Sun Bancorp (SNBC) 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2007
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ____________ to ____________

Commission file number 0 - 20957

		SUN BANCORP, INC.
(Exact name of registrant as specified in its charter)
	New Jersey		52-1382541
	(State or other jurisdiction of		(I.R.S. Employer
	incorporation or organization)		Identification No)
	226 Landis Avenue, Vineland, New Jersey 08360
(Address of principal executive offices)
(Zip Code)
	(856) 691-7700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (check one): Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). Yes o No x

Common Stock, $1.00 Par Value – 22,243,286 Shares Outstanding at August 7, 2007

SUN BANCORP, INC.

TABLE OF CONTENTS

		Page Number
PART I - FINANCIAL INFORMATION
	Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition at June 30, 2007 and December 31, 2006		3
Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006		4
Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2007 and 2006		5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six MonthsEnded June 30, 2007 and 2006		6
Notes to Unaudited Condensed Consolidated Financial Statements		7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	31
	Item 4. Controls and Procedures	33
PART II - OTHER INFORMATION
	Item 1. Legal Proceedings	34
	Item 1A. Risk Factors	34
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
	Item 3. Defaults upon Senior Securities	34
	Item 4. Submission of Matters to a Vote of Security Holders	34
	Item 5. Other Information	35
	Item 6. Exhibits	35
	Signatures	36
	Certifications
	Exhibit 31 Section 302 Certifications	37
	Exhibit 32 Section 906 Certifications	39

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except par value amounts)
	June 30, 2007			December 31, 2006
ASSETS
Cash and due from banks	$	80,862		$	74,991
Interest-earning bank balances		3,555			48,066
Federal funds sold		15,950			47,043
Cash and cash equivalents		100,367			170,100
Investment securities available for sale (amortized cost of $470,770 and $488,007 at June 30, 2007 and December 31, 2006, respectively)		463,883			481,952
Investment securities held to maturity (estimated fair value of $20,940 and $24,846 at June 30, 2007 and December 31, 2006, respectively)		21,562			25,441
Loans receivable (net of allowance for loan losses of $26,079 and $25,658 at June 30, 2007 and December 31, 2006, respectively)		2,421,182			2,339,584
Restricted equity investments		16,249			17,729
Bank properties and equipment, net		43,574			42,292
Real estate owned		1,165			600
Accrued interest receivable		18,026			17,419
Goodwill		127,936			128,117
Intangible assets, net		25,833			28,570
Deferred taxes, net		4,592			3,939
Bank owned life insurance		65,122			57,370
Other assets		15,142			12,450
Total assets	$	3,324,633		$	3,325,563
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	2,725,747		$	2,667,997
Advances from the Federal Home Loan Bank (FHLB)		66,029			103,560
Securities sold under agreements to repurchase - customers		44,612			51,740
Obligation under capital lease		5,291			5,322
Junior subordinated debentures		97,941			108,250
Other liabilities		29,255			46,467
Total liabilities		2,968,875			2,983,336
Commitments and contingencies (see Note 14)
Shareholders’ equity:
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued		-			-
Common stock, $1 par value, 50,000,000 shares authorized, 21,942,691 and 20,507,549 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		21,943			20,508
Additional paid-in capital		327,709			304,857
Retained earnings		10,583			20,794
Accumulated other comprehensive loss		(4,477	)		(3,932	)
Total shareholders’ equity		355,758			342,227
Total liabilities and shareholders’ equity	$	3,324,633		$	3,325,563
See notes to unaudited condensed consolidated financial statements.

3

SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2007		2006		2007		2006
INTEREST INCOME
Interest and fees on loans	$	43,403	$	39,714	$	86,514	$	76,309
Interest on taxable investment securities		4,500		5,015		9,034		10,592
Interest on non-taxable investment securities		733		341		1,391		597
Interest and dividends on restricted equity investments		281		262		547		576
Interest on federal funds sold		741		232		1,263		512
Total interest income		49,658		45,564		98,749		88,586
INTEREST EXPENSE
Interest on deposits		22,077		15,964		42,911		29,611
Interest on borrowed funds		1,558		2,377		3,329		5,421
Interest on junior subordinated debentures		2,473		2,110		4,626		4,020
Total interest expense		26,108		20,451		50,866		39,052
Net interest income		23,550		25,113		47,883		49,534
PROVISION FOR LOAN LOSSES		950		875		1,700		1,500
Net Interest income after provision for loan losses		22,600		24,238		46,183		48,034
NON-INTEREST INCOME
Service charges on deposit accounts		3,552		2,622		6,681		4,746
Other service charges		75		80		147		158
Net gain on sale of branches		-		-		1,443		-
Net gain on sale of bank property & equipment		12		-		12		-
Loss on sale of investment securities		-		-		-		(20	)
Gain on sale of loans		447		160		955		444
Net gain on derivative instruments		525		458		759		824
Other		1,694		1,750		3,325		3,314
Total non-interest income		6,305		5,070		13,322		9,466
NON-INTEREST EXPENSE
Salaries and employee benefits		11,023		12,110		23,612		23,587
Occupancy expense		2,717		2,849		5,729		5,793
Equipment expense		1,829		2,084		3,780		4,011
Amortization of intangible assets		1,178		1,193		2,360		2,381
Data processing expense		1,100		1,103		2,108		2,162
Professional fees		566		397		1,377		785
Advertising expense		509		550		982		973
Real estate owned expense, net		10		167		16		140
Other		3,086		3,188		5,625		6,082
Total non-interest expense		22,018		23,641		45,589		45,914
INCOME BEFORE INCOME TAXES		6,887		5,667		13,916		11,586
INCOME TAXES		1,975		1,877		4,319		3,623
NET INCOME	$	4,912	$	3,790	$	9,597	$	7,963
Basic earnings per share	$	0.23	$	0.18	$	0.44	$	0.38
Diluted earnings per share	$	0.22	$	0.17	$	0.42	$	0.36
Weighted average shares - basic	21,738,367		21,380,072		21,643,651		21,078,294
Weighted average shares - diluted	22,670,769		22,374,387		22,618,810		22,212,091
See notes to unaudited condensed consolidated financial statements.

4

SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss				Total
BALANCE, JANUARY 1, 2006	$	18,169	$	264,152	$	20,757		$	(7,425	)	$	295,653
Comprehensive income:
Net income		-		-		7,963			-			7,963
Unrealized losses on available for sale securities net of reclassification adjustment, net of tax (see Note 1)		-		-		-			(512	)		(512	)
Comprehensive income												7,451
Exercise of stock options		405		3,231		-			-			3,636
Excess tax benefit related to stock options		-		235		-			-			235
Issuance of common stock		33		573		-			-			606
Common stock issued in acquisition		832		16,997		-			-			17,829
Stock options exchanged in acquisition		-		1,954		-			-			1,954
Stock-based compensation		-		305		-			-			305
Stock dividend		970		16,247		(17,217	)		-			-
BALANCE, JUNE 30, 2006	$	20,409	$	303,694	$	11,503		$	(7,937	)	$	327,669
BALANCE, JANUARY 1, 2007	$	20,508	$	304,857	$	20,794		$	(3,932	)	$	342,227
Comprehensive income:
Net income		-		-		9,597			-			9,597
Unrealized losses on available for sale securities net of reclassification adjustment, net of tax (see Note 1)		-		-		-			(545	)		(545	)
Comprehensive income												9,052
Exercise of stock options		370		2,146		-			-			2,516
Excess tax benefit related to stock options		-		1,159		-			-			1,159
Issuance of common stock		32		555		-			-			587
Stock-based compensation		1		234		-			-			235
Stock dividend		1,032		18,758		(19,790	)		-			-
Cash paid for fractional interests resulting from stock dividend		-		-		(18	)		-			(18	)
BALANCE, JUNE 30, 2007	$	21,943	$	327,709	$	10,583		$	(4,477	)	$	355,758
See notes to unaudited condensed consolidated financial statements.

5

SUN BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	For the Six Months Ended
	June 30,
	2007			2006
OPERATING ACTIVITIES
Net income	$	9,597		$	7,963
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,700			1,500
Depreciation, amortization and accretion		4,429			4,501
Write down of book value of fixed assets and real estate owned		-			79
Loss on sale of investment securities available for sale		-			20
Gain on sale of branches		(1,443	)		-
Gain on sale of bank properties and equipment		(12	)		-
Gain on sale of real estate owned		-			(46	)
Gain on sale of loans		(955	)		(433	)
Increase in cash value of bank owned life insurance		(952	)		(888	)
Deferred income taxes		366			(1,022	)
Stock-based compensation		235			305
Shares contributed to employee benefit plans		287			282
Proceeds from sale of loans		43,007			31,467
Originations of loans held for sale		(44,737	)		(33,712	)
Excess tax benefit related to stock options		(1,340	)		(1,487	)
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable		(774	)		245
Other assets		(679	)		(2,136	)
Other liabilities		1,473			(722	)
Net cash provided by operating activities		10,202			5,916
INVESTING ACTIVITIES
Purchases of investment securities available for sale		(177,230	)		(36,099	)
Purchases of investment securities held to maturity		-			(500	)
Redemption of restricted equity securities		1,480			2,432
Proceeds from maturities, prepayments or calls of investment securities available for sale		175,960			217,131
Proceeds from maturities, prepayments or calls of investment securities held to maturity		3,104			4,245
Proceeds from sale of investment securities available for sale		-			25,498
Net increase in loans		(99,942	)		(119,438	)
Purchase of bank properties and equipment		(4,200	)		(1,471	)
Proceeds from the sale of real estate owned		-			1,383
Purchase of bank owned life insurance		(6,800	)		-
Net cash from sales of branches or acquisition of bank		(19,044	)		(15,101	)
Net cash (used in) provided by investing activities		(126,672	)		78,080
FINANCING ACTIVITIES
Net increase (decrease) in deposits		98,031			(33,628	)
Purchase price adjustment to goodwill resulting from stock options exercised		(181	)		-
Net repayments under lines of credit and repurchase agreements		(44,690	)		(74,588	)
Excess tax benefit from stock-based compensation		1,340			1,487
Proceeds from exercise of stock options		2,516			2,385
Proceeds from issuance of subordinated debt		10,310			30,928
Redemption of subordinated debt		(20,619	)		-
Proceeds from issuance of common stock		48			89
Cash paid for fractional interests resulting from stock dividend		(18	)		-
Net cash provided by (used in) financing activities		46,737			(73,327	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(69,733	)		10,699
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		170,100			85,462
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	100,367		$	96,131
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	50,020		$	35,966
Income taxes paid	$	4,139		$	2,886
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Commitments to purchase investment securities	$	9,000		$	-
Transfer of loans to real estate owned	$	565		$	669
Write-off of trust preferred issuance costs	$	541		$	-
Net assets acquired and purchase adjustments in bank acquisition	$	-		$	34,884
Value of shares issued in bank acquisition	$	-		$	17,829
Fair value of options exchanged in bank acquisition	$	-		$	1,954
See notes to unaudited condensed consolidated financial statements.

