UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K




FOR
ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934


(Mark
One)


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


For
the fiscal year ended: December 31, 2008





o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For
the transition period from ____________ to ____________




Commission
File No. 0-20957




Sun
Bancorp, Inc.


(Exact
Name of Registrant as Specified in Its Charter)




New
      Jersey
            
            52-1382541(State
      or Other Jurisdiction of Incorporation or Organization)
            
            (IRS
      Employer Identification No.)226
      Landis Avenue, Vineland, New Jersey
            
            08360(Address
      of Principal Executive Offices)
            
            (Zip
      Code)




Registrant’s
telephone number, including area code:   (856)
691-7700




Securities
registered pursuant to Section 12(b) of the Exchange Act:




Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock, $1.00 par value
            
            The
      NASDAQ Stock Market LLC




Securities registered
pursuant to Section 12(g) of the Exchange Act:  None





Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.  YESoNOx


Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.  YESoNOx


Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for 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.  YESx NO o





Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K.x




Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.  See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):





Large
      accelerated filero
            Accelerated
      filerx
            Non-accelerated
      filero
            Smaller
      reporting companyo





Indicate by check
mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act).YESoNO x


The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the closing price of the registrant’s
Common Stock as of June 30, 2008 was approximately $152.9 million.




As
of March 12, 2009, there were 21,956,017 outstanding shares of the registrant’s
Common Stock.




DOCUMENTS
INCORPORATED BY REFERENCE




1.
            Portions
      of the Annual Report to Shareholders for the Fiscal Year Ended December
      31, 2008.  (Parts II and IV)2.
            Portions
      of the Proxy Statement for the 2009 Annual Meeting of
      Shareholders.  (Part III)







SUN
BANCORP, INC


FORM
10-K


TABLE
OF CONTENTS




PagePART IITEM
      1.
            
            Business
            
            2ITEM
      1A.
            
            Risk
      Factors
            
            19ITEM
      1B.
            
            Unresolved
      Staff Comments
            
            29ITEM
      2.
            
            Properties
            
            29ITEM
      3.
            
            Legal
      Proceedings
            
            30ITEM
      4.
            
            Submission
      of Matters to a Vote to Security Holders
            
            30PART IIITEM
      5.
            
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            
            30ITEM
      6.
            
            Selected
      Financial Data
            
            30ITEM
      7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            30ITEM
      7A.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            30ITEM
      8.
            
            Financial
      Statements and Supplementary Data
            
            30ITEM
      9.
            
            Changes
      in and Disagreements With Accountants On Accounting and Financial
      Disclosure
            
            30ITEM
      9A.
            
            Controls
      and Procedures
            
            31ITEM
      9B
            
            Other
      Information
            
            31PART IIIITEM
      10.
            
            Directors,
      Executive Officers and Corporate Governance
            
            32ITEM
      11.
            
            Executive
      Compensation
            
            32ITEM
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            32ITEM
      13.
            
            Certain
      Relationships and Related Transactions and Director
      Independence
            
            33ITEM
      14.
            
            Principal
      Accounting Fees and Services
            
            33PART IVITEM
      15.
            
            Exhibits
      and Financial Statement Schedules
            
            34SIGNATURES
            
            36





PART I




SUN
BANCORP, INC. (THE “COMPANY”) MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL
“FORWARD-LOOKING STATEMENTS,” INCLUDING STATEMENTS CONTAINED IN THE COMPANY’S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL
REPORT ON FORM 10-K AND THE EXHIBITS HERETO), IN ITS REPORTS TO SHAREHOLDERS AND
IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE
COMPANY PURSUANT TO THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.  FORWARD-LOOKING STATEMENTS OFTEN
INCLUDE THE WORDS “BELIEVES,” “EXPECTS,” “ANTICIPATES,” “ESTIMATES,”
“FORECASTS,” “INTENDS,” “PLANS,” “TARGETS,” “POTENTIALLY,” “PROBABLY,”
“PROJECTS,” “OUTLOOK,” OR SIMILAR EXPRESSIONS OR FUTURE OR CONDITIONAL VERBS
SUCH AS “MAY,” “WILL,” “SHOULD,” “WOULD,” “COULD.”




THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS
OF THE COMPANY’S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT
ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE
BEYOND THE COMPANY’S CONTROL).  THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY’S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE
PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS:  THE STRENGTH OF THE UNITED STATES ECONOMY
IN GENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS
OPERATIONS; MARKET VOLATILITY; THE CREDIT RISKS OF LENDING ACTIVITIES, INCLUDING
CHANGES IN THE LEVEL AND TREND OF LOAN DELINQUENCIES AND WRITE-OFFS; THE OVERALL
QUALITY OF THE COMPOSITION OF OUR LOAN AND SECURITIES PORTFOLIOS; THE EFFECTS
OF, AND CHANGES IN, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST
RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM;
INFLATION, INTEREST RATE, MARKET AND MONETARY FLUCTUATIONS; FLUCTUATIONS IN THE
DEMAND FOR LOANS, THE NUMBER OF UNSOLD HOMES AND OTHER PROPERTIES AND
FLUCTUATIONS IN REAL ESTATE VALUES IN OUR MARKET AREAS; RESULTS OF EXAMINATIONS
OF THE BANK BY THE OFFICE OF THE COMPTROLLER OF THE CURRENCY (“OCC”), INCLUDING
THE POSSIBILITY THAT THE OCC MAY, AMONG OTHER THINGS, REQUIRE US TO INCREASE OUR
ALLOWANCE FOR LOAN LOSSES OR TO WRITE-DOWN ASSETS; OUR ABILITY TO CONTROL
OPERATING COSTS AND EXPENSES; OUR ABILITY TO MANAGE DELINQUENCY RATES; OUR
ABILITY TO RETAIN KEY MEMBERS OF OUR SENIOR MANAGEMENT TEAM; COSTS OF
LITIGATION, INCLUDING SETTLEMENTS AND JUDGMENTS; INCREASED COMPETITIVE PRESSURES
AMONG FINANCIAL SERVICES COMPANIES; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF
NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF
THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND
QUALITY COMPARED TO COMPETITORS’ PRODUCTS AND SERVICES; THE IMPACT OF CHANGES IN
FINANCIAL SERVICES’ LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES,
BANKING, SECURITIES AND INSURANCE); CHANGES IN LAWS AND REGULATIONS OF THE U.S.
GOVERNMENT, INCLUDING THE U.S. TREASURY AND ANY OTHER GOVERNMENT AGENCIES;
TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER AND BUSINESS SPENDING,
BORROWINGS AND SAVING HABITS AND DEMAND FOR FINANCIAL SERVICES IN OUR MARKET
AREA; ADVERSE CHANGES IN SECURITIES MARKETS; INABILITY OF KEY THIRD-PARTY
PROVIDERS TO PERFORM THEIR OBLIGATIONS TO US; CHANGES IN ACCOUNTING POLICIES AND
PRACTICES, AS MAY BE ADOPTED BY THE FINANCIAL INSTITUTION REGULATORY AGENCIES,
THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD OR THE FINANCIAL ACCOUNTING
STANDARDS BOARD; WAR OR TERRORIST ACTIVITIES; AND THE SUCCESS OF THE COMPANY AT
MANAGING THE RISKS INVOLVED IN THE FOREGOING.




THE
COMPANY CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS NOT
EXCLUSIVE.  THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY
FORWARD-LOOKING STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME
TO TIME BY OR ON BEHALF OF THE COMPANY UNLESS REQUIRED TO DO SO BY LAW OR
REGULATION.


1


Item
1.Business.




General




Sun
Bancorp, Inc. (the “Company”), a New Jersey corporation, is a bank holding
company headquartered in Vineland, New Jersey.  The Company’s
principal subsidiary is Sun National Bank (the “Bank”).  At December
31, 2008, the Company had total assets of $3.62 billion, total deposits of $2.90
billion and total shareholders’ equity of $358.5 million.  The
Company’s principal business is to serve as a holding company for the
Bank.  As a registered bank holding company, the Company is subject to
the supervision and regulation of the Board of Governors of the Federal Reserve
System (the “Federal Reserve”).  At December 31, 2008, the Company had
667 full-time and 114 part-time employees.  As of December 31, 2008,
the Company had 70 locations, including 62 Community Banking Centers in New
Jersey and five Commercial Lending Centers, including one located in Wilmington,
Delaware.




Through
the Bank, the Company provides a comprehensive array of commercial and retail
banking services.  The Company’s lending services to businesses
include term loans and lines of credit, mortgage loans, construction loans, and
equipment leasing.  The Company is a Preferred Lender with both the
Small Business Administration (“SBA”) and the New Jersey Economic Development
Authority.  The Company’s commercial deposit services include business
checking accounts and cash management services such as electronic banking, sweep
accounts, lockbox services, internet banking,  remote deposit and
controlled disbursement services.  The Company’s lending services to
consumers include residential mortgage loans, residential construction loans,
second mortgage loans, home equity loans and installment loans.  The
Company’s consumer deposit services include checking accounts, savings accounts,
money market deposits, certificates of deposit and individual retirement
accounts.  In addition, the Company offers mutual funds, securities
brokerage, annuities and investment advisory services through a third-party
arrangement.




The
Company’s website address is www.sunnb.com.  The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and other documents filed by the Company with the Securities
and Exchange Commission are available free of charge on the Company’s website
under the Investor Relations menu.




Market
Area




The
Company is headquartered in Cumberland County, New Jersey.  The city
of Vineland is approximately 30 miles southeast of Philadelphia, Pennsylvania,
and 30 miles southeast of Camden, New Jersey.  The Philadelphia
International Airport is approximately 45 minutes from Vineland.  The
economy of the Company’s primary market area is based upon a mixture of the
agriculture, transportation, manufacturing and tourism trade, including a
substantial casino industry in Atlantic City, New Jersey.  The
Atlantic City International Airport is approximately 29 miles from
Vineland.


2


The
Company’s primary market area consists of the State of New Jersey.  In
addition, although the Company sold its six Community Banking Centers located in
New Castle County, Delaware during the fourth quarter 2008, it retained a loan
production office in Delaware for its commercial lending which includes a
portfolio of approximately $122 million at December 31, 2008.  The
Company’s deposit gathering base and lending area is concentrated in the
communities surrounding its offices in New Jersey.  The
Company believes these markets are attractive and have strong growth potential
based on key economic indicators.  The State of New Jersey has the
highest median household income in the nation, as well as the second highest per
capita income.  The Company’s markets are home to a diverse pool of
businesses and industries, representing key opportunities for growth in the
business and commercial banking products and services. Related to the Company’s
retail growth, New Jersey is the most densely populated state in the U.S.,
providing a deep consumer base as well.  The Company’s market area is
also home to many affluent suburbs, catering to commuters who live in New Jersey
and work in New York and Philadelphia.




Lending
Activities




General.  The
principal lending activity of the Company is the origination of commercial and
industrial loans.  The Company also offers home equity loans,
residential real estate and second mortgage loans and other consumer loans,
including installment loans.  Substantially all loans are originated
in the Company’s primary market area.  For more information about the
Company’s lending activities, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Loans” in the Company’s 2008
Annual Report to Shareholders (the “Annual Report”), included herein as Exhibit
13.




Commercial
and Industrial Loans.  Included as commercial and industrial
loans are short- and long-term business loans, lines of credit, mortgage loans
on commercial real estate and construction loans to developers and
builders.  The Company’s primary lending focus is the origination of
commercial loans.




The
Company’s lending to businesses includes the origination of SBA guaranteed term
loans and lines of credit.  The Company generally sells the guaranteed
portion of each SBA term loan in the secondary market to generate fee
income.  In 2008, the Company recognized a gain of $473,000 from the sale
of such loans.




The
Company is an SBA Preferred Lender.  As an SBA Preferred Lender, the
Company is able to originate SBA Loans without requesting the approval of the
SBA prior to closing the loan.




The
trend of the Company’s lending continues to reflect the diversification of the
commercial loan portfolio. As the Company’s marketplace has expanded within the
State of New Jersey, likewise, its commercial lending activities have grown,
especially in the central and more recently the northern parts of the state. A
significant broad-based deterioration in economic conditions throughout New
Jersey, including the real estate markets as well as other external factors,
could have a material adverse effect on the credit quality of the loan portfolio
and consequently, the Company’s financial condition, results of operations and
cash flows. At December 31, 2008 and 2007, the Company did not have more than
10% of its total loans outstanding concentrated in any one category including,
but not limited to, hospitality, entertainment and leisure industries and
general office space.  Loan categories are based upon borrowers
engaged in similar activities who would be similarly impacted by economic or
other conditions.


