** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

**(Mark One)**

**ý****Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of  1934**

** **

**Forthe quarterly period ended June 30, 2002**

** **

**or**

** **

o**TransitionReport 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 90 days.             ý   Yes    o   No

 

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.   ý   Yes   o   No

 

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** |   | **7,170,199**                       |
|---------------------------------|--------|-------------------------------------|
| Class                           |   | Outstanding Shares At July 26, 2002 |

 

 

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SUN BANCORP, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30,2002

 
| CONTENTS                                                                                             |                                                                                                             |
|------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |                                                                                                             |
| PART I -  FINANCIAL INFORMATION                                                                      |
|                                                                                                 |                                                                                                             |
| Item 1 - Financial Statements:                                                                       |
|                                                                                                 |                                                                                                             |
|                                                                                                 | Consolidated Balance Sheet as of June 30, 2002 (Unaudited) and  December 31, 2001                                |
|                                                                                                 | Consolidated Statement of Income for the  Three and Six Months Ended June 30, 2002 and June 30, 2001 (Unaudited) |
|                                                                                                 | Consolidated Statement of Cash Flows for  the Six Months Ended June 30, 2002 and June 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)**                                                  |   | **June 30,  2002** |    | **December  31, 2001** |   |
|-----------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                    |   | **(Unaudited)**    |    |                   |   |
| ASSETS                                                                                  |   |               |    |                   |   |
|                                                                                    |   |               |    |                   |   |
| Cash and due from banks                                                                 |   | $                  | 21,841  |                   | $      | 24,125 |   |
| Interest-bearing deposits in banks                                                      |   | 1,491              |    | 20,858                 |   |
| Total cash and cash equivalents                                                         |   | 23,332             |    | 44,983                 |   |
|                                                                                    |   |               |    |                   |   |
| Investment securities                                                                   |   | 247,071            |    | 305,612                |   |
| Loans, net of allowance for loan and lease  losses of $6,790 in 2002 and $6,204 in 2001 |   | 575,616            |    | 515,520                |   |
| Bank premises and equipment, net                                                        |   | 14,348             |    | 14,462                 |   |
| Goodwill and core deposit intangibles                                                   |   | 22,305             |    | 22,773                 |   |
| Accrued interest                                                                        |   | 3,789              |    | 5,063                  |   |
| Bank owned life insurance                                                               |   | 15,287             |    | —                 |   |
| Other assets                                                                            |   | 21,574             |    | 12,442                 |   |
| Total assets                                                                            |   | $                  | 923,322 |                   | $      | 920,855 |   |

 

3

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| **(In  Thousands, Except Share Data)**                                                      |   | **June 30,  2002** |    | **December  31, 2001** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                        |   | **(Unaudited)**    |    |                   |   |
|                                                                                        |   |               |    |                   |   |
| LIABILITIES & SHAREHOLDERS’ EQUITY                                                 |   |               |    |                   |   |
|                                                                                        |   |               |    |                   |   |
| Deposits                                                                                    |   |               |    |                   |   |
| Noninterest-bearing                                                                         |   | $                  | 58,981  |                   | $      | 57,990 |   |
| Interest-bearing                                                                            |   | 512,390            |    | 515,887                |   |
| Total deposits                                                                              |   | 571,371            |    | 573,877                |   |
|                                                                                        |   |               |    |                   |   |
| Short-term borrowings                                                                       |   | 26,718             |    | 22,138                 |   |
| Other borrowed funds                                                                        |   | 220,000            |    | 222,000                |   |
| Subordinated debentures                                                                     |   | 19,655             |    | 20,444                 |   |
| Accrued interest and other liabilities                                                      |   | 5,479              |    | 4,885                  |   |
| Total liabilities                                                                           |   | 843,223            |    | 843,344                |   |
|                                                                                        |   |               |    |                   |   |
| Shareholders’ equity                                                                   |   |               |    |                   |   |
| Common stock, no par value per share;                                                       |   |               |    |                   |   |
| Authorized 20,000,000 shares: issued  7,265,943 shares in 2002 and 7,236,251 shares in 2001 |   | 83,996             |    | 83,565                 |   |
| Retained earnings (deficit)                                                                 |   | (6,026             | )       | (6,961                 | )      |
| Accumulated other comprehensive income                                                      |   | 3,604              |    | 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                                                             |   | 80,099             |    | 77,511                 |   |
| Total liabilities and shareholders’ equity                                             |   | $                  | 923,322 |                   | $      | 920,855 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

4

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SUN BANCORP, INC.

CONSOLIDATEDSTATEMENT OF INCOME

(UNAUDITED)

 
| **(In  Thousands, Except for Per Share Data)**                  |   | **For the  Three Months  Ended June 30** |   | **For the  Six Months  Ended June 30** |   |
|-----------------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                            |   | **2002**                                 |   | **2001**                               |   | **2002** |   | **2001** |   |
|                                                            |   |                                     |   |                                   |   |   |   |   |   |
| Interest and dividend income:                                   |   |                                     |   |                                   |   |   |   |   |   |
| Interest and fees on loans                                      |   | $                                        | 10,204 |                                   | $      | 9,233 |   | $ | 19,898 |   | $ | 17,902 |   |
| Income from investment securities:                              |   |                                     |   |                                   |   |   |   |   |   |
| Taxable                                                         |   | 3,499                                    |   | 4,370                                  |   | 7,048 |   | 8,524 |   |
| Tax exempt                                                      |   | 258                                      |   | 276                                    |   | 518 |   | 516 |   |
| Dividends                                                       |   | 112                                      |   | 401                                    |   | 246 |   | 800 |   |
| Interest on deposits in banks                                   |   | 71                                       |   | 443                                    |   | 175 |   | 673 |   |
| Total interest and dividend income                              |   | $                                        | 14,144 |                                   | $      | 14,723 |   | $ | 27,885 |   | $ | 28,415 |   |
|                                                            |   |                                     |   |                                   |   |   |   |   |   |
| Interest expense:                                               |   |                                     |   |                                   |   |   |   |   |   |
| Interest on deposits                                            |   | 3,684                                    |   | 5,401                                  |   | 7,684 |   | 10,460 |   |
| Interest on short-term borrowings                               |   | 71                                       |   | 94                                     |   | 143 |   | 232 |   |
| Interest on other borrowed funds                                |   | 3,180                                    |   | 3,188                                  |   | 6,333 |   | 6,341 |   |
| Interest on subordinated debentures                             |   | 476                                      |   | 459                                    |   | 956 |   | 627 |   |
|                                                            |   |                                     |   |                                   |   |   |   |   |   |
| Total interest expense                                          |   | 7,411                                    |   | 9,142                                  |   | 15,116 |   | 17,660 |   |
|                                                            |   |                                     |   |                                   |   |   |   |   |   |
| Net interest income                                             |   | 6,733                                    |   | 5,581                                  |   | 12,769 |   | 10,755 |   |
|                                                            |   |                                     |   |                                   |   |   |   |   |   |
| Provision for loan and lease losses                             |   | 405                                      |   | 300                                    |   | 810 |   | 600 |   |
|                                                            |   |                                     |   |                                   |   |   |   |   |   |
| Net interest income, after provision For  loan and lease losses |   | $                                        | 6,328  |                                   | $      | 5,281 |   | $ | 11,959 |   | $ | 10,155 |   |

 