6

SUN BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, all dollar amounts presented in the tables, except per share amounts, are in thousands)

(1) Summary of Significant Accounting Policies

Basis of Financial Statement Presentation. The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, changes in equity and cash flows in conformity with generally accepted accounting principles (“GAAP”) in the United States of America. However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2006. The results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2007 or any other period.

Basis of Consolidation. The unaudited condensed consolidated financial statements include, after all significant intercompany balances and transactions have been eliminated, the accounts of Sun Bancorp, Inc. (the “Company”) and its principal wholly owned subsidiary, Sun National Bank (the “Bank”), and the Bank’s wholly owned subsidiaries, Med-Vine, Inc., Sun Financial Services, L.L.C., 2020 Properties, L.L.C., Sun Home Loans, Inc. and Del-Vine, Inc.  Del-Vine, Inc. began operations during the second quarter 2007.  From time to time, the Bank may sell a participation interest in a pool of loans to Del-Vine, Inc., with servicing and administrative responsibilities provided in exchange for consideration. In accordance with the Financial Accounting Standards Board (the “FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities - an interpretation of ARB No. 51, and FIN 46 (R), Consolidation of Variable Interest Entities (revised December 2003) - an interpretation of ARB No. 51, Sun Capital Trust III, Sun Capital Trust IV, Sun Capital Trust V, Sun Capital Trust VI, Sun Capital Trust VII, Sun Statutory Trust VII and CBNJ Trust I collectively, the “Issuing Trusts”, are presented on a deconsolidated basis. 

Reclassifications. Certain items previously reported in the 2006 financial statements have been reclassified to conform to the current presentation.

Use of Estimates in the Preparation of Financial Statements. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. The significant estimates include the allowance for loan losses, goodwill, intangible assets, deferred tax asset valuation allowance, stock-based compensation and derivative financial instruments. Actual results may differ from these estimates.

Stock Dividend. On April 26, 2007, the Company’s Board of Directors declared a 5% stock dividend to be paid on May 24, 2007 to shareholders of record on May 14, 2007. Accordingly, per share data have been adjusted for all periods presented.

Loans Held for Sale. Included in loans receivable is approximately $3.8 million and $4.1 million of loans held for sale at June 30, 2007 and December 31, 2006, respectively. These loans are carried at the lower of cost or estimated fair value, on an aggregate basis.

Other Comprehensive Income. The Company classifies items of other comprehensive income by their nature and displays the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial position. Amounts categorized as other comprehensive income represent net unrealized gains or losses on investment securities available for sale, net of income taxes. Reclassifications are made to avoid double counting in comprehensive income of items which are displayed as part of net income for the period. These reclassifications are as follows:

7

Disclosure of Reclassification Amounts, Net of Tax

	For the Six Months Ended June 30, 2007									For the Six Months Ended June 30, 2006
	Pre-tax			Tax			After-tax			Pre-tax			Tax			After-tax
Unrealized holding loss on securities available for sale during the period	$	(834	)	$	288		$	(546	)	$	(790	)	$	265		$	(525	)
Less: reclassification adjustment for net loss included in net income		2			(1	)		1			20			(7	)		13
Net unrealized loss on securities available for sale	$	(832	)	$	287		$	(545	)	$	(770	)	$	258		$	(512	)

Recent Accounting Principles. In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect that the guidance will have an effect on the Company’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. SFAS No. 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is continuing to evaluate the impact of this pronouncement but does not expect that the guidance will have a material effect on the Company’s financial position or results of operations.

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN No. 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that has greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 was applied to all existing tax positions upon initial adoption. FIN No. 48 was effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 on January 1, 2007 and the initial application of the interpretation did not have an impact to the Company’s financial position or results of operations. As of the date of adoption, there was no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the condensed consolidated income statement. As of January 1, 2007, the tax years ended December 31, 2003, 2004, 2005 and 200 remain subject to examination by all tax jurisdictions. As of June 30, 2007, no audits were in process by a tax jurisdiction.  However, the Company did receive notification from the Internal Revenue Service of its intention to audit the 2004 tax return during the third quarter 2007.  The Company does not expect the audit to result in a material change to the Company's tax position.

8

(2) Stock-Based Compensation

Stock-based compensation is accounted for in accordance with SFAS No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment. The Company adopted SFAS No. 123R on January 1, 2006 using the modified prospective approach. The Company establishes fair value for its equity awards to determine its cost and recognizes the related expense for stock options over the appropriate vesting period, or when applicable, service period, using the straight-line method. The grant date fair value for stock options is calculated using the Black-Scholes option valuation model. Prior to January 1, 2006, the Company accounted for stock-based compensation in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, as adopted prospectively on January 1, 2003 and in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees.

The Company’s Stock Plans authorize the issuance of shares of common stock pursuant to awards that may be granted in the form of stock options to purchase common stock (“options”) and awards of shares of common stock (“stock awards”). The purpose of the Company’s stock-based incentive plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors, advisory directors, employees and other persons to promote the success of the Company. Under the Company’s Stock Plans, options expire ten years after the date of grant, unless terminated earlier under the option terms. A committee of non-employee directors has the authority to determine the conditions upon which the options granted will vest. Options are granted at the then fair market value of the Company’s stock. The grant date fair value is calculated using the Black-Scholes option valuation model.

A summary of option activity under the Stock Plans as of June 30, 2007 and changes during the six month period is presented below:

Summary of Stock Option Activity

	Number of Options			Weighted Average Exercise Price Per Share		Number of Options Exercisable
January 1, 2007		3,205,826		$	9.79		3,011,690
Granted		206,850		$	17.74
Exercised		(386,340	)	$	6.97
Forfeited		(55,222	)	$	17.92
Expired		(5,973	)	$	17.76
June 30, 2007		2,965,141		$	10.54		2,628,557

The weighted average remaining contractual term was approximately 3.9 years for options outstanding and 3.2 years for options exercisable as of June 30, 2007.

As of June 30, 2007, there was $1.5 million of total unrecognized compensation cost related to nonvested options and nonvested stock awards granted under the Stock Plans. That cost is expected to be recognized over a weighted average period of 1.9 years.

The total intrinsic value (the excess of the market price over the exercise price) for options exercised during the six months ended June 30, 2007 was $4.2 million. At June 30, 2007, the aggregate intrinsic value was $19.2 million for options outstanding and $19.2 million for options exercisable.

The amount of cash received from the exercise of options for the six month period ended June 30, 2007 was $2.5 million. The total tax benefit for the six months ended June 30, 2007 was approximately $1.3 million.

During the six months ended June 30, 2007 and 2006, the Company granted 206,850 options and 45,738 options, respectively. The fair value of the options granted is estimated on the date of grant using the Black-Scholes option valuation model which uses the assumptions noted in the following table. The risk-free rate of return is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of the option is estimated using the historical exercise behavior of employees at a particular level of management who were granted options with a ten-year term. Options have historically been granted with this term, and therefore information necessary to make this estimate was available. The expected volatility is based on the historical volatility for a period of three years ending on the date of grant. Utilizing a period greater than this is not representative of the Company’s view of its current stock volatility.

9

Significant weighted average assumptions used to calculate the fair value of the options for the six months ended June 30, 2007 and 2006 are as follows:

Weighted Average Assumptions Used in Black-Scholes Option Pricing Model

	For the Six Months Ended June 30,
	2007			2006
Weighted average fair value of options granted	$	4.10		$	6.30
Weighted average risk-free rate of return		4.50	%		5.19	%
Weighted average expected option life in months		58			120
Weighted average expected volatility		27	%		29	%
Expected dividends(1)	$	-		$	-
(1) To date, the Company has not paid cash dividends on its common stock.

During the six months ended June 30, 2007, the Company issued 9,492 shares of restricted stock.  The restricted stock issued during the six months ended June 30, 2007 was valued at $167,000 at the time of grant. The value of these shares is based upon the closing price of the common stock on the date of grant. The shares vest monthly over the following one-year service period with compensation expense recognized on a straight-line basis over the same service period. The compensation expense recognized for the three and six months ended June 30, 2007 was $24,000 and $27,000, respectively. There were no restricted stock awards issued during the three and six months ended June 30, 2006.

(3) Branch Sales

During the first quarter of 2007, the Company completed the sales of three branch offices to three separate buyers. The sales of the branch offices included approximately $40 million of aggregate deposits and approximately $19 million of aggregate loans receivable. The Company recognized a net pre-tax gain on the sales of the branch offices of approximately $1.4 million.

