the nine months endedSeptember 30, 2002.  The increase is theresult of Sun’s continued growth of the loan portfolio.

 

Excludingsecurity gains, total other operating income increased $1,245, for the ninemonths ended September 30, 2002, compared to the same period of 2001.  Service charges on deposit accountsincreased 60.1% to $2,108 for the nine months ended September 30, 2002.  The increase is primarily the result of theimplementation of a new overdraft honor program and increased emphasis ongenerating fee income.  Trust incomedecreased $163, or 22.5%, to $563 for the nine months ended September 30,2002.  This decrease is partiallyattributable to the decline in the stock market as account fees are related tothe market value of each account.  Otherincome has increased $122, or 20.9%, to $706 for the nine months endedSeptember 30, 2002 as leasing fees have increased $69 for the nine-month periodended September 30, 2002, as compared to the same period in 2001.

 

Otheroperating expenses increased to $16,682 for the nine months ended September 30,2002, compared to $14,342 in the same period of 2001.  The main reason for Sun’s $2,340 increase in other operatingexpenses for the nine months ended September 30, 2002, as compared to September30, 2001, is expansion as SunBank added nine branches during 2001.  Salaries and employee benefits increased 22.8%to $1,600 for the nine months ended September 30, 2002, as SunBank continues toattract new employees to expand SunBank’s market area coverage.  Net occupancy and furniture and equipmentexpenses increased 9.5% to $2,073.  Theincrease is primarily due to internal growth and acquisitions.  Amortization of intangibles decreased $350,or 33.2% to $703 for the nine months ended September 30, 2002.  Effective January 1, 2002 Sun Bancorp, Inc.was no longer required to amortize the goodwill associated with prior bankacquisitions (see Note 6).  Otherexpenses increased $986, or 23.4%, to $5,199 due to increases in normalbusiness expenses  (PA Shares tax,telephone, and FDIC insurance) associated with the acquisition of GuarantyBank, N.A. and three Mellon branches during 2001.  In addition, SunBank is now outsourcing its data processing.

 

14

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The costreduction of the outsourcing will not be realized until the end of the fourthquarter of 2002 and continuing into the middle of the first quarter of 2003 asSunBank runs duplicate systems until the entire project is completed.

 

Balance Sheet– September 30, 2002 and December 31, 2001

 

Total assetswere $948,950 at September 30, 2002, an increase of $27,735 from $920,855 atDecember 31, 2001.  Cash and cashequivalents increased $15,484, or 34.4% from $44,983 at December 31, 2001.  Management’s efforts to shift funds from theinvestment portfolio to the higher-yielding loan portfolio is evidenced by adecrease in the investment portfolio of $76,810, or 25.1%, when comparingSeptember 30, 2002 to December 31, 2001 with a corresponding increase of$63,713, or 12.4%, in the net loan portfolio during the same period.  The growth in the loan portfolio hasoccurred primarily in the commercial/industrial category.  Bank-owned life insurance of $15,473 wasadded to the balance sheet in March 2002 as a vehicle to offset the futureincreases in employee benefit costs.

 

Totalliabilities increased $23,842 to $867,168 at September 30, 2002.  Total deposits increased $27,966 to $601,843as core deposits (non-time deposits) increased 9.2% and time deposits remainedsteady.  Of the increase, $11,467 and $9,165was from money market and savings growth, respectively.  Since December 31, 2001,non-interest-bearing deposits have increased $2,412 or 4.2%.

 

15

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Sun Bancorp,Inc.’s total shareholders’ equity increased $3,893 from December 31, 2001 toSeptember 30, 2002.  The increase 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) increased 111.4%,or $2,305, to $4,374 from $2,069 at December 31, 2001 because of changes in themarket value of Sun Bancorp, Inc.’s investment securities.  Second, net income of $4,724 augmentedshareholders’ equity.  These increaseswere offset by an increase in treasury stock of $313 as Sun Bancorp, Inc.purchased 17,800 shares of treasury stock at an average cost of $17.61 pershare over the first nine months of 2002. Sun Bancorp, Inc. also paid $3,431 in dividends to shareholders duringthe nine months ended September 30, 2002.

 

Allowance forLoan and Lease Losses 

 

SunBank’s allowancefor loan and lease losses is increased through periodic provisions for loan andlease losses, and that provision is reported as an expense in currentincome.  Loan losses are charged againstthe 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 September 30, 2002.

 

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.

 

16

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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 was increased to $1,260 for the first nine months of2002, as compared to $925 for the same period of 2001.  This increase was due to loan growth of$64,687, since December 31, 2001 and the risks associated with any loan.  The 36.2% increase, coupled with increasedrecoveries, resulted in an allowance for loan and lease losses of 1.22% oftotal loans at September 30, 2002.

