FORM 10-Q—QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

Sun Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

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.                Yes  ý        No  o

 

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

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 

 

 

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

 

CONTENTS

 

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

 

2

 

SUN BANCORP, INC.
FORM 10-Q
PART I

 

Item 1.  Financial Statements

 

SUN BANCORP, INC.
CONSOLIDATED BALANCE SHEET

 

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

 

3

 

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

 

The accompanying notes are an integral part of these financial statements.

 

4

 

SUN BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

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

 

5

 

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

 

The accompanying notes are an integral part of these financial statements.

 

6

 

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

 

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

 

7

 

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

 

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

 

The accompanying notes are an integral part of these financial statements.

 

8

 

SUN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Forward-Looking Statements:

 

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

 

Readers should note that many factors, some of which are discussed elsewhere in this report and in the documents that management incorporates by reference, could affect the future financial results of the Corporation and its subsidiaries, both individually and collectively, and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this Form 10-Q.  These factors include:

 

•              operating, legal and regulatory risks;

 

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

 

•           the risk that management’s analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

 

The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.  Readers should carefully review the risk factors described in other documents that Sun files periodically with the Securities and Exchange Commission.

 

Note 1 — Basis of Interim Presentation

 

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

 

The accompanying unaudited consolidated financial statements for the interim periods do not include all of the information and footnotes required by generally accepted accounting principles.  However, in the opinion of management, all adjustments necessary for a fair presentation of the results of the interim period have been included.  Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.

 

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis.  These policies are presented on pages 18 thru 20 of the 2002 Annual Report to Shareholders.

 

9

 

Note 2 – Net Income Per Share

 

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

 

The following data shows the amounts used in computing net income per share and the weighted average number of shares of dilutive stock options for the periods ended March 31, 2003 and 2002:

 

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

 

10

 

Note 3 – Consolidated Statement of Changes in Shareholder’s Equity

 

The purpose of reporting comprehensive income is to report a measure of all changes in Sun Bancorp, Inc.’s equity resulting from economic events other than transactions with shareholders in their capacity as shareholders.  For Sun Bancorp, Inc., “comprehensive income” includes traditional income statement amounts as well as unrealized gains and losses on certain investments in debt and equity securities (i.e. available-for-sale securities).  Unrealized gains and losses are part of comprehensive income, therefore comprehensive income may vary substantially between reporting periods due to fluctuations in the market prices of securities held.

 

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

(In Thousands, Except for Share Data)

 

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

 

11

 

Note 4 – Investment Securities

 

The amortized cost and fair value of investment securities at September 30, 2002 and December 31, 2002 were as follows:

 

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

 

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

 

12

 

Note 5 – Loans

 

The balances for principal loan categories are as follows:

 

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

 

13

 

Note 5 – Stock Options

 

Sun has three common stock plans for employees and directors.  The 1998 Stock Incentive Plan, administered by a Board of Directors committee of independent directors, allows for 716,625 shares of common stock for key officers and other management employees in the form of qualified options, non qualified options, stock appreciation rights, or restrictive stock.  The 1998 Independent Directors Stock Option Plan allows 115,763 shares of common stock to be issued for non-employee directors.  Options under those plans expire ten years after the grant date.  Both of these plans terminate in 2008.

 

The 1998 Employee Stock Purchase Plan, which permits all employees to purchase common stock at an option price per share not less than 85% of the market value on the exercise date was allocated 248,063 shares.  Options granted to date have been awarded at 90% of the market value on the exercise date.  Each option under the 1998 Employee Stock Purchase Plan expires no later than 5 years from the grant date.  This plan terminates in 2008.

 

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

 

 

14

 

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

(in thousands, except per share amounts)

 

The following is management’s discussion and analysis of the significant changes in the results of operations, capital resources, and liquidity presented in its accompanying consolidated financial statements for Sun Bancorp, Inc., a bank holding company, and its wholly-owned subsidiaries, SunBank, Beacon Life Insurance Company, and Sun Bancorp Statutory Trust I.  Sun Bancorp, Inc. also holds thirty percent ownership in Sun Abstract and Settlement Services.  Sun Bancorp, Inc.’s consolidated financial condition and results of operations consist almost entirely of SunBank’s financial condition and results of operations.  This discussion should be read in conjunction with the 2002 Annual Report, which is incorporated herein by reference.  Current performance does not guarantee or assure similar performance in the future, and may not be indicative of future results.

 

Results of Operations – Three Months Ended March 31, 2003 and 2002

 

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

 

Comparative information for the three months ended March 31, 2003 and 2002 is impacted by the acquisition of Bank Capital Services Corporation in January 2003, which provided pre-tax income of $59 for the first quarter of 2003.