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(4) Investment Securities

The amortized cost of investment securities and the approximate fair value were as follows:

Summary of Investment Securities

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
June 30, 2007
Available for sale:
U.S. Treasury obligations	$	14,896	$	-	$	(28	)	$	14,868
U.S. Government agencies and mortgage-backed securities		337,416		3		(5,465	)		331,954
State and municipal obligations		73,296		130		(1,529	)		71,897
Other		45,162		2		-			45,164
Total available for sale		470,770		135		(7,022	)		463,883
Held to maturity:
Mortgage-backed securities		21,562		-		(622	)		20,940
Total held to maturity		21,562		-		(622	)		20,940
Total investment securities	$	492,332	$	135	$	(7,644	)	$	484,823
December 31, 2006
Available for sale:
U.S. Treasury obligations	$	29,956	$	-	$	(39	)	$	29,917
U.S. Government agencies and mortgage-backed securities		372,864		7		(6,129	)		366,742
State and municipal obligations		63,211		373		(267	)		63,317
Other		21,976		-		-			21,976
Total available for sale		488,007		380		(6,435	)		481,952
Held to maturity:
Mortgage-backed securities		24,691		-		(595	)		24,096
Other		750		-		-			750
Total held to maturity		25,441		-		(595	)		24,846
Total investment securities	$	513,448	$	380	$	(7,030	)	$	506,798

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The following table provides the gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at June 30, 2007 and December 31, 2006:  

Gross Unrealized Losses by Investment Category

	Less than 12 Months					12 Months or Longer					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
June 30, 2007
U.S. Treasury obligations	$	14,869	$	(28	)	$	-	$	-		$	14,869	$	(28	)
U.S. Government agencies and mortgage-backed securities		91,123		(986	)		260,100		(5,101	)		351,223		(6,087	)
State and municipal obligations		47,505		(1,309	)		10,996		(220	)		58,501		(1,529	)
Total	$	153,497	$	(2,323	)	$	271,096	$	(5,321	)	$	424,593	$	(7,644	)
December 31, 2006
U.S. Treasury obligations	$	24,928	$	(39	)	$	-	$	-		$	24,928	$	(39	)
U.S. Government agencies and mortgage-backed securities		40,798		(69	)		320,068		(6,655	)		360,866		(6,724	)
State and municipal obligations		13,366		(30	)		10,570		(237	)		23,936		(267	)
Total	$	79,092	$	(138	)	$	330,638	$	(6,892	)	$	409,730	$	(7,030	)

At June 30, 2007, 99.9% of the gross unrealized losses in the security portfolio were comprised of securities issued by U.S. Government agencies, U.S. Government sponsored agencies and other securities rated investment grade by at least one bond credit rating service.  Management believes the unrealized losses are due to increases in market interest rates since the time the underlying securities were purchased. Recovery of fair value is expected as the securities approach their maturity date or as valuations for such securities improve as market yields change. Management considers the length of time and the extent to which fair value is less than cost, the credit worthiness and near-term prospects of the issuer, among other things, in determining the nature of the decline in market value of the securities. As the Company has the intent and ability to retain the investment in the issuer for a period of time sufficient to allow for a recovery of amortized cost, which may be maturity, no decline is deemed to be other than temporary. At June 30, 2007, the gross unrealized loss in the category 12 months or longer of $5.3 million consisted of 101 securities having an aggregate unrealized loss of 1.9% of the amortized cost.  The securities represented Federal Agency issues and 17 securities currently rated AA or better by at least one bond credit rating service.  At June 30, 2007, securities in a gross unrealized loss position for less than 12 months consisted of 126 securities having an aggregate unrealized loss of 1.5% of the amortized cost basis.

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(5) Loans

The components of loans as of June 30, 2007 and December 31, 2006 were as follows:

Loan Components

	June 30, 2007			December 31, 2006
Commercial and industrial	$	1,985,584		$	1,925,103
Home equity		245,283			232,321
Second mortgages		79,120			77,337
Residential real estate		47,101			38,418
Other		90,173			92,063
Total gross loans		2,447,261			2,365,242
Allowance for loan losses		(26,079	)		(25,658	)
Net loans receivable	$	2,421,182		$	2,339,584
Non-accrual loans	$	14,505		$	14,322

(6) Allowance for Loan Losses

Changes in the allowance for loan losses for the six months ended June 30, 2007 and 2006 and for the year ended December 31, 2006 were as follows:

Allowance for Loan Losses

	For the Six Months Ended June 30,						For the Year Ended December 31,
		2007			2006			2006
Balance, beginning of period	$	25,658		$	22,463		$	22,463
Charge-offs		(1,518	)		(916	)		(2,513	)
Recoveries		239			374			642
Net charge-offs		(1,279	)		(542	)		(1,871	)
Provision for loan losses		1,700			1,500			3,807
Purchased allowance from bank acquisition		-			1,259			1,259
Balance, end of period	$	26,079		$	24,680		$	25,658

The provision for loan losses charged to expense is based upon past loan loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans under SFAS No. 114, Accounting by Creditors for Impairment of a Loan - an amendment of FASB Statements No. 5 and 15 and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures - an amendment of FASB Statement No. 114. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in a loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. Impairment losses are included in the provision for loan losses. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for impairment include consumer loans and residential real estate loans, and are not included in the data that follow:

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Components of Impaired Loans

	June 30, 2007		December 31,    2006
Impaired loans with related allowance for loan losses calculated under SFAS No. 114	$	6,271		$	7,975
Impaired loans with no related allowance for loan losses calculated under SFAS No. 114		6,892			4,774
Total impaired loans	$	13,163		$	12,749
Valuation allowance related to impaired loans	$	1,692		$	2,267

Analysis of Impaired Loans

	For the Six Months Ended June 30,
	2007		2006
Average impaired loans	$	12,773	$	19,492
Interest income recognized on impaired loans	$	138	$	394
Cash basis interest income recognized on impaired loans	$	7	$	55

(7) Real Estate Owned

Real estate owned at June 30, 2007 and December 31, 2006 was as follows:

	June 30, 2007		December 31,  2006
Commercial properties	$	300		$	-
Residential properties		865			600
Total	$	1,165		$	600

(8) Bank Owned Life Insurance (“BOLI”)

At June 30, 2007 and December 31, 2006, BOLI was $65.1 million and $57.4 million, respectively. During the first quarter 2007, the Company purchased an additional $6.8 million of BOLI. The remaining increase of $952,000 represents an increase in the cash surrender value of the policies during the six months ended June 30, 2007, which was recorded as other non-interest income in the consolidated statement of operations.

(9) Derivative Financial Instruments.

The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. As of June 30, 2007, derivative financial instruments have been entered into to hedge the interest rate risk associated with the Bank’s commercial lending activity. In general, the derivative transactions fall into one of two types, a bank hedge of a specific fixed-rate loan or a hedged derivative offering to a Bank customer. In those transactions in which the Bank hedges a specific fixed-rate loan, the derivative is executed for periods that match the related underlying exposures and do not constitute positions independent of these exposures. For derivatives offered to Bank customers, the economic risk of the customer transaction is offset by a mirror position with a non-affiliated third party.

The Company currently utilizes interest rate swaps to hedge specified assets. The Company does not use derivative financial instruments for trading or speculative purposes. Interest rate swaps were entered into as fair value hedges for the purpose of modifying the interest rate characteristics of certain commercial loans. The interest rate swaps involve no exchange of principal either at inception or upon maturity; rather, it involves the periodic exchange of interest payments arising from an underlying notional value.

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Financial derivatives involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures. The Company seeks to minimize counterparty credit risk by establishing credit limits, and generally requiring bilateral netting and collateral agreements.

For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. Currently, the Company only participates in fair value hedges.

Fair Value Hedges - Interest Rate Swaps. The Company has entered into interest rate swap arrangements to exchange the payments on fixed-rate commercial loan receivables for variable-rate payments based on the one-month London Interbank Offered Rate (“LIBOR”). The interest rate swaps involve no exchange of principal either at inception or maturity and have maturities and call options identical to the fixed-rate loan agreements. The arrangements have been designated as fair value hedges. The swaps are carried at their fair value and the carrying amount of the commercial loans includes the change in their fair values since the inception of the hedge. Because the hedging arrangement is considered highly effective, changes in the fair value of interest rate swaps exactly offset the corresponding changes in the fair value of the commercial loans and, as a result, the changes in fair value do not result in an impact on net income.

Information pertaining to outstanding interest rate swap agreements was as follows:

Summary of Interest Rate Swap Agreements

	June 30,		December 31,
	2007			2006
Notional amount	$	49,386		$	48,063
Weighted average pay rate		6.77	%		6.74	%
Weighted average receive rate		7.32	%		7.34	%
Weighted average maturity in years		6.2			6.6
Unrealized gain relating to interest rate swaps	$	1,652		$	640

Customer Derivatives. The Company also enters into several commercial loan swaps in order to provide commercial loan clients the ability to swap from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a client in addition to a swap agreement. This swap agreement effectively swaps the client’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed components of the customer agreement. At June 30, 2007 and December 31, 2006, the notional amount of such arrangements was $642.4 million and $545.0 million, respectively. As the interest rate swaps with the clients and third parties are not designated as hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the instruments are marked to market in earnings. As the interest rate swaps are structured to offset each other, changes in market values will have no net earnings impact. The Company earned $525,000 and $759,000 from facilitating customer derivative transactions during the three and six months ended June 30, 2007, as compared to $458,000 and $824,000 for the same periods in 2006.

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(10) Deposits

Deposits consist of the following major classifications:

Summary of Deposits

	June 30, 2007		December 31, 2006
Demand deposits - interest bearing	$	764,900		$	792,955
Demand deposits - non-interest bearing		466,960			501,185
Savings deposits		471,060			412,973
Time certificates under $100,000		673,387			634,350
Time certificates $100,000 or more		349,440			326,534
Total	$	2,725,747		$	2,667,997

(11) Junior Subordinated Debentures Held by Trusts that Issued Capital Debt

The following is a summary of the outstanding capital securities issued by each Issuer Trust and the junior subordinated debentures issued by the Company to each Trust as of June 30, 2007:

Summary of Capital Securities and Junior Subordinated Debentures

	Capital Securities				Junior Subordinated Debentures
Issuer Trust	Issuance Date	Stated Value		Distribution Rate	Principal Amount		Maturity	Redeemable    Beginning
Sun Capital Trust IV	July 7, 2002		10,000	3-mo LIBOR plus 3.65%		10,310	October 7, 2032	July 7, 2007
Sun Capital Trust V	December 18, 2003		15,000	3-mo LIBOR plus 2.80%		15,464	December 30, 2033	December 30, 2008
Sun Capital Trust VI	December 19, 2003		25,000	3-mo LIBOR plus 2.80%		25,774	January 23, 2034	January 23, 2009
CBNJ Trust I	December 19, 2002		5,000	3-mo LIBOR plus 3.35%		5,155	January 7, 2033	January 7, 2008
Sun Statutory Trust VII	January 17, 2006		30,000	6.24% Fixed		30,928	March 15, 2036	March 15, 2011
Sun Capital Trust VII	April 19, 2007		10,000	6.428% Fixed		10,310	June 30, 2042	June 30, 2012
		$	95,000		$	97,941

Junior subordinated debentures were $97.9 million and $108.3 million at June 30, 2007 and December 31, 2006, respectively.  In April 2007, the Company called the $20.0 million of outstanding capital securities of Sun Capital Trust III contemporaneously with the redemption of the Sun Capital Trust III debentures. At the time of the call, the Company recognized a write-down of approximately $541,000 of unamortized debt issuance costs. In addition, in April 2007, the Company issued an additional $10.0 million of Trust Preferred Securities (Sun Capital Trust VII) of which the annual rate will be fixed at 6.428% until April 2012. The proceeds from the issuance of $10.0 million were used in part to redeem the $20.0 million of previously issued trust preferred securities (Sun Capital Trust III) in April 2007.