 

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 anincreased allowance for loan and lease losses. As a result, any number of factors may materially change management’sanalysis in the future.

 

17

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Deposits

 

Sun Bancorp,Inc.’s total deposits decreased $27,966 or 4.9%, to $601,843 at September 30,2002, as compared to $573,877 at December 31, 2001.  This decrease is the result of Sun focusing on growing low costcore deposits (all deposits excluding time deposits).  This focus has resulted in core deposits increasing 9.2% or$27,080, to $319,890 at September 30, 2002, as compared to $292,810 at December31, 2001.  A majority of the growth is theresult of NOW accounts increasing $11,467 or 7.8% and savings depositsincreasing $9,165 or 13.0% since December 31, 2001.  Over the same time frame, demand deposit accounts have grown$2,412, or 4.2%, to $60,402 at September 30, 2002, as Sun continues focusing onattracting non-interest bearing deposit accounts.

 
|             |   | **September  30, 2002** |   | **December  31, 2001** |   | **Change** |    |
|------------------|--------|-------------------------|--------|------------------------|--------|------------|---------|
|             |   | **Amount**              |   | **%****Total**         |   | **Amount** |    | **%****Total** |   | **Amount** |   | **%** |   |
|             |   |                    |   |                   |   |       |    |   |   |   |   |   |   |
| Demand deposits  |   | $                       | 60,402 |                   | 10.0   | %          | $       | 57,990 |   | 10.1 | % | $ | 2,412 |   | 4.2 | % |
| NOW accounts     |   | 157,806                 |   | 26.2                   | %      | 146,339    |    | 25.5 | % | 11,467 |   | 7.8 | % |
| Insured MMDA     |   | 22,094                  |   | 3.7                    | %      | 18,058     |    | 3.1 | % | 4,036 |   | 22.4 | % |
| Savings deposits |   | 79,588                  |   | 13.2                   | %      | 70,423     |    | 12.3 | % | 9,165 |   | 13.0 | % |
| Time deposits    |   | 281,953                 |   | 46.9                   | %      | 281,067    |    | 49.0 | % | 886 |   | 0.3 | % |
| Total deposits   |   | 601,843                 |   | 100.00                 | %      | $          | 573,877 |   | 100.0 | % | 27,966 |   | 4.9 | % |
|             |   |                    |   |                   |   |       |    |   |   |   |   |   |   |
| Core deposits*   |   | 319,890                 |   | 53.2                   | %      | $          | 292,810 |   | 51.0 | % | $ | 27,880 |   | 9.2 | % |
|                  |        |                         |        |                        |        |            |         |  |  |  |  |  |  |  |  |  |

 

----

| * Core deposits are defined as total deposits less time deposits |
|------------------------------------------------------------------|

 

Other Funding:

 

Sun continuedusing borrowed funds to supplement deposits during 2001 and 2002.  At September 30,  2002, Sun had $220,000 in variable Federal Home Loan Bank (FHLB) borrowings,which represented a decrease of $2,000 in total FHLB borrowings from December31, 2001.  These variable rate advanceshave maturities between 2008 and 2010.

 

Other fundingsources of short-term monies include deposit customers’ cash managementaccounts (classified as securities sold under agreements to repurchase) and theTreasury Tax and Loan Note Option.  Suncontinually monitors its borrowed funds positions and market conditions inorder to maintain an effective funding structure.  When appropriate, Sun may take future action to modify itsborrowed funds structure.

 

18

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#### **NetInterest 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 increasedby 3 basis points to 3.16% for the nine months ending September 30, 2002, ascompared to 3.13% for the same period of 2001. This increase resulted principally due to acquiring low-costing depositsthrough the acquisition of Guaranty Bank, N.A. and several Mellon Bank branchesduring 2001.  These deposits, coupledwith management’s decision to shift funds from the investment portfolio to thehigher-yielding loan portfolio and the decline in interest rates during thelast 12 months, resulted in the higher NIM during 2002.

 

19

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The following table sets forth comparative yields and rates paid forinterest bearing assets and liabilities:

 
| **Nine  Months Ended**                                          |       | **September 30, 2002** |    | **September 30, 2001** |   |
|-----------------------------------------------------------------|------------|------------------------|---------|------------------------|--------|
| **(Dollars in thousands)**                                      |       | **AVERAGE  BALANCE**   |    | **INTEREST**           |   | **RATE** |   | **AVERAGE  BALANCE** |   | **INTEREST** |   | **RATE** |   |
| ASSETS                                                          |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                        |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                                       |       | $                      | 16,520  |                   | $      | 269 |   | 2.18 | % | $ | 34,749 |   | 1,087 |   | 4.18 | % |
| Loans (net of unearned income)                                  |       | 563,050                |    | 30,673                 |   | 7.28 | % | 467,764 |   | 29,902 |   | 8.55 | % |
| Investments:                                                    | Taxable    |                   | 242,838 |                   | 10,313 |   | 5.66 | % | 295,823 |   | 14,257 |   | 6.43 | % |
|                                                            | Tax-exempt |                   | 21,102  |                   | 1,163  |   | 7.35 | % | 22,470 |   | 1,248 |   | 7.41 | % |
| Total interest-earning assets                                   |       | 843,510                |    | 42,418                 |   | 6.72 | % | 820,807 |   | 46,494 |   | 7.57 | % |
|                                                            |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets:                                     |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                         |       | 19,229                 |    |                   |   |   |   | 14,721 |   |   |   |   |   |
| Bank premises & equipment                                   |       | 14,472                 |    |                   |   |   |   | 13,006 |   |   |   |   |   |
| Accrued interest and other assets                               |       | 57,375                 |    |                   |   |   |   | 68,613 |   |   |   |   |   |
| Less:   Allowance for loan losses                          |       | (6,714                 | )       |                   |   |   |   | (5,645 | ) |   |   |   |   |
| Unamortized loan fees                                           |       | 102                    |    |                   |   |   |   | 210 |   |   |   |   |   |
| Total assets                                                    |       | $                      | 927,974 |                   |   |   |   |   | $ | 911,712 |   |   |   |   |   |
|                                                            |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                       |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                   |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| NOW Accounts                                                    |       | 150,513                |    | 1,501                  |   | 1.33 | % | 142,169 |   | 2,496 |   | 2.35 | % |
| Insured Money Market Accounts                                   |       | 21,649                 |    | 307                    |   | 1.90 | % | 22,283 |   | 460 |   | 2.76 | % |
| Savings deposits                                                |       | 76,960                 |    | 945                    |   | 1.64 | % | 69,585 |   | 961 |   | 1.85 | % |
| Time deposits                                                   |       | 275,004                |    | 8,536                  |   | 4.15 | % | 260,663 |   | 12,321 |   | 6.32 | % |
| Short-term borrowings                                           |       | 21,956                 |    | 236                    |   | 1.44 | % | 15,465 |   | 353 |   | 3.05 | % |
| Subordinated debentures                                         |       | 20,112                 |    | 1,428                  |   | 9.47 | % | 14,898 |   | 1,098 |   | 9.83 | % |
| Other borrowed funds                                            |       | 221,136                |    | 9,514                  |   | 5.75 | % | 222,000 |   | 9,564 |   | 5.76 | % |
| Total interest-bearing liabilities                              |       | 787,330                |    | 22,467                 |   | 3.82 | % | 747,064 |   | 27,253 |   | 4.88 | % |
|                                                            |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing liabilities and  shareholders’ equity: |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                 |       | 57,266                 |    |                   |   |   |   | 53,494 |   |   |   |   |   |
| Accrued interest and other liabilities                          |       | 3,682                  |    |                   |   |   |   | 43,391 |   |   |   |   |   |
| Shareholders’ equity                                       |       | 79,696                 |    |                   |   |   |   | 67,762 |   |   |   |   |   |
| Total liabilities and shareholders’ equity                 |       | $                      | 927,974 |                   |   |   |   |   | $ | 911,712 |   |   |   |   |   |
|                                                            |       |                   |    |                   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                            |       |                   |    |                   |   | 2.90 | % |   |   |   |   | 2.69 | % |
| Net interest income/margin                                      |       |                   |    | $                      | 19,951 |   | 3.16 | % |   |   | $ | 19,241 |   | 3.13 | % |
|                                                                 |            |                        |         |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

#### ** **

----

* Average loanbalances include non-accrual loans and interest income includes fees on loans

* Yields ontax exempt loans and investments have been adjusted to a fully taxableequivalent basis using a 34% federal income tax rate

 

20

----

#### ** **

#### **OtherOperating Income**

 

Other operating income,excluding security gains, increased $1,245 or 42.4% to $4,183 for the ninemonths ended September 30, 2002 as compared to 2001.  Increased service charges on deposits accounted for $791 of theincrease.  The increase in servicecharges was primarily the result of a newly implemented program involvingoverdraft protection.  In addition, thefirst nine months of 2002 included the full impact of Sun purchasing threeformer Mellon branches and Guaranty Bank; in December 2001 two branches weresold, N.A. (6 branches) during the first nine months of 2001.  The sale of investment products contributedan additional $195 of the increase. This program was initiated during the second quarter of 2001.  An investment in bank owned life insurancewas made during 2002 to fund future increases in employee benefit expenses,which accounted for $393 of the increase from the nine months ended September30, 2001.  Offsetting the increase was adecrease of $163 in trust fees from $726 for the nine months ended September30, 2001.

