10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

For the fiscal year ended: December 31, 2006

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

For the transition period from ____________ to ____________

Commission File No. 0-20957

Sun Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

YES o NO x

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

YES o NO x

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 by Rule 12b-2 of the Exchange Act).

YES o NO x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the registrant’s Common Stock as of June 30, 2006 was approximately $231.6 million.

As of March 12, 2007, there were issued and outstanding 20,530,031 shares of the registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.	Portions of the Annual Report to Shareholders for the Fiscal Year Ended December 31, 2006. (Parts II and IV)
2.	Portions of the Proxy Statement for the 2007 Annual Meeting of Shareholders. (Part III)

SUN BANCORP, INC

FORM 10-K

TABLE OF CONTENTS

		Page
	PART I
ITEM 1.	Business	2
ITEM 1A.	Risk Factors	14
ITEM 1B.	Unresolved Staff Comments	17
ITEM 2.	Properties	17
ITEM 3.	Legal Proceedings	17
ITEM 4.	Submission of Matters to a Vote to Security Holders	17
	PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
ITEM 6.	Selected Financial Data	18
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	18
ITEM 8.	Financial Statements and Supplementary Data	18
ITEM 9.	Changes in and Disagreements With Accountants On Accounting and Financial Disclosure	18
ITEM 9A.	Controls and Procedures	18
ITEM 9B	Other Information	19
	PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	20
ITEM 11.	Executive Compensation	20
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	20
ITEM 13.	Certain Relationships and Related Transactions and Director Independence	21
ITEM 14.	Principal Accounting Fees and Services	21
	PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	22
SIGNATURES		24

PART I

SUN BANCORP, INC. (THE “COMPANY”) MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL “FORWARD-LOOKING STATEMENTS,” INCLUDING STATEMENTS CONTAINED IN THE COMPANY’S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS HERETO), IN ITS REPORTS TO SHAREHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

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, 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, 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.

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Item 1. Business.

General

Sun Bancorp, Inc. (the “Company”), a New Jersey corporation, is a bank holding company headquartered in Vineland, New Jersey. The Company’s principal subsidiary is Sun National Bank (the “Bank”). At December 31, 2006, the Company had total assets of $3.33 billion, total deposits of $2.67 billion and total shareholders’ equity of $342.2 million. The Company’s principal business is to serve as a holding company for the Bank. As a registered bank holding company, the Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

Through the Bank, the Company provides consumer and business banking services. As of December 31, 2006, the Bank had 75 Community Banking Centers located in southern and central New Jersey, in the contiguous New Castle County market in Delaware, and in Philadelphia, Pennsylvania. During the first quarter of 2007, the Company sold three of its community banking centers, including two located in New Jersey and its Philadelphia, Pennsylvania location. The Bank offers comprehensive lending, domestic letters of credit, remote deposit, depository and financial services to its customers and marketplace. The Bank’s lending services to businesses include commercial business loans, equipment leasing and commercial real estate and construction loans. The Bank’s commercial deposit services include checking accounts and cash management products such as electronic banking, sweep accounts, lockbox services, internet banking, PC banking, remote deposit and controlled disbursement services. The Bank’s lending services to consumers include residential mortgage loans, second mortgage loans, home equity loans and installment loans. The Bank’s consumer services include checking accounts, savings accounts, money market deposits, certificates of deposit and individual retirement accounts. Through a third-party arrangement, the Bank offers mutual funds, securities brokerage, annuities and investment advisory services. The Bank is a Preferred Lender with both the Small Business Administration (SBA) and the New Jersey Economic Development Authority.

On January 19, 2006, the Company completed the acquisition of Advantage Bank. At the time of the acquisition, Advantage Bank operated five branches in Hunterdon County and Somerset County, New Jersey and had approximately $164 million in assets and $148 million of deposits.

During the first quarter of 2006, the Bank established a new operating subsidiary, Sun Home Loans, Inc., which engages in mortgage banking activities. The Bank’s branch and loan personnel previously contracted outside loan correspondents to originate residential mortgages. Sun Home Loans, Inc. employs its own residential mortgage originators. The majority of the loans originated by Sun Home Loans, Inc. are made with a forward commitment to sell these loans in the secondary market shortly after the origination of the loan.