5

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| **(In  Thousands, Except for Per Share Data)**                |   | **For the  Three Months  Ended June 30** |   | **For the  Six Months  Ended June 30** |   |
|---------------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                          |   | **2002**                                 |   | **2001**                               |   | **2002** |   | **2001** |   |
| Other operating income:                                       |   |                                     |   |                                   |   |   |   |   |   |
| Service charges on deposit accounts                           |   | $                                        | 708    |                                   | $      | 437 |   | $ | 1,228 |   | $ | 766 |   |
| Trust income                                                  |   | 187                                      |   | 250                                    |   | 341 |   | 500 |   |
| Net security gains                                            |   | 45                                       |   | 38                                     |   | 140 |   | 836 |   |
| Income from investment product sales                          |   | 155                                      |   | 23                                     |   | 260 |   | 23 |   |
| Bank owned life insurance                                     |   | 161                                      |   | —                                 |   | 206 |   | — |   |
| Income from insurance subsidiary                              |   | 19                                       |   | 20                                     |   | 49 |   | 91 |   |
| Other income                                                  |   | 301                                      |   | 163                                    |   | 472 |   | 323 |   |
| Total other operating income                                  |   | 1,576                                    |   | 931                                    |   | 2,696 |   | 2,539 |   |
|                                                          |   |                                     |   |                                   |   |   |   |   |   |
| Other operating expense:                                      |   |                                     |   |                                   |   |   |   |   |   |
| Salaries and employee benefits                                |   | 2,829                                    |   | 2,288                                  |   | 5,633 |   | 4,286 |   |
| Net occupancy expenses                                        |   | 251                                      |   | 220                                    |   | 525 |   | 436 |   |
| Furniture and equipment expenses                              |   | 418                                      |   | 452                                    |   | 815 |   | 773 |   |
| Amortization of intangibles                                   |   | 234                                      |   | 345                                    |   | 468 |   | 538 |   |
| Expenses of insurance subsidiary                              |   | 18                                       |   | 45                                     |   | 61 |   | 100 |   |
| Other expenses                                                |   | 1,912                                    |   | 1,483                                  |   | 3,294 |   | 2,796 |   |
| Total other operating expenses                                |   | 5,662                                    |   | 4,833                                  |   | 10,796 |   | 8,929 |   |
|                                                          |   |                                     |   |                                   |   |   |   |   |   |
| Income before income tax provision                            |   | 2,242                                    |   | 1,379                                  |   | 3,859 |   | 3,765 |   |
| Income tax provision                                          |   | 456                                      |   | 285                                    |   | 675 |   | 898 |   |
| Net income                                                    |   | $                                        | 1,786  |                                   | $      | 1,094 |   | $ | 3,184 |   | $ | 2,867 |   |
|                                                          |   |                                     |   |                                   |   |   |   |   |   |
| PER SHARE DATA                                                |   |                                     |   |                                   |   |   |   |   |   |
|                                                          |   |                                     |   |                                   |   |   |   |   |   |
| Net income per share – Basic                             |   | $                                        | 0.25   |                                   | $      | 0.16 |   | $ | 0.45 |   | $ | 0.43 |   |
|                                                          |   |                                     |   |                                   |   |   |   |   |   |
| Weighted average number of shares  outstanding – Basic   |   | 7,141,139                                |   | 6,827,588                              |   | 7,141,897 |   | 6,734,656 |   |
|                                                          |   |                                     |   |                                   |   |   |   |   |   |
| Net income per share – Diluted                           |   | $                                        | 0.25   |                                   | $      | 0.16 |   | $ | 0.45 |   | $ | 0.42 |   |
|                                                          |   |                                     |   |                                   |   |   |   |   |   |
| Weighted average number of shares  outstanding – Diluted |   | 7,163,965                                |   | 6,841,998                              |   | 7,143,824 |   | 6,749,401 |   |
|                                                          |   |                                     |   |                                   |   |   |   |   |   |
| Dividends paid                                                |   | $                                        | 0.165  |                                   | $      | 0.15 |   | $ | 0.315 |   | $ | 0.30 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

6

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SUN BANCORP, INC.

CONSOLIDATEDSTATEMENT OF CASH FLOWS

(UNAUDITED)

 
| **(In  Thousands)**                                                            |   | **For the  Six Months  Ended June 30** |       |
|--------------------------------------------------------------------------------|--------|----------------------------------------|------------|
|                                                                           |   | **2002**                               | ** ** | **2001** | ** ** |
| Cash flows from operating activities:                                          |   |                                   |       |   |   |
| Net income                                                                     |   | $                                      | 3,184      |   | $ | 2,867 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |   |                                   |       |   |   |
| Provision for loan and lease losses                                            |   | 810                                    |       | 600 |   |
| Provision for depreciation                                                     |   | 512                                    |       | 458 |   |
| Amortization of intangibles                                                    |   | 468                                    |       | 538 |   |
| Amortization and accretion of securities,  net                                 |   | 578                                    |       | 71 |   |
| Net security gains                                                             |   | (140                                   | )          | (836 | ) |
| Increase in accrued interest and other  assets                                 |   | (23,594                                | )          | (4,471 | ) |
| Gain on sale of bank premises and equipment                                    |   | (6                                     | )          | (71 | ) |
| Increase in accrued interest and other  liabilities                            |   | 594                                    |       | 14,393 |   |
| Net cash used in operating activities                                          |   | (17,594                                | )          | 13,549 |   |
|                                                                           |   |                                   |       |   |   |
| Cash flows from investing activities:                                          |   |                                   |       |   |   |
| Proceeds from sales of investment  securities                                  |   | 1,044                                  |       | 39,845 |   |
| Proceeds from maturities of investment  securities                             |   | 65,364                                 |       | 27,652 |   |
| 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                                             |   | (5,979                                 | )          | (106,420 | ) |
| Net increase in loans                                                          |   | (61,248                                | )          | (28,765 | ) |
| Proceeds from sales of bank premises and  equipment                            |   | 6                                      |       | 222 |   |
| Capital expenditures                                                           |   | (398                                   | )          | (766 | ) |
| Net cash provided by investing activities                                      |   | (1,211                                 | )          | 24,619 |   |
|                                                                           |   |                                   |       |   |   |
| Cash flows from financing activities:                                          |   |                                   |       |   |   |
| Net increase (decrease) in deposits                                            |   | (2,506                                 | )          | 10,501 |   |
| Net increase (decrease)in short-term  borrowings                               |   | 4,580                                  |       | (1,135 | ) |
| Repayment of other borrowed funds                                              |   | (2,000                                 | )          | — |   |
| Proceeds from issuance of subordinated  debentures                             |   | —                                 |       | 16,500 |   |
| Repayment of subordinated debt                                                 |   | (789                                   | )          | — |   |
| Cash dividends paid                                                            |   | (2,249                                 | )          | (1,986 | ) |
| Proceeds from sale of stock for employee  benefits program                     |   | 431                                    |       | 94 |   |
| Purchase of treasury stock                                                     |   | (313                                   | )          | (1,044 | ) |
| Net cash provided by financing activities                                      |   | (2,846                                 | )          | 22,930 |   |
|                                                                           |   |                                   |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                          |   | (21,651                                | )          | 61,098 |   |
| Cash and cash equivalents at beginning of  period                              |   | 44,983                                 |       | 15,277 |   |
| Cash and cash equivalents at end of period                                     |   | $                                      | 23,332     |   | $ | 76,375 |   |

 

7

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| **(In  Thousands)**                                |   | **For the  Six Months  Ended June 30** |   |
|----------------------------------------------------|--------|----------------------------------------|--------|
|                                               |   | **2002**                               |   | **2001** |   |
|                                               |   |                                   |   |   |   |
| Supplemental disclosure of cash flow  information: |   |                                   |   |   |   |
|                                               |   |                                   |   |   |   |
| Cash paid during the period for:                   |   |                                   |   |   |   |
|                                               |   |                                   |   |   |   |
| Interest                                           |   | $                                      | 14,983 |   | $ | 16,568 |   |
|                                               |   |                                   |   |   |   |
| Income taxes                                       |   | $                                      | 1,409  |   | $ | 1,150 |   |

 

Loans with an estimated value of $342,000 and$273,000 were reclassified to foreclosed assets held for sale during thesix-month periods ended June 30, 2002 and 2001, respectively. 

 

The accompanying notes are an integral partof these financial statements.

 

8

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SUN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

ForwardLooking Statements (FLSs)

 

This report contains FLSs thatreflect Sun’s current views regarding future events and financial performancefor Sun and its subsidiaries.  FLSs maygenerally, but not always, be identified by words such as “estimate,”“believe,” “forecast” and other indications of future events and trends.  FLSs are subject to considerable uncertaintiesand risks, including factors beyond Sun’s control that could cause actualresults to differ materially from historical or anticipated results.  Such factors include, but are not limited to(1) customer and deposit attrition or revenue loss following announced mergersmay be greater than expected; (2) financial industry competition may increasesignificantly; (3) changing economic, interest rate, and regulatoryenvironments; (4) announced mergers do not consummate as anticipated; (5) otherfactors that may not be identifiable at this time.  Further, Sun’s historical performance does not guarantee and maynot 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

 

Theconsolidated financial statements include the accounts of Sun Bancorp, Inc.,the parent company, and its wholly owned subsidiaries SunBank, SUBI InvestmentCompany, Beacon Life Insurance Company, and Sun Bancorp Statutory Trust I.  Sun also holds thirty percent ownership inSun Abstract and Settlement Services. The transactions of Beacon Life Insurance Company and Sun Abstract and SettlementServices are not material to the consolidated financial statements.  All significant intercompany balances andtransactions have been eliminated in consolidation.