 
| **Nine  Months Ended**               |   | **September  30, 2002** |   | **September  30, 2001** |   | **Change** |   |
|--------------------------------------|--------|-------------------------|--------|-------------------------|--------|------------|--------|
|                                 |   | **Amount**              |   | **%****Total**          |   | **Amount** |   | **%****Total** |   | **Amount** |   | **%** |   |
|                                 |   |                    |   |                    |   |       |   |   |   |   |   |   |   |
| Service charge on deposit accounts   |   | $                       | 2,108  |                    | 48.7   | %          | $      | 1,317 |   | 34.3 | % | $ | 791 |   | 60.1 | % |
| Trust income                         |   | 563                     |   | 13.0                    | %      | 726        |   | 18.9 | % | (163 | ) | (22.5 | )% |
| Net security gains                   |   | 143                     |   | 3.3                     | %      | 898        |   | 23.4 | % | (755 | ) | (84.1 | )% |
| Income from investment product sales |   | 350                     |   | 8.1                     | %      | 155        |   | 4.0 | % | 195 |   | 125.8 | % |
| Bank owned life insurance            |   | 393                     |   | 9.1                     | %      | —     |   | 0.0 | % | 393 |   | 100.0 | % |
| Income from insurance subsidiary     |   | 63                      |   | 1.5                     | %      | 156        |   | 4.1 | % | (93 | ) | (59.6 | )% |
| Other income                         |   | 706                     |   | 16.3                    | %      | 584        |   | 15.3 | % | 122 |   | 20.9 | % |
| Total other income                   |   | $                       | 4,326  |                    | 100.0  | %          | $      | 3,836 |   | 100.0 | % | $ | 490 |   | 12.8 | % |

 

Excluding security gains, otheroperating income increased $392 or 31.7% to $1,627 for the three months endedSeptember 30, 2002 as compared to 2001. The significant increase is a result of the new overdraft program.

 
| **Three Months Ended**               |   | **September  30, 2002** |   | **September  30, 2001** |   | **Change** |   |
|--------------------------------------|--------|-------------------------|--------|-------------------------|--------|------------|--------|
|                                 |   | **Amount**              |   | **%****Total**          |   | **Amount** |   | **%****Total** |   | **Amount** |   | **%** |   |
|                                 |   |                    |   |                    |   |       |   |   |   |   |   |   |   |
| Service charge on deposit accounts   |   | $                       | 880    |                    | 54.0   | %          | $      | 551 |   | 42.5 | % | $ | 329 |   | 59.7 | % |
| Trust income                         |   | 222                     |   | 13.6                    | %      | 226        |   | 17.4 | % | (4 | ) | (1.8 | )% |
| Net security gains                   |   | 3                       |   | 0.2                     | %      | 62         |   | 4.8 | % | (59 | ) | (95.2 | )% |
| Income from investment product sales |   | 90                      |   | 5.5                     | %      | 132        |   | 10.2 | % | (42 | ) | (31.8 | )% |
| Bank owned life insurance            |   | 187                     |   | 11.5                    | %      | —     |   | 0.0 | % | 187 |   | 100.0 | % |
| Income from insurance subsidiary     |   | 14                      |   | 0.9                     | %      | 65         |   | 5.0 | % | (51 | ) | (78.5 | )% |
| Other income                         |   | 234                     |   | 14.3                    | %      | 261        |   | 20.1 | % | (27 | ) | (10.3 | )% |
| Total other income                   |   | $                       | 1,630  |                    | 100.0  | %          | $      | 1,297 |   | 100.0 | % | $ | 333 |   | 25.7 | % |

 

21

----

 

#### **OtherOperating Expenses**

 

Otheroperating expenses increased $2,340 or 16.3% to $16,682 for the nine monthsended September 30, 2002 as compared to 2001. A majority of the increase, $1,600, is due to a 22.8% increase insalaries and employee benefits expenses. This increase is the result of programs and acquisitions that took placeduring the first nine months of 2001 (three former Mellon branches, GuarantyBank N.A., in addition to the sale of 2 branches in December 2001).  Net occupancy expense and furniture andequipment expenses remained stable from period to period as Sun continues itsfocus on cost control.  Other expensesincreased 23.4% or $986 due to increases in normal business expenses associatedwith the growth in branches.  Theseexpenses include: FDIC insurance, PA shares tax, advertising, and telephone.