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

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Market Area

The Bank’s market area consists of 13 counties in central and southern New Jersey, as well as New Castle County, Delaware and Philadelphia, Pennsylvania. The Bank’s deposit gathering base and lending area is concentrated in the communities surrounding its offices in New Jersey, Delaware and the Philadelphia area. The Bank believes these markets are attractive and have strong growth potential based on key economic indicators. The state of New Jersey has the highest median household income in the nation, as well as the fourth highest per capita income. The Bank’s markets are home to a diverse pool of businesses and industries, representing key opportunities for growth in the business and commercial banking products and services segment. Related to the Bank’s retail growth, New Jersey is the most densely populated state in the U.S., providing a deep consumer base as well. The Bank’s market area is also home to many affluent suburbs, catering to commuters who live in New Jersey and work in New York, Philadelphia and Wilmington, Delaware.

The Bank is organized in two key business divisions: Community Banking and Wholesale Banking.

Community Banking. This division offers services to our retail customers through branch offices and the customer service call center, including consumer lending services, deposit products, investment services and residential mortgages.

Wholesale Banking. This division includes the business banking group and the commercial banking group. The business banking group serves business customers with revenues up to $7.5 million and credit needs up to $2 million, and it provides deposit products designed for small businesses and lending services, including Small Business Administration (SBA) loans. The commercial banking groups serves governmental, institutional and business banking customers with revenues over $7.5 million and credit needs of more than $2 million, and it provides cash management and other specialized services and lending services. Both groups provide equipment leasing, construction lending and other commercial loan products.

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

Lending Activities

General. The principal lending activity of the Bank is the origination of commercial business loans, commercial real estate loans, small business loans and SBA guaranteed loans. The Bank also offers home equity loans, residential real estate and second mortgage loans and other consumer loans, including installment loans. Substantially all loans are originated in the Bank’s primary market area.

Commercial and Industrial Loans. The Bank originates several types of commercial and industrial loans. Included as commercial and industrial loans are short- and long-term business loans, lines of credit, commercial real estate loans, small business loans and real estate construction loans. The Bank’s primary lending focus is the origination of commercial loans. The Bank is predominately a secured lender with full recourse from the borrower and the collateral tends to be real estate.

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The trend of the Bank’s lending over the past several years has been diversification of commercial and industrial loans. A large portion of the total portfolio is concentrated in the hospitality, entertainment and leisure industries and general office space. Many of these industries are dependent upon seasonal business and other factors beyond the control of the industries, such as weather and beach conditions along the New Jersey seashore. Any significant or prolonged adverse weather or beach conditions along the New Jersey seashore could have an adverse impact on the borrowers’ ability to repay loans. In addition, because these loans are concentrated in southern and central New Jersey, a decline in the general economic conditions of southern or central New Jersey and the impact on discretionary consumer spending could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. At December 31, 2006 and 2005, the Company did not have more than 10% of its total loans outstanding concentrated in any one category.

Commercial and industrial loans, because of their nature and larger size, generally involve a greater degree of risk. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing activities and properties and the greater difficulty of evaluating and monitoring these types of loans. A significant portion of the Bank’s commercial and industrial loans include a balloon payment or repricing feature. A number of factors may affect a borrower’s ability to make or refinance a balloon payment, including without limitation the financial condition of the borrower at the time, the prevailing local economic conditions and the prevailing interest rate environment. There can be no assurance that borrowers will be able to make or refinance balloon payments when due.

Furthermore, the repayment of commercial real estate loans is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, the Bank may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or economy. The Bank’s commercial real estate loans are predominantly owner occupied real estate.

Home Equity Lines of Credit (“HELOC”). The Bank originates home equity lines of credit, secured by first or second homes owned or being purchased by the loan applicant. HELOC loans are consumer revolving lines of credit. The interest rates charged on such loans can be fixed or floating and are generally related to the prime lending rate. HELOC loans may provide for interest only payments for the first two years with principal payments to begin in the third year. A home equity loan is typically originated as a twenty-year note that allows the borrower to draw upon the approved line of credit during the same period as the note. The Bank generally requires a loan-to-value ratio in the range of 70% to 80% of the appraised value, less any outstanding mortgage. Although HELOC loans expose the Bank to the risk that falling collateral values may leave such credits inadequately secured, the Bank has not had any significant adverse experience to date.