In July 2007, the Company called the $10.0 million of outstanding capital securities of Sun Capital Trust IV contemporaneously with the redemption of the Sun Capital Trust IV debentures. At the time of the call the Company recognized a write-down of approximately $250,000 of unamortized debt issuance costs.  In addition, in July 2007, the Company issued an additional $10.0 million of Trust Preferred Securities (Sun Capital Trust VIII) of which the variable annual rate of interest resets quarterly and is equal to LIBOR plus 1.39%, with an initial rate of 6.75%. The proceeds from the issuance of $10.0 million were used to redeem the $10.0 million of previously issued trust preferred securities (Sun Capital Trust IV) in July 2007.

While the capital securities are deconsolidated in accordance with GAAP, they continue to qualify as Tier 1 capital under federal regulatory guidelines. In March 2005, the Federal Reserve amended its risk-based capital standards to expressly allow the continued limited inclusion of outstanding and prospective issuances of trust preferred securities in a bank holding company’s Tier 1 capital, subject to tightened quantitative limits. The Federal Reserve’s amended rule will, effective March 31, 2009, limit capital securities and other restricted core capital elements to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Management has developed a capital plan for the Company and the Bank that should allow the Company and the Bank to maintain “well-capitalized” regulatory capital levels.

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The Issuer Trusts are wholly owned unconsolidated subsidiaries of the Company and have no independent operations. The obligations of Issuer Trusts are fully and unconditionally guaranteed by the Company. The debentures are unsecured and rank subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. Interest on the debentures is cumulative and payable in arrears. Proceeds from any redemption of debentures would cause a mandatory redemption of capital securities having an aggregate liquidation amount equal to the principal amount of debentures redeemed.

Sun Capital Trust V and Sun Capital Trust VI do not have interest rate caps. CBNJ Trust I was acquired in the July 2004 acquisition of Community Bancorp of New Jersey. CBNJ Trust I variable annual rate will not exceed 12.5% through five years from its issuance.   Sun Statutory Trust VII has a fixed rate for a period of five years from the date of issuance and beginning in year six a variable rate of LIBOR plus 1.35%.  Sun Capital Trust VII has a fixed rate for a period of five years from the date of issuance and beginning in year six a variable rate of LIBOR plus 1.39%.

(12) Other Liabilities

At June 30, 2007 and December 31, 2006, other liabilities were $29.3 million and $46.5 million, respectively. Other liabilities at June 30, 2007 and December 31, 2006 include a $9.0 million and $27.8 million, respectively, payable for unsettled security trades.

(13) Earnings Per Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents, based upon the treasury stock method using an average market price for the period. Retroactive recognition has been given to market values, common stock outstanding and potential common shares for periods prior to the date of the Company’s stock dividends.

Earnings per share for the periods presented are as follows:

Earnings Per Share Calculation

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2007		2006		2007		2006
Net income	$	4,912	$	3,790	$	9,597	$	7,963
Average common shares outstanding	21,738,367		21,380,072		21,643,651		21,078,294
Net effect of dilutive common stock equivalents	932,402		994,315		975,159		1,133,797
Adjusted average shares outstanding - dilutive	22,670,769		22,374,387		22,618,810		22,212,091
Basic earnings per share	$	0.23	$	0.18	$	0.44	$	0.38
Dilutive earnings per share	$	0.22	$	0.17	$	0.42	$	0.36
Dilutive common stock equivalents		2,839,191		3,100,845		3,056,008		3,283,550
Average exercise price	$	9.35	$	9.03	$	9.66	$	8.85
Average market price	$	17.70	$	16.42	$	18.08	$	17.21

17

There were 359,569 weighted average common stock equivalents and 188,121 weighted average common stock equivalents outstanding during the three months ended June 30, 2007 and 2006, respectively, which were not included in the computation of diluted EPS as a result of the stock options’ exercise prices being greater than the average market price of the common shares for the respective periods.  There were 134,428 weighted average common stock equivalents and 164,777 weighted average common stock equivalents outstanding during the six months ended June 30, 2007 and 2006, respectively, which were not included in the computation of diluted EPS as a result of the stock options’ exercise prices being greater than the average market price of the common shares for the respective periods.

(14) Commitments and Contingencies

On February 6, 2007, the Board of Directors of the Company terminated the employment of the Company’s President and Chief Executive Officer. In April 2007, the Company entered into an agreement that provides for certain terms and conditions of the former President and Chief Executive Officer’s separation from the Company including, among other things, non-compete agreements and a general release from any claims, rights or causes of action in connection with his termination of employment or otherwise. The severance agreement provides for an aggregate cash payment of $1.7 million. The total amount charged to earnings during the first quarter 2007 as a result of this termination of employment was $1.8 million. This amount includes other severance related charges, including a charge as a result of a change in terms of the exercisability for certain stock options, continued use of a company car and payment of certain legal fees incurred in connection with the settlement agreement.  As of June 30, 2007, $450,000 of the $1.7 million remains outstanding and is expected to be paid through the first quarter of 2008.

(15) Stock Repurchase Plan

In July 2007, the Board of Directors of the Company authorized the initiation of a stock repurchase plan covering up to approximately 5%, or approximately 1,000,000 shares of the Company’s outstanding common stock.  The repurchases will be made from time to time in open-market transactions, subject to the availability of the stock, over the next 18 months.

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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 QUARTERLY REPORT ON FORM 10-Q AND THE EXHIBITS THERETO), 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.

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; THE EFFECTS OF, AND CHANGES IN, TRADE, 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; 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, RISK-BASED CAPITAL GUIDELINES AND REPORTING INSTRUCTIONS, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; 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 UNDER FEDERAL SECURITIES LAWS.

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

(All dollar amounts presented in the tables, except per share amounts, are in thousands)

Critical Accounting Policies, Judgments and Estimates

The discussion and analysis of the financial condition and results of operations are based on the unaudited condensed consolidated financial statements, which are prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expense. Management evaluates these estimates and assumptions on an ongoing basis, including those related to allowance for loan losses, goodwill, intangible assets, deferred tax asset valuation allowance, stock-based compensation and derivative financial instruments. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the bases for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Allowance for Loan Losses. Through the Bank, the Company originates loans that it intends to hold for the foreseeable future or until maturity or repayment. The Bank may not be able to collect all principal and interest due on these loans. Allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date. The determination of the allowance for loan losses requires management to make significant estimates with respect to the amounts and timing of losses and market and economic conditions. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairment based upon an evaluation of known and inherent risk in the loan portfolio. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. A provision for loan losses is charged to operations based on management’s evaluation of the estimated losses that have been incurred in the Company’s loan portfolio. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to classified loans.

Management monitors its allowance for loan losses at least quarterly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate. In this context, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:

·   Levels of past due, classified and non-accrual loans, troubled debt restructurings and modifications

·   Nature and volume of loans

·   Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries

·   National and local economic and business conditions, including various market segments

·   Concentrations of credit and changes in levels of such concentrations

·   Effect of external factors on the level of estimated credit losses in the current portfolio.

Additionally, historic loss experience over the trailing eight quarters is taken into account. In determining the allowance for loan losses, management has established both specific and general pooled allowances. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and those criticized and classified loans without Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan - an amendment of FASB Statements No. 5 and 15, reserves (specific allowance). The amount of the specific allowance is determined through a loan-by-loan analysis of certain large dollar commercial loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historic loss experience and the qualitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan to value ratios, and external factors. Estimates are periodically measured against actual loss experience.

As changes in the Company’s operating environment occur and as recent loss experience fluctuates, the factors for each category of loan based on type and risk rating will change to reflect current circumstances and the quality of the loan portfolio.

20

Although the Company maintains its allowance for loan losses at levels considered adequate to provide for the inherent risk of loss in its loan portfolio, if economic conditions differ substantially from the assumptions used in making the evaluations there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. Accordingly, a decline in the national economy or the local economies of the areas in which the loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. In addition, the Company’s determination as to the amount of its allowance for loan losses is subject to review by its primary regulator, the Office of the Comptroller of the Currency (the “OCC”), as part of its examination process, which may result in the establishment of an additional allowance based upon the judgment of the OCC after a review of the information available at the time of the OCC examination.

Accounting for Income Taxes.  The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, and FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. SFAS No. 109 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. On January 1, 2007, the Company incorporated FIN No. 48 with its existing accounting policy. FIN No. 48 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the condensed consolidated income statement. 

Valuation of Goodwill. The Company assesses the impairment of goodwill at least annually and whenever events or significant changes in circumstance indicate that the carrying value may not be recoverable. Factors that the Company considers important in determining whether to perform an impairment review include significant under-performance relative to forecasted operating results and significant negative industry or economic trends. If the Company determines that the carrying value of goodwill may not be recoverable, then the Company will assess impairment based on a projection of future cash flows and measure the amount of impairment based on fair value.

Stock-Based Compensation. The Company accounts for stock based compensation in accordance with the fair value recognition provisions of SFAS No. 123R, Share-Based Payment.. Under the fair value provisions of SFAS No. 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the appropriate vesting period. Determining the fair value of stock based awards at grant date requires judgment, including estimating the expected term of the stock options and the expected volatility of the Company’s stock. In addition, judgment is required in estimating the amount of stock based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on the Company’s Consolidated Financial Statements. See Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding stock-based compensation expense.