 
| **Nine  Months Ended**           |   | **September  30, 2002** |   | **September  30, 2001** |   | **Change** |   |
|----------------------------------|--------|-------------------------|--------|-------------------------|--------|------------|--------|
|                             |   | **Amount**              |   | **%****Total**          |   | **Amount** |   | **%****Total** |   | **Amount** |   | **%** |   |
|                             |   |                    |   |                    |   |       |   |   |   |   |   |   |   |
| Salaries and employee benefits   |   | $                       | 8,624  |                    | 51.7   | %          | $      | 7,024 |   | 49.0 | % | $ | 1,600 |   | 22.8 | % |
| Net occupancy expense            |   | 807                     |   | 4.8                     | %      | 704        |   | 4.9 | % | 103 |   | 14.6 | % |
| Furniture and equipment expenses |   | 1,266                   |   | 7.6                     | %      | 1,189      |   | 8.3 | % | 77 |   | 6.5 | % |
| Amortization of intangibles      |   | 703                     |   | 4.2                     | %      | 1,053      |   | 7.3 | % | (350 | ) | (33.2 | )% |
| Expenses of insurance subsidiary |   | 83                      |   | .5                      | %      | 159        |   | 1.1 | % | (76 | ) | (47.8 | )% |
| Other expenses                   |   | 5,199                   |   | 31.2                    | %      | 4,213      |   | 29.4 | % | 986 |   | 23.4 | % |
| Total other expenses             |   | $                       | 16,682 |                    | 100.0  | %          | $      | 14,342 |   | 100.0 | % | $ | 2,340 |   | 16.3 | % |

 

Otheroperating expenses increased $473 or 8.7% to $5,886 for the three months endedSeptember 30, 2002 as compared to 2001. The increase is a result of the new programs and acquisitions mentionedabove in the nine-month analysis.

 
| **Three  Months Ended**          |   | **September  30, 2002** |   | **September  30, 2001** |   | **Change** |   |
|----------------------------------|--------|-------------------------|--------|-------------------------|--------|------------|--------|
|                             |   | **Amount**              |   | **%****Total**          |   | **Amount** |   | **%****Total** |   | **Amount** |   | **%** |   |
|                             |   |                    |   |                    |   |       |   |   |   |   |   |   |   |
| Salaries and employee benefits   |   | $                       | 2,991  |                    | 50.8   | %          | $      | 2,738 |   | 50.6 | % | $ | 253 |   | 9.2 | % |
| Net occupancy expense            |   | 282                     |   | 4.8                     | %      | 268        |   | 4.9 | % | 14 |   | 5.2 | % |
| Furniture and equipment expenses |   | 451                     |   | 7.6                     | %      | 416        |   | 7.7 | % | 35 |   | 8.4 | % |
| Amortization of intangibles      |   | 235                     |   | 4.0                     | %      | 515        |   | 9.5 | % | (280 | ) | 54.4 | % |
| Expenses of insurance subsidiary |   | 22                      |   | 0.4                     | %      | 59         |   | 1.1 | % | (37 | ) | 62.7 | % |
| Other expenses                   |   | 1,905                   |   | 32.4                    | %      | 1,417      |   | 26.2 | % | 488 |   | 34.4 | % |
| Total other expenses             |   | $                       | 5,886  |                    | 100.0  | %          | $      | 5,413 |   | 100.0 | % | $ | 473 |   | 8.7 | % |

 

 

22

----

 

#### **EquitySecurities 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 stock.  Because FHLB stock is redeemable at par, SunBank carries it atcost and periodically evaluates the stock for impairment.  Possible impairment factors includepotential dramatic changes to the housing and residential mortgage industry orthe related regulatory environment. Management currently does not believe any factors exist to suggestpotential impairment.

 

Bank and bankand financial 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.

 

Sun Bancorp,Inc. continually monitors its risk associated with equity securities.   Sun Bancorp, Inc.’s other marketableequities and equities of banks outside Pennsylvania were acquired as part of aprior investment strategy.  In 2000,management began a long-term program to gradually reduce the equity investmentsand risk exposure to a nominal amount. Management has successfully reduced Sun Bancorp, Inc.’s marketableequity price risk exposure, as shown below.

 
|                                            |   | **September  30, 2002** |       |
|-------------------------------------------------|--------|-------------------------|------------|
|                                            |   | **Cost**                |       | **Fair  Value** |   | **Unrealized  Losses** |   |
| Banks and bank and financial holding  companies |   | $                       | 3,121      |   | $ | 2,534 |   | $ | (587 | ) |
| FHLB stock                                      |   | 11,593                  |       | 11,593 |   | — |   |
| Non-bank companies                              |   | 87                      |       | 61 |   | (26 | ) |
| Total                                           |   | $                       | 14,801     |   | $ | 14,188 |   | $ | (613 | ) |
|                                            |   |                    |       |   |   |   |   |
|                                            |   | **December  31, 2001**  | ** ** |
|                                            |   | **Cost**                |       | **Fair  Value** |   | **Unrealized  Losses** |   |
| Banks and bank and financial holding  companies |   | $                       | 3,749      |   | $ | 3,102 |   | $ | (647 | ) |
| FHLB stock                                      |   | 11,114                  |       | 11,114 |   | — |   |
| Non-bank companies                              |   | 87                      |       | 80 |   | (7 | ) |
| Total                                           |   | $                       | 14,950     |   | $ | 14,296 |   | $ | (654 | ) |

 

23

----

 

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 $3,893 to $81,404 at September 30, 2002, from $77,511 at December 31,2001.  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 thefollowing capital ratios, which are well above the regulatory minimum levels.