3


Many
of the Company’s commercial and industrial loans have a real estate component as
part of the collateral securing the loan.  Additionally, the Company
makes commercial loans for the acquisition, refinance, improvement and
construction of real property.  Loans secured by owner occupied
properties are dependent upon the successful operation of the borrower’s
business.  If the operating company experiences difficulties in terms
of sales volume and/or profitability, the borrower’s ability to repay the loan
may be impaired.  Loans secured by properties where repayment is
dependent upon payment of rent by third party tenants or the sale of the
property may be impacted by loss of tenants, lower lease rates needed to attract
new tenants or the inability to sell a completed project in a timely fashion and
at a profit.  At December 31, 2008, the Company’s commercial real
estate portfolio was $1.71 billion of which $771.9 million or 45.1% were
classified as owner occupied and $941.4 million or 54.9% were classified as
non-owner occupied.




In
addition, a portion of the Company’s commercial loans are to
contractors.   As of December 31, 2008, commercial loans to
contractors was $140.8 million, or 5.1%, of the overall loan portfolio. The
recessionary climate and stressed real estate values may negatively impact the
ability of this group of borrowers’ ability to obtain profitable work and to
collect on work performed on existing projects that are being affected by the
downturn.




Home
Equity Lines of Credit (“HELOC”).  The Company originates home
equity lines of credit, secured by first or second homes owned or being
purchased by the loan applicant.  HELOCs are consumer revolving lines
of credit.  The interest rates charged on such loans can be fixed or
floating and are generally related to the prime lending rate.  HELOC
loans, which are underwritten to reflect the borrower’s ability to pay the full
principal and interest, may provide for interest only payments for the first
three years with principal payments to begin in the fourth year.  A
home equity line is typically originated as a twenty-year note that allows the
borrower to draw upon the approved line of credit during the same period as the
note.  The Company generally permits a loan-to-value ratio in the
range of 70% to 80% of the appraised value, less any outstanding
mortgage.  HELOC loans expose the Company to the risk that falling
collateral values may leave such credits inadequately secured especially in the
current economic environment where residential real estate values have been
negatively impacted.




Second
Mortgage Loans.  The Company originates second mortgage loans
secured by mortgage liens against the borrowers’ primary, secondary or
investment property.  Second mortgage loans are consumer term
loans.  The interest rate charged on such loans is usually a fixed
rate related to the Company’s cost of funds and market
conditions.  These loans typically require fixed payments of principal
and interest up to a maximum term of fifteen years.  The average
second mortgage term is between five and ten years.  The Company
generally permits a loan-to-value ratio of up to 80% of the appraised value,
less any outstanding mortgages.  Home Equity Term Loans expose the
Company to the risk that falling collateral values may leave such credits
inadequately secured.




Residential
Real Estate Loans.The Company originates residential
mortgages through Sun Home Loans, Inc., a wholly owned subsidiary of the
Company.  The majority of these loans are for owner occupied
single-family residences and originated with a forward commitment to sell the
loan in the secondary market with servicing released.  In 2008, the
Company recognized a gain of $1.2 million from the sale of such
loans.  The mortgage loans are typically sold with recourse, in the
event of default within the first one to six months of origination, depending on
the terms with the investor.  The Company did not have to repurchase any
previously sold mortgage loans during 2008.


4


Other
Loans.  Included in the category of “Other Loans” are certain
small business loans serving businesses with credit needs up to
$250,000.  These small business loans are generally lines of
credit.  The Company has experienced credit quality challenges with
our credit scored portfolio which consists of small business lines of credit of
up to $100,000 that were approved based on a minimum qualifying credit
score.  Products of this type which include overdraft protection for
business checking accounts up to $2,500 or ten month term loans up to $50,000
are still being offered on a very limited basis.  It is the Company’s
intention to aggressively manage this portfolio down during 2009 and
beyond.  At December 31, 2008, the Company had $23.6 million of small
business loans.




Also
included in “Other Loans” are secured and unsecured installment loans to
consumers.  Secured installment loans are secured by a variety of
collateral, such as new and used automobiles, boats and certificates of
deposits.  At December 31, 2008, the Company had $3.1 million of
secured installment loans and $4.9 million of unsecured installment
loans.  Installment loans may entail greater risk than residential
real estate loans, particularly in the case of consumer loans that are unsecured
or secured by assets that depreciate rapidly.  Repossessed collateral
may not be sufficient for repayment of the outstanding loan, and the remaining
deficiency may not be collectible.




Loans
secured by modular housing and recreational vehicles are also included in the
“Other Loans” category.  These loans are generated through third-party
arrangements.  At December 31, 2008, the Company’s modular housing
portfolio was $35.9 million.  In April 2007, the Company ceased its
relationship with the third-party used to generate the recreational vehicle
portfolio and as of December 31, 2008, there was $12.6 million
outstanding.  Loans originated for modular housing uses the Company’s
underwriting standards, rates and terms and are approved according to the
Company’s policies which include appraisals on all new homes supporting a 90%
loan to value on homes placed on land owned by the occupant and 80% on homes in
which land is leased by the occupant.  The credit risk in these
portfolios is managed like any other consumer portfolio through loan to value
requirements, debt to income ratios and credit history of the
borrower.  Historically, the modular home business and the
recreational vehicle business has been viewed as a higher risk lending
activity.




Loan
Solicitation and Processing.  Loan originations are derived
from a number of sources such as loan officers, existing customers and borrowers
and referrals from real estate professionals, accountants, attorneys, regional
advisory boards and the Board of Directors.




Upon
the receipt of a loan request, the borrower’s financial condition is analyzed,
and appropriate agency reports are obtained to verify the applicant’s
creditworthiness.  For the majority of real estate that will secure a
loan, the Company obtains an appraisal or evaluation from an independent
appraiser approved by the Company and licensed or certified by the
state.  After all required information is received and evaluated, a
credit decision is made.  Depending on the loan type, collateral and
amount of the credit request, various levels of approval are
required.  The Company has implemented a Loan Approval Matrix (LAM)
which was devised to facilitate the timely approval of commercial loans in an
environment that promotes responsible use of coordinated lending authority by
groups of loan and credit officers.  In terms of control, the LAM is
structured to provide for at least two signatures for every action.




On
an annual basis, the Chief Executive Officer presents to the Board of Directors
the recommended structure of the LAM in terms of the amounts of lending
authority granted to combining levels.  On that same occasion, the
Chief Executive Officer also recommends levels of lending authority within the
matrix for individual loan and credit officers.  Between the annual
reviews of lending authorities by the Board of Directors, the Chief Executive
Officer may assign interim lending authorities within the LAM to individual loan
and credit officers and report his actions to the Board in a timely
fashion.


5


Levels
of individual lending authority are based on the functional assignment of a loan
officer as well as the officer’s perceived level of expertise and areas of
experience.




The
positions of credit officer (CO) and senior credit officer (SCO) are an integral
feature of the LAM process.  CO’s and SCO’s are granted substantial
levels of authority but do not carry a portfolio.  These individuals
are collectively responsible for maintaining the quality and soundness of the
Company’s loan portfolio.




Loan
Commitments.  When a commercial loan is approved, the Company
may issue a written commitment to the loan applicant.  The loan
commitment specifies the terms and conditions of the proposed loan including the
amount, interest rate, amortization term, a brief description of the required
collateral, and the required insurance coverage.  The loan commitment
is valid for approximately 30 days.  At December 31, 2008, the Company
had approximately $96 million in commercial loans that were approved but
unfunded.




Credit
Risk, Credit Administration and Loan Review.  Credit risk
represents the possibility that a customer or counterparty may not perform in
accordance with contractual terms.  The Company incurs credit risk
whenever it extends credit to, or enters into other transactions with
customers.  The risks associated with extensions of credit include
general risk, which is inherent in the lending business, and risk specific to
individual borrowers.  The credit administration department is
responsible for the overall management of the Company’s credit risk and the
development, application and enforcement of uniform credit policies and
procedures the principal purpose of which is to minimize such
risk.  One objective of credit administration is to identify and,
monitor and report extensions of credit by industry concentration and the type
of borrower.  Loan review and other loan monitoring practices provide
a means for management to ascertain whether proper credit, underwriting and loan
documentation policies, procedures and practices are being followed by the
Company’s loan officers and are being applied uniformly.  Loan review
coverage in 2008 was approximately $2 billion, or 85%, of the Company’s total
outstanding loans.




The
underpinning of the Company’s credit process is a numerical risk rating
system.  All commercial and small business credit accommodations are
assigned a risk rating at the time of initial underwriting by the relationship
manager. The risk rating system is well-defined and requires quantification of
various risk factors based on a 10 to 90 point scale.   Risk
rating is a dynamic process and ratings will change as risk factors
change.   Additionally, the system has a historic loss component and a
qualitative factor component which are analyzed and adjusted quarterly and are
central to the development of an appropriate reserve level for the loan
portfolio.  The risk rating system is also the driver of management’s
methodology for determining and monitoring the adequacy of the allowance for
loan losses.




While
management continues to review these and other related functional areas, there
can be no assurance that the steps the Company has taken to date will be
sufficient to enable it to identify, measure, monitor and control all credit
risk.


6


Investment
Activities




The
investment policy of the Company is established by senior management and
approved by Board of Directors.  It is based on asset and liability
management goals which are designed to provide a portfolio of high quality
investments that optimize interest income within acceptable limits of safety and
liquidity.  The Company’s investments consist primarily of federal
funds, securities issued or guaranteed by the United States Government or its
agencies, mortgage-backed securities, states and political subdivisions and
trust preferred securities.   For more information about the
investment securities portfolio, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Financial Condition - Investment
Securities” in the Annual Report, included herein as Exhibit 13.




Sources
of Funds




General.  Deposits
are the primary source of the Company’s funds for lending and other investment
purposes.  In addition to deposits, the Company derives funds from the
amortization, prepayment or sale of loans, maturities or calls of investment
securities, borrowings and operations.  Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and market conditions.




Deposits.  Consumer
and commercial deposits, as well as deposits from governmental entities are
attracted principally from within the Company’s primary market area through the
offering of a broad selection of deposit instruments including checking, regular
savings, money market deposits, term certificate accounts and individual
retirement accounts.  Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate, among other factors.  The Company regularly
evaluates the internal cost of funds, surveys rates offered by competing
institutions, reviews the Company’s cash flow requirements for lending and
liquidity and executes rate changes when deemed appropriate.  The
Company joined the Certificate of Deposit Account Registry Service (CDARS®)
program in 2008, which enables our local customers to obtain expanded FDIC
insurance coverage on their deposits.  The Company may also obtain
funding through brokered deposits.  For more information about the
Company’s deposits, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Financial Condition - Deposits” in the
Annual Report, included herein as Exhibit 13.




Borrowings.The
Company may obtain advances from the Federal Home Loan Bank of New York
(“FHLBNY”) to supplement its funding requirements.  Such advances must
be secured by a pledge of a portion of the Company’s assets which may include
securities, first mortgage loans and other collateral acceptable to the
FHLBNY.  The Company, if the need arises, may also access the Federal
Reserve Bank discount window to supplement its supply of lendable funds and to
meet deposit withdrawal requirements.  The
Company has additional secured borrowing capacity with the Federal Reserve Bank
of approximately $213 million and the FHLBNY of approximately $68 million, of
which $71.5 million and $57.1 million, respectively, was utilizedas
of December 31, 2008. As
of December 31, 2008, the Company had $159.4 million and $121.2 million in loans
and securities, respectively, pledged as collateral on secured
borrowings.The
Company has additional unsecured borrowing capacity through lines of credit with
other financial institutions of approximately $117 million.  For more
information about the Company’s borrowings, see “Management’s Discussion and
Analysisof
Financial Condition and Results of Operations – Financial Condition -
Borrowings” in the Annual Report, included herein as an
exhibit.


7


Securities
Sold Under Agreements to Repurchase.  The Company has overnight
repurchase agreements with customers as well as term repurchase agreements with
the FHLBNY.  The Company obtains funds through overnight repurchase
agreements with customers pursuant to which the Company sells U.S. Treasury
notes or securities issued or guaranteed by one of the government sponsored
enterprises to customers under an agreement to repurchase them, at par, on the
next business day.  At December 31, 2008, the amount of securities
under agreements to repurchase with customers totaled $20.3
million.  In addition, the Company may obtain funds through term
repurchase agreements with the FHLBNY.  At December 31, 2008, the
amount of repurchase agreements with the FHLBNY totaled $15.0
million.  For more information regarding repurchase agreements, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Financial Condition - Borrowings” in the Annual Report and Note 13
of the Notes to Consolidated Financial Statements included in the Annual Report,
included herein as Exhibit 13.