Financial Condition

Total assets were $3.32 billion at June 30, 2007 as compared to $3.33 billion at December 31, 2006. Total loans before allowance for loan losses increased 3.5% or $82.0 million to $2.45 billion offset by a decrease in cash and cash equivalents of 41.0% or $69.7 million to $100.4 million and a decrease in investment securities available for sale of 3.7% or $18.1 million to $463.9 million. Total deposits increased 2.2% or $57.8 million to $2.73 billion while total borrowings decreased 27.8% or $44.7 million to $115.9 million and junior subordinated debentures decreased 9.5% or $10.3 million to $97.9 million.

Loans receivable at June 30, 2007 were $2.45 billion, an increase of $82.0 million from $2.37 billion at December 31, 2006. Organic loan growth for the first six months of 2007, adjusted for approximately $19 million in loans sold in connection with the sale of a branch and approximately $43.0 million in prepayments, was approximately 6.1%. Competition for loans across all products and markets continues to be intense during 2007.

21

Credit quality trends remain stable.  Total non-performing loans were $15.3 million at June 30, 2007, or 0.63%, of total loans and real estate owned, compared to $14.6 million or 0.62% at December 31, 2006. The ratio of allowance for loan losses to total non-performing loans was 169.98% at June 30, 2007 compared to 175.50% at December 31, 2006. Non-performing assets were $16.5 million at June 30, 2007 compared to $15.2 million at December 31, 2006. The ratio of allowance for loan losses to total gross loans was 1.07% at June 30, 2007 as compared to 1.08% at December 31, 2006.

Investment securities available for sale and investment securities held to maturity decreased from $507.4 million at December 31, 2006 to $485.4 million at June 30, 2007. The investment securities portfolio balance is expected to remain relatively stable through the second half of 2007 as maturing securities will primarily be reinvested in investment securities. This reinvestment strategy is expected to increase portfolio yield and increase both the estimated average life and the duration of the portfolio.

Bank owned life insurance (“BOLI”) increased from $57.4 million at December 31, 2006, to $65.1 million at June 30, 2007. The increase is primarily a result of the purchase of an additional $6.8 million of BOLI and a $952,000 increase in the cash surrender value of the policies.

Total deposits were $2.73 billion at June 30, 2007, reflecting a $57.8 million increase from December 31, 2006. Organic deposit growth, adjusted for approximately $40 million in deposits sold in connection with the sale of three branches, was approximately 3.7%. Core deposits, which exclude all certificates of $100,000 or more, represented 87.2% and 87.8% of total deposits at June 30, 2007 and December 31, 2006, respectively. The Company has experienced a change in the composition of deposits with a decline in demand deposits and an increase in higher cost savings and time deposits. The Company’s increase in rates on savings and time deposits are commensurate with increases in short-term interest rates by the Federal Reserve during the first half of 2006, the intense competitive environment for retaining and attracting deposits and the continued focus on the Company’s retail initiative.

Total borrowings decreased $44.7 million from $160.6 million at December 31, 2006 to $115.9 million at June 30, 2007 primarily as a result of a decrease of $37.5 million in advances from Federal Home Loan Bank (FHLB) and a decrease of $7.1 million in securities sold under agreements to repurchase with customers.

Junior subordinated debentures decreased $10.3 million as the Company called $20.0 million of outstanding capital securities of Sun Capital Trust III contemporaneously with the redemption of the Sun Capital Trust III debentures during the second quarter of 2007.  In addition, the Company issued an additional $10.0 million of Trust Preferred Securities (Sun Capital Trust VII) during the second quarter of 2007 which was used in part to redeem the $20.0 million of previously issued trust preferred securities.

Other liabilities decreased $17.2 million to $29.3 million at June 30, 2007, as compared to $46.5 million at December 31, 2006. Other liabilities decreased primarily as a result of a $18.8 million decrease in the payable for unsettled security trades which decreased from $27.8 million at December 31, 2006 to $9.0 million at June 30, 2007. This decrease was offset by a $1.1 million increase in accrued interest payable on deposits which was due to increases in volume and rates.

Total shareholders’ equity increased $13.5 million, from $342.2 million at December 31, 2006 to $355.8 million at June 30, 2007. The increase was primarily the result of net income of $9.6 million for the first half of 2007 and stock options exercised which increased shareholders’ equity $2.5 million.

Comparison of Operating Results for the Three Months Ended June 30, 2007 and 2006

Overview. Net income for the three months ended June 30, 2007 was $4.9 million or $0.22 per share, compared to $3.8 million or $0.17 per share for the same period in 2006. Per share data has been adjusted for the 5% stock dividend declared on April 26, 2007.   The current quarter include charges of approximately $751,000 (pre-tax), or $.02 per share.  The charges represent $541,000 of write-off of unamortized issuance costs of redeemed Sun Trust III trust preferred securities, an early extinguishment of debt charge of $124,000 for an FHLB borrowing prepayment and $86,000 of severance related expenses.  The three months ended June 30, 2006 includes $400,000 (pre-tax), or $0.01 of severance related expenses.

Table 1 sets forth a summary of average balances with corresponding interest income (on a tax-equivalent basis) and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances.

22

Table 1: Quarterly Statements of Average Balances, Income or Expense, Yield or Cost

	For The Three Months Ended June 30, 2007							For the Three Months Ended June 30, 2006
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Cost			Balance		Expense		Cost
Interest-earning assets:
Loans receivable(1),(2):
Commercial and industrial	$	1,978,175	$	35,648		7.21	%	$	1,868,587	$	33,000		7.06	%
Home equity		240,150		3,945		6.57			194,103		3,176		6.54
Second mortgage		77,442		1,238		6.39			75,059		1,168		6.22
Residential real estate		39,193		747		7.62			28,784		588		8.17
Other		91,578		1,825		7.97			86,047		1,782		8.28
Total loans receivable		2,426,538		43,403		7.15			2,252,580		39,714		7.05
Investment securities(3)		505,315		5,764		4.56			627,863		5,672		3.61
Interest-earning deposit with banks		16,457		141		3.43			10,970		129		4.70
Federal funds sold		55,897		741		5.30			18,803		232		4.94
Total interest-earning assets		3,004,207		50,049		6.66			2,910,216		45,747		6.29
Cash and due from banks		71,814							79,224
Bank properties and equipment		42,958							43,610
Goodwill and intangible assets, net		154,494							160,002
Other assets		68,033							57,154
Total non-interest-earning assets		337,299							339,990
Total assets	$	3,341,506						$	3,250,206
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits	$	741,568		5,873		3.17	%	$	863,264		5,891		2.73	%
Savings deposits		467,455		3,508		3.00			343,974		1,284		1.49
Time deposits		1,056,680		12,696		4.81			889,277		8,789		3.95
Total interest-bearing deposit accounts		2,265,703		22,077		3.90			2,096,515		15,964		3.05
Borrowed money:
Federal funds purchased		863		13		6.03			7,967		109		5.47
Securities sold under agreements to repurchase - customers		43,011		498		4.63			39,671		422		4.25
FHLB advances		86,136		950		4.41			149,761		1,748		4.67
Junior subordinated debentures		100,887		2,473		9.81			108,250		2,110		7.80
Obligation under capital lease		5,296		97		7.33			5,357		98		7.32
Total borrowings		236,193		4,031		6.83			311,006		4,487		5.77
Total interest-bearing liabilities		2,501,896		26,108		4.17			2,407,521		20,451		3.40
Non-interest-bearing demand deposits		458,851							503,081
Other liabilities		27,479							14,258
Total non-interest-bearing liabilities		486,330							517,339
Total liabilities		2,988,226							2,924,860
Shareholders’ equity		353,280							325,346
Total liabilities and shareholders’ equity	$	3,341,506						$	3,250,206
Net interest income			$	23,941						$	25,296
Interest rate spread(4)						2.49	%						2.89	%
Net interest margin(5)						3.19	%						3.48	%
Ratio of average interest-earning assets to average interest-bearing liabilities						120.08	%						120.88	%
(1)  Average balances include non-accrual loans.
(2)  Loan fees are included in interest income and the amount is not material for this analysis.
(3)  Interest earned on non-taxable investment securities is shown on a tax equivalent basis assuming a 35% marginal federal tax rate for all periods.
(4)  Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5)  Net interest margin represents net interest income as a percentage of average interest-earning assets.

23

Table 2 sets forth certain information regarding changes in interest income and interest expense for the periods presented.

Table 2: Quarterly Rate-Volume Variance Analysis⁽¹⁾

	For the Three Months Ended June 30, 2007 vs. 2006
	Increase (Decrease) Due To
	Volume			Rate			Net
Interest income:
Loans receivable:
Commercial and industrial	$	1,965		$	683		$	2,648
Home equity		756			13			769
Second mortgage		38			32			70
Residential real estate		200			(41	)		159
Other		112			(69	)		43
Total loans receivable		3,071			618			3,689
Investment securities		(1,227	)		1,319			92
Interest-bearing deposit accounts		53			(41	)		12
Federal funds sold		490			19			509
Total interest-earning assets		2,387			1,915			4,302
Interest expense:
Interest-bearing deposit accounts:
Interest-bearing demand deposits		(890	)		872			(18	)
Savings deposits		583			1,641			2,224
Time deposits		1,821			2,086			3,907
Total interest-bearing deposit accounts		1,514			4,599			6,113
Borrowed money:
Federal funds purchased		(96	)		-			(96	)
Securities sold under agreements to repurchase - customers		37			39			76
FHLB advances		(707	)		(91	)		(798	)
Junior subordinated debentures		(151	)		514			363
Obligation under capital lease		(1	)		-			(1	)
Total borrowings		(918	)		462			(456	)
Total interest-bearing liabilities		596			5,061			5,657
Net change in net interest income	$	1,791		$	(3,146	)	$	(1,355	)
(1) For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rate (changes in rate multiplied by old average volume). The combined effect of changes in both volume and rate has been allocated to volume or rate changes in proportion to the absolute dollar amounts of the change in each.

Net Interest Income. Net interest income (on a tax-equivalent basis) decreased $1.4 million to $23.9 million for the three months ended June 30, 2007 from $25.3 million for the same period in 2006.  Interest income (on a tax equivalent basis) increased $4.3 million from the prior period to $50.0 million while interest expense increased $5.7 million.  Interest expense for 2007 includes a $541,000 write-off of unamortized issuance costs of redeemed Sun Trust III trust preferred securities.