** **

(Dollars in thousands)

 
|                                      |   | **Actual** |   | **For  Capital  Adequacy Purposes** |   | **For Well  Capitalized Purposes** |   |
|-------------------------------------------|--------|------------|--------|-------------------------------------|--------|------------------------------------|--------|
| ** **                                |   | **Amount** |   | **Ratio**                           |   | **Ratio**                          |   | **Ratio** |   |
| As of September 30, 2002:                 |   |       |   |                                |   |                               |   |   |   |
| Total Capital  (to Risk Weighted Assets)  |   | $          | 81,383 |                                | 13.4   | %                                  | 8.0    | % | 10.0 | % |
| Tier I Capital  (to Risk Weighted Assets) |   | $          | 71,050 |                                | 11.7   | %                                  | 4.0    | % | 6.0 | % |
| Tier I Capital  (to Average Assets)       |   | $          | 71,050 |                                | 7.8    | %                                  | 4.0    | % | 5.0 | % |
|                                      |   |       |   |                                |   |                               |   |   |   |
| As of December 31, 2001:                  |   |       |   |                                |   |                               |   |   |   |
| Total Capital  (to Risk Weighted Assets)  |   | $          | 78,730 |                                | 14.9   | %                                  | 8.0    | % | 10.0  | % |
| Tier I Capital  (to Risk Weighted Assets) |   | $          | 68,582 |                                | 13.0   | %                                  | 4.0    | % | 6.0 | % |
| Tier I Capital  (to Average Assets)       |   | $          | 68,582 |                                | 7.1    | %                                  | 4.0    | % | 6.0 | % |

 

24

----

 

Regulatory and Industry 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 of legislationon the liquidity, capital resources, and results of operations of Sun Bancorp,Inc. will be immaterial. Future recommendations by regulatory authorities orproposed legislation, which if they were implemented, would have a materialadverse effect upon the liquidity, capital resources, or results of operations,although the general cost of compliance with numerous and multiple federal andstate laws and regulations does have, and in the future may have, a negativeimpact 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 the financialservices industry strives for greater cost efficiencies and market share.  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.

 

25

----

The following tables set forth Selected Financial Data for each of thepast five quarters:

 