Fee
Income Services




The
Company offers an array of full-service banking capabilities though products and
services designed to enhance the overall relationship with its
customers.




Cash
Management Services.  The Company offers a menu of cash
management services designed to meet the more sophisticated needs of its
commercial and small business customers.  The Cash Management
department offers additional products and services such as electronic banking,
sweep accounts, lockbox services, internet banking, remote deposit and
controlled disbursement services.  Many of these services are provided
through third-party vendors with links to the Company’s data
center.




Sun
Financial Services.  The Company’s investment services
division, in conjunction with its broker-dealer affiliation, offers experienced
professionals that deliver a full range of products and services to meet the
specific needs of the Company’s customers.  The products offered
include insurance, annuities, mutual funds, securities and real estate
investment trusts.




Leasing.  The
Company has a relationship with a third-party to develop a referral program with
lease financing products.  Under this program, the third-party assists
the Company in offering leasing products to its commercial
customers.  Leases are underwritten by the Company as based on the
creditworthiness of the Company’s customer who is the lessee with the
third-party being the lessor.  A loan is made to the third-party
leasing company on a non-recourse basis for the purchase of the asset being
leased.  The loan is secured by an assignment of the third-party’s
interest as lessor and by a lien on the asset being leased.  The
third-party makes an effective equity investment into each transaction for the
balance of the total funded amount based on an accelerated repayment of the
Company’s loan.  The third-party provides complete documentation
services, portfolio administration and disposal or sale of
equipment.  Under the program, the Company can provide leases to its
customers with minimal operating expense and no additional risk beyond normal
underwriting.




Customer
Derivatives.  To accommodate customer needs, the Company also
enters into financial derivative transactions primarily consisting of interest
rate swaps.  Market risk exposure from customer positions is managed
through transactions with third-party dealers.  The credit risk
associated with derivatives executed with customers is essentially the same as
that involved in extending loans and is subject to normal credit
policies.  Collateral may be obtained based on management’s assessment
of the customer.  The positions of customer derivatives are recorded
at fair value and changes in value are included in non-interest
income.


8


Competition




The
Company faces substantial competition in all phases of our
operations.  The banking business in the State of New Jersey is highly
competitive.  The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Company, all of which are
competitors of the Company to varying degrees.  In order to compete
with the many financial institutions serving its primary market area, the
Company’s strategy is to focus on providing a superior level of personalized
service to local businesses and individual customers.




The
competition for deposits comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, and multi-state regional
and money center banks in the Company’s market area.  Competition for
funds also includes a number of insurance products sold by local agents and
investment products such as mutual funds and other securities sold by local and
regional brokers.  Loan competition varies depending upon market
conditions and comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, multi-state regional and
money center banks, and mortgage-bankers many of whom have far greater resources
than the Company.  Non-bank competition, such as investment brokerage
houses, has intensified in recent years for all banks as non-bank competitors
are not subject to the same regulatory burdens.




SUPERVISION
AND REGULATION




Introduction




Bank
holding companies and banks are extensively regulated under both federal and
state law.  The description of statutory provisions and regulations
applicable to banking institutions and their holding companies set forth in this
Form 10-K does not purport to be a complete description of such statutes and
regulations and their effects on the Bank and the Company.  The
discussion is qualified in its entirety by reference to all particular statutory
or regulatory provisions.








The
Company is a legal entity separate and distinct from the
Bank.  Accordingly, the right of the Company, and consequently the
right of creditors and shareholders of the Company, to participate in any
distribution of the assets or earnings of the Bank is necessarily subject to the
prior claims of creditors of the Bank, except to the extent that claims of the
Company in its capacity as creditor may be recognized.  The principal
sources of the Company’s revenue and cash flow are management fees and dividends
from the Bank.  There are legal limitations on the extent to which a
subsidiary bank can finance or otherwise supply funds to its parent holding
company.




The
Company




General.  As
a registered bank holding company, the Company is regulated under the Bank
Holding Company Act of 1956 and is subject to supervision and regular inspection
by the Federal Reserve.


9


Emergency
Economic Stabilization Act of 2008.In response to recent
unprecedented market turmoil, the Emergency Economic Stabilization Act (“EESA”)
was enacted on October 3, 2008.  EESA authorizes the Secretary of
the Treasury to purchase up to $700 billion in troubled assets from financial
institutions under the Troubled Asset Relief Program
(“TARP”).  Troubled assets include residential or commercial mortgages
and related instruments originated prior to March 14, 2008 and any other
financial instrument that the Secretary determines, after consultation with the
Chairman of the Board of Governors of the Federal Reserve System, the purchase
of which is necessary to promote financial stability.  If the
Secretary exercises his authority under TARP, EESA directs the Secretary of
Treasury to establish a program to guarantee troubled assets originated or
issued prior to March 14, 2008.  The Secretary is authorized to
purchase up to $250 billion in troubled assets immediately and up to $350
billion upon certification by the President that such authority is needed. The
Secretary’s authority will be increased to $700 billion if the President submits
a written report to Congress detailing the Secretary’s plans to use such
authority unless Congress passes a joint resolution disapproving such amount
within 15 days after receipt of the report. The Secretary’s authority under TARP
expires on December 31, 2009 unless the Secretary certifies to Congress
that extension is necessary provided that his authority may not be extended
beyond October 3, 2010.




Institutions
selling assets under TARP will be required to issue warrants for common or
preferred stock or senior debt to the Secretary.  If the Secretary
purchases troubled assets directly from an institution without a bidding process
and acquires a meaningful equity or debt position in the institution as a result
or acquires more than $300 million in troubled assets from an institution
regardless of method, the institution will be required to meet certain standards
for executive compensation and corporate governance, including a prohibition
against incentives to take unnecessary and excessive risks, recovery of bonuses
paid to senior executives based on materially inaccurate earnings or other
statements and a prohibition against agreements for the payment of golden
parachutes.  Institutions that sell more than $300 million in assets
under TARP auctions will not be entitled to a tax deduction for compensation in
excess of $500,000 paid to its chief executive or chief financial officer or any
its other three most highly compensated officers. In addition, any severance
paid to such officers for involuntary termination or termination in connection
with a bankruptcy or receivership will be subject to the golden parachute rules
under the Internal Revenue Code.




EESA
increases the maximum deposit insurance amount up to $250,000 until
December 31, 2009 and removes the statutory limits on the FDIC’s ability to
borrow from the Treasury during this period.  The FDIC may not take
the temporary increase in deposit insurance coverage into account when setting
assessments.  EESA allows financial institutions to treat any loss on
the preferred stock of the Federal National Mortgage Association or Federal Home
Loan Mortgage Corporation as an ordinary loss for tax purposes.


10


Pursuant
to his authority under EESA, the Secretary of the Treasury has created the TARP
Capital Purchase Plan under which the Treasury Department will invest up to $250
billion in senior preferred stock of U.S. banks and savings associations or
their holding companies. Qualifying financial institutions may issue senior
preferred stock with a value equal to not less than 1% of risk-weighted assets
and not more than the lesser of $25 billion or 3% of risk-weighted
assets.  The senior preferred stock will pay dividends at the rate of
5% per annum until the fifth anniversary of the investment and thereafter
at the rate of 9% per annum.  The senior preferred stock may not
be redeemed for three years except with the proceeds from an offering of common
stock or preferred stock qualifying as Tier 1 capital in an amount equal to not
less than 25% of the amount of the senior preferred.  After three
years, the senior preferred may be redeemed at any time in whole or in part by
the financial institution.  No dividends may be paid on common stock
unless dividends have been paid on the senior preferred stock.  Until
the third anniversary of the issuance of the senior preferred, the consent of
the U.S. Treasury will be required for any increase in the dividends on the
common stock or for any stock repurchases unless the senior preferred has been
redeemed in its entirety or the Treasury has transferred the senior preferred to
third parties.  The senior preferred will not have voting rights other
than the right to vote as a class on the issuance of any preferred stock ranking
senior, any change in its terms or any merger, exchange or similar transaction
that would adversely affect its rights.  The senior preferred will
also have the right to elect two directors if dividends have not been paid for
six periods.  The senior preferred will be freely transferable and
participating institutions will be required to file a shelf registration
statement covering the senior preferred.  The issuing institution must
grant the Treasury piggyback registration rights.  Prior to issuance,
the financial institution and its senior executive officers must modify or
terminate all benefit plans and arrangements to comply with
EESA.  Senior executives must also waive any claims against the
Department of Treasury.




In
connection with the issuance of the senior preferred, participating institutions
must issue to the Secretary immediately exercisable 10-year warrants to purchase
common stock with an aggregate market price equal to 15% of the amount of senior
preferred.  The exercise price of the warrants will equal the market
price of the common stock on the date of the investment. The Secretary may only
exercise or transfer one-half of the warrants prior to the earlier of December
31, 2009 or the date the issuing financial institution has received proceeds
equal to the senior preferred investment from one or more offerings of common or
preferred stock qualifying as Tier 1 capital.  The Secretary will not
exercise voting rights with respect to any shares of common stock acquired
through exercise of the warrants.  The financial institution must file
a shelf registration statement covering the warrants and underlying common stock
as soon as practicable after issuance and grant piggyback registration
rights.  The number of warrants will be reduced by one-half if the
financial institution raises capital equal to the amount of the senior preferred
through one or more offerings of common stock or preferred stock qualifying as
Tier 1 capital.  If the financial institution does not have sufficient
authorized shares of common stock available to satisfy the warrants or their
issuance otherwise requires shareholder approval, the financial institution must
call a meeting of shareholders for that purpose as soon as practicable after the
date of investment.  The exercise price of the warrants will be
reduced by 15% for each six months that lapse before shareholder approval
subject to a maximum reduction of 45%.




On
January 9, 2009, the Company entered into a Letter Agreement and Securities
Purchase Agreement (collectively, the “Purchase Agreement”) with the United
States Department of the Treasury (“Treasury”) under the TARP Capital Purchase
Program, pursuant to which the Company sold (i) 89,310 shares of the Company’s
Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A
Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 1,543,376
shares of the Company’s common stock, par value $1.00 per share (the “Common
Stock”), for an aggregate purchase price of $89.3 million in cash.


11


The
Series A Preferred Stock will qualify as Tier 1 capital and will pay cumulative
dividends at a rate of 5% per annum for the first five years, and
9% per annum thereafter.  Pursuant to the terms of the American
Recovery and Reinvestment Act of 2009 (“ARRA”), the Company may repay any
assistance it has received under the TARP Capital Purchase Program and may
withdraw from this program without replacing such funds from any other
source.  However, the Company must consult with its primary Federal
banking regulatory prior to repaying the investment.




The
Company believes that recent actions by the Treasury, the U.S. Congress and
banking regulators have changed the rules applicable to companies participating
in the TARP and such changes have created a competitive disadvantage for the
Company.  Accordingly, as permitted by the ARRA, on February 27, 2009,
the Company notified the Treasury that it intended to redeem in full all of its
outstanding shares of Series A Preferred Stock, plus all accrued and unpaid
dividends, as soon as possible.  The Treasury has advised the Company
that it must consult with the Company’s primary federal banking regulator, the
OCC, before it will permit repayment.  The Company has notified the
OCC, as well as the Federal Reserve Board, regarding the
repayment.  Once the redemption price is paid and the Series Preferred
Stock is redeemed, the related preferred stock dividends will cease to accrue
and the common stock warrant issued under the TARP will be liquidated if the
Company chooses not to redeem the warrant at fair market value. The Company
has sufficient funds to complete the redemption payment and will not have to
issue any additional common shares or other securities. The Company believes it
has sufficient capital and access to capital to operate without the TARP
investment.




Pursuant
to the terms of the Purchase Agreement, the ability of the Company to declare or
pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its Junior Stock (as defined below) and Parity Stock
(as defined below) will be subject to restrictions, including a restriction
against increasing dividends from the last quarterly cash dividend declared on
the Common Stock prior to January 9, 2009.  The redemption, purchase
or other acquisition of trust preferred securities of the Company or its
affiliates also will be restricted.  These restrictions will terminate
on the earlier of (a) the third anniversary of the date of issuance of the
Series A Preferred Stock and (b) the date on which the Series A Preferred
Stock has been redeemed in whole or Treasury has transferred all of the Series A
Preferred Stock to third parties.  The restrictions described in this
paragraph are set forth in the Purchase Agreement.