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Second Mortgage Loans. The Bank originates second mortgage loans, typically called Home Equity Term Loans secured by a mortgage lien against the applicant’s primary, secondary or investment property. Second mortgage loans are consumer term loans. The interest rate charged on such loans is usually a fixed rate related to the Bank’s cost of funds and market conditions. Home Equity Term Loans typically require fixed payments of principal and interest up to a maximum term of fifteen years. The average second mortgage term is between five and ten years. The Bank generally requires a loan-to-value ratio up to a maximum of 80% of the appraised value, less any outstanding mortgages. Although Home Equity Term Loans expose the Bank to the risk that falling collateral values may leave such credits inadequately secured, the Bank has not had any significant adverse experience to date.

Residential Real Estate Loans. The majority of the Bank’s residential mortgage loans consist of loans secured by owner-occupied, single-family residences. Sun Home Loans, Inc, which originates residential mortgages, employs its own residential mortgage originators. The Bank’s branch and loan personnel previously contracted outside loan correspondents to originate residential mortgages. The majority of the loans originated by Sun Home Loans, Inc. are made with a forward commitment to sell these loans in the secondary market shortly after the origination of the loan.

Other Loans. Included in other loans in addition to installment and consumer loans are certain small business loans serving businesses with credit needs up to $250,000. These small business loans are generally credit lines with check writing capabilities or small business loans with overdraft protection attached. At December 31, 2006, the Bank had $37.6 million of these small business loans.

At December 31, 2006, the Bank had $21.3 million of installment loans secured by a variety of collateral, such as new and used automobiles, boats and certificates of deposits and $5.8 million of unsecured installment loans. Installment or consumer loans may entail greater risk than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not be sufficient for repayment of the outstanding loan, and the remaining deficiency may not be collectible.

The Bank has a modular housing portfolio with $27.5 million in loans outstanding as of December 31, 2006. This activity is generated through a third-party arrangement, which began in 1990. These loans are originated using the Bank’s underwriting standards, rates and terms and are approved according to the Bank’s policies. The credit risk in the modular home portfolio is managed like any other consumer portfolio through loan to value requirements, debt to income ratios and credit history of the borrower. Historically, the modular home business has been viewed as a higher risk lending activity with dealers having little to zero net worth.

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

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

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

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

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

Loan Commitments. When a commercial loan is approved, the Bank may issue a written commitment to the loan applicant. The loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, amortization term, a brief description of the required collateral, and the required insurance coverage. The loan commitment is valid for approximately 30 days. At December 31, 2006, the Bank had approximately $119 million in commercial loans that were approved but unfunded.

Credit Risk, Credit Administration and Loan Review. Credit risk represents the possibility that a customer or counterparty may not perform in accordance with contractual terms. The Bank incurs credit risk whenever it extends credit to, or enters into other transactions with customers. The risks associated with extensions of credit include general risk, which is inherent in the lending business, and risk specific to individual borrowers. The credit administration department is responsible for the overall management of the Bank’s credit risk and the development, application and enforcement of uniform credit policies and procedures the principal purpose of which is to minimize such risk. One objective of credit administration is to identify and, monitor and report extensions of credit by industry concentration and the type of borrower. Loan review and other loan monitoring practices provide a means for management to ascertain whether proper credit, underwriting and loan documentation policies, procedures and practices are being followed by the Bank’s loan officers and are being applied uniformly. While management continues to review these and other related functional areas, there can be no assurance that the steps the Bank has taken to date will be sufficient to enable it to identify, measure, monitor and control all credit risk.

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Investment Securities Activities

General. The investment policy of the Bank is established by senior management and approved by the Board of Directors. It is based on asset and liability management goals which are designed to provide a portfolio of high quality investments that optimize interest income within acceptable limits of safety and liquidity. The Bank’s investments consist primarily of federal funds, securities issued or guaranteed by the United States Government or its agencies, states and political subdivisions and corporate bonds.

Sources of Funds

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

Deposits. Consumer and commercial deposits are attracted principally from within the Bank’s primary market area through the offering of a broad selection of deposit instruments including checking, regular savings, money market deposits, term certificate accounts and individual retirement accounts. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Bank regularly evaluates the internal cost of funds, surveys rates offered by competing institutions, reviews the Bank’s cash flow requirements for lending and liquidity and executes rate changes when deemed appropriate. The Bank currently does not obtain funds through brokers, nor does it solicit funds outside the States of New Jersey, Delaware or Pennsylvania.