 

Theaccompanying unaudited consolidated financial statements for the interimperiods do not include all of the information and footnotes required bygenerally accepted accounting principles. However, in the opinion of management, all adjustments necessary for afair presentation of the results of the interim period have been included.  Operating results for the three and sixmonths ended June 30, 2002 are not necessarily indicative of the results thatmay 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.

 

9

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Note 2 – Net Income PerShare

 

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

 

The followingdata shows the amounts used in computing net income per share and the weightedaverage number of shares of dilutive stock options for the periods ended June30, 2002 and 2001:

 
|                                |   | **For the  Three Months Ended June 30** |      |
|-------------------------------------|--------|-----------------------------------------|-----------|
|                                |   | **Income  Numerator**                   |      | **Common  Shares  Denominator** |   | **Net  IncomePer  Share** | ** ** |
| 2002                                |   |                                    |      |   |   |   |   |
| Net income per share – Basic   |   | $                                       | 1,786,000 |   | 7,141,139 |   | $ | 0.25 |   |
| Dilutive effect of stock options    |   |                                    |      | 22,826 |   |   |   |
| Net income per share – Diluted |   | $                                       | 1,786,000 |   | 7,163,965 |   | $ | 0.25 |   |
|                                |   |                                    |      |   |   |   |   |
| 2001                                |   |                                    |      |   |   |   |   |
| Net income per share – Basic   |   | $                                       | 1,094,000 |   | 6,827,588 |   | $ | 0.16 |   |
| Dilutive effect of stock options    |   |                                    |      | 14,410 |   |   |   |
| Net income per share – Diluted |   | $                                       | 1,094,000 |   | 6,841,998 |   | $ | 0.16 |   |

 

 
|                                |   | **For the  Six Months Ended June 30** |      |
|-------------------------------------|--------|---------------------------------------|-----------|
|                                |   | **Income  Numerator**                 |      | **Common  Shares  Denominator** |   | **Net  IncomePer  Share** |   |
| 2002                                |   |                                  |      |   |   |   |   |
| Net income per share – Basic   |   | $                                     | 3,184,000 |   | 7,141,897 |   | $ | 0.45 |   |
| Dilutive effect of stock options    |   |                                  |      | 1,927 |   |   |   |
| Net income per share – Diluted |   | $                                     | 3,184,000 |   | 7,143,824 |   | $ | 0.45 |   |
|                                |   |                                  |      |   |   |   |   |
| 2001                                |   |                                  |      |   |   |   |   |
| Net income per share – Basic   |   | $                                     | 2,867,000 |   | 6,734,656 |   | $ | 0.43 |   |
| Dilutive effect of stock options    |   |                                  |      | 14,745 |   |   |   |
| Net income per share – Diluted |   | $                                     | 2,867,000 |   | 6,749,401 |   | $ | 0.42 |   |

 

10

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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 transactions withshareholders 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.

 
| **(In  Thousands)**                                                        |   | **For the  Three Months  Ended June 30** |   | **For the  Six Months  Ended June 30** |   |
|----------------------------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                                       |   | **2002**                                 |   | **2001**                               |   | **2002** |   | **2001** |   |
|                                                                       |   |                                     |   |                                   |   |   |   |   |   |
| Net income                                                                 |   | $                                        | 1,786  |                                   | $      | 1,094 |   | $ | 3,184 |   | $ | 2,867 |   |
|                                                                       |   |                                     |   |                                   |   |   |   |   |   |
| Other comprehensive income:                                                |   |                                     |   |                                   |   |   |   |   |   |
| Unrealized holding gains (losses) on  available for sale securities:       |   |                                     |   |                                   |   |   |   |   |   |
| Gains (losses) arising during the period                                   |   | 3,518                                    |   | (1,148                                 | )      | 2,466 |   | 3,116 |   |
| Reclassification adjustment – realized  gains included in net income  |   | (45                                      | )      | (38                                    | )      | (140 | ) | (836 | ) |
|                                                                       |   |                                     |   |                                   |   |   |   |   |   |
| Other comprehensive income (loss) before  income taxes                     |   | 3,473                                    |   | (1,186                                 | )      | 2,326 |   | 2,280 |   |
| Income tax (expense) benefit related to  other comprehensive income (loss) |   | (1,181                                   | )      | 403                                    |   | (791 | ) | (775 | ) |
|                                                                       |   |                                     |   |                                   |   |   |   |   |   |
| Other comprehensive income (loss)                                          |   | 2,292                                    |   | (783                                   | )      | 1,535 |   | 1,505 |   |
|                                                                       |   |                                     |   |                                   |   |   |   |   |   |
| Comprehensive income                                                       |   | $                                        | 4,078  |                                   | $      | 311 |   | $ | 4,719 |   | $ | 4,372 |   |

 

11

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Note 4 – InvestmentSecurities

 

The amortizedcost and fair value of investment securities at June 30, 2002 and December 31,2001 were as follows:

 
| **(In  Thousands)**                               |   | **June 30,  2002**  |       |
|---------------------------------------------------|--------|---------------------|------------|
|                                              |   | **Amortized  Cost** |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
|                                              |   | ** **          | ** ** | ** ** | ** ** |
|                                              |   |                |       |   |   |
| Debt securities:                                  |   |                |       |   |   |   |   |   |   |
| Obligations of U.S. government agencies           |   | $                   | 198,902    |   | $ | 5,364 |   | (238 | ) | $ | 204,028 |   |
| Obligations of states and political  subdivisions |   | 20,634              |       | 608 |   | (30 | ) | 21,212 |   |
| Other corporate                                   |   | 7,050               |       | 330 |   | (140 | ) | 7,240 |   |
| Total debt securities                             |   | $                   | 226,586    |   | $ | 6,302 |   | (408 | ) | $ | 232,480 |   |
|                                              |   |                |       |   |   |   |   |   |   |
| Equity securities:                                |   |                |       |   |   |   |   |   |   |
| Marketable equity securities                      |   | 3,432               |       | 42 |   | (476 | ) | 2,998 |   |
| Restricted equity securities                      |   | 11,593              |       | — |   | — |   | 11,593 |   |
| Total equity securities                           |   | 15,025              |       | 42 |   | (476 | ) | 14,591 |   |
|                                              |   |                |       |   |   |   |   |   |   |
| Total                                             |   | $                   | 241,611    |   | $ | 6,344 |   | (884 | ) | $ | 247,071 |   |

 

 
|                                              |   | **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 |   |

 

12

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Note 5 – Loans

 

The balancesfor principal loan categories are as follows:

 
|                                        |   | **June 2002** |    | **December  2001** |   |
|---------------------------------------------|--------|---------------|---------|--------------------|--------|
| Real estate – Mortgage                 |   | $             | 283,262 |               | $      | 261,310 |   |
| Real estate – Construction             |   | 11,868        |    | 6,912              |   |
| Agricultural                                |   | 508           |    | 503                |   |
| Commercial and industrial                   |   | 173,263       |    | 151,181            |   |
| Lease – Auto                           |   | 23,817        |    | 8,489              |   |
| Lease – Equipment                      |   | 3,448         |    | 2,287              |   |
| Individual                                  |   | 92,527        |    | 92,649             |   |
| Other                                       |   | 578           |    | 1,619              |   |
| Total                                       |   | $             | 589,271 |               | $      | 524,950 |   |
|                                        |   |          |    |               |   |
| Less:                                       |   |          |    |               |   |
| Unearned income & deferred loan fees    |   | (6,763        | )       | (3,089             | )      |
| Unamortized net discount on purchased loans |   | (102          | )       | (137               | )      |
| ALLL                                        |   | (6,790        | )       | (6,204             | )      |
| Net Loans                                   |   | $             | 575,616 |               | $      | 515,520 |   |

 

13

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Note 6 – Change inAccounting

 