**Quarter Ended**

 
| **(dollars in thousands, except per share data)**   |   | **9/30/2002** |    | **6/30/2002** |   | **3/31/2002** |   | **12/31/2001** |    | **9/30/2001** |   |
|-----------------------------------------------------|--------|---------------|---------|---------------|--------|---------------|--------|----------------|---------|---------------|--------|
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| **Financial  Condition Data:**                      |   |          |    |          |   |          |   |           |    |          |   |
| **General**                                         |   |          |    |          |   |          |   |           |    |          |   |
| Total assets                                        |   | $             | 948,590 |          | $      | 923,322       |   | $              | 922,473 |          | $      | 920,855 |   | $ | 992,475 |   |
| Loans, net                                          |   | 579,233       |    | 575,616       |   | 547,080       |   | 515,520        |    | 527,925       |   |
| Goodwill & Core  Deposit Intangible             |   | 22,071        |    | 22,305        |   | 22,539        |   | 22,773         |    | 23,439        |   |
| Total deposits                                      |   | 601,843       |    | 571,371       |   | 576,754       |   | 573,877        |    | 648,153       |   |
| Non interest bearing                                |   | 60,402        |    | 58,981        |   | 57,866        |   | 57,990         |    | 71,118        |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| Savings                                             |   | 79,588        |    | 79,375        |   | 75,726        |   | 70,423         |    | 79,703        |   |
| NOW                                                 |   | 157,806       |    | 143,144       |   | 145,694       |   | 146,339        |    | 157,945       |   |
| Money Market                                        |   | 22,094        |    | 23,056        |   | 21,735        |   | 18,058         |    | 21,634        |   |
| Time Deposits                                       |   | 281,953       |    | 266,815       |   | 275,733       |   | 281,067        |    | 317,753       |   |
| Total interest bearing  deposits                    |   | 541,441       |    | 512,390       |   | 518,888       |   | 515,887        |    | 577,035       |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| Core deposits*                                      |   | 319,890       |    | 304,556       |   | 301,021       |   | 292,810        |    | 330,400       |   |
| Trust preferred securities  & subordinated debt |   | 19,655        |    | 19,655        |   | 20,444        |   | 20,444         |    | 20,444        |   |
| Stocholders’ equity                            |   | 81,404        |    | 80,099        |   | 76,992        |   | 77,511         |    | 76,589        |   |
| Trust assets under  management                      |   | 152,434       |    | 147,682       |   | 136,899       |   | 136,859        |    | 147,924       |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| **Asset  Quality**                                  |   |          |    |          |   |          |   |           |    |          |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| Non-performing assets                               |   | $             | 4,852   |          | $      | 4,461         |   | $              | 5,017   |          | $      | 4,853 |   | $ | 4,755 |   |
| Non-performing assets to  total assets              |   | 0.51          | %       | 0.48          | %      | 0.54          | %      | 0.53           | %       | 0.48          | %      |
| Allowance for loan losses                           |   | 7,178         |    | 6,790         |   | 6,537         |   | 6,204          |    | 6,098         |   |
| Allowance for loan losses  to total loans           |   | 1.22          | %       | 1.17          | %      | 1.18          | %      | 1.20           | %       | 1.14          | %      |
| Allowance for loan losses  to non-performing loans  |   | 170.70        | %       | 184.81        | %      | 172.80        | %      | 180.14         | %       | 179.88        | %      |
| Non-performing loans to  total loans                |   | 0.72          | %       | 0.63          | %      | 0.68          | %      | 0.66           | %       | 0.63          | %      |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| **Capitalization  – Bancorp**                  |   |          |    |          |   |          |   |           |    |          |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| Shareholders’ equity to  total assets          |   | 8.58          | %       | 8.68          | %      | 8.35          | %      | 8.42           | %       | 7.72          | %      |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| **Operating  Data**                                 |   |          |    |          |   |          |   |           |    |          |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| Cash earnings                                       |   | $             | 1,864   |          | $      | 2,109         |   | $              | 1,722   |          | $      | 4,360 |   | $ | 1,983 |   |
| Net income/(loss)                                   |   | 1,540         |    | 1,786         |   | 1,398         |   | 3,932          |    | 1,551         |   |
| Net interest income                                 |   | 6,376         |    | 6,733         |   | 6,036         |   | 6,375          |    | 6,605         |   |
| Provision for loan losses                           |   | 450           |    | 405           |   | 405           |   | 575            |    | 325           |   |
| Other operating income                              |   | 1,630         |    | 1,576         |   | 1,120         |   | 5,672          |    | 1,297         |   |
| Other operating expense                             |   | 5,886         |    | 5,662         |   | 5,134         |   | 5,707          |    | 5,413         |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| **Performance  Statistics**                         |   |          |    |          |   |          |   |           |    |          |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| Net interest margin                                 |   | 3.12          | %       | 3.35          | %      | 3.01          | %      | 3.09           | %       | 3.13          | %      |
| Return on average assets                            |   | 0.66          | %       | 0.77          | %      | 0.61          | %      | 1.72           | %       | 0.61          | %      |
| Return on average equity                            |   | 7.58          | %       | 8.97          | %      | 7.17          | %      | 22.80          | %       | 8.20          | %      |
| Cash return on average  assets                      |   | 0.80          | %       | 0.90          | %      | 0.75          | %      | 1.86           | %       | 0.76          | %      |
| Cash return on average  equity                      |   | 9.18          | %       | 10.59         | %      | 8.83          | %      | 25.25          | %       | 10.49         | %      |
| Annualized net loan  charge-offs to avg loans       |   | 0.04          | %       | 0.11          | %      | 0.05          | %      | 0.35           | %       | 0.16          | %      |
| Net charge-offs                                     |   | 62            |    | 152           |   | 72            |   | 469            |    | 214           |   |
| Efficiency ratio                                    |   | 70.6          |    | 65.7          |   | 69.4          |   | 72.0           |    | 62.5          |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| **Per Share  Data**                                 |   |          |    |          |   |          |   |           |    |          |   |
|                                                |   |          |    |          |   |          |   |           |    |          |   |
| Cash earnings per share                             |   | $             | 0.26    |          | $      | 0.30          |   | $              | 0.24    |          | $      | 0.61 |   | $ | 0.28 |   |
| Basic earnings per share                            |   | 0.21          |    | 0.25          |   | 0.20          |   | 0.55           |    | 0.22          |   |
| Diluted earnings per share                          |   | 0.21          |    | 0.25          |   | 0.20          |   | 0.55           |    | 0.22          |   |
| Dividend declared per share                         |   | 0.165         |    | 0.165         |   | 0.150         |   | 0.150          |    | 0.150         |   |
| Book value                                          |   | 11.36         |    | 11.20         |   | 10.79         |   | 10.85          |    | 10.71         |   |
| Common stock price:                                 |   |          |    |          |   |          |   |           |    |          |   |
| High                                                |   | 23.98         |    | 24.49         |   | 18.05         |   | 17.50          |    | 17.50         |   |
| Low                                                 |   | 21.85         |    | 17.65         |   | 16.28         |   | 15.50          |    | 14.65         |   |
| Close                                               |   | 22.48         |    | 24.49         |   | 17.70         |   | 17.11          |    | 17.50         |   |
| Weighted average common  shares:                    |   |          |    |          |   |          |   |           |    |          |   |
| Basic                                               |   | 7,165         |    | 7,141         |   | 7,143         |   | 7,148          |    | 7,151         |   |
| Fully Diluted                                       |   | 7,248         |    | 7,164         |   | 7,164         |   | 7,162          |    | 7,162         |   |
| End-of-period common  shares:                       |   |          |    |          |   |          |   |           |    |          |   |
| Issued                                              |   | 7,276         |    | 7,266         |   | 7,237         |   | 7,236          |    | 7,235         |   |
| Treasury                                            |   | 111           |    | 111           |   | 99            |   | 93             |    | 84            |   |