In
addition, the ability of the Company to declare or pay dividends or
distributions on, or repurchase, redeem or otherwise acquire for consideration,
shares of its Junior Stock and Parity Stock will be subject to restrictions in
the event that the Company fails to declare and pay full dividends (or declare
and set aside a sum sufficient for payment thereof) on its Series A Preferred
Stock.




“Junior
Stock” means the Common Stock and any other class or series of stock of the
Company the terms of which expressly provide that it ranks junior to the Series
A Preferred Stock as to dividend rights and/or rights on liquidation,
dissolution or winding up of the Company. “Parity Stock” means any class or
series of stock of the Company the terms of which do not expressly provide that
such class or series will rank senior or junior to the Series A Preferred Stock
as to dividend rights and/or rights on liquidation, dissolution or winding up of
the Company (in each case without regard to whether dividends accrue
cumulatively or non-cumulatively).




The
Warrant has a 10-year term and is immediately exercisable upon its issuance,
with an exercise price, subject to anti-dilution adjustments, equal to $8.68 per
share of the Common Stock. Treasury has agreed not to exercise voting power with
respect to any shares of Common Stock issued upon exercise of the
Warrant.


12


The
Series A Preferred Stock and the Warrant were issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.  Upon the request of Treasury at any time, the
Company has agreed to promptly enter into a deposit arrangement pursuant to
which the Series A Preferred Stock may be deposited and depositary shares
(“Depositary Shares”), representing fractional shares of Series A Preferred
Stock, may be issued.  The Company registered the Series A Preferred
Stock, the Warrant, the shares of Common Stock underlying the Warrant (the
“Warrant Shares”) and Depositary Shares on February 6, 2009.  Neither
the Series A Preferred Stock nor the Warrant will be subject to any contractual
restrictions on transfer, except that Treasury may only transfer or exercise an
aggregate of one-half of the Warrant Shares prior to the earlier of the
redemption of 100% of the shares of Series A Preferred Stock and December 31,
2009.




The
Purchase Agreement also subjects the Company to certain of the executive
compensation limitations included in the EESA.  In this connection, as
a condition to the closing of the transaction, the Company’s Senior Executive
Officers (as defined in the Purchase Agreement) (the “Senior Executive
Officers”), (i) executed a waiver (the “Waiver”) voluntarily waiving any
claim against the Treasury or the Company for any changes to such Senior
Executive Officer’s compensation or benefits that are required to comply with
the regulation issued by the Treasury under the TARP Capital Purchase Program as
published in the Federal Register on October 20, 2008 and acknowledging
that the regulation may require modification of the compensation, bonus,
incentive and other benefit plans, arrangements and policies and agreements
(including so-called “golden parachute” agreements) (collectively, “Benefit
Plans”) as they relate to the period the Treasury holds any equity or debt
securities of the Company acquired through the TARP Capital Purchase Program;
and (ii) entered into a letter agreement (the “Letter Agreement”) with the
Company amending the Benefit Plans with respect to such Senior Executive Officer
as may be necessary, during the period that the Treasury owns any debt or equity
securities of the Company acquired pursuant to the Purchase Agreement or the
Warrant, as necessary to comply with Section 111(b) of the
EESA.




The
foregoing description of the TARP, the CPP and securities covered thereby is
qualified in its entirety by reference to the Summary of Senior Preferred Terms
and other information regarding the TARP and CPP published on the Department’s
website at www.treasury.gov
and incorporated herein by reference




American
Recovery and Reinvestment Act of 2009.On February 17, 2009,
ARRA was enacted.  ARRA is intended to provide a stimulus to the U.S.
economy in the wake of the economic downturn brought about by the subprime
mortgage crisis and the resulting credit crunch.  The bill includes
federal tax cuts, expansion of unemployment benefits and other social welfare
provisions, and domestic spending in education, healthcare, and infrastructure,
including the energy structure.  The new law also includes numerous
non-economic recovery related items, including a limitation on executive
compensation in federally aided banks.




Under
ARRA, an institution will be subject to the following restrictions and standards
through out the period in which any obligation arising from financial assistance
provided under TARP remains outstanding:






●
            Limits
      on compensation incentives for risk taking by senior executive
      officers;




●
            Requirement
      of recovery of any compensation paid based on inaccurate financial
      information;




●
            Prohibition
      on “Golden Parachute Payments”;




13


●
            Prohibition
      on compensation plans that would encourage manipulation of reported
      earnings to enhance the compensation of
  employees;




●
            Publicly
      registered TARP recipients must establish a board compensation committee
      comprised entirely of independent directors, for the purpose of reviewing
      employee compensation plans;




●
            Prohibition
      on bonus, retention award, or incentive compensation, except for payments
      of long term restricted stock;




●
            Limitation
      on luxury expenditures;




●
            TARP
      recipients are required to permit a separate shareholder vote to approve
      the compensation of executives, as disclosed pursuant to the SEC’s
      compensation disclosure rules;




●
            The
      chief executive officer and chief financial officer of each TARP recipient
      will be required to provide a written certification of compliance with
      these standards to the SEC;




Sarbanes
Oxley Act of 2002.  The Sarbanes-Oxley Act of 2002 mandated
significant reforms in various aspects of the auditing, financial reporting,
disclosures and corporate governance of public companies.  The
Securities and Exchange Commission promulgated new regulations pursuant to the
Sarbanes-Oxley Act and may continue to propose additional implementing or
clarifying regulations as necessary.  Compliance with the
Sarbanes-Oxley Act and corresponding regulations has increased and is expected
to continue to affect the Company’s non-interest expenses.




Financial
Modernization.  The Gramm-Leach-Bliley Act (“GLB”) permits
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature.  GLB defines “financial
in nature” to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking.  A qualifying
national bank also may engage, subject to limitations on investment, in
activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development, and real estate
investment, through a financial subsidiary of the bank.




Regulatory
Capital Requirements.  The Federal Reserve has adopted capital
adequacy guidelines under which it assesses the adequacy of capital in examining
and supervising bank holding companies, such as the Company and in processing
applications to it under the Bank Holding Company Act.  The Federal
Reserve’s capital adequacy guidelines are similar to those imposed on the Bank
by the Office of the Comptroller of the Currency.  At December 31,
2008, the Company was in compliance with all applicable regulatory capital
requirements.  See Note 24 of the Notes to Consolidated Financial
Statements included in the Annual Report.




Source
of Strength Policy.  Under Federal Reserve policy, a bank
holding company is expected to serve as a source of financial strength to each
of its subsidiary banks and to commit resources to support each such
bank.  Consistent with its “source of strength” policy for subsidiary
banks, the Federal Reserve has stated that, as a matter of prudent banking, a
bank holding company generally should not maintain a rate of cash dividends
unless its net income available to common shareholders has been sufficient to
fund fully the dividends, and the prospective rate of earnings retention appears
to be consistent with the corporation’s capital needs, asset quality and overall
financial condition.


14


The
Bank




General.  The
Bank is subject to supervision and examination by the OCC.  In
addition, the Bank is insured by and subject to certain regulations of the
FDIC.  The Bank is also subject to various requirements and
restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types, amount and terms and
conditions of loans that may be granted and limitations on the types of
investments that may be made and the types of services that may be
offered.  Various consumer laws and regulations also affect the
operations of the Bank.




Dividend
Restrictions.  Dividends from the Bank constitute the principal
source of income to the Company.  The Bank is subject to various
statutory and regulatory restrictions on its ability to pay dividends to the
Company.  Under such restrictions, the amount available for payment of
dividends to the Company by the Bank totaled $40.9 million at December 31,
2008.  In addition, the OCC has the authority to prohibit the Bank
from paying dividends, depending upon the Bank’s financial condition, if such
payment is deemed to constitute an unsafe or unsound
practice.




Legal
Lending Limits.The FDIC imposes restrictions on the amount of
loans that a national bank can lend to one borrower.  Based upon these
legal lending limits, the Bank’s total outstanding loans and extensions of
credit to one borrower may not exceed fifteen percent of the Bank’s capital and
surplus, plus an additional ten percent for loans fully secured by readily
marketable collateral, as such term is defined in the applicable
regulation.




Affiliate
Transaction Restrictions.  The Bank is subject to federal laws
that limit the transactions by a subsidiary bank to or on behalf of its parent
company and to or on behalf of any nonbank subsidiaries.  Such
transactions by a subsidiary bank to its parent company or to any nonbank
subsidiary are limited to 10% of a bank subsidiary’s capital and surplus and,
with respect to such parent company and all such nonbank subsidiaries, to an
aggregate of 20% of such bank subsidiary’s capital and
surplus.  Further, loans and extensions of credit generally are
required to be secured by eligible collateral in specified
amounts.  Federal law also prohibits banks from purchasing
“low-quality” assets from affiliates.




Acquisitions.  The
Bank has the ability, subject to certain restrictions, to acquire by acquisition
or merger branches both inside and outside its home state.  The
establishment of new interstate branches is possible in those states with laws
that expressly permit it.  Interstate branches are subject to certain
laws of the states in which they are located.




Insurance
of Deposit Accounts.The Bank's deposits are insured to
applicable limits by the Federal Deposit Insurance
Corporation.  Although the FDIC is authorized to assess premiums under
a risk-based system for such deposit insurance, most insured depository
institutions had not been required to pay premiums for ten years prior to
January 1, 2007.  The Federal Deposit Insurance Reform Act of 2005
(the "Reform Act"), which was signed into law on February 15, 2006, resulted in
significant changes to the federal deposit insurance program: (i) effective
March 31, 2006, the Bank Insurance Fund (“BIF”) and the Savings Association
Insurance Fund (“SAIF”) were merged into a new combined fund, called the Deposit
Insurance Fund; (ii) the current $100,000 deposit insurance coverage will be
indexed for inflation (with adjustments every five years, commencing January 1,
2011); and (iii) deposit insurance coverage for retirement accounts was
increased to $250,000 per participant subject to adjustment for
inflation.  In addition, the Reform Act gave the FDIC greater latitude
in setting the assessment rates for insured depository institutions, which could
be used to impose minimum assessments.


15


The
FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund
annually at between 1.15% and 1.5% of estimated insured deposits.  If
the Deposit Insurance Fund's reserves exceed the designated reserve ratio, the
FDIC is required to pay out all or, if the reserve ratio is less than 1.5%, a
portion of the excess as a dividend to insured depository institutions based on
the percentage of insured deposits held on December 31, 1996 adjusted for
subsequently paid premiums.  Insured depository institutions that were
in existence on December 31, 1996 and paid assessments prior to that date (or
their successors) were entitled to a one-time credit against future assessments
based on the amount of their assessable deposits on that date.  The
FDIC provided a one-time assessment credit of $526,000 to the Company which
partially offset the FDIC insurance premiums for 2007.




Pursuant
to the Reform Act, the FDIC has determined to maintain the designated reserve
ratio at 1.25%.  The FDIC has also adopted a new risk-based premium
system that provides for quarterly assessments based on an insured institution's
ranking in one of four risk categories based on their examination ratings and
capital ratios.  Beginning in 2007, institutions in Risk Category I
are assessed for deposit insurance at an annual rate of between five and seven
basis points, with the assessment rate for an individual institution to be
determined according to a formula based on a weighted average of the
institution's individual CAMELS component ratings plus either five financial
ratios or the average ratings of its long-term debt.   Institutions in
Risk Categories II, III and IV will be assessed at annual rates of 10, 28 and 43
basis points, respectively.




Due
to recent bank failures, the FDIC determined that the reserve ratio was 1.01% as
of June 30, 2008.  In accordance with the Reform Act, the FDIC
was required to establish and implement a plan within 90 days to restore the
reserve ratio to 1.15% within five years (subject to extension due to
extraordinary circumstances). For the quarter beginning January 1, 2009,
the FDIC raised the base annual assessment rate for institutions in Risk
Category I to between 12 and 14 basis points while the base annual assessment
rates for institutions in Risk Categories II, III and IV have been increased to
17, 35 and 50 basis points, respectively. For the quarter beginning
April 1, 2009 the FDIC has proposed to set the base annual assessment rate
for institutions in Risk Category I to between 12 and 16 basis points and the
base annual assessment rates for institutions in Risk Categories II, III and IV
at 22, 32 and 45 basis points, respectively. In addition, the FDIC is
simultaneously issuing an interim rule to impose a 20 basis point special
assessment (and possible additional special assessments of up to 10 basis points
thereafter) to be paid in September 2009.  An institution’s assessment
rate can vary from the initial base rate as a result of possible
adjustments.  An institution’s assessment rate could be lowered by as
much as five basis points based on the ratio of its long-term unsecured debt to
deposits or, for smaller institutions, Tier 1 capital. The assessment rate would
be adjusted towards the maximum rate for Risk Category I institutions that have
a high level of brokered deposits or have experienced higher levels of asset
growth (other than through acquisitions) and could be increased by as much as
ten basis points for institutions in Risk Categories II, III and IV whose ratio
of brokered deposits to deposits exceeds 10%. Reciprocal deposit arrangements
like the CDARS® would count as brokered deposits for Risk Category II, III and
IV institutions but not for Risk Category I institutions. An institution’s base
assessment rate would also be increased if an institution’s ratio of secured
liabilities (including FHLBNY advances) to domestic deposits exceeds
25%.  The maximum adjustment for secured liabilities for institutions
in Risk Categories I, II, III and IV would be 8, 11, 16 and 22.5 basis points,
respectively, provided that the adjustment may not increase the base assessment
rate by more than 50%.