 

Net interest income decreased 8.1% to $5,548 for the three months ended March 31, 2003 as compared to $6,036 for the same period of 2002.  Total interest and dividend income decreased $1,353 to $12,388 for the three months ended March 31, 2003.  Interest and fees on loans remained flat at $9,695 for the three months ended March 31, 2003 as compared to 2002 despite net loan growth of $41,929 over the same period.  The stable interest and fees on loans is due to higher-rate loans prepaying and their replacement by predominately lower rate variable loans.  Interest and dividends on the investment portfolio decreased $1,302 to $2,641 for the three months ended March 31, 2003 due to accelerated prepayments as a result of the current low rate environment.  Interest on deposits in banks decreased 50.0% or $52 to $52 for the three months ended March 31, 2003. Total interest expense decreased 11.2% or $865 to $6,840 for the three months ended March 31, 2003, as compared to 2002.  The decrease is the result of management’s focus on growing low-cost core deposits (non-time deposits) and the rate reductions by the Federal Reserve during the past year.  Interest on deposits decreased 21.8%, or $873 as a result of the interest rate decreases when comparing the three months ended March 31, 2003 to 2002.

 

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

 

15

 

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

 

Non-interest income, excluding security gains, increased $1,369 or 133.6% to $2,394 for the three months ended March 31, 2003 as compared to 2002.  Increased service charges on deposits accounted for $325 of the increase.  The increase in service charges was primarily the result of a program implemented during 2002 involving overdraft protection.  The addition of bank owned life insurance during 2002 represented $280 of the increase.  The bank owned life insurance was purchased to supplement future increases in employee benefit plans.  During late 2002, Sun began to sell its residential mortgages as they were originated.  This program added $233 in other income for the three months ended March 31, 2003 as compared to 2002.  Other income increased $554 for the respective period as the addition of Bank Capital Services provided $303 in income.  Offsetting the increases in other income was a decrease in income from investment product sales of $81 when comparing the three months ended March 31, 2003 to 2002 as dollars have flowed out of the stock/bond markets and into banks.

 

Non-interest expenses increased $1,663 or 33.9% to $6,563 for the three months ended March 31, 2003 as compared to 2002.  All categories of other expenses have been impacted by the acquisition of Bank Capital Services Corporation (Bank Capital) during January 2003.  In aggregate, Bank Capital represented $244 or 14.7% of the total increase.  The outsourcing of operational processing increased expenses $300 or 18.0% of the total increase.  Salaries and employee benefits increased $362 or 12.9% due to Bank Capital and increased employee benefit costs.  Net occupancy expense and furniture and equipment expenses increased as Sun undertakes infrastructure improvements and expanded into its new corporate headquarters.  Other expenses increased 82.4% or $1,139 due to increases in normal business expenses, Bank Capital, and the outsourcing of operational processing and certain other support functions.

 

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

 

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

 

16

 

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

 

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

 

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

 

17

 

Allowance for Loan and Lease Losses

 

SunBank’s allowance for loan and lease losses is increased through periodic provisions for loan and lease losses, and that provision is reported as an expense in current income.  Loan losses are charged against the allowance for loan and lease losses in the period in which they are determined to be uncollectible.  Recoveries of previously charged off loans are credited to the allowance as they are received.  Management maintains the allowance for loan and lease losses at a level it believes will be adequate to absorb probable credit losses in the existing loan portfolio.  Management believes the allowance for loan and lease losses is adequate at March 31, 2003.

 

Management’s analysis incorporates many factors, including current and anticipated economic conditions, loss experience, loan portfolio composition, anticipated losses, and unfunded commitments.  For significant real estate properties, management obtains independent value appraisals.  SunBank also retains consultants to conduct independent, periodic loan quality reviews, which management incorporates into its allowance for loan and lease losses analysis.

 

Management determines its allowance for loan and lease losses based on criteria and analysis developed to evaluate credit risk within each loan category.  Each loan category’s unique risk characteristics guide management’s analysis and determination of an adequate specific reserve for that category.  For real estate loans, management considers factors that include historical loss rates, past due levels, collateral values, and anticipated economic conditions.  For commercial and industrial loans, management evaluates several factors including historical loss experience, current loan grades, expected future cash flows, individual loan reviews, internal and external analysis, and anticipated economic conditions.  For individual (consumer) loans, management evaluates factors such as historical and projected loss rates, past due levels, collateral values, and anticipated economic conditions.

 

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

 

As management continues to closely monitor the allowance for loan and lease losses, the provision for these losses remained constant at $405 for the three months ended March 31, 2003 and 2002.  The stable provision was the result of 0.9% loan growth since December 31, 2002 coupled with net charge-offs of $133 for the three months ended March 31, 2003.  These factors resulted in an allowance for loan and lease losses of 1.09% of total loans and leases at March 31, 2003 as compared to 1.18% at March 31, 2002 and 1.05% at December 31, 2002.