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 $14,035 in unamortized goodwill from previousacquisitions.  SFAS 142 requires atransitional impairment test be performed within six months of adoption.  The initial valuation of Sun Bancorp, Inc.’sgoodwill pursuant to this pronouncement resulted in no write-downs forimpairment.  Additionally, SFAS 142requires a reconciliation of previously reported net income and earnings pershare, adjusted for changes pursuant to this statement.  Following is the pro forma effect ofadoption of SFAS 142 on the three and six month periods ended June 30, 2002 and2001:

 
| **(In Thousands, Except for Per Share Data)** |   | **For the Three Months  Ended June 30** |       | **For the Six Months  Ended June 30** |       |
|-----------------------------------------------|--------|-----------------------------------------|------------|---------------------------------------|------------|
|                                          |   | **2002**                                | ** ** | **2001**                              | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                          |   |                                    |       |                                  |       |   |   |   |   |
| Net income:                                   |   |                                    |       |                                  |       |   |   |   |   |
| Reported net income                           |   | $                                       | 1,786      |                                  | $          | 1,094 |   | $ | 3,184 |   | $ | 2,867 |   |
| Add back: goodwill amortization               |   | —                                  |       | 189                                   |       | — |   | 404 |   |
| Adjusted net income                           |   | $                                       | 1,786      |                                  | $          | 1,283 |   | $ | 3,184 |   | $ | 3,271 |   |
|                                          |   |                                    |       |                                  |       |   |   |   |   |
| Basic earnings per share:                     |   |                                    |       |                                  |       |   |   |   |   |
| Reported net income                           |   | $                                       | 0.25       |                                  | $          | 0.16 |   | $ | 0.45 |   | $ | 0.43 |   |
| Add back: goodwill amortization, net of  tax  |   | —                                  |       | 0.03                                  |       | — |   | 0.06 |   |
| Adjusted net income                           |   | $                                       | 0.25       |                                  | $          | 0.19 |   | $ | 0.45 |   | $ | 0.49 |   |
|                                          |   |                                    |       |                                  |       |   |   |   |   |
| Diluted earnings per share:                   |   |                                    |       |                                  |       |   |   |   |   |
| Reported net income                           |   | $                                       | 0.25       |                                  | $          | 0.16 |   | $ | 0.45 |   | $ | 0.42 |   |
| Add back: goodwill amortization, net of  tax  |   | —                                  |       | 0.03                                  |       | — |   | 0.06 |   |
| Adjusted net income                           |   | $                                       | 0.25       |                                  | $          | 0.19 |   | $ | 0.45 |   | $ | 0.48 |   |

 

Refer to page 29 for SelectedFinancial Data for cash earnings and cash earnings per share.

 

14

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Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations (in thousands,except per share amounts)

 

The followingis management’s discussion and analysis of the significant changes in theresults of operations, capital resources, and liquidity presented in itsaccompanying consolidated financial statements for Sun Bancorp, Inc., a bankholding company, and its wholly-owned subsidiaries, SunBank, Beacon LifeInsurance Company, and Sun Bancorp Statutory Trust I.  Sun Bancorp, Inc. also holds thirty percent ownership in SunAbstract and Settlement Services.  SunBancorp, Inc.’s consolidated financial condition and results of operationsconsist almost entirely of SunBank’s financial condition and results ofoperations.  This discussion should beread in conjunction with the 2001 Annual Report, which is incorporated hereinby reference.  Current performance doesnot guarantee or assure similar performance in the future, and may not beindicative of future results.

 

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

 

Sun Bancorp,Inc.’s earnings of $1,786,000 ($0.25 per share basic and diluted) for the threemonths ended June 30, 2002  were$692,000 ($0.10 per share basic and diluted) higher than the three months ended2001.

 

Net interestincome increased 20.6% to $6,733 for the three months ended June 30, 2002 ascompared to $5,581 for the same period of 2001.  Total interest and dividend income decreased $579 to $14,144 forthe three months ended June 30, 2002. Interest and fees on loans increased to $10,204 for the three monthsended June 30, 2002 as compared to $9,233 for the three months ended June 30,2001.  The increase of $971 in interestand fees on loans was partially offset by a decrease of $1,178 in income oninvestment securities.  The net decreaseis the result of management shifting funds from the investment portfolio to thehigher-yielding loan portfolio and also a direct result of management’s actionsto reduce overall risk in the investment portfolio.  Interest on deposits in banks has decreased 84.0% or $372 to $71for the three months ended June 30, 2002 as management funds loan growth byusing cash on deposit in banks and cash flow from the investmentportfolio.  Total interest expensedecreased 18.9% or $1,731 to $7,411 for the three months ended June 30, 2002,as compared to 2001.  The decrease isthe result of management’s focus on growing low-cost core deposits (non-timedeposits) and the rate reductions by the Federal Reserve during the pastyear.  Interest on deposits decreased31.8%, or $1,717 as a result of the interest rate decreases when comparing thethree months ended June 30, 2002 to 2001.

 

The provisionfor loan and lease losses increased 35% to $405 for the three months ended June30, 2002.  The increase is the result ofcontinued growth in the loan portfolio of $68,913 since June 30, 2001 and$60,682 since December 31, 2001 and the inherent risks associated with anyloan.

 

15

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Total otheroperating income increased for the three months ending June 30, 2002 by $645,or 69.3%, when compared to the same period of 2001.  Service charges on deposit accounts increased 62.0% to $708 forthe three months ended June 30, 2002. Of the increase, $294,000 is the direct result of the implementation ofa new overdraft honor program.  Theremaining increase is the result of an updated fee structure and the effect ofthe acquisition of three Mellon branches and Guaranty Bank, N.A. during2001.  These purchases resulted in a37.5% increase in our branch network. Income from the sale of investment products increased by $132, or 573.9%for the three months ended June 30, 2002 as compared to the same period in2001.  In March of 2002, management madean investment in Bank Owned Life Insurance to offset future increases inemployee benefit costs.  The incomegenerated from this investment was $161 for the three months ended June 30,2002.  Other income increased by $138,or 84.7%, for the three months ended June 30, 2002 as compared to $163 for thethree months ended June 30, 2001. Increased gains from the sale of loans represented $51 of the increasein other income.

 

Otheroperating expenses increased 17.2% to $5,662 for the three months ended June30, 2002, as compared to $4,833 for the same period of 2001.  The principal reason for the $829 increasein other operating expenses when comparing the quarters ended June 30, 2002 and2001 is expansion of the branch network. During the first six months of 2001, Sun Bancorp, Inc.,  acquired three Mellon branches and Guarantybank, N.A., which consisted of six branches. The addition of these nine branches increased the branch network by37.5%.  Salaries and employee benefitsincreased 23.6% to $2,829 for the three months ended June 30, 2002, asmanagement continues to attract new employees to expand SunBank’s market areacoverage.  This increase can also beattributed to the increase in SunBank’s branch network.  Net occupancy and furniture, fixture andequipment expenses remained stable at $669 and $672 for the three months endedJune 30, 2002 and 2001, respectively. Other expenses increased $429 to $1,912 for the three months ended June30, 2002.  The increase is the result ofnormal business activities (including the Pennsylvania Shares Tax and FDICassessment) associated with the increased number of branches and customers.

 

Results ofOperations – Six Months Ended June 30, 2002 and 2001

 

Sun Bancorp,Inc.’s earnings of $3,184,000 ($0.45 per share basic and diluted) for the sixmonths ended June 30, 2002  were$317,000 ($0.02 per share basic and diluted) higher than the six months ended2001.

 

The earningsresulted in annualized return on average assets for the six months ended June30, 2002 of  0.69% as compared to 0.69%for the six months ended June 30, 2001. Annualized return on average equity for the six months ended June 30,2002 was 8.07% as compared to 8.99% for the six months ended June 30, 2001.

 

16

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Net interestincome increased to $11,959 for the six months ended June 30, 2002, as comparedto $10,155 for the same period of 2001. Total interest and dividend income decreased $470,000 to $27,885 for thesix months ended June 30, 2002, as compared to 2001.  A majority of the decrease, $2,776, is the result of the lowercost of deposit accounts.  Totalinterest expense decreased $2,544, or 14.4%, for the six months ended June 30,2002, as compared to 2001.  Theprovision  for loan and lease lossesincreased 35.0% to $810 for the six months ended June 30, 2002.  The increase is the result of Sun’scontinued growth of the loan portfolio.

 

Total otheroperating income increased $853, excluding security gains, for the six monthsended June 30, 2002, compared to the same period of 2001.  Service charges on deposit accountsincreased 60.3% to $1,228 for the six months ended June 30, 2002.  The increase is the result of SunBankupdating its fee structure along with the acquisition of three Mellon branchesand Guaranty Bank, N.A. during 2001.

 

Otheroperating expenses increased to $10,796 for the six months ended June 30, 2002,compared to $8,929 in the same period of 2001. The main reason for Sun’s $1,867 increase in other operating expensesfor the six months ended June 30, 2002, as compared to June 30, 2001, is expansion.  Salaries and employee benefits increased31.4% to $5,633 for the six months ended June 30, 2002, as SunBank continues toattract new employees to expand SunBank’s market area coverage and as a resultof recent acquistions.  Net occupancyand furniture and equipment expenses increased 20.4% to $525,000.  The increase is primarily due to internalgrowth and acquisitions.