16


In
addition, all FDIC-insured institutions are required to pay assessments to the
FDIC to fund interest payments on bonds issued by the Financing Corporation
("FICO"), an agency of the Federal government established to recapitalize the
predecessor to the SAIF.  The FICO assessment rate on, which is
determined quarterly based upon rates, which are determined quarterly, totaled
0.011% of insured deposits in fiscal 2008.  These assessments will
continue until the FICO bonds mature in 2017.




Pursuant
to EESA, the maximum deposit insurance amount has been increased from $100,000
to $250,000 until December 31, 2009.  On October 13, 2008,
the FDIC established a Temporary Liquidity Guarantee Program under which the
FDIC will fully guarantee all non-interest-bearing transaction accounts and all
senior unsecured debt of insured depository institutions or their qualified
holding companies issued between October 14, 2008 and June 30, 2009.
Senior unsecured debt would include federal funds purchased and certificates of
deposit outstanding to the credit of the bank.  All eligible
institutions participate in the program without cost for the first 30 days of
the program. After December 5, 2008, institutions will be assessed at the
rate of ten basis points for transaction account balances in excess of $250,000
and at the rate of 75 basis points of the amount of debt issued. Institutions
were required to opt out of the Temporary Liquidity Guarantee Program by
December 5, 2008 if they do not wish to participate. The Bank did not opt
out of either part.  The Company did not have any senior unsecured
debt at December 31, 2008.




Regulatory
Capital Requirements.  The OCC has promulgated capital adequacy
requirements for national banks.  The OCC’s capital regulations
establish a minimum leverage ratio (Tier 1 capital to total adjusted average
assets) of 3% for highly rated national banks meeting certain criteria,
including that such banks have the highest regulatory examination rating and are
not contemplating or experiencing significant growth.  Banks not
meeting these criteria are required to maintain a leverage ratio that exceeds
the 3% minimum by at least 100 to 200 basis points.  Tier 1, or core,
capital is defined as the sum of common stockholders’ equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain mortgage and non-mortgage servicing assets and purchased
credit card relationships.




The
OCC’s regulations also require that national banks meet a risk-based capital
standard.  The risk-based capital standard requires the maintenance of
total capital (which is defined as Tier 1 capital and supplementary (Tier
2) capital) to risk weighted assets of 8%.  In determining the amount
of risk-weighted assets, all assets, plus certain off balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, based on the risks the OCC believes
are inherent in the type of asset or item.  The components of Tier 1
capital for the risk-based standards are the same as those for the leverage
capital requirement.  The components of supplementary (Tier 2) capital
include cumulative perpetual preferred stock, mandatory subordinated debt,
perpetual subordinated debt, intermediate-term preferred stock, up to 45% of
unrealized gains on equity securities and a bank’s allowance for loan and lease
losses, subject to certain limitations.  Overall, the amount of
supplementary capital that may be included in total capital is limited to 100%
of Tier 1 capital.




The
OCC may, in addition, establish higher capital requirements than those set forth
in its capital regulations when particular circumstances
warrant.  Under the federal banking laws, failure to meet the minimum
regulatory capital requirements could subject a bank to a variety of enforcement
remedies available to federal bank regulatory agencies.




At
December 31, 2008, the Bank’s leverage ratio and total and Tier 1 risk-based
capital ratios exceeded the minimum regulatory capital
requirements.  See Note 24 of the Notes to Consolidated Financial
Statements included in the Annual Report.


17


Enforcement
Powers of Federal Banking Agencies.Federal
banking agencies possess broad powers to make corrective and other supervisory
action as deemed appropriate for an insured depository institution and its
holding company.  The extent of these powers depends on whether the
institution in question is considered “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” or
“critically undercapitalized.”  At December 31, 2008, the Bank
exceeded the required ratios for classification as “well
capitalized.”  The classification of depository institutions is
primarily for the purpose of applying the federal banking agencies’ prompt
corrective action and other supervisory powers and is not intended to be, and
should not be interpreted as, a representation of the overall financial
condition or prospects of any financial institution.




Under
the OCC’s prompt corrective action regulations, the OCC is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution’s degree of
undercapitalization.  Generally, a bank is considered “well
capitalized” if its ratio of total capital to risk-weighted assets is at least
10%, its ratio of Tier 1 (core) capital to risk-weighted assets is at least 6%,
its ratio of core capital to total assets is at least 5%, and it is not subject
to any order or directive by the OCC to meet a specific capital
level.  A bank generally is considered “adequately capitalized” if its
ratio of total capital to risk-weighted assets is at least 8%, its ratio of Tier
1 (core) capital to risk-weighted assets is at least 4%, and its ratio of core
capital to total assets is at least 4% (3% if the institution receives the
highest CAMELS rating).  A bank that has lower ratios of capital is
categorized as “undercapitalized,” “significantly under capitalized,” or
“critically undercapitalized.”  Numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion.




The
OCC’s prompt corrective action powers can include, among other things, requiring
an insured depository institution to adopt a capital restoration plan which
cannot be approved unless guaranteed by the institution’s parent company;
placing limits on asset growth and restrictions on activities; including
restrictions on transactions with affiliates; restricting the interest rate the
institution may pay on deposits; prohibiting the payment of principal or
interest on subordinated debt; prohibiting the bank from making capital
distributions without prior regulatory approval and, ultimately, appointing a
receiver for the institution.  In addition, only a “well capitalized”
depository institution may accept brokered deposits without prior regulatory
approval and only an “adequately capitalized” depository institution may accept
brokered deposits with prior regulatory approval.  The OCC could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.




Capital
Guidelines.  Under the risk-based capital guidelines applicable
to the Company and the Bank, the minimum guideline for the ratio of total
capital to risk-weighted assets (including certain off-balance sheet activities)
is 8.00%.  At least half of the total capital must be “Tier 1” or core
capital, which primarily includes common shareholders’ equity and qualifying
preferred stock, less goodwill and other disallowed intangible
assets.  “Tier 2” or supplementary capital includes, among other
items, certain cumulative and limited-life preferred stock, qualifying
subordinated debt and the allowance for credit losses, subject to certain
limitations, less required deductions as prescribed by
regulation.


18


In
addition, the federal bank regulators established leverage ratio (Tier 1 capital
to total adjusted average assets) guidelines providing for a minimum leverage
ratio of 3% for bank holding companies and banks meeting certain specified
criteria, including that such institutions have the highest regulatory
examination rating and are not contemplating significant growth or
expansion.  Institutions not meeting these criteria are expected to
maintain a ratio which exceeds the 3% minimum by at least 100 to 200 basis
points.  The federal bank regulatory agencies may, however, set higher
capital requirements when particular circumstances warrant.  Under the
federal banking laws, failure to meet the minimum regulatory capital
requirements could subject a bank to a variety of enforcement remedies available
to federal bank regulatory agencies.




At
December 31, 2008, the Bank’s total and Tier 1 risk-based capital ratios and
leverage ratios exceeded the minimum regulatory capital
requirements.   See Note 24 of the Notes to Consolidated
Financial Statements included in the Annual Report.




Item 1A.  Risk Factors.




The
following is a summary of the material risks related to an investment in the
Company’s securities.




RISKS
RELATED TO OUR BUSINESS




Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. economy or the U.S. banking
system.




On
October 3, 2008, President Bush signed into law EESA which, among other
measures, authorizes Treasury to purchase from financial institutions and their
holding companies up to $700 billion in mortgage loans, mortgage-related
securities and certain other financial instruments, including debt and equity
securities issued by financial institutions and their holding companies, under a
troubled asset relief program, or “TARP.”  The purpose of TARP is to
restore confidence and stability to the U.S. banking system and to encourage
financial institutions to increase their lending to customers and to each other.
Under the TARP Capital Purchase Program, Treasury is purchasing equity
securities from participating institutions.  On January 9, 2009, the
Company sold 89,310 shares of its Fixed Rate Cumulative Perpetual Preferred
Stock, Series A (the “Series A Preferred Stock”) along with a warrant to
purchase 1,543,376 shares of the Company’s common stock at a per share exercise
price of $8.68 pursuant to the TARP Capital Purchase Program. The EESA also
increased federal deposit insurance on most deposit accounts from $100,000 to
$250,000. This increase is in place until the end of 2009 and is not covered by
deposit insurance premiums paid by the banking industry. The EESA followed, and
has been followed by, numerous actions by the Board of Governors of the Federal
Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC and others to
address the current liquidity and credit crisis that has followed the sub-prime
meltdown that commenced in 2007. These measures include homeowner relief
that encourage loan restructuring and modification; the establishment of
significant liquidity and credit facilities for financial institutions and
investment banks; the lowering of the federal funds rate; emergency action
against short selling practices; a temporary guaranty program for money market
funds; the establishment of a commercial paper funding facility to provide
back-stop liquidity to commercial paper issuers; and coordinated international
efforts to address illiquidity and other weaknesses in the banking
sector.  Most recently, on February 17, 2009, the ARRA was signed into
law.  ARRA, more commonly known as the economic stimulus bill or
economic recovery package, is intended to stimulate the economy and provides for
broad infrastructure, education and health spending.


19


On
October 14, 2008, the FDIC announced the establishment of a temporary liquidity
guarantee program to provide full deposit insurance for all non-interest bearing
transaction accounts and guarantees of certain newly issued senior unsecured
debt issued by FDIC-insured institutions and their holding
companies.  Insured institutions were automatically covered by this
program from October 14, 2008 until December 5, 2008, unless they opted out
prior to that date.  Under the program, the FDIC will guarantee timely
payment of newly issued senior unsecured debt issued on or before June 30,
2009.  The debt includes all newly issued unsecured senor debt
including promissory notes, commercial paper and inter-bank
funding.  The aggregate coverage for an institution may not exceed
125% of its debt outstanding on September 30, 2008 that was scheduled to mature
before June 30, 2009, or, for certain insured institutions, 2% of liabilities as
of September 30, 2008.  The guarantee will extend to June 30, 2012
even if the maturity of the debt is after that date.  The Bank elected
to participate in both parts of the temporary liquidity guarantee
program.




The
purpose of these legislative and regulatory actions is to stabilize the U.S.
banking system. The EESA and the other regulatory initiatives described above
may not have their desired effects. If the volatility in the markets continues
and economic conditions fail to improve or worsen, our business, financial
condition, results of operations and cash flows could be materially and
adversely affected.




Difficult
market conditions and economic trends have adversely affected our industry and
our business.




We
are particularly exposed to downturns in the U. S. housing
market.  Dramatic declines in the housing market over the past year,
with decreasing home prices and increasing delinquencies and foreclosures, have
negatively impacted the credit performance of mortgage and construction loans
and resulted in significant write-downs of assets by many financial
institutions.  In addition, the values of real estate collateral
supporting many loans have declined and may continue to decline. General
downward economic trends, reduced availability of commercial credit and
increasing unemployment have negatively impacted the credit performance of
commercial and consumer credit, resulting in additional
write-downs.  Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by financial institutions to
their customers and to each other. This market turmoil and tightening of credit
has led to increased commercial and consumer deficiencies, lack of customer
confidence, increased market volatility and widespread reduction in general
business activity.  Competition among depository institutions for
deposits has increased significantly. Financial institutions have experienced
decreased access to deposits or borrowings. The resulting economic pressure on
consumers and businesses and the lack of confidence in the financial markets may
adversely affect our business, financial condition, results of operations, cash
flows and stock price.  We do not expect that the difficult market
conditions will improve in the near future.  A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the industry.  In particular, we may
face the following risks in connection with these events:




●
            We
      expect to face increased regulation of our industry.  Compliance
      with such regulation may increase our costs and limit our ability to
      pursue business opportunities.