Overall interest income increased $4.3 million for the three months ended June 30, 2007, compared to the same period in 2006. Interest income related to loan volume increased $3.1 million as average loans receivable grew $174.0 million or 7.7% which were partially funded by calls or maturities of lower yielding investment securities. The decrease of $122.5 million or 19.5% in average investment securities resulted in a $1.2 million decrease to interest income.  The Company expects the utilization of its investment portfolio as a primary source of liquidity to continue to decrease over the second half of 2007 and that it will rely on deposit growth and wholesale borrowings to support its loan demand. This may place continued pressure on the net interest margin due to continued intense market competitiveness for deposits and the expected interest rate environment. The yields earned on average loan receivables and average investments securities increased 10 basis points and 95 basis points, respectively, which increased interest income $618,000 and $1.3 million, respectively.

24

Overall interest expense increased $5.7 million. Interest expense increased $4.6 million as the cost of average interest-bearing deposit accounts increased 85 basis points, reflecting the continued market competition for retail deposits and the increase in rates during the early part of 2006. The Company expects that this interest rate trend, as well as the continued competition will continue through the balance of 2007. In addition, interest expense increased $1.5 million as average interest-bearing deposit accounts grew $169.2 million or 8.1% offset by a decrease of $707,000 in interest expense as average FHLB advances decreased $63.6 million or 42.5%, as a result of the repayments of FHLB borrowings.

The interest rate spread and net interest margin (on a tax-equivalent basis) for the three months ended June 30, 2007 was 2.49% and 3.19%, respectively, compared to 2.89% and 3.48% respectively, for the same period in 2006. The net interest margin, adjusted for the $541,000 write-off of unamortized issuance costs of redeemed trust preferred securities was 3.26%. The decrease in the interest rate spread and net interest margin reflect continued intense market competitiveness for both loans and deposits, the current interest rate environment as well as the increased costs of interest-bearing deposits attributable to the Company’s deposit pricing strategy in support of the retail transformation initiative which began in the third quarter of 2006.

Provision for Loan Losses. For the three months ended June 30, 2007, the provision for loan losses was $950,000 compared to $875,000 for the same period in 2006. The Company’s gross loans receivable grew 6.6% to $2.45 billion at June 30, 2007 as compared to the same period in 2006. The provision recorded is the amount necessary to bring the allowance for loan losses to a level deemed appropriate by management based on the current risk profile of the portfolio. The Company focuses on its loan portfolio management and credit review process to address the current risk profile of the portfolio and manage troubled credits. This analysis includes evaluations of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio, estimated fair value of underlying collateral, loan commitments outstanding, delinquencies and other factors.

Non-Interest Income. Non-interest income increased $1.2 million or 24.4% for the three months ended June 30, 2007, as compared to the same period in 2006. The increase was primarily as a result of an increase of $930,000 in service charges on deposit accounts as a result of the implementation of select fee enhancement recommendations from the retail banking consulting initiative in the early part of 2006.  In addition, the gain on sale of loans, which includes mortgages and SBA loans, increased $287,000 or 179.4% as a result of an increase in sales transactions.

Non-Interest Expense. Non-interest expense decreased $1.6 million or 6.9% for the three months ended June 30, 2007 as compared to the same period in 2006, as the Company continues to focus on its profitability enhancement initiatives with particular emphasis on expense savings.  The decrease was primarily a result of a decrease in salaries and employee benefits of $1.1 million which was primarily a result of the staff reductions which were initiated in the second quarter of 2006.

Comparison of Operating Results for the Six Months Ended June 30, 2007 and 2006

Overview. Net income for the six months ended June 30, 2007 was $9.6 million or $0.42 per per share, compared to $8.0 million or $0.36 per share for the same period in 2006. Per share data has been adjusted for the 5% stock dividend declared on April 26, 2007. Net income for the first half of 2007 includes net charges of approximately $1.6 million (pre-tax), or $.05 per share. The charges were a result of $2.4 million of severance related expenses, the $541,000 write-off of unamortized issuance costs of redeemed Sun Trust III trust preferred securities, and an early extinguishment of debt charge of $124,000 for an FHLB borrowing prepayment, offset by a net gain of $1.4 million realized from the sale of three branches. The first half of 2006 includes severance related charges of $400,000 (pre-tax), or $.01 per share.

Table 3 sets forth a summary of average balances with corresponding interest income (on a tax-equivalent basis) and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances.

25

Table 3: Year-to-date Statements of Average Balances, Income or Expense, Yield or Cost

	For The Six Months Ended June 30, 2007							For the Six Months Ended June 30, 2006
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Cost			Balance		Expense		Cost
Interest-earning assets:
Loans receivable(1),(2):
Commercial and industrial	$	1,967,243	$	71,152		7.23	%	$	1,840,366	$	63,594		6.91	%
Home equity		237,011		7,770		6.56			182,378		5,919		6.49
Second mortgage		76,808		2,428		6.32			70,766		2,167		6.12
Residential real estate		38,456		1,504		7.82			29,126		1,210		8.31
Other		92,138		3,660		7.94			84,259		3,419		8.12
Total loans receivable		2,411,656		86,514		7.17			2,206,895		76,309		6.92
Investment securities(3)		503,836		11,336		4.50			660,568		11,811		3.58
Interest-earning deposit with banks		17,405		377		4.33			11,667		274		4.70
Federal funds sold		47,928		1,263		5.27			22,250		512		4.60
Total interest-earning assets		2,980,825		99,490		6.68			2,901,380		88,906		6.13
Cash and due from banks		72,228							79,659
Bank properties and equipment		42,681							43,460
Goodwill and intangible assets, net		155,198							155,863
Other assets		71,384							57,718
Total non-interest-earning assets		341,491							336,700
Total assets	$	3,322,316						$	3,238,080
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits	$	751,258		11,808		3.14	%	$	872,853		11,236		2.57	%
Savings deposits		453,690		6,601		2.91			358,286		2,650		1.48
Time deposits		1,031,301		24,502		4.75			835,738		15,725		3.76
Total interest-bearing deposit accounts		2,236,249		42,911		3.84			2,066,877		29,611		2.87
Borrowed money:
Federal funds purchased		450		13		5.78			6,235		162		5.20
Securities sold under agreements to repurchase - customers		44,163		1,026		4.65			40,938		828		4.05
FHLB advances		93,670		2,096		4.48			178,670		4,104		4.59
Junior subordinated debentures		104,548		4,626		8.85			105,516		4,020		7.62
Obligation under capital lease		5,304		194		7.32			5,378		327		7.30
Total borrowings		248,135		7,955		6.41			336,737		9,441		5.61
Total interest-bearing liabilities		2,484,384		50,866		4.09			2,403,614		39,052		3.25
Non-interest-bearing demand deposits		458,528							499,684
Other liabilities		30,382							15,860
Total non-interest-bearing liabilities		488,910							515,544
Total liabilities		2,973,294							2,919,158
Shareholders’ equity		349,022							318,922
Total liabilities and shareholders’ equity	$	3,322,316						$	3,238,080
Net interest income			$	48,624						$	49,854
Interest rate spread(4)						2.59	%						2.88	%
Net interest margin(5)						3.26	%						3.44	%
Ratio of average interest-earning assets to average interest-bearing liabilities						119.98	%						120.71	%
(1)  Average balances include non-accrual loans.
(2)  Loan fees are included in interest income and the amount is not material for this analysis.
(3)  Interest earned on non-taxable investment securities is shown on a tax equivalent basis assuming a 35% marginal federal tax rate for all periods.
(4)  Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5)  Net interest margin represents net interest income as a percentage of average interest-earning assets.

26

Table 4 sets forth certain information regarding changes in interest income and interest expense for the periods presented.

Table 4: Year-to-date Rate-Volume Variance Analysis⁽¹⁾

	For the Six Months Ended June 30, 2007 vs. 2006
	Increase (Decrease) Due To
	Volume			Rate			Net
Interest income:
Loans receivable:
Commercial and industrial	$	4,506		$	3,052		$	7,558
Home equity		1,790			61			1,851
Second mortgage		189			72			261
Residential real estate		367			(73	)		294
Other		313			(72	)		241
Total loans receivable		7,165			3,040			10,205
Investment securities		(3,125	)		2,652			(473	)
Interest-bearing deposit accounts		126			(23	)		103
Federal funds sold		667			84			751
Total interest-earning assets		4,833			5,753			10,586
Interest expense:
Interest-bearing deposit accounts
Interest-bearing demand deposits		(1,683	)		2,256			573
Savings deposits		853			3,098			3,951
Time deposits		4,135			4,641			8,776
Total interest-bearing deposit accounts		3,305			9,995			13,300
Borrowed money:
Federal funds purchased		(149	)		-			(149	)
Securities sold under agreements to repurchase - customers		69			129			198
FHLB advances		(1,905	)		(104	)		(2,009	)
Junior subordinated debentures		(37	)		643			606
Obligations under capital lease		(126	)		(7	)		(133	)
Total borrowings		(2,148	)		661			(1,487	)
Total interest-bearing liabilities		1,157			10,656			11,813
Net change in net interest income	$	3,676		$	(4,903	)	$	(1,227	)
(1) For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rate (changes in rate multiplied by old average volume). The combined effect of changes in both volume and rate has been allocated to volume or rate changes in proportion to the absolute dollar amounts of the change in each.

Net Interest Income. Net interest income (on a tax-equivalent basis) was $48.6 million for the six months ended June 30, 2007, compared to $49.9 million for the same period in 2006. Interest income (on a tax equivalent basis) increased $10.6 million from the same period in 2006 to $99.5 million while interest expense increased $11.8 million from the same period in 2006 to $50.9 million.

Overall interest income increased $10.6 million for the six months ended June 30, 2007, compared to the same period in 2006. Interest income related to loan volume increased $7.2 million as average loans receivable grew $204.8 million or 9.28% which were partially funded by calls or maturities of lower yielding investment securities. This increase was offset by a $3.1 million decrease in interest income as average investment securities decreased $156.7 million or 23.7%. The Company expects the utilization of its investment portfolio as a primary source of liquidity will continue to decrease over the second half of 2007 and that it will rely on deposit growth and wholesale borrowings to support its loan demand. This may place continued pressure on the net interest margin due to continued intense market competitiveness for deposits and the expected interest rate environment. The yields earned on average loan receivables and average investments securities increased 25 basis points and 92 basis points, respectively, which increased interest income $3.0 million and $2.7 million, respectively.