 

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

 

Total assetswere $923,322 at June 30, 2002, an increase of $2,467 from $920,855 at December31, 2001.  Cash and cash equivalentsdecreased $21,651 or 48.1% from $44,983 at December 31, 2001.  The decrease is the result of our use ofcash to fund increased loan growth and the purchase of a $15,000 investment inBank-Owned Life Insurance to fund future employee benefit expenses.  Management’s efforts to shift funds from theinvestment portfolio into the higher-yielding loan portfolio is evidenced in adecrease in the investment portfolio of $58,541 or 19.2%, when comparing June30, 2002 to December 31, 2001.

 

Total liabilitiesdecreased $121 to $843,223 at June 30, 2002. Total deposits decreased $2,506 to $571,371 as time deposits havedecreased $14,252 or 5.1% from December 31, 2001.  The decrease in time deposits was offset by an increase of$11,746 or 4.0% in core deposits (non-time). Of the increase, $8,952 and $4,998 were from savings and money marketgrowth, respectively.  Since December31, 2001, non-interest-bearing deposits have increased $991 or 1.7%.  Total borrowings increased $2,580, asdecreases in Federal Home Loan Bank term borrowings and subordinated debentureswere offset by increased overnight borrowings.

 

17

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Sun Bancorp,Inc.’s total shareholders’ equity increased $2,588 from December 31, 2001 toJune 30, 2002.  The increase is theresult of several factors.  First, SunBancorp, Inc.’s accumulated other comprehensive income (34% of the change inthe market value of Sun Bancorp, Inc.’s investment portfolio) increased 74.2%,or $1,535, to $3,604 from $2,069 at December 31, 2001 because of changes in themarket value of Sun Bancorp, Inc.’s investment securities.  Second, net income of $3,184 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 six months of 2002. Sun Bancorp, Inc. also paid $2,249 in dividends to shareholders duringthe six months ended June 30, 2002.

 

Allowance forLoan and Lease Losses 

 

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

 

18

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SunBank’sallowance for loan and lease losses components are based on loss rates by loangrade, economic trends, and other risk factor. Management determines estimated loss rates by loan grade based on currentloan grade, remaining term, loan type, periodic quantification of actual lossesover a period of time, and other factors. Management believes its methodology reasonably measures the credit risknot captured in specific allocations and provides for an adequate aggregateallowance for loan and lease losses.

 

As managementcontinues to closely monitor the allowance for loan and lease losses, theprovision for these losses was increased to $810 for the first six months of2002, as compared to $600 for the same period of 2001.  This increase was due to loan growth of$68,913, since June 30, 2001 and the inherent risks associated with anyloan.  The 35.0% increase, coupled withincreased recoveries, resulted in an allowance for loan and lease losses of1.17% of total loans at June 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.

 

19

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Deposits

 

Sun Bancorp, Inc.’s totaldeposits decreased $2,506 or 0.4%, to $571,371 at June 2002, as compared to$573,877 at December 2001.  Thisdecrease is the result of Sun focusing on growing low cost core deposits (alldeposits excluding time deposits).  Thisfocus has resulted in core deposits increasing 4.0% or $11,746, to $304,556 atJune 2002, as compared to $292,810 at December 2001.  A majority of the growth is the result of savings depositsincreasing $8,952 or 12.7% since December 2001.  Over the same time frame, demand deposit accounts have grown $991or $1.7%, to $58,981, at June 2002 Sun continues focusing on attractingnon-interest bearing deposit accounts.

 
|             |   | **June 2002** |    | **December  2001** |   | **Change** |   |
|------------------|--------|---------------|---------|--------------------|--------|------------|--------|
|             |   | **Amount**    |    | **%****Total**     |   | **Amount** |   | **%****Total** |   | **Amount** |   | **%** |   |
|             |   |          |    |               |   |       |   |   |   |   |   |   |   |
| Demand deposits  |   | $             | 58,981  |               | 10.3   | %          | $      | 57,990 |   | 10.1 | % | $ | 991 |   | 1.7 | % |
| NOW accounts     |   | 143,144       |    | 25.1               | %      | 146,339    |   | 25.5 | % | (3,195 | ) | (2.2 | )% |
| Insured MMA      |   | 23,056        |    | 4.0                | %      | 18,058     |   | 3.1 | % | 4,998 |   | 27.7 | % |
| Savings deposits |   | 79,375        |    | 13.9               | %      | 70,423     |   | 12.3 | % | 8,952 |   | 12.7 | % |
| Time deposits    |   | 266,815       |    | 46.7               | %      | 281,067    |   | 49.0 | % | (14,252 | ) | (5.1 | )% |
| Total deposits   |   | $             | 571,371 |               | 100.0  | %          | $      | 573,877 |   | 100.0 | % | $ | (2,506 | ) | (0.4 | )% |
|             |   |          |    |               |   |       |   |   |   |   |   |   |   |
| Core deposits*   |   | $             | 304,556 |               | 53.3   | %          | $      | 292,810 |   | 45.2 | % | $ | 11,746 |   | 4.0 | % |

 

----

* Core deposits are definedas total deposits less time deposits

 

Other Funding:

 

Sun continued using borrowedfunds to supplement deposits during 2001 and 2002,  At June 2002,  Sun had$220,000 in variable Federal Home Loan Bank (FHLB) borrowings, whichrepresented a decrease of $2,000 in total FHLB borrowings from December2001.  These variable rate advances havematurities between 2008 and 2010.

 

Other funding sources of short-termmonies include deposit customers’ cash management accounts (classified assecurities sold under agreements to repurchase) and the Treasury Tax and LoanNote Option.  Sun continually monitorsits borrowed funds positions and market conditions in order to maintain aneffective funding structure.  Whenappropriate, Sun may take future action to modify its borrowed funds structure.

 

20

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Net InterestIncome and Net Interest Margin

 

Net interest income, thedifference between interest income and interest expense, is the largestcomponent of Sun’s earnings.  Netinterest margin (NIM) measures the difference between the interest earningassets yield and the aggregate funding cost. The NIM is calculated as taxable equivalent net interest income dividedby average interest earning assets.

 

NIM increased by 5 basis pointsto 3.18% for the six months ending June 30, 2002, as compared to 3.13% for thesame period of 2001.  This increaseresulted principally due to acquiring low-costing deposits through theacquisition of Guaranty Bank, N.A. and several Mellon Bank branches during2001.  These deposits, coupled withmanagement’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.

 

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The followingtable sets forth comparative yields and rates paid for interest bearing assets andliabilities:

 
| **Six Months Ended**                                            |   | **June 30,  2002**   |    | **June 30,  2001** |   |
|-----------------------------------------------------------------|--------|----------------------|---------|--------------------|--------|
| **(Dollars in thousands)**                                      |   | **AVERAGE  BALANCE** |    | **INTEREST**       |   | **RATE** |   | **AVERAGE  BALANCE** |   | **INTEREST** |   | **RATE** |   |
| ASSETS                                                          |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                        |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                                       |   | $                    | 14,514  |               | $      | 175 |   | 2.43 | % | $ | 29,700 |   | $ | 673 |   | 4.57 | % |
| Loans (net of unearned income)                                  |   | 552,003              |    | 20,165             |   | 7.37 |   | 438,545 |   | 18,828 |   | 8.66 |   |
| Investments:  Taxable                                      |   | 254,789              |    | 7,294              |   | 5.73 |   | 281,937 |   | 9,325 |   | 6.61 |   |
| Tax-exempt                                                      |   | 21,194               |    | 785                |   | 7.41 |   | 20,841 |   | 789 |   | 7.52 |   |
| Total interest-earning assets                                   |   | $                    | 842,500 |               | $      | 28,419 |   | 6.79 | % | $ | 771,023 |   | $ | 29,615 |   | 7.72 | % |
|                                                            |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets:                                     |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                         |   | 19,869               |    |               |   |   |   | 12,678 |   |   |   |   |   |
| Bank premises & equipment                                   |   | 14,432               |    |               |   |   |   | 11,830 |   |   |   |   |   |
| Accrued interest and other assets                               |   | 53,325               |    |               |   |   |   | 44,758 |   |   |   |   |   |
| Less:   Allowance for loan losses                          |   | (6,563               | )       |               |   |   |   | (5,422 | ) |   |   |   |   |
| Unamortized loan fees                                           |   | 58                   |    |               |   |   |   | 209 |   |   |   |   |   |
| Total assets                                                    |   | $                    | 923,621 |               |   |   |   |   | $ | 835,076 |   |   |   |   |   |
|                                                            |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                       |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                   |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| NOW Accounts                                                    |   | $                    | 149,588 |               | 1,009  |   | 1.36 | % | $ | 134,509 |   | 1,672 |   | 2.51 | % |
| Insured Money Market Accounts                                   |   | 21,197               |    | 201                |   | 1.91 |   | 21,984 |   | 326 |   | 2.99 |   |
| Savings deposits                                                |   | 75,583               |    | 633                |   | 1.69 |   | 64,705 |   | 570 |   | 1.78 |   |
| Time deposits                                                   |   | 275,356              |    | 5,841              |   | 4.28 |   | 230,803 |   | 7,892 |   | 6.90 |   |
| Short-term borrowings                                           |   | 20,815               |    | 143                |   | 1.39 |   | 13,502 |   | 232 |   | 3.47 |   |
| Subordinated debentures                                         |   | 20,345               |    | 956                |   | 9.40 |   | 12,233 |   | 627 |   | 10.25 |   |
| Other borrowed funds                                            |   | 221,713              |    | 6,333              |   | 5.76 |   | 222,000 |   | 6,341 |   | 5.76 |   |
| Total interest-bearing liabilities                              |   | 784,597              |    | 15,116             |   | 3.89 | % | 699,736 |   | 17,660 |   | 5.09 | % |
|                                                            |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing liabilities and shareholders’  equity: |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                 |   | 56,863               |    |               |   |   |   | 47,914 |   |   |   |   |   |
| Accrued interest and other liabilities                          |   | 3,264                |    |               |   |   |   | 23,661 |   |   |   |   |   |
| Shareholders’ equity                                       |   | 78,899               |    |               |   |   |   | 63,765 |   |   |   |   |   |
| Total liabilities and shareholders’ equity                 |   | $                    | 923,623 |               |   |   |   |   | $ | 835,076 |   |   |   |   |   |
|                                                            |   |                 |    |               |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                            |   |                 |    |               |   | 2.90 | % |   |   |   |   | 2.63 | % |
| Net interest income/margin                                      |   |                 |    | $                  | 13,303 |   | 3.18 | % |   |   | $ | 11,955 |   | 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