●
            Our
      ability to assess the creditworthiness of customers and to estimate the
      losses inherent in our credit exposure is made more complex by these
      difficult market and economic
conditions.




●
            We
      also may be required to pay even higher Federal Deposit Insurance
      Corporation premiums than the recently increased level, because financial
      institution failures resulting from the depressed market conditions have
      depleted and may continue to deplete the deposit insurance fund and reduce
      its ratio of reserves to insured
deposits.




20


●
            Our
      ability to borrow from other financial institutions or the Federal Home
      Loan Bank on favorable terms or at all could be adversely affected by
      further disruptions in the capital markets or other
  events.




●
            We
      may experience a decrease in dividend income from our investment in
      Federal Home Loan Bank stock.




●
            We
      may experience increases in foreclosures, delinquencies and customer
      bankruptcies, as well as more restricted access to
  funds.




Current
levels of market volatility are unprecedented.




The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward
pressure on stock prices and credit availability for certain issuers without
regard to those issuers’ underlying financial strength. If current levels of
market disruption and volatility continue or worsen, there can be no assurance
that we will not experience an adverse effect, which may be material, on our
ability to access capital and on our business, financial condition, results of
operations and cash flows.




Our
stock price can be volatile.




Our
stock price can fluctuate widely in response to a variety of factors
including:




●
            Variations
      in our quarterly operating results.




●
            Changes
      in market valuations of companies in the financial services
      industry.




●
            Governmental
      and regulatory legislation or
actions




●
            Issuance
      of shares of common shares or other securities in the
    future.




●
            The
      addition or departure of key
personnel.




●
            Cyclical
      fluctuations.




●
            Changes
      in financial estimates or recommendations by securities analysts regarding
      us or shares of our common shares.




●
            Announcements
      by us or our competitors of new services or technology, acquisitions,
      joint ventures.




●
            Activity
      by short sellers and changing government restrictions on such
      activity




General
market fluctuations, industry factors, and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes, credit loss trends, or currency fluctuations, also could cause our
stock price to decrease regardless of operating results.


21


The
market value of our securities portfolio may be impacted by the level of
interest rates and the credit quality and strength of the underlying
issuers.




If a
decline in market value of a security is determined to be other than temporary,
under generally accepted accounting principles, we are required to write these
securities down to their estimated fair value through a charge to
earnings.  As of December 31, 2008, we owned two pooled trust
preferred securities classified as available for sale with an aggregate
historical cost of $9.0 million and an estimated fair value of $1.5
million.  During the quarter ended December 31, 2008, these securities
were determined to be other than temporarily impaired and, as a result, a charge
of $7.5 million was incurred during the quarter.  In
addition, as of December 31, 2008, we had two single trust-preferred
securities with an original cost basis of $20 million and an estimated fair
value of $10.3 million and a pooled trust-preferred security with an original
cost basis of $8.8 million and an estimated fair value of $2.7 million, both
classified as available for sale.We
have reviewed these securities and determined that the decreases in
estimated fair value are temporary.  We perform an ongoing analysis of
these securities.  Future changes in interest rates or the credit
quality and strength of the underlying issuers may reduce the market value of
these and other securities.




The
Company, through the Bank, is a member of the FHLBNY, and is required to
maintain an investment in its capital stock and it is restricted in that they
can only be redeemed by the issuer at par value. On January 8, 2009, Moody’s
Global Banking issued a report stating the potential for a significant
other-than-temporary impairment (“OTTI”) charge on private label mortgage-backed
securities held by the Federal Home Loan Banks (“FHLBanks”).  Of the
12 regional FHLBanks, capital levels for 8 of these banks would be in jeopardy
of meeting minimum regulatory capital requirements under a “worst-case” scenario
that assumes all private label securities owned by the FHLBanks are deemed to be
impaired.  The capital levels of the other 4 FHLBanks, which includes
FHLBNY, would remain above minimum regulatory capital requirements under the
same scenario.  The FHLBNY has since declared a fourth quarter
dividend which was distributed to member financial institutions on January 30,
2009 and the president of the FHLBNY issued a report stating the FHLBNY
anticipates positive earnings for both the fourth quarter and full-year 2008 and
that initial indications are that OTTI charges in the fourth quarter of 2008 for
the FHLBNY, if any, will not be material.  The Company does not
believe that an OTTI of its holdings exists as of December 31, 2008 and will
continue to monitor the financial performance of the FHLBNY.  If
FHLBNY is unable to meet minimum regulatory capital requirements or is required
to aid the remaining FHLBanks, the Company’s holdings in FHLBNY may be
determined to be other than temporarily impaired and may require a charge to the
Company’s earnings which could have a material impact on our financial
condition, results of operations and cash flows.




Our
profitability could be adversely affected if we are unable to promptly deploy
the capital raised in our recent offering




We
may not be able to immediately deploy all of the capital raised in the recent
sale of the Series A Preferred Stock to the Treasury.  Investing the
offering proceeds in securities until we are able to deploy the proceeds or
investing in securities that do not provide the expected return may provide
lower margins than we generally earn on loans, potentially adversely affecting
shareholder returns, including earnings per share, return on assets and return
on equity.


22


The
Bank’s loan portfolio includes a substantial amount of commercial and industrial
loans. The credit risk related to these types of loans is greater than the risk
related to residential loans.




The
Company’s commercial and industrial loan portfolios, which include commercial
real estate loans, totaled $2.2 billion at December 31, 2008, comprising 82.7%
of total loans.  Commercial and industrial loans generally carry
larger loan balances and involve a greater degree of risk of nonpayment or late
payment than home equity loans or residential mortgage loans.  Any
significant failure to pay or late payments by the Company’s customers would
hurt the Company’s earnings.  The increased credit risk associated
with these types of loans is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the size
of loan balances, and the effects of general economic conditions on
income-producing properties.  A significant portion of the Company’s
commercial real estate and commercial and industrial loan portfolios includes a
balloon payment feature.  A number of factors may affect a borrower’s
ability to make or refinance a balloon payment, including the financial
condition of the borrower, the prevailing local economic conditions and the
prevailing interest rate environment.




Furthermore,
commercial real estate loans secured by owner occupied properties are dependent
upon the successful operation of the borrower’s business.  If the
operating company suffers difficulties in terms of sales volume and/or
profitability, the borrower’s ability to repay the loan may be
impaired.  Loans secured by properties where repayment is dependent
upon payment of rent by third party tenants or the sale of the property may be
impacted by loss of tenants, lower lease rates needed to attract new tenants or
the inability to sell a completed project in a timely fashion and at a
profit.  The collateral for the Company’s commercial loans that are
secured by real estate are classified as 45.1% owner occupied properties and
54.9% non-owner occupied properties.




Overall,
the Company’s market place has expanded within the State of New Jersey and
likewise, commercial lending activities have grown, especially in the central
and more recently the northern parts of the state.  A significant
broad based deterioration in economic conditions throughout New Jersey,
including the real estate markets as well as other external factors, could have
a material adverse effect on the credit quality of the loan portfolio and
consequently, the Company’s financial condition, results of operations and cash
flows.




If
the Company has failed to provide an adequate allowance for loan losses, there
could be a significant negative impact on its earnings.




The
risk of loan losses varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the value
of the collateral for the loan.  Based upon factors such as historical
experience, an evaluation of economic conditions and a regular review of
delinquencies and loan portfolio quality, the Company’s management makes various
assumptions and judgments about the ultimate collectibility of the loan
portfolio and provides an allowance for loan losses.  At December 31,
2008, the Company’s allowance for loan losses was $37.3 million which
represented 1.36% of total loans and 79.69% of nonperforming
loans.  If management’s assumptions and judgments prove to be
incorrect and the allowance for loan losses is inadequate to absorb future
credit losses, or if the bank regulatory authorities require the Company to
increase its allowance for loan losses, its financial condition, results of
operations and cash flows could be significantly and adversely
affected.  Given that the components of the allowance are based
partially on historical losses and on risk rating changes in response to recent
events, required reserves may trail the emergence of any unforeseen
deterioration in credit quality.


23


The
Company may not be able to achieve its growth plans or effectively manage its
growth.




The
Company’s ability to successfully grow depends on a variety of factors including
the continued availability of desirable acquisition and business opportunities,
the competitive responses from other financial institutions in its market areas
and its ability to integrate any acquisitions and otherwise manage its
growth.  There can be no assurance that growth opportunities will be
available or that growth will be successfully managed.




Competition
from other financial institutions in originating loans, attracting deposits and
providing various financial services may adversely affect the Company’s
earnings.




The
market areas in which the Company operates are among the most highly competitive
in the country.  There is substantial competition in originating loans
and in attracting and retaining deposits and competition is increasing in
intensity.  The competition comes principally from other banks, larger
and smaller, savings institutions, credit unions, mortgage banking companies and
the myriad of nonbanking competitors, such as full service brokerage firms,
money market mutual funds, insurance companies and other institutional
lenders.




Ultimately,
competition may adversely affect the rates the Company pays on deposits and
charges on loans, thereby potentially adversely affecting the Company’s
profitability.




Changes
in interest rates may reduce the Company’s profits.




The
most significant component of the Company’s net income is net interest income,
which accounted for 75.4% of total revenue in 2008 and 79.1% in
2007.  Net interest income is the difference between the interest
income generated on interest-earning assets, such as loans and investments, and
the interest expense paid on the funds required to support earning assets,
namely deposits and borrowed funds.  Interest income, which represents
income from loans, investment securities and short-term investments is dependent
on many factors including the volume of earning assets, the level of interest
rates, the interest rate sensitivity of the earning assets and the levels of
nonperforming loans.  The cost of funds is a function of the amount
and type of funds required to support the earning assets, the rates paid to
attract and retain deposits, rates paid on borrowed funds and the levels of
non-interest bearing demand deposits.




Interest
rate sensitivity is a measure of how our assets and liabilities react to changes
in market interest rates.  The Company expects that this interest
sensitivity will not always be perfectly balanced.  This means that
either the Company’s interest-earning assets will be more sensitive to changes
in market interest rates than its interest bearing liabilities, or vice
versa.  If more interest-earning assets than interest –bearing
liabilities reprice or mature during a time when interest rates are declining,
then the Company’s net interest income may be reduced.  If more
interest-bearing liabilities than interest-earning assets reprice or mature
during a time when interest rates are rising, then the Company’s net income may
be reduced.


24


After
maintaining a tightening bias through 2006, the Federal Reserve Board began
easing rates in September 2007 by decreasing the federal funds target rate by 50
basis points, the first time rates decreased since June 2003. By the end of
2007, the Federal Reserve Board decreased short-term rates an additional 50
basis points to a new target rate of 4.25%.  In response to concerns
over a weakening economy, the Federal Reserve Board began 2008 with an
unprecedented drop of 75 basis points followed by an additional 50 basis points
at Federal Open Market Committee (“FOMC”) meetings on January 22nd
and January 30th,
respectively.  Further reductions followed at the March and April FOMC
meetings totaling 100 basis points.  After a mid-year hiatus, the
Federal Reserve Board reduced rates again twice in October and also in
December.  As of year end, the target federal funds rate ranged from
0.0% to 0.25%, a historic low. Longer term rates generally followed the declines
in the federal funds rate; however, the magnitude of the change was not as
dramatic as short rates. The yield curve was generally positive throughout most
of 2008. Turmoil in the financial markets resulted in widening of credit
spreads. These wider spreads impacted both the asset and liability sides of the
Company’s balance sheet. Wider spreads available on loans were offset by higher
rates demanded for deposits. Further Federal Reserve Board interest reductions
or yield curve flattening in 2009 will likely result in further compression of
the Company’s net interest margin which could have an impact on the
Company's financial condition, results of operations and cash
flows.




If
the goodwill that the Company has recorded in connection with its acquisitions
becomes impaired, there could be a negative impact on the Company’s
profitability.




Under
the purchase method of accounting for all business combinations, if the purchase
price of an acquired company exceeds the fair value of the company’s net assets,
the excess is carried on the acquiror’s balance sheet as goodwill and
identifiable intangible assets.  At December 31, 2008, the Company had
$146.7 million of goodwill and identifiable intangible assets on its balance
sheet.  Companies must evaluate goodwill for impairment at least
annually.  Write-downs of the amount of any impairment are to be
charged to the results of operations in the period in which the impairment is
determined and there would not be any impact to the Company’s regulatory capital
ratios.  Based on tests of goodwill and identifiable intangible assets
impairment, the Company has concluded that there has been no impairment during
2008 and 2007, and thus no write-downs have been recorded.
However, the Company will continue to monitor conditions, such as fluctuations
in market value and credit quality for both the Company and its peers, which
would trigger the need for a more frequent review.  There can be no
assurance that the future evaluations of goodwill and identifiable intangible
assets will not result in determinations of impairment and write-downs which
could have a non-cash impact on the Company's financial condition and
results of operations.