27

Overall interest expense increased $11.8 million. Interest expense increased $10.0 million as the cost of average interest-bearing deposit accounts increased 97 basis points, reflecting the continued market competition for retail deposits and the increase in rates during the early part of 2006. The Company expects that this interest rate trend, as well as the continued competition will continue through the balance of 2007. In addition, interest expense increased $3.3 million as average interest-bearing deposit accounts grew $169.4 million or 8.2% offset by a decrease of $1.9 million in interest expense as average FHLB advances decreased $85,000 million or 47.6%, as a result of the repayments of FHLB borrowings.

The interest rate spread and net interest margin (on a tax-equivalent basis) for the six months ended June 30, 2007 was 2.59% and 3.26%, respectively, compared to 2.88% and 3.44% respectively, for the same period in 2006. The net interest margin, adjusted for the $541,000 write-off of unamortized issuance costs of redeemed trust preferred securities, was 3.30%. The decrease in the interest rate spread and net interest margin reflect continued intense market competitiveness for both loans and deposits, the current interest rate environment as well as the increased costs of interest-bearing deposits attributable to the Company’s deposit pricing strategy in support of the retail transformation initiative which began in the third quarter of 2006.

Provision for Loan Losses. For the six months ended June 30, 2007, the provision for loan losses was $1.7 million compared to $1.5 million for the same period in 2006. The Company’s gross loans receivable grew 6.6% to $2.45 billion at June 30, 2007 as compared to the same period in 2006. The provision recorded is the amount necessary to bring the allowance for loan losses to a level deemed appropriate by management based on the current risk profile of the portfolio. The Company focuses on its loan portfolio management and credit review process to address the current risk profile of the portfolio and manage troubled credits. This analysis includes evaluations of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio, estimated fair value of underlying collateral, loan commitments outstanding, delinquencies and other factors.

Non-Interest Income. Non-interest income increased $3.9 million or 40.7% for the six months ended June 30, 2007, as compared to the same period in 2006. The increase was primarily the result of the $1.4 million net gain on the sales of branches which was recognized during the first quarter 2007. In addition, service charges on deposit accounts increased $1.9 million over 2006 as a result of the implementation of select fee enhancement recommendations from the retail banking consulting initiative in the early part of 2006 and gain on sale of loans, which includes mortgages and SBA loans, increased $511,000 or 115.1% as a result of an increase in sales transactions.  

Non-Interest Expense. Non-interest expense decreased $325,000 for the six months ended June 30, 2007, compared to the same period in 2006. Non-interest expense for the six months ended June 30, 2007 excluding severance and other related charges of $2.4 million and a $124,000 prepayment penalty recognized as a result of the early extinguishment of an FHLB borrowing, decreased $2.5 million compared to the same period in 2006. The six months ended June 30, 2006 included severance and other related charges of $400,000. The $2.5 million decrease was primarily a result of a $1.6 million decrease in salaries and employee benefits which was primarily a result of the staff reduction which was initiated in the second quarter of 2006. In addition, insurance with the Federal Deposit Insurance Corporation (“FDIC”) increased $215,000 as a result of the Federal Deposit Insurance Reform Act of 2005 which resulted in significant changes to the federal deposit insurance program.  The changes to the program include revisions to the assessments paid by FDIC-insured depository institutions.  The FDIC provided a one-time assessment credit of $526,000 to the Company which will partially offset the FDIC insurance premiums for 2007 which are estimated to be approximately $1.5 million. The Company completely exhausted the credit during the first half of 2007 and expects to recognize an additional $740,000 in premiums over the remainder of 2007.

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Liquidity and Capital Resources

Liquidity management is a daily and long-term business function. The Company’s liquidity, represented in part by cash and cash equivalents, is a product of its operating, investing and financing activities. Proceeds from the repayment and maturities of loans, maturities or calls of investment securities, net income and increases in deposits and borrowings are the primary source of liquidity for the Company.

A major source of the Company's funding is deposits, which management believes will be sufficient to meet the Company’s long-term daily operating liquidity needs. The ability of the Company to retain and attract new deposits is dependent upon the variety and effectiveness of its customer account products, customer service and convenience, and rates paid to customers. The Company also obtains funds from the repayment and maturities of loans as well as maturities or calls of investment securities, while additional funds can be obtained from a variety of sources including federal funds purchased, securities sold under agreements to repurchase, FHLB advances, loan sales or participations and other secured and unsecured borrowings. At June 30, 2007, the Company does not feel that its future levels of principal repayments will be materially impacted by problems currently being experienced in the residential mortgage market. It is anticipated that FHLB advances and securities sold under agreements to repurchase will be secondary sources of funding, and management expects there to be adequate collateral for such funding requirements.

The Company's primary uses of funds are the origination of loans, the funding of the Company's maturing certificates of deposit, deposit withdrawals and the repayment of borrowings. Certificates of deposit scheduled to mature during the 12 months ending June 30, 2008 total $825.9 million. The Company anticipates that it will be able to retain a significant amount of these maturing deposits. The Company continues to operate with a core deposit relationship strategy that values a long-term stable customer relationship. This strategy employs a pricing strategy that rewards to customers that establish core accounts and maintain a certain minimum threshold account balance. The Company will continue to competitively price deposits for growth and retention. However, based on market conditions and other liquidity considerations, it may also avail itself of the secondary borrowings discussed above. The Company anticipates that deposits, cash and cash equivalents on hand, the cash flow from assets, as well as other sources of funds will provide adequate liquidity for the Company's future operating, investing and financing needs. The Company has additional secured borrowing capacity with the FHLB of approximately $115.4 million, of which $66.0 million was outstanding at June 30, 2007, and other sources of approximately $42.1 million. The FHLB provides a reliable source of funds with a wide variety of terms and structures. Management will continue to monitor the Company’s liquidity and maintain it at a level deemed adequate but not excessive.

Management has a capital plan for the Company and the Bank that should allow the Company and the Bank to grow capital internally at levels sufficient for achieving its internal growth projections while managing its operating and financial risks. The Company has also considered a plan for contingency capital needs, and when appropriate, the Company’s Board of Directors may consider various capital raising alternatives. The principle components of the capital plan are to generate additional capital through retained earnings from internal growth, access the capital markets for external sources of capital, such as common equity and trust preferred securities, when necessary or appropriate, redeem existing capital instruments and refinance such instruments at lower rates when conditions permit and maintain sufficient capital for safe and sound operations. In April 2007, the Company called the $20.0 million outstanding capital securities of Sun Capital Trust III contemporaneously with the redemption of the Sun Capital Trust III debentures. In addition, in April 2007, the Company issued an additional $10.0 million of Trust Preferred Securities (Sun Capital Trust VIII) which was used in part to redeem the $20.0 million of previously issued trust preferred securities (Sun Capital Trust III).  In July 2007, the Company called the $10.0 million of outstanding capital securities of Sun Capital Trust IV contemporaneously with the redemption of the Sun Capital Trust IV debentures. At the time of the call the Company recognized a write-down of approximately $250,000 of unamortized debt issuance costs.

In July 2007, the Board of Directors of the Company authorized the initiation of a stock repurchase plan covering up to approximately 5%, or approximately 1,000,000 shares of the Company’s outstanding common stock.  The repurchases will be made from time to time in open-market transactions, subject to the availability of the stock, over the next 18 months.

The Company is subject to risk-based capital guidelines adopted by the Federal Reserve Board for bank holding companies. The Bank is also subject to similar capital requirements adopted by the Office of the Comptroller of the Currency. It is the Company’s intention to maintain “well-capitalized” risk-based capital levels.

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While the capital securities are deconsolidated in accordance with GAAP, they continue to qualify as Tier 1 capital under federal regulatory guidelines. In March 2005, the Federal Reserve amended its risk-based capital standards to expressly allow the continued limited inclusion of outstanding and prospective issuances of trust preferred securities in a bank holding company’s Tier 1 capital, subject to tightened quantitative limits. The Federal Reserve’s amended rule, effective March 31, 2009, will limit capital securities and other restricted core capital elements to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. The Company does not anticipate that this amended rule will have a material impact on its capital ratios.

As part of its capital plan, the Company, through its deconsolidated trust subsidiaries, issued Trust Preferred Securities that qualify as Tier 1 or core capital of the Company. These securities are subject to a 25% capital limitation under risk-based capital guidelines developed by the Federal Reserve Board. The portion that exceeds the 25% capital limitation qualifies as Tier 2, or supplementary capital of the Company. At June 30, 2007, the Company’s $95.0 million in Trust Preferred Securities qualify as Tier 1. 

Disclosures about Commitments

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. The guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company takes various forms of collateral, such as real estate assets and customer business assets to secure the commitment. Additionally, all letters of credit are supported by indemnification agreements executed by the customer. The maximum undiscounted exposure related to these commitments at June 30, 2007 was $62.3 million, and the portion of the exposure not covered by collateral was approximately $1.7 million. The Company believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of these commitments, as has been the Company’s experience to date.

 On February 6, 2007, the Board of Directors of the Company terminated the employment of the Company’s President and Chief Executive Officer. In April 2007, the Company entered into an agreement that provides for certain terms and conditions of the former President and Chief Executive Officer’s separation from the Company including, among other things, non-compete agreements and a general release from any claims, rights or causes of action in connection with his termination of employment or otherwise. The severance agreement provides for an aggregate cash payment of $1.7 million. The total amount charged to earnings during the first quarter 2007 as a result of this termination of employment was $1.8 million. This amount includes other severance related charges, including a charge as a result of a change in terms of the exercisability for certain stock options, continued use of a company car and payment of certain legal fees incurred in connection with the settlement agreement. As of June 30, 2007, $450,000 of the $1.7 million remains outstanding and is expected to be paid through the first quarter of 2008.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect that the guidance will have an  effect on the Company’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. SFAS No. 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is continuing to evaluate the impact of this pronouncement but does not expect that the guidance will have a material effect on the Company’s financial position or results of operations.