Borrowings. The Bank may obtain advances from the Federal Home Loan Bank (the “FHLB”) of New York to supplement its funding requirements. Such advances must be secured by a pledge of a portion of the Bank’s first mortgage loans and other collateral acceptable to the FHLB. The Bank, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At December 31, 2006, the Bank had $103.6 million in secured FHLB advances. Additionally, the Company has an unsecured line of credit with another financial institution in the amount of $5.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Borrowings” in the Company’s 2006 Annual Report to Shareholders for more information about borrowings, which is incorporated by reference.

Securities Sold Under Agreements to Repurchase. The Bank has overnight repurchase agreements with customers as well as repurchase agreements with the FHLB. The Bank obtains funds through overnight repurchase agreements with customers pursuant to which the Bank sells U.S. Treasury notes or securities issued or guaranteed by one of the government sponsored enterprises to customers under an agreement to repurchase them, at par, on the next business day. At December 31, 2006, the amount of securities under agreements to repurchase with customers totaled $51.7 million. In addition, the Bank may obtain funds through short-term repurchase agreements with the FHLB. At December 31, 2006, the Company did not have any repurchase agreements with the FHLB. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Borrowings” in the Annual Report. For additional information regarding repurchase agreements, refer to Note 13 of the Notes to Consolidated Financial Statements included in the Annual Report, which is incorporated by reference.

Fee Income Services

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

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

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

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

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

SBA Loan Sales. The Bank is an SBA Preferred Lender and an approved SBA Express Lender.  As an SBA Preferred Lender, the Bank has earned the privilege of approving SBA Loans without requesting the approval of the SBA prior to closing the loan.  All SBA policies and procedures must be followed by the Bank to maintain the Preferred Lender Status. As an approved SBA Express Lender the Bank has earned the privilege of approving loans and lines of credit up to $350,000 and closing these loans using Bank documents which provide the Bank with quicker turn-around times in approvals and funding of the loans.  All SBA Express policies and procedures must be followed by the Bank to maintain the SBA Express Lender Status.  The Bank's strategy is to sell the guaranteed portion of each SBA term loan in the secondary market to generate fee income.  In 2006, the Bank recognized $848,000 from the sale of SBA loans.

Competition

The Bank faces substantial competition both in attracting deposits and in lending funds. The States of New Jersey and Delaware and the county of Philadelphia, Pennsylvania have high densities of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources than the Bank, all of which are competitors of the Bank to varying degrees. In order to compete with the many financial institutions serving its primary market area, the Bank’s strategy is to focus on providing a superior level of personalized service to local businesses and individual customers.

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

Personnel

At December 31, 2006, the Company had 702 full-time and 134 part-time employees. The Company’s employees are not represented by a collective bargaining group. The Company believes that its relationship with its employees is good.

SUPERVISION AND REGULATION

Introduction

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

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

The Company

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

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

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

Regulatory Capital Requirements.The Federal Reserve has adopted capital adequacy guidelines under which it assesses the adequacy of capital in examining and supervising bank holding companies, such as the Company and in processing applications to it under the Bank Holding Company Act. The Federal Reserve’s capital adequacy guidelines are similar to those imposed on the Bank by the Office of the Comptroller of the Currency.

At December 31, 2006, the Company was in compliance with all applicable regulatory capital requirements. See Note 22 of the Notes to Consolidated Financial Statements included in the Annual Report.

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

The Bank

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

Dividend Restrictions. Dividends from the Bank constitute the principal source of income to the Company. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $49.5 million at December 31, 2006. In addition, the OCC has the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice.

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

10

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

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

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

Pursuant to the Reform Act, the FDIC has determined to maintain the designated reserve ratio at its current 1.25%. The FDIC has also adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution's ranking in one of four risk categories based on their examination ratings and capital ratios. Beginning in 2007, well-capitalized institutions with the CAMELS ratings of 1 or 2 will be grouped in Risk Category I and will be assessed for deposit insurance at an annual rate of between five and seven basis points, with the assessment rate for an individual institution to be determined according to a formula based on a weighted average of the institution's individual CAMEL component ratings plus either five financial ratios or the average ratings of its long-term debt. Institutions in Risk Categories II, III and IV will be assessed at annual rates of 10, 28 and 43 basis points, respectively.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the SAIF. The FICO assessment rates, which are determined quarterly, averaged 0.013% of insured deposits in fiscal 2006. These assessments will continue until the FICO bonds mature in 2017.

11

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

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

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

At December 31, 2006, the Bank’s leverage ratio and total and Tier 1 risk-based capital ratios exceeded the minimum regulatory capital requirements. See Note 22