 

22

----

 

OtherOperating Income

 

Other operating income, excludingsecurity gains, increased $853 or 50.1% to $2,556 for the six months ended June2002 as compared to 2001.  Increasedservice charge on deposits accounted for $462 of the increase.  The increase in service charges wasprimarily the result of a newly implemented program involving overdraftprotection.  In addition, the first sixmonths of 2002 included the full impact of Sun purchasing three former Mellonbranches and Guaranty Bank, N.A. (6 branches) during the first six months of2001.  The sale of investment productscontributed an additional $237 of the $853 increase.  This program was initiated during the second quarter of2001.  An investment in bank owned lifeinsurance was made during 2002 to fund future increases in employee benefitexpenses, which accounted for $206 of the increase from the six months endedJune 2001.  Offsetting the increases wasa decrease of $159 in trust fees from $500 for the six months ended June 2001.

 

Excluding security gains, otheroperating income increased $638 or 71.4% to $1,531 for the three months endedJune 2002 as compared to 2001.  Thesignificant increase is a result of the new programs and acquisitions describedabove in the six month analysis.

 
| **Three Months Ended**               |   | **June 2002** |   | **June 2001**  |   | **Change** |   |
|--------------------------------------|--------|---------------|--------|----------------|--------|------------|--------|
|                                 |   | **Amount**    |   | **%****Total** |   | **Amount** |   | **% Total** |   | **Amount** |   | **%** |   |
|                                 |   |          |   |           |   |       |   |   |   |   |   |   |   |
| Service charge on deposit accounts   |   | $             | 708    |           | 44.9   | %          | $      | 437 |   | 46.9 | % | $ | 271 |   | 62.0 | % |
| Trust income                         |   | 187           |   | 11.9           |   | 250        |   | 26.9 |   | (63 | ) | (25.2 | ) |
| Net security gains                   |   | 45            |   | 2.9            |   | 38         |   | 4.1 |   | 7 |   | 18.4 |   |
| Income from investment product sales |   | 155           |   | 9.8            |   | 23         |   | 2.5 |   | 132 |   | 573.9 |   |
| Bank owned life insurance            |   | 161           |   | 10.2           |   | —     |   | 0.0 |   | 161 |   | N/A |   |
| Income from insurance subsidiary     |   | 19            |   | 1.2            |   | 20         |   | 2.2 |   | (1 | ) | (5.0 | ) |
| Other income                         |   | 301           |   | 19.1           |   | 163        |   | 17.5 |   | 138 |   | 84.7 |   |
| Total other income                   |   | $             | 1,576  |           | 100.0  | %          | $      | 931 |   | 100.0 | % | $ | 645 |   | 69.3 | % |

 

 
| **Six Months  Ended**                |   | **June 2002** |   | **June 2001**  |   | **Change** |   |
|--------------------------------------|--------|---------------|--------|----------------|--------|------------|--------|
|                                 |   | **Amount**    |   | **%****Total** |   | **Amount** |   | **% Total** |   | **Amount** |   | **%** |   |
|                                 |   |          |   |           |   |       |   |   |   |   |   |   |   |
| Service charge on depsosit accounts  |   | $             | 1,228  |           | 45.6   | %          | $      | 766 |   | 30.2 | % | $ | 462 |   | 60.3 | % |
| Trust income                         |   | 341           |   | 12.7           |   | 500        |   | 19.7 |   | (159 | ) | (31.8 | ) |
| Net security gains                   |   | 140           |   | 5.2            |   | 836        |   | 32.9 |   | (696 | ) | (83.3 | ) |
| Income from investment product sales |   | 260           |   | 9.6            |   | 23         |   | 0.9 |   | 237 |   | 1030.4 |   |
| Bank owned life insurance            |   | 206           |   | 7.6            |   | —     |   | 0.0 |   | 206 |   | N/A |   |
| Income from insurance subsidiary     |   | 49            |   | 1.8            |   | 91         |   | 3.6 |   | (42 | ) | (46.2 | ) |
| Other income                         |   | 472           |   | 17.5           |   | 323        |   | 12.7 |   | 149 |   | 46.1 |   |
| Total other income                   |   | $             | 2,696  |           | 100.0  | %          | $      | 2,539 |   | 100.0 | % | $ | 157 |   | 6.2 | % |

 

23

----

 

OtherOperating Expenses

 

Other operating expensesincreased $1,867 or 20.9% to $10,796 for the six months ended June 2002 ascompared to 2001.  A majority of theincrease, $1,347, is due to a 31.4% increase in salaries and employee benefitsexpenses.  This increase is the resultof programs and acquisitions that took place during the first six months of2001 (three former Mellon branches, Guaranty Bank N.A., and Sun InvestmentServices).  Net occupancy expense andfurniture and equipment expenses remained stable from period to period as Suncontinues its focus on cost control. Other expenses increased 17.8% or $498 due to increases in normalbusiness expenses associated with the growth in branches.  These expenses include: FDIC insurance, PAshares tax, advertising, and telephone.

 

Other operating expensesincreased $829 or 17.2% to $5,662 for the three months ended June 2002 ascompared to 2001.  The increase is aresult of the new programs and acquisitions mentioned above in the six month analysis.

 
| **Three  Months Ended**          |   | **June 2002** |   | **June 2001**  |   | **Change** |   |
|----------------------------------|--------|---------------|--------|----------------|--------|------------|--------|
|                             |   | **Amount**    |   | **%****Total** |   | **Amount** |   | **% Total** |   | **Amount** |   | **%** |   |
|                             |   |          |   |           |   |       |   |   |   |   |   |   |   |
| Salaries and employee benefits   |   | $             | 2,829  |           | 50.0   | %          | $      | 2,288 |   | 47.4 | % | $ | 541 |   | 23.7 | % |
| Net occupancy expense            |   | 251           |   | 4.4            |   | 220        |   | 4.6 |   | 31 |   | 14.1 |   |
| Furniture and equipment expenses |   | 418           |   | 7.4            |   | 452        |   | 9.4 |   | (34 | ) | (7.5 | ) |
| Amortization of intangibles      |   | 234           |   | 4.1            |   | 345        |   | 7.1 |   | (111 | ) | (32.2 | ) |
| Expenses of insurance subsidiary |   | 18            |   | 0.3            |   | 45         |   | 0.9 |   | (27 | ) | (60.0 | ) |
| Other expenses                   |   | 1,912         |   | 33.8           |   | 1,483      |   | 30.7 |   | 429 |   | 28.9 |   |
| Total other expenses             |   | $             | 5,662  |           | 100.0  | %          | $      | 4,833 |   | 100.0 | % | $ | 829 |   | 17.2 | % |