Government
regulation significantly affects the Company’s business and
operations.




The
Company and the banking industry are subject to extensive regulation and
supervision under federal and state laws and regulations.  The
restrictions imposed by such laws and regulations limit the manner in which the
Company conducts its business.


25


Overall,
these various statutes establish the corporate governance and permissible
business activities for the Company, acquisition and merger restrictions,
limitations on inter-company transactions, capital adequacy requirements, and
requirements for anti-money laundering programs and other compliance
matters.  These regulations are designed primarily for the protection
of the deposit insurance funds, consumers and not to the benefit of the
Company’s shareholders.  Financial institution regulation has been the
subject of significant legislation in recent years and may continue to be the
subject of further significant legislation in the future, which is not in the
control of the Company.  Significant new laws, or changes to existing
laws could have a material adverse effect on the Company’s business, financial
condition, results of operations and cash flows.  Overall compliance
with all the required statutes increases Sun’s operating expenses, requires a
significant amount of management’s attention and could be a competitive
disadvantage with respect to non-regulated competitors.




RISKS
RELATED TO THE SERIES A PREFERRED STOCK




The
Series A Preferred Stock is equity and is subordinate to all of our existing and
future indebtedness; regulatory and contractual restrictions may limit or
prevent us from paying dividends on the Series A Preferred Stock; and the Series
A Preferred Stock places no limitations on the amount of indebtedness we and our
subsidiaries may incur in the future.




Shares
of the Series A Preferred Stock are equity interests in Sun Bancorp and do not
constitute indebtedness. As such, the Series A Preferred Stock, like our common
stock, ranks junior to all indebtedness and other non-equity claims on Sun
Bancorp with respect to assets available to satisfy claims on Sun Bancorp,
including in a liquidation of Sun Bancorp. Additionally, unlike indebtedness,
where principal and interest would customarily be payable on specified due
dates, in the case of preferred stock like the Series A Preferred Stock,
(1) dividends are payable only when, as and if authorized and declared by,
our Board of Directors and depend on, among other things, our results of
operations, financial condition, debt service requirements, other cash needs and
any other factors our Board of Directors deems relevant, (2) as a New
Jersey corporation, we may not pay dividends if, after giving effect thereto, we
would not be able to pay our debts as they come due in the usual course of
business, or our total assets would be less than our total liabilities; and (3)
we may not pay dividends on our capital stock if we are in default on certain
indebtedness or have elected to defer payments of interest on our subordinated
indebtedness.




The
Company is an entity separate and distinct from its principal subsidiary, Sun
Bank, and derives substantially all of its revenue in the form of dividends from
that subsidiary. Accordingly, The Company is and will be dependent upon
dividends from the Bank to pay the principal of and interest on its
indebtedness, to satisfy its other cash needs and to pay dividends on the Series
A Preferred Stock and its common stock. The Bank’s ability to pay dividends is
subject to its ability to earn net income and to meet certain regulatory
requirements. In the event the Bank is unable to pay dividends to the Company,
the Company may not be able to pay dividends on the Series A Preferred
Stock.  Also, Sun Bancorp’s right to participate in a distribution of
assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors.




In
addition, the Series A Preferred Stock does not limit the amount of debt or
other obligations we or our subsidiaries may incur in the future. Accordingly,
we and our subsidiaries may incur substantial amounts of additional debt and
other obligations that will rank senior to the Series A Preferred Stock or to
which the Series A Preferred Stock will be structurally
subordinated.


26


An
active trading market for the Series A Preferred Stock may not
develop.




The
Series A Preferred Stock is not currently listed on any securities exchange and
we do not anticipate listing the Series A Preferred Stock on an exchange unless
we are requested to do so by Treasury pursuant to the securities purchase
agreement between us and Treasury. There can be no assurance that an active
trading market for the Series A Preferred Stock will develop, or, if developed,
that an active trading market will be maintained. If an active market is not
developed or sustained, the market value and liquidity of the Series A Preferred
Stock may be adversely affected.




The
Series A Preferred Stock may be junior in rights and preferences to our future
preferred stock.




Subject
to approval by the holders of at least 66 2/3% of the shares of Series A
Preferred Stock then outstanding, voting together as a separate class, we may
issue preferred stock in the future the terms of which are expressly senior to
the Series A Preferred Stock. The terms of any such future preferred stock
expressly senior to the Series A Preferred Stock may restrict dividend payments
on the Series A Preferred Stock. For example, the terms of any such senior
preferred stock may provide that, unless full dividends for all of our
outstanding preferred stock senior to the Series A Preferred Stock have been
paid for the relevant periods, no dividends will be paid on the Series A
Preferred Stock, and no shares of the Series A Preferred Stock may be
repurchased, redeemed, or otherwise acquired by us. This could result in
dividends on the Series A Preferred Stock not being paid when contemplated. In
addition, in the event of our liquidation, dissolution or winding-up, the terms
of the senior preferred stock may prohibit us from making payments on the Series
A Preferred Stock until all amounts due to holders of the senior preferred stock
in such circumstances are paid in full.




Holders
of the Series A Preferred Stock have limited voting rights.




Unless
and until we are in arrears on our dividend payments on the Series A Preferred
Stock for six dividend periods, whether or not consecutive, the holders of the
Series A Preferred Stock will have no voting rights except with respect to
certain fundamental changes in the terms of the Series A Preferred Stock and
certain other matters and except as may be required by New Jersey law. If
dividends on the Preferred Stock are not paid in full for six dividend periods,
whether or not consecutive, the total number of positions on the Sun Bancorp
Board of Directors will automatically increase by two and the holders of the
Series A Preferred Stock, acting as a class with any other parity securities
having similar voting rights, will have the right to elect two individuals to
serve in the new director positions. This right and the terms of such directors
will end when we have paid in full all accrued and unpaid dividends for all past
dividend periods.  Based on the current number of members of the Sun
Bancorp Board of Directors (15), directors elected by the holders of the common
stock would have a controlling majority of the Board and would be able to take
any action approved by them notwithstanding any objection by the directors
elected by the holders of the Series A Preferred Stock.




If
we are unable to redeem the Series A Preferred Stock after five years, the cost
of this capital to us will increase substantially.




If
we are unable to redeem the Series A Preferred Stock prior to February 15,
2014, the cost of this capital to us will increase substantially on that date,
from 5.0% per annum (approximately $4.5 million annually) to 9.0% per
annum (approximately $8.0 million annually). See “Description of Series A
Preferred Stock—Redemption and Repurchases.” Depending on our financial
condition at the time, this increase in the annual dividend rate on the Series A
Preferred Stock could have a material negative effect on our
liquidity.


27


RISKS
RELATED TO OUR COMMON STOCK




Our
common stock is not insured and you could lose the value of your entire
investment.




An
investment in shares of our common stock is not a deposit and is not insured
against loss by the government.




Our
management and significant shareholders control a substantial percentage of our
stock and therefore have the ability to exercise substantial control over our
affairs.




As
of December 31, 2008, our directors and executive officers beneficially owned
approximately 9.0 million shares, or approximately 38.3% of our outstanding
common stock, including options to purchase approximately 1.5 million shares, in
the aggregate, of our common stock at exercise prices ranging from $4.51
to $16.10 per share and exercisable within 60 days of December 31, 2008.
Because of the large percentage of stock held by our directors and executive
officers and other significant shareholders, these persons could influence the
outcome of any matter submitted to a vote of our shareholders.




We
may issue additional shares of common or preferred stock, which may dilute the
ownership and voting power of our shareholders and the book value of our common
stock.




We
are currently authorized to issue up to 50,000,000 shares of common stock of
which 21,830,798 shares were outstanding as of December 31, 2008 and up to
1,000,000 shares of preferred stock of which no shares were outstanding as of
December 31, 2008 and 89,310 shares are outstanding as of the date hereof. Our
Board of Directors has authority, without action or vote of the shareholders, to
issue all or part of the authorized but unissued shares and to establish the
terms of any series of preferred stock. These authorized but unissued shares
could be issued on terms or in circumstances that could dilute the interests of
other stockholders. In addition, a total of 3,054,121 shares of common stock are
reserved for issuance under our stock-based incentive plans of which 2,620,924
shares of common stock are subject to options or grants of restricted stock
units.  As of December 31, 2008, options to purchase a total of
1,949,277 shares were exercisable and had exercise prices ranging from $4.51 to
$18.36.  Any such issuance will dilute the percentage ownership
interest of shareholders and may further dilute the book value of our common
stock.




Provisions
of our Amended and Restated Certificate of Incorporation and the New Jersey
Business Corporation Act could deter takeovers which are opposed by the Board of
Directors.




Our
Amended and Restated Certificate of Incorporation requires the approval of 80%
of our outstanding shares for any merger or consolidation unless the transaction
meets certain fair price criteria or the business combination has been approved
or authorized by the Board of Directors.  As a New Jersey corporation
with a class of securities registered with the Securities and Exchange
Commission, the Company is governed by certain provisions of the New Jersey
Business Corporation Act that also restrict business combinations with
stockholders owning 10% or more of Sun Bancorp’s outstanding shares (“interested
stockholders”) for a period of five years after such interested stockholder
achieves such status unless the business combination is approved by the Board of
Directors prior to the stockholder becoming an interested
stockholder.  The New Jersey Shareholders’ Protection Act also
restricts business combinations with an interested stockholder after the
five-year period unless the transaction receives the approval of two-thirds of
the shares outstanding, exclusive of the shares held by the interested
stockholder or the transaction satisfies certain fair price
requirements.


28


The
securities purchase agreement between us and Treasury limits our ability to pay
dividends on and repurchase our common stock.




The
securities purchase agreement between us and Treasury provides that prior to the
earlier of (i) January 9, 2012 and (ii) the date on which all of the shares
of the Series A Preferred Stock have been redeemed by us or transferred by
Treasury to third parties, we may not, without the consent of Treasury, (a) pay
a cash dividend on our common stock or (b) subject to limited exceptions,
redeem, repurchase or otherwise acquire shares of our common stock or preferred
stock other than the Series A Preferred Stock or trust preferred securities. In
addition, we are unable to pay any dividends on our common stock unless we are
current in our dividend payments on the Series A Preferred Stock. These
restrictions, together with the potentially dilutive impact of the warrant
described in the next risk factor, could have a negative effect on the value of
our common stock. Moreover, holders of our common stock are entitled to receive
dividends only when, as and if declared by our Board of Directors.




The
Series A Preferred Stock impacts net income available to our common stockholders
and earnings per common share, and the warrant we issued to Treasury may be
dilutive to holders of our common stock.




The
dividends declared and the accretion on discount on the Series A Preferred Stock
will reduce the net income available to common stockholders and our earnings per
common share. The Series A Preferred Stock will also receive preferential
treatment in the event of liquidation, dissolution or winding up of Sun Bancorp.
Additionally, the ownership interest of the existing holders of our common stock
will be diluted to the extent the warrant we issued to Treasury in conjunction
with the sale to Treasury of the Series A Preferred Stock is exercised. The
shares of common stock underlying the warrant represent approximately 6.6% of
the shares of our common stock outstanding as of March 12, 2009 (including the
shares issuable upon exercise of the warrant in total shares outstanding).
Although Treasury has agreed not to vote any of the shares of common stock it
receives upon exercise of the warrant, a transferee of any portion of the
warrant or of any shares of common stock acquired upon exercise of the warrant
is not bound by this restriction.




Item 1B.  Unresolved Staff
Comments.




None.




Item 2.  Properties.




At
December 31, 2008, the Company operated from its main office in Vineland, New
Jersey.  The Company has 62 Community Banking Centers and five
Commercial Lending Centers, including one Commercial Lending Center located in
its main office.  The Company leases its main office, 28 Community
Banking Centers and all of its Commercial Lending Centers.  At
December 31, 2008, the Company’s commitments under noncancelable operating
leases were $31.1 million which are payable in years subsequent to December 31,
2008.  The remainder of the Community Banking Centers are owned by the
Company.  At December 31, 2008, the Company’s net bank properties and
equipment was $48.6 million.


29


Item 3.  Legal
Proceedings.