 

18

 

Management continues to enhance its methodology for analyzing the allowance for loan and leases losses and for assigning reserves.  However, the allowance for loan and lease losses still only represents management’s estimate of an amount adequate to absorb probable loan losses due to credit quality.  Management cannot precisely quantify that amount due to many uncertainties, including future global, national, and local economic conditions and other factors.  As a result, unforeseen developments may require management to increase the allowance for loan and lease losses.  Such developments could include changing economic conditions or negative developments with borrowers.  In addition, bank regulators periodically assess Sun Bancorp, Inc.’s allowance for loan and lease losses and may, consistent with examination guidelines and current information, require an increased allowance for loan and lease losses.  As a result, any number of factors may materially change management’s analysis in the future.

 

19

 

Deposits

 

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

 

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

 

*  Core deposits are defined as total deposits less time deposits

 

Other Funding

 

Sun continued using borrowed funds to supplement deposits during 2003 and 2002.  At March 31, 2003, Sun had $231,900 in long term debt funding.  This funding consisted primarily of $220,000 in variable Federal Home Loan Bank (FHLB) borrowings that  have maturities between 2008 and 2010.  Sun also had $11,900 in long term repurchase agreements at March 31, 2003.

 

Sun also had $19,655 in long term subordinated debentures at March 31, 2003.  The debentures consisted of $16,500 in trust preferred securities with a maturity of February 22, 2031 and initial call of February 22, 2011.  The remaining $3,155 was the result of a note issued for the purchase of Guaranty Bank, N.A. during 2001.

 

Other funding sources of short-term monies include deposit customers’ cash management accounts (classified as securities sold under agreements to repurchase), Treasury Tax and Loan Note Option, repurchase agreements, and FHLB overnight borrowings.  At March 31, 2003, Sun was utilizing its short term funding sources to provide for loan growth and investment purchases in

 

20

 

advance of receipt of principal and interest payments.  Sun continually monitors its borrowed funds positions and market conditions in order to maintain an effective funding structure.  When appropriate, Sun may take future action to modify its borrowed funds structure.

 

Net Interest Income and Net Interest Margin

 

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

 

NIM decreased by 16 basis points to 2.85% for the three months ended March 31, 2003, as compared to 3.01% for the same period of 2002.  The decrease was primarily the result of decreased yield on the loan and investment portfolio, which decreased greater than the cost of funds.  The NIM has stabilized from 2.86% for the fourth quarter of 2002.  The stabilization of the margin is the result of Sun lowering the deposit rates at nearly the same rate of decline seen in the yield on earning assets.

 

21

 

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

 

		March 31, 2003								March 31, 2002
Nine Months Ended (Dollars in thousands)		AVERAGE BALANCE			INTEREST			RATE		AVERAGE BALANCE			INTEREST			RATE
ASSETS
Interest-earning assets:
Interest-bearing deposits		$	17,477		$	52		1.21	%	$	16,437		$	104		2.57	%
Loans (net of unearned income)		584,183			9,939			6.90	%	537,834			9,827			7.41	%
Investments:   Taxable		219,027			2,410			4.40	%	272,326			3,683			5.41	%
Tax-exempt		19,306			351			7.26	%	21,302			394			7.40	%
Total interest-earning assets		839,993			12,752			6.14	%	847,899			14,008			6.67	%
Noninterest-earning assets:
Cash and due from banks		19,260								20,588
Bank premises & equipment		16,147								14,448
Accrued interest and other assets		91,552								44,757
Less:  Allowance for loan losses		(6,368		)						(6,450		)
Unamortized loan fees		205								(81		)
Total assets		$	960,789							$	921,131
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
NOW Accounts		156,497			378			0.98	%	144,991			496			1.39	%
Insured Money Market Accounts		16,147			99			1.56	%	20,305			99			1.98	%
Savings deposits		91,552			192			0.99	%	73,027			329			1.83	%
Time deposits		275,963			2,458			3.61	%	280,456			3,076			4.45	%
Short-term borrowings		33,245			107			1.31	%	21,311			72			1.37	%
Subordinated debentures		19,655			468			9.52	%	20,444			480			9.52	%
Other borrowed funds		223,702			3,138			5.69	%	222,000			3,153			5.76	%
Total interest-bearing liabilities		813,743			6,840			3.41	%	782,534			7,705			3.99	%
Noninterest-bearing liabilities and shareholders’ equity:
Demand deposits		56,204								55,751
Accrued interest and other liabilities		8,440								4,843
Shareholders’ equity		82,402								78,003
Total liabilities and shareholders’ equity		$	960,789							$	921,131
Interest rate spread								2.73	%							2.68	%
Net interest income/margin					$	5,912		2.85	%				$	6,303		3.01	%

 

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

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

 

22

 