 

 
| **Six Months  Ended**            |   | **June 2002** |   | **June 2001**  |   | **Change** |   |
|----------------------------------|--------|---------------|--------|----------------|--------|------------|--------|
|                             |   | **Amount**    |   | **%****Total** |   | **Amount** |   | **% Total** |   | **Amount** |   | **%** |   |
|                             |   |          |   |           |   |       |   |   |   |   |   |   |   |
| Salaries and employee benefits   |   | $             | 5,633  |           | 52.2   | %          | $      | 4,286 |   | 48.0 | % | $ | 1,347 |   | 31.4 | % |
| Net occupancy expense            |   | 525           |   | 4.9            |   | 436        |   | 4.9 |   | 89 |   | 20.4 |   |
| Furniture and equipment expenses |   | 815           |   | 7.6            |   | 773        |   | 8.7 |   | 42 |   | 5.4 |   |
| Amortization of intangibles      |   | 468           |   | 4.3            |   | 538        |   | 6.0 |   | (70 | ) | (13.0 | ) |
| Expenses of insurance subsidiary |   | 61            |   | 0.6            |   | 100        |   | 1.1 |   | (39 | ) | (39.0 | ) |
| Other expenses                   |   | 3,294         |   | 30.5           |   | 2,796      |   | 31.3 |   | 498 |   | 17.8 |   |
| Total other expenses             |   | $             | 10,796 |           | 100.0  | %          | $      | 8,929 |   | 100.0 | % | $ | 1,867 |   | 20.9 | % |

 

24

----

 

Equity SecuritiesRisk

 

Sun Bancorp,Inc.’s equity securities consist of marketable equities and restrictedstock.  Marketable equities consistentirely of common stock, primarily of bank and bank holding companies.  Restricted stock consists almost entirely ofFHLB stock.  Since FHLB stock isredeemable at par, SunBank carries it at cost and periodically evaluates thestock for impairment.  Possibleimpairment factors include potential dramatic changes to the housing andresidential mortgage industry or the related regulatory environment.  Management currently does not believe anyfactors exist to suggest potential impairment.

 

Bank and bankholding company stocks are subject to general industry risks, includingcompetition from non-bank entities, credit risk, interest rate risk, and otherfactors.  Individual stocks could sufferprice 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.

 
|                             |   | **June 30,  2002** |   |
|----------------------------------|--------|--------------------|--------|
|                             |   | **Cost**           |   | **Fair  Value** |   | **Unrealized  Losses** |   |
| Banks and bank holding companies |   | $                  | 2,845  |   | $ | 2,429 |   | $ | (416 | ) |
| FHLB stock                       |   | 11,593             |   | 11,593 |   | — |   |
| Non-bank companies               |   | 87                 |   | 69 |   | (18 | ) |
| Total                            |   | $                  | 14,525 |   | $ | 14,091 |   | $ | (434 | ) |

 
|                             |   | **December  31, 2001** |   |
|----------------------------------|--------|------------------------|--------|
|                             |   | **Cost**               |   | **Fair  Value** |   | **Unrealized  Losses** |   |
| Banks and bank 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 | ) |

 

 

25

----

 

CapitalAdequacy

 

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

 

Sun Bancorp,Inc. is currently, and has been in the past, designated a well-capitalizedinstitution.  Shareholders’ equityincreased $2,588 to $80,099 at June 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)** |   |       |   |                   |   | **For  Capital** |   |
|-----------------------------|--------|------------|--------|------------------------|--------|------------------|--------|
|                        |   | **Actual** |   | **Adequacy  Purposes** |   |
|                        |   | **Amount** |   | **Ratio**              |   | **Ratio**        |   |
| As of June 30, 2002:        |   |       |   |                   |   |             |   |
| Total Capital               |   | $          | 80,346 |                   | 13.6   | %                | 8.0    | % |
| (to Risk Weighted Assets)   |   |       |   |                   |   |             |   |
| Tier I Capital              |   | $          | 70,401 |                   | 12.0   | %                | 4.0    | % |
| (to Risk Weighted Assets)   |   |       |   |                   |   |             |   |
| Tier I Capital              |   | $          | 70,401 |                   | 7.8    | %                | 4.0    | % |
| (to Average Assets)         |   |       |   |                   |   |             |   |
|                        |   |       |   |                   |   |             |   |
| As of December 31, 2001:    |   |       |   |                   |   |             |   |
| Total Capital               |   | $          | 78,730 |                   | 14.9   | %                | 8.0    | % |
| (to Risk Weighted Assets)   |   |       |   |                   |   |             |   |
| Tier I Capital              |   | $          | 68,582 |                   | 13.0   | %                | 4.0    | % |
| (to Risk Weighted Assets)   |   |       |   |                   |   |             |   |
| Tier I Capital              |   | $          | 68,582 |                   | 7.1    | %                | 4.0    | % |
| (to Average Assets)         |   |       |   |                   |   |             |   |
|                             |        |            |        |                        |        |                  |        |  |  |

 

26

----

 

Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

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 oflegislation on the liquidity, capital resources, and results of operations of SunBancorp, Inc. will be immaterial. Future recommendations by regulatoryauthorities or proposed legislation, which if they were implemented, would havea material adverse effect upon the liquidity, capital resources, or results ofoperations, although the general cost of compliance with numerous and multiplefederal and state laws and regulations does have, and in the future may have, anegative impact on Sun Bancorp, Inc.’s results of operations.

 

Further, thebusiness of Sun Bancorp, Inc. is also affected by the state of the financialservices industry in general.  As aresult of legal and industry changes, management predicts the industry willcontinue to experience an increase in consolidations and mergers as thefinancial services industry strives for greater cost efficiencies and marketshare.  Management also expectsincreased diversification of financial products and services offered by SunBankand its competitors.  Managementbelieves such consolidations and mergers, and diversification of products andservices may enhance its competitive position as a community bank.

 

27

----

 

Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

The followingtables set forth Selected Financial Data for each of the past five quarters:

 
|                                               |   | **For the Three Months Ended** |    |
|----------------------------------------------------|--------|--------------------------------|---------|
| **(dollars in  thousands, except per share data)** |   | **6/30/2002**                  |    | **3/31/2002** |   | **12/31/2001** |   | **9/30/2001** |   | **6/30/2001** |   |
|                                               |   |                           |    |   |   |   |   |   |   |   |   |
| **Financial Condition Data:**                      |   |                           |    |   |   |   |   |   |   |   |   |
| **General**                                        |   |                           |    |   |   |   |   |   |   |   |   |
| Total assets                                       |   | $                              | 923,322 |   | $ | 922,473 |   | $ | 920,855 |   | $ | 992,475 |   | $ | 998,437 |   |
| Loans, net                                         |   | 575,616                        |    | 547,080 |   | 515,520 |   | 527,925 |   | 507,506 |   |
| Goodwill & Core Deposit Intangible             |   | 22,305                         |    | 22,539 |   | 22,773 |   | 23,439 |   | 23,993 |   |
| Total deposits                                     |   | 571,371                        |    | 576,754 |   | 573,877 |   | 648,153 |   | 647,442 |   |
| Non interest bearing                               |   | 58,981                         |    | 57,866 |   | 57,990 |   | 71,118 |   | 61,417 |   |
|                                               |   |                           |    |   |   |   |   |   |   |   |   |
| Savings                                            |   | 79,375                         |    | 75,726 |   | 70,423 |   | 79,703 |   | 78,782 |   |
| NOW                                                |   | 143,144                        |    | 145,694 |   | 146,339 |   | 157,945 |   | 146,538 |   |
| Money Market                                       |   | 23,056                         |    | 21,735 |   | 18,058 |   | 21,634 |   | 24,859 |   |
| Time Deposits                                      |   | 266,815                        |    | 275,733 |   | 281,067 |   | 317,753 |   | 335,846 |   |
| Total interest bearing deposits                    |   | 512,390                        |    | 518,888 |   | 515,887 |   | 577,035 |   | 586,025 |   |
|                                               |   |                           |    |   |   |   |   |   |   |   |   |
| Core deposits*                                     |   | 304,556                        |    | 301,021 |   | 292,810 |   | 330,400 |   | 311,596 |   |
| Trust preferred securities & subordinated debt |   | 19,655                         |    | 20,444 |   | 20,444 |   | 20,444 |   | 20,444 |   |
| Stockholders’ equity                          |   | 80,099                         |    | 76,992 |   | 77,511 |   | 76,589 |   | 72,161 |   |
| Trust assets under management                      |   | 147,682                        |    | 136,899 |   | 136,859 |   | 147,924 |   | 147,051 |   |
|                                               |   |                           |    |   |   |   |   |   |   |   |   |
| **Asset Quality**                                  |   |                           |    |   |   |   |   |   |   |   |   |
|                                               |   |                           |    |   |   |   |   |   |   |   |   |
| Non-performing assets                              |   | $                              | 4,461   |   | $ | 5,017 |   | $ | 4,853 |   | $ | 4,755 |   | $ | 5,638 |   |
| Non-performing assets to total assets              |   | 0.48                           | %       | 0.54 | % | 0.53 | % | 0.48 | % | 0.56 | % |
| Allowance for loan losses                          |   | 6,790                          |    | 6,537 |   | 6,204 |   | 6,098 |   | 5,987 |   |
| Allowance for loan losses to total loans           |   | 1.17                           | %       | 1.18 | % | 1.20 | % | 1.14 | % | 1.17 | % |
| Allowance for loan losses to non-performing loans  |   | 184.81                         | %       | 172.80 | % | 180.14 | % | 179.88 | % | 137.63 | % |
| Non-performing loans to total loans                |   | 0.63                           | %       | 0.68 | % | 0.66 | % | 0.63 | % | 0.85 | % |
|                                               |   |                           |    |   |   |   |   |   |   |   |   |
| **Capitalization – Bancorp**                  |   |                           |    |   |   |   |   |   |   |   |   |
|                                               |   |                           |    |   |   |   |   |   |   |   |   |
| Shareholders’ equity to total assets          |   | 8.68                           | %       | 8.35 | % | 8.42 | % | 7.72 | % | 7.23 | % |