The
Company or the Bank is periodically involved in various claims and lawsuits,
such as claims to enforce liens, condemnation proceedings on properties in which
the Bank holds security interests, claims involving the making and servicing of
real property loans, and other issues incident to the Company’s and the Bank’s
business.  While the ultimate outcome of these proceedings cannot be
predicated with certainty, management, after consultation with counsel
representing the Company in these proceedings, does not expect that the
resolution of these proceedings will have a material effect on the Company’s
financial condition, results of operations or cash flows.  In
addition, management was not aware of any pending or threatened material
litigation as of December 31, 2008.




Item 4.  Submission of Matters to a Vote of
Security Holders.




No
matter was submitted to a vote of security holders during the fourth quarter of
the fiscal year.






PART II




Item 5.  Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.




The
information contained under the captions “Common Stock Price Range and
Dividends,” “Issuer Purchases of Equity Securities” and “Stock Performance” in
the Company’s 2008 Annual Report to Shareholders, included herein as Exhibit 13to this Report (the “Annual
Report”).




Item 6.  Selected Financial Data.




The
information contained under the caption “Selected Financial Data” in the Annual
Report is included herein as Exhibit
13.




Item  7.  Management’s Discussion and Analysis of
Financial Condition and Results of Operations.




The
information contained under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in the Annual Report is included
herein as Exhibit 13.




Item 7A.  Quantitative and Qualitative Disclosures About
Market Risk.




The
information contained under the captions “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Liquidity and Capital
Resources - Gap Analysis” and “ - Net Interest Income Simulation” in the Annual
Report are included herein as Exhibit
13.






Item 8.  Financial Statements and Supplementary
Data.




The
Consolidated Financial Statements of Sun Bancorp, Inc. and the Summarized
Quarterly Financial Data included in the notes thereto, included in the Annual
Report, are included herein as  Exhibit
13.




Item 9.  Changes in and Disagreements With Accountants On
Accounting and Financial Disclosure.




Not
applicable.


30


Item 9A.  Controls and Procedures.




(a)           Disclosure
Controls and Procedures




Based
on their evaluation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”)), the Company’s principal executive officer and principal
financial officer have concluded that as of the end of the period covered by
this Annual Report on Form 10-K such disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and is accumulated and communicated to the
Company’s management, including the principal executive and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosures.




(b)           Internal
Control over Financial Reporting




1.           Management’s
Annual Report on Internal Control Over Financial Reporting.




Management’s
report on the Company’s internal control over financial reporting appears in the
Annual Report, included herein as Exhibit 13.




2.           Attestation
Report of Independent Public Accounting Firm.




The
attestation report of Deloitte & Touche LLP on the Company’s internal
control over financial reporting, as defined in Rule 15d-15e of the Securities
Exchange Act of 1934, appears in the Annual Report filed, included herein as
Exhibit 13.




3.           Changes
in Internal Control Over Financial Reporting.




During
the last quarter of the year under report, there was no change in the Company’s
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.




Item 9B.  Other Information.




None.


31


PART III




Item 10.  Directors, Executive Officers and Corporate
Governance.




The
information contained under the sections captioned “Additional Information About
Directors and Executive Officers - Section 16(a) Beneficial Ownership Reporting
Compliance” and “Proposal I - Election of Directors” in the Company’s Proxy
Statement for its 2009 Annual Meeting of Shareholders (the “Proxy Statement”) is
incorporated herein by reference.




The
Company has adopted a Code of Ethics and Conduct that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions.  A copy of the
Code of Ethics and Conduct is posted at the Company’s website at
www.sunnb.com.






Item 11.  Executive Compensation.




The
information contained under the section captioned “Director and Executive
Officer Compensation” in the Proxy Statement is incorporated herein by
reference.




Item 12.  Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.




(a)           Security
Ownership of Certain Beneficial Owners




Information
required by this item is incorporated herein by reference to the section
captioned “Voting Securities and Principal Holders Thereof” in the Proxy
Statement.




(b)           Security
Ownership of Management




Information
required by this item is incorporated herein by reference to the first table
under the caption “Proposal I - Election of Directors” in the Proxy
Statement.




(c)           Changes
in Control




Management
of the Company knows of no arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.


32


(d)           Securities
Authorized for Issuance Under Equity Compensation Plans




Set
forth below is information as of December 31, 2008 with respect to compensation
plans under which equity securities of the Company are authorized for
issuance.




EQUITY
      COMPENSATION PLAN INFORMATION(a)
            
            (b)
            
            (c)Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights (3)
            
            Weighted-average
      exercise price of outstanding options, warrants
              and
      rights (4)
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in
              column
      (a))Equity
      compensation plans approved by shareholders (1)
            2,620,924
            
            $
            10.27
            
            433,197Equity
      compensation plans not approved by shareholders (2)
            -
            
            
            -
            
            -Total
            2,620,924
            
            $
            10.27
            
            433,197




(1)
            Plans
      approved by shareholders include the 1997 Stock Option Plan, the 2002
      Stock Option Plan and the 2004 Stock Based-Incentive Plan, as
      amended.  The amount of securities includes options for 171,282
      shares of our common stock as a result of our assuming obligations under
      stock option plans of Advantage Bank in connection with an acquisition in
      2006 and Community Bancorp of New Jersey in connection with an acquisition
      in 2004.  While we assumed the obligations existing under these
      plans as of the time of merger, we have not and will not in the future,
      use them to make further grants.




(2)
            Not
      applicable.




(3)
            Amount
      includes 100,934 unvested restricted stock awards that have been
      granted, but not yet issued, and are therefore not included in shares
      outstanding.




(4)
            Amount
      does not reflect the market value of 100,934 unvested restricted stock
      awards included in columns (a)
herein.




Item 13.  Certain Relationships and Related Transactions
and Director Independence.




The
information contained under the section captioned “Additional Information About
Directors and Executive Officers - Certain Relationships and Related
Transactions” in the Proxy Statement is incorporated herein by
reference.




Item 14.  Principal Accounting Fees and
Services.




The
information called for by this item is incorporated herein by reference to the
section captioned “Audit Fees and Services” in the Proxy Statement.


33


PART IV




Item 15.  Exhibits
and Financial Statement Schedules.





(a)
              The
      following documents are filed as a part of this report:(1)
              The
      following consolidated financial statements and the report of independent
      registered public accounting firm of the Registrant included in the
      Registrant’s Annual Report to Shareholders are included herein asExhibit
      13and
      also in Item 8 hereof.Reports
      of Independent Registered Public Accounting Firm Consolidated Statements
      of Financial Condition as of December 31, 2008 and 2007Consolidated
      Statements of Income for the Years Ended December 31, 2008, 2007 and
      2006Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31, 2008,
      2007 and 2006Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006Notes
      to Consolidated Financial Statements(2)
              There
      are no financial statements schedules that are required to be included in
      Part II, Item 8.(b)
              The
      following exhibits are filed as part of this report:3.1
              Amended and
      Restated Certificate of Incorporation of Sun Bancorp, Inc. (1)3.2
              Certificate of
      Amendment to the Registrant’s Amended and Restated Certificate of
      Incorporation Setting Forth the Terms of the Fixed Rate Cumulative
      Perpetual Preferred Stock, Series A (2)3.3
              Amended and
      Restated Bylaws of Sun Bancorp, Inc. (3)4.1
              Form of
      certificate evidencing the Registrant’s Fixed Rate Cumulative Perpetual
      Preferred Stock, Series A(2)4.2
              Warrant to
      purchase shares of the Registrant’s common stock dated January 9,
      2009(2)4.3
              Letter
      Agreement (including Securities Purchase Agreement-Standard Terms attached
      as Exhibit A) dated January 9, 2009 between the Registrant and the United
      States Department of the Treasury (2)10.1
              1995 Stock
      Option Plan(4)10.2
              Amended and
      Restated 1997 Stock Option Plan (5)10.3
              2002 Stock
      Option Plan (6)10.4
              Amended and
      Restated 2004 Stock-Based Incentive Plan (7)10.5
              Directors Stock
      Purchase Plan (8)10.6
              Separation
      Agreement and General Release for former President and Chief Executive
      Officer, Thomas A. Bracken (9)10.7
              Form of
      Management Change in Control Severance Agreement, as amended and restated
      (A. Bruce Dansbury, Chief Operating Officer; Dan A. Chila, Executive Vice
      President and Chief Financial Officer; and Bart A. Speziali, Executive
      Vice President) (3)10.8
              Management
      Change in Control Severance Agreement, as amended and restated, for
      Chairman of the Board, Bernard A. Brown (3)10.9
              Management
      Change in Control Severance Agreement, as amended and restated, for
      Vice-Chairman of the Board, Sidney R. Brown(3)10.10
              Agreement with
      President and Chief Executive Officer Thomas X. Geisel (10)11
              Computation
      regarding earnings per share (11)13
              2008 Annual Report to
      Shareholders21
              Subsidiaries of the
      Registrant23
              Consent of Deloitte & Touche
      LLP31
              Certifications pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232
              Certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002
  34
  (1)
              Incorporated
      by reference to Exhibit 3.1 of the Company’s Registration Statement on
      Form S-3 filed on February 6, 2009 (Registration Number
      333-157131).(2)
              Incorporated
      by reference to the exhibits to the Company’s Current Report on Form 8-K
      filed on January 9, 2009 (File No. 0-20957).(3)
              Incorporated
      by reference to the exhibits to the Company’s Current Report on Form 8-K
      filed on October 24, 2007 (File No. 0-20957).(4)
              Incorporated
      by reference to Exhibit 10 to the Company’s Registration Statement on Form
      10 filed on June 28, 1996 (File No. 0-20957).(5)
              Incorporated
      by reference Exhibit 10.3 to the Company’s Annual Report on Form 10-K for
      the fiscal year ended December 31, 1999 (File No.
  0-20957).(6)
              Incorporated
      by reference to Appendix A to the Company’s Proxy Statement for the 2002
      Annual Meeting of Shareholders filed with the SEC on April 16, 2002 (File
      No. 0-20957).(7)
              Incorporated
      by reference to Appendix A to the Company’s Proxy Statement for the 2007
      Annual Meeting of Shareholders filed with the SEC on April 12, 2007 (File
      No. 0-20957).(8)
              Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Registration Statement on
      Form S-8, filed with the SEC on August 1, 1997 (File No.
      333-32681).(9)
              Incorporated
      by reference to the exhibit to the Company’s Current Report on Form 8-K
      filed on April 17, 2007 (File No. 0-20957).(10)
              Incorporated
      by reference to the exhibit to the Company’s Current Report on Form 8-K
      filed on December 14, 2007 (File No. 0-20957).(11)
              Incorporated
      by reference to Note 23 of the Notes to Consolidated Financial Statements
      of the Company included in Exhibit 13hereto.




35






SIGNATURES




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the registrant has duly caused this report to be signed on its
      behalf by the undersigned, thereunto duly authorized as of March 16,
      2009.




SUN
      BANCORP, INC.By:
            /s/
      Thomas X. GeiselThomas
      X. GeiselPresident
      and Chief Executive Officer(Duly
      Authorized Representative)




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report
      has been signed below by the following persons on behalf of the registrant
      and in the capacities indicated as of March 16,
  2009




/s/
      Bernard A. Brown
            
            /s/
      Sidney R. BrownBernard
      A. Brown
            
            Sidney
      R. BrownChairman
            
            Vice
      Chairman, Secretary and Treasurer/s/
      Anat Bird
            
            /s/
      Irwin J. BrownAnat
      Bird
            
            Irwin
      J. BrownDirector
            
            Director/s/
      Jeffrey S. Brown
            
            /s/
      John A. FalloneJeffrey
      S. Brown
            
            John
      A. FalloneDirector
            
            Director/s/
      Peter Galetto, Jr.
            
            /s/
      Thomas X. GeiselPeter
      Galetto, Jr
            
            Thomas
      X. GeiselDirector
            
            President
      & Chief Executive Officer(Principal
      Executive Officer)/s/
      Douglas J. Heun
            
            /s/
      Anne E. KoonsDouglas
      J. Heun
            
            Anne
      E. KoonsDirector
            
            Director/s/
      Eli Kramer
            
            /s/
      Alfonse M. MattiaEli
      Kramer
            
            Alfonse
      M. MattiaDirector
            
            Director/s/
      George A. Pruitt
            
            /s/
      Anthony Russo, IIIGeorge
      A. Pruitt
            
            Anthony
      Russo, IIIDirector
            
            Director/s/
      Edward H. Salmon
            
            /s/
      Dan A. ChilaEdward
      H. Salmon
            
            Dan
      A. ChilaDirector
            
            Executive
      Vice President and Chief Financial Officer (Principal Financial and
      Accounting Officer)








36