Non-interest Income

 

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

 

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

 

23

 

Non-interest Expenses

 

Non-interest expenses increased $1,663 or 33.9% to $6,563 for the three months ended March 31, 2003 as compared to 2002.  All categories of other expenses have been impacted by the acquisition of Bank Capital Services Corporation (Bank Capital) during January 2003.  In aggregate, Bank Capital represented $244 or 14.7% of the total increase.  The outsourcing of operational processing increased expenses $300 or 18.0% of the total increase.  Salaries and employee benefits increased $362 or 12.9% due to the acquisition of Bank Capital and increased employee benefit costs.  Net occupancy expense and furniture and equipment expenses increased as Sun undertakes infrastructure improvements .  Other expenses increased 82.4% or $1,139 due to increases in normal business expenses, Bank Capital, and the outsourcing of operational processing and certain other support functions.

 

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

 

24

 

Equity Securities Risk

 

Sun Bancorp, Inc.’s equity securities consist of marketable equities and restricted stock.  Marketable equities consist entirely of common stock, primarily of bank and bank and financial holding companies.  Restricted stock consists almost entirely of Federal Home Loan Bank (FHLB) stock.  Because FHLB stock is redeemable at par, SunBank carries it at cost and periodically evaluates the stock for impairment.  Possible impairment factors include potential dramatic changes to the housing and residential mortgage industry or the related regulatory environment.  Management currently does not believe any factors exist to suggest potential impairment.

 

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

 

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

 

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

 

25

 

Capital Adequacy

 

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

 

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

 

Management is not aware of any events or regulatory restrictions that would have a material effect on Sun Bancorp, Inc.’s capital adequacy.

 

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

 

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

 

26

 

Regulatory and Industry Merger Activity

 

From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of Sun Bancorp, Inc. and SunBank.  It cannot be predicted whether such legislation will be adopted or, if adopted, how such legislation would affect the business of Sun Bancorp, Inc. and SunBank.  As a consequence of the extensive regulation of commercial banking activities in the United States, Sun Bancorp, Inc.’s and SunBank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.  Except as specifically described above, management believes the effect of the provisions of legislation on the liquidity, capital resources, and results of operations of Sun Bancorp, Inc. will be immaterial. Future recommendations by regulatory authorities or proposed legislation, which if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on Sun Bancorp, Inc.’s results of operations.

 

Further, the business of Sun Bancorp, Inc. is also affected by the state of the financial services industry in general.  As a result of legal and industry changes, management predicts the industry will continue to experience an increase in consolidations and mergers as the financial services industry strives for greater cost efficiencies and market share.  Management also expects increased diversification of financial products and services offered by SunBank and its competitors.  Management believes such consolidations and mergers, and diversification of products and services may enhance its competitive position as a community bank.

 

27

 

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

 

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

 

* Core deposits are defined as total deposits less time deposits

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

 

28

 

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

 

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

 

29

 

Item 4 — Controls and Procedures

 

Management maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. Management evaluated the effectiveness of the design and operation of management’s disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, Sun Bancorp, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that management’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in Sun Bancorp, Inc.’s periodic Securities and Exchange Commission filings. No significant changes were made to Sun Bancorp, Inc.’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.

 

30

 

PART II

 

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

 

Item 6 — Exhibits and Reports on Form 8-K

 

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

 

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

 

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

 

d.                                Exhibits

 

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

 

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

 

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

 

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

 

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

 

10.4                     Change of Control Agreement between Maureen M. Bufalino, the Registrant and Sun Bank, dated May 31, 2001.  (Incorporated by reference to Exhibit 10.3  to the Registrant’s Current Report on Form 8-K filed with the Commission on March 20, 2003).

 

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

 

10.6                     1998 Independent Directors Stock Option Plan.  (Incorporated by reference to Exhibit 4.3 of Registration Statement No. 333-61241 on Form S-8 filed with the Commission on August 12, 1998).

 

10.7                     1998 Employee Stock Purchase Plan.  (Incorporated by reference to Exhibit 4.3 of Registration Statement No. 333-61249 on Form S-8 filed with the Commission on August 12, 1998).

 

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

 

99.1                     Certification of principal executive officer or principal financial officer pursuant to 18U.S.C. Section 1350.

 

99.2                     Certification of principal executive officer or principal financial officer pursuant to 18U.S.C. Section 1350.

 

31

 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

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

 

32

 

CERTIFICATION

 

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

 

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

 

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

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

 

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

 

(a)                                  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

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

 

(c)                                  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

 

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

 

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

 

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

 

6.                                       The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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

 

33

 

CERTIFICATION

 

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

 

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

 

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

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

 

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

 

(a)                                  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

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

 

(c)                                  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

 

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

 

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

 

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

 

8.                                       The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant  changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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

 

34