 

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* Core deposits are defined as total deposits less time deposits

** Cash earnings take intoaccount depreciation and amortization at a tax rate of 34%

26

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PART II

 

Items 1, 2, 3, and 4 — Omittedpursuant to instructions to Part II

 

Item 4 — Controls and Procedures

 

Managementmaintains a system of controls and procedures designed to provide reasonableassurance as to the reliability of the financial statements and otherdisclosures included in this report, as well as to safeguard assets fromunauthorized use or disposition. Management evaluated the effectiveness of thedesign and operation of management’s disclosure controls and procedures underthe supervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, within 90 days prior to thefiling 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 to materialinformation required to be included in Sun Bancorp, Inc.’s periodic Securitiesand Exchange Commission filings. No significant changes were made to SunBancorp, Inc.’s internal controls or other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

Item 5 — Otherinformation

 

On October 24,2002, the Board of Directors approved a quarterly dividend payment of $0.165per share for shareholders of record November 29, 2002, payable on December 13,2002.

 

On October 28,2002, SunBank identified an apparent fraudulent $2 million commercial loan andbegan a full investigation of the situation as well as an exhaustive review ofSunBank’s internal policies and controls. After conducting the review, management is convinced that this is anisolated situation and that the situation is contained.   In addition, after reviewing the loanpolicies, controls, and underwriting, management is confident that they arefundamentally sound.  Management expectsminimal or no impact to future earnings as assets of the alleged perpetratorhave been frozen, the alleged perpetrator’s accounts at SunBank have beenoffset, and SunBank is making a claim under it’s insurance policy andevaluating its legal recourse options. Management has also placed the loan on nonaccrual status and allocated areserve of 100% of the principal.

 

Item 6 —Exhibits and Reports on Form 8-K

 

a.  No reports on Form 8-K were filed for thequarter ended September 30, 2002.

 

b.  Exhibits

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.

 

27

----

 

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   November 14, 2002 | /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)         |

 

28

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** **

**CERTIFICATION**

 

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

 

1.             I have reviewed this quarterlyreport on Form 10-Q of Sun Bancorp, Inc.

 

2.             Based on my knowledge, thequarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances  under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report.

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly 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.             The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

(a)           designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

(c)           presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date.

 

5.             The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)           all significantdeficiencies in the design or operation of the internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           any fraud, whetheror not material, that involves management or other employees who have asignificant 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.

 

 
| 7.     | Date:   November  14, 2002 | By:    | /s/ Robert  J. McCormack |                                     |
|--------|-------------------------------------------|--------|--------------------------|------------------------------------------|
|   |                                      |   |                     | President  & Chief Executive Officer |
|        |                                           |        |                          |                                          |  |

 

----

** **

**CERTIFICATION**

 

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

 

1.             I have reviewed this quarterlyreport on Form 10-Q of Sun Bancorp, Inc.

 

2.             Based on my knowledge, thequarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances  under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report.

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly 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.             The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 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.             The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(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.

 

 
| 9.     | Date:   November  14, 2002 | By:    |  /s/ Wilmer D. Leinbach |                                                  |
|--------|-------------------------------------------|--------|------------------------------|-------------------------------------------------------|
|   |                                      |   |                         | Executive Vice President and  Chief Financial Officer |   |
|        |                                           |        |                              |                                                       |  |

 

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