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In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN No. 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that has greater than fifty percent likelihood of being realized upon ultimate settlement. FIN No. 48 was applied to all existing tax positions upon initial adoption. FIN No. 48 was effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 on January 1, 2007 and the initial application of the interpretation did not have an impact to the Company’s financial position or results of operations. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the condensed consolidated income statement. As of January 1, 2007, the tax years ended December 31, 2003, 2004, 2005 and 200 remain subject to examination by all tax jurisdictions. As of June 30, 2007, no audits were in process by a tax jurisdiction.  However, the Company did receive notification from the Internal Revenue Service of its intention to audit the 2004 tax return during the third quarter 2007.  The Company does not expect the audit to result in a material change to the Company's tax position.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset and Liability Management

Interest rate, credit and operational risks are among the most significant market risks impacting the performance of the Company. The Company has an Asset Liability Committee (“ALCO"), composed of senior management representatives from a variety of areas within the Company. ALCO, which meets monthly, devises strategies and tactics to maintain the net interest income of the Company within acceptable ranges over a variety of interest rate scenarios. Should the Company’s risk modeling indicate an undesired exposure to changes in interest rates, there are a number of remedial options available including changing the investment portfolio characteristics, and changing loan and deposit pricing strategies. Two of the tools used in monitoring the Company’s sensitivity to interest rate changes are gap analysis and net interest income simulation.

Gap Analysis. Banks are concerned with the extent to which they are able to match maturities or repricing characteristics of interest-earning assets and interest-bearing liabilities. Such matching is facilitated by examining the extent to which such assets and liabilities are interest-rate sensitive and by monitoring the bank’s interest rate sensitivity gap. Gap analysis measures the volume of interest-earning assets that will mature or reprice within a specific time period, compared to the interest-bearing liabilities maturing or repricing within that same time period.  On a monthly basis the Company and the Bank monitor their gap, primarily cumulative through both six months and one year maturities

At June 30, 2007, the Company’s gap analysis showed a liability sensitive position with total interest-bearing liabilities maturing or repricing within one year exceeding interest-earning assets maturing or repricing during the same time period by $24.2 million, representing a negative one-year gap ratio of -0.7%. All amounts are categorized by their actual maturity, anticipated call or repricing date with the exception of interest-bearing demand deposits and savings deposits. Though the rates on interest-bearing demand and savings deposits generally trend with open market rates, they often do not fully adjust to open market rates and frequently adjust with a time lag. As a result of prior experience during periods of rate volatility and management's estimate of future rate sensitivities, the Company allocates the interest-bearing demand deposits and savings deposits based on an estimated decay rate for those deposits.

Net Interest Income Simulation. Due to the inherent limitations of gap analysis, the Company also uses simulation models to measure the impact of changing interest rates on its operations. The simulation model attempts to capture the cash flow and repricing characteristics of the current assets and liabilities on the Company’s balance sheet. Assumptions regarding such things as prepayments, rate change behaviors, level and composition of new balance sheet activity and new product lines are incorporated into the simulation model. Net interest income is simulated over a twelve month horizon under a variety of linear yield curve shifts, subject to certain limits agreed to by ALCO. The Company uses a base interest rate scenario provided by a third party econometric modeling service.

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Net interest income simulation analysis shows a position that is relatively neutral to increasing rates with a negative exposure to declining rates. The current exposure to declining rates is largely influenced by deposit competition and the Company’s current expectation that deposit rates may not decline as rapidly as the market rates to which many of our assets are indexed.

Actual results may differ from the simulated results due to such factors as the timing, magnitude and frequency of interest rate changes, changes in market conditions, management strategies and differences in actual versus forecasted balance sheet composition and activity.

Table 5 provides the Company’s estimated earnings sensitivity profile versus the most likely rate forecast as of June 30, 2007:

Table 5: Sensitivity Profile

Change in Interest Rates	Percentage Change in Net Interest Income
(Basis Points)	Year 1
+200	-1.1%
+100	-0.4%
-100	-0.2%
-200	-0.1%

Derivative Financial Instruments.  The Company utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. As of June 30, 2007, all derivative financial instruments have been entered into to hedge the interest rate risk associated with the Bank’s commercial lending activity. In general, the derivative transactions fall into one of two types: a Bank hedge of a specific fixed-rate loan or a hedged derivative offering to a Bank customer. In those transactions in which the Bank hedges a specific fixed-rate loan, the derivative is executed for periods and terms that match the related underlying exposures and do not constitute positions independent of these exposures. For derivatives offered to Bank customers, the economic risk of the customer transaction is offset by a mirror position with a non-affiliated third party.

As noted above, the Company currently utilizes interest rate swaps to hedge specified assets. The Company does not use derivative financial instruments for trading or speculative purposes. Interest rate swaps were entered into as fair value hedges for the purpose of modifying the interest rate characteristics of certain commercial loans. The interest rate swaps involve no exchange of principal either at inception or upon maturity; rather, it involves the periodic exchange of interest payments arising from an underlying notional value.

Financial derivatives involve, to varying degrees, interest rate, market and credit risk. The Company manages these risks as part of its asset and liability management process and through credit policies and procedures. The Company seeks to minimize counterparty credit risk by establishing credit limits, and generally requiring bilateral netting and collateral agreements.

For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. Currently, the Company only participates in fair value hedges.

Fair Value Hedges - Interest Rate Swaps

The Company has entered into interest rate swap arrangements to exchange the payments on fixed-rate commercial loan receivables for variable-rate payments based on the one-month London Interbank Offered Rate. The interest rate swaps involve no exchange of principal either at inception or maturity and have maturities and call options identical to the fixed rate loan agreements. The arrangements have been designated as fair value hedges. The swaps are carried at their fair value and the carrying amount of the commercial loans includes the net change in their fair values since the inception of the hedge. Because the hedging arrangement is considered highly effective, changes in the fair value of interest rate swaps exactly offset the corresponding changes in the fair value of the commercial loans and, as a result, the changes in fair value do not result in an impact on net income.

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Information pertaining to outstanding interest rate swap agreements was as follows:

Table 6: Summary of Interest Rate Swap Agreements

	June 30,		December 31,
	2007			2006
Notional amount	$	49,386		$	48,063
Weighted average pay rate		6.77	%		6.74	%
Weighted average receive rate		7.32	%		7.34	%
Weighted average maturity in years		6.2			6.6
Unrealized gain relating to interest rate swaps	$	1,652		$	640

Customer Derivatives

The Company entered into several commercial loan swaps in order to provide commercial loan clients the ability to swap from variable to fixed interest rates. Under these agreements, the Company enters into a variable rate loan agreement with a client in addition to a swap agreement. This swap agreement effectively swaps the client’s variable rate loan into a fixed rate loan. The Company then enters into a corresponding swap agreement with a third party in order to swap its exposure on the variable to fixed rate swap on the commercial loan. At June 30, 2007 and December 31, 2006, the notional amount of such arrangements was $642.4 million and $545.0 million, respectively. As the interest rate swaps with the clients and third parties are not designated as hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the instruments are marked to market in earnings. As the interest rate swaps are structured to offset each other, changes in market values will have no net earnings impact. The Company earned $525,000 and $759,000 from facilitating customer derivative transactions during the three and six months ended June 30, 2007, as compared to $458,000 and $824,000 for the same periods in 2006.

Item 4. Controls and Procedures

(a) Evaluation of 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 Quarterly Report on Form 10-Q 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 officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in internal control over financial reporting. During the quarter 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.

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PART II - OTHER INFORMATION

Item 1.	Legal Proceedings
	The Company is not engaged in any legal proceedings of a material nature at June 30, 2007. From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in loans.
Item 1A.	Risk Factors
	Management of the Company does not believe there have been any material changes to the Risk Factors previously disclosed under Item 1A. of the Company’s Form 10K for the year ended December 31, 2006, previously filed with the Securities and Exchange Commission.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Not applicable
Item 3.	Defaults upon Senior Securities
	Not applicable
Item 4.	Submission of Matters to a Vote of Security Holders
	The Annual Meeting of the shareholders of the Company was held on May 17, 2007 and the following matters were voted on:
	1)	Election of Directors
				Vote
				For	Withheld
		Anat Bird		15,598,108	3,332,204
		Bernard A. Brown		17,104,138	1,826,175
		Ike Brown		17,060,653	1,869,660
		Jeffrey S. Brown		17,064,192	1,866,121
		Sidney R. Brown		17,141,268	1,789,045
		John A. Fallone		17,200,711	1,729,601
		Peter Galetto, Jr.		17,207,642	1,722,670
		Douglas J. Heun		17,210,579	1,719,734
		Charles P. Kaempffer		17,187,199	1,743,113
		Anne E. Koons		16,992,654	1,937,658
		Eli Kramer		17,228,307	1,702,005
		Alfonse M. Mattia		17,205,377	1,724,934
		George A. Pruitt		17,171,384	1,758,928
		Anthony Russo, III		17,190,461	1,739,851
		Edward H. Salmon		16,989,355	1,940,957
	2)	Amendment to the Company’s 2004 Stock-Based Incentive Plan (“2004 Stock Plan”) to include (i) and increase to the aggregate number of shares of common stock authorized to be issued pursuant to the 2004 Stock Plan and (ii) permitting Stock Appreciation Rights (“SARs”) to be granted under the 2004 Stock Plan.
			Vote
			For	Against	Withheld
			11,087,761	4,368,747	293,602
	3)	The ratification of the appointment of Deloitte & Touche LLP as the Company's registered public accounting firm for the fiscal year ending December 31, 2007.
			Vote
			For	Against	Withheld
			18,785,065	89,548	55,699

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Item 5.	Other Information
	Not applicable
Item 6.	Exhibits
	Exhibit 31(a)  Certifications of Chief Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2003.
	Exhibit 31(b)  Certifications of Chief Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of 2003.
	Exhibit 32  Certification of Chief Executive Officer and Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2003.

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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.
		(Registrant)
Date: August 9, 2007		/s/ Sidney R. Brown
		Sidney R. Brown
		Acting President and Chief Executive Officer
Date: August 9, 2007		/s/ Dan A. Chila
		Dan A. Chila
		Executive Vice President and
	��	Chief Financial Officer

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