 

----

*  Core deposits are defined as total deposits less time deposits

 

28

----

 
|                                               |   | **For the  Three Months Ended** |   |
|----------------------------------------------------|--------|---------------------------------|--------|
| **Operating Data**                                 |   | **6/30/2002**                   |   | **3/31/2002** |   | **12/31/2001** |   | **9/30/2001** |   | **6/30/2001** |   |
| **(dollars in  thousands, except per share data)** |   |                            |   |   |   |   |   |   |   |   |   |
| Cash earnings                                      |   | $                               | 2,109  |   | $ | 1,722 |   | $ | 4,360 |   | $ | 1,983 |   | $ | 1,508 |   |
| Net income                                         |   | 1,786                           |   | 1,398 |   | 3,932 |   | 1,551 |   | 1,094 |   |
| Net interest income                                |   | 6,733                           |   | 6,036 |   | 6,375 |   | 6,605 |   | 5,581 |   |
| Provision for loan losses                          |   | 405                             |   | 405 |   | 575 |   | 325 |   | 300 |   |
| Other operating income                             |   | 1,576                           |   | 1,120 |   | 5,672 |   | 1,297 |   | 931 |   |
| Other operating expense                            |   | 5,662                           |   | 5,134 |   | 5,707 |   | 5,413 |   | 4,833 |   |
|                                               |   |                            |   |   |   |   |   |   |   |   |   |
| **Performance Statistics**                         |   |                            |   |   |   |   |   |   |   |   |   |
|                                               |   |                            |   |   |   |   |   |   |   |   |   |
| Net interest margin                                |   | 3.35                            | %      | 3.01 | % | 3.09 | % | 3.13 | % | 3.06 | % |
| Return on average assets                           |   | 0.77                            | %      | 0.61 | % | 1.72 | % | 0.61 | % | 0.47 | % |
| Return on average equity                           |   | 8.97                            | %      | 7.17 | % | 22.80 | % | 8.20 | % | 6.70 | % |
| Cash return on average assets                      |   | 0.90                            | %      | 0.75 | % | 1.86 | % | 0.76 | % | 0.65 | % |
| Cash return on average equity                      |   | 10.59                           | %      | 8.83 | % | 25.25 | % | 10.49 | % | 9.29 | % |
| Annualized net loan charge-offs to averageloans    |   | 0.11                            | %      | 0.05 | % | 0.35 | % | 0.16 | % | 0.18 | % |
| Net charge-offs                                    |   | 152                             |   | 72 |   | 469 |   | 214 |   | 201 |   |
| Efficiency ratio                                   |   | 65.7                            |   | 69.4 |   | 72.0 |   | 62.5 |   | 69.7 |   |
|                                               |   |                            |   |   |   |   |   |   |   |   |   |
| **Per Share Data**                                 |   |                            |   |   |   |   |   |   |   |   |   |
|                                               |   |                            |   |   |   |   |   |   |   |   |   |
| Cash earnings per share                            |   | $                               | 0.30   |   | $ | 0.24 |   | $ | 0.61 |   | $ | 0.28 |   | $ | 0.22 |   |
| Basic earnings per share                           |   | 0.25                            |   | 0.20 |   | 0.55 |   | 0.22 |   | 0.16 |   |
| Diluted earnings per share                         |   | 0.25                            |   | 0.20 |   | 0.55 |   | 0.22 |   | 0.16 |   |
| Dividend declared per share                        |   | 0.165                           |   | 0.150 |   | 0.150 |   | 0.150 |   | 0.150 |   |
| Book value                                         |   | 11.20                           |   | 10.79 |   | 10.85 |   | 10.71 |   | 10.09 |   |
| Common stock price:                                |   |                            |   |   |   |   |   |   |   |   |   |
| High                                               |   | 24.49                           |   | 18.05 |   | 17.50 |   | 17.50 |   | 16.50 |   |
| Low                                                |   | 17.65                           |   | 16.28 |   | 15.50 |   | 14.65 |   | 14.85 |   |
| Close                                              |   | 24.49                           |   | 17.70 |   | 17.11 |   | 17.50 |   | 15.30 |   |
| Weighted average common shares:                    |   |                            |   |   |   |   |   |   |   |   |   |
| Basic                                              |   | 7,141                           |   | 7,143 |   | 7,148 |   | 7,151 |   | 6,828 |   |
| Fully Diluted                                      |   | 7,164                           |   | 7,164 |   | 7,162 |   | 7,162 |   | 6,842 |   |
| End-of-period common shares:                       |   |                            |   |   |   |   |   |   |   |   |   |
| Issued                                             |   | 7,266                           |   | 7,237 |   | 7,236 |   | 7,235 |   | 7,234 |   |
| Treasury                                           |   | 111                             |   | 99 |   | 93 |   | 84 |   | 83 |   |

 

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*  Thecash earnings calculations is net income reduced for depreciation andamortization net of taxes (34%).

 

29

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PART II

 

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

 

Item 5 – Otherinformation

 

On July 25,2002, the Board of Directors approved a quarterly dividend payment of $0.165per share for shareholders of record August 30, 2001, payable on September 13,2002.

 

Item 6 –Exhibits and Reports on Form 8-K

 

a.  Noreports on Form 8-K were filed for the quarter ended June 30, 2002.

 

b.  Exhibits

 
| 3(i)   |   | The Articles of  Incorporation of the Corporation are incorporated herein by reference to  Exhibit 3 to the Corporation’s Registration Statement on Form S-8 filed with  the Securities and Exchange Commission on August 12, 1998 (Commission File  Number 0-14745).                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                          |
| 3(ii)  |   | The By-Laws, as amended and restated, dated  July 10, 1990.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                          |
| 10     |   | Employment agreement  between Robert J. McCormack and SUN BANCORP, INC. and SunBank dated March 1,  2002 incorporated herein by reference to Exhibit 3 to the Corporation’s 10-K  filed with the Securities and Exchange Commission on March 22, 2002  (Commission File Number 0-14745). |
|   |   |                                                                                                                                                                                                                                                                                          |
| 99.1   |   | Certification of  principal executive officer or principal financial officer pursuant to  18U.S.C. Section 1350.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                          |
| 99.2   |   | Certification of principal executive  officer or principal financial officer pursuant to 18U.S.C. Section 1350.                                                                                                                                                                               |

 

30

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SIGNATURES

 

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

 
|                         |       | Sun Bancorp, Inc.                     |
|------------------------------|------------|---------------------------------------|
|                         |       |                                  |
| Date                         | 08/14/2002 |                                  | /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)         |
|                         |       |                                  |
|                         |       |                                  |
| Sun Bancorp,  Inc.           |       |                                  |
| PO Box 57                    |       |                                  |
| Selinsgrove,  PA  17870 |       |                                  |
| (570)  374-1131              |       |                                  |
|                              |            |                                       |  |

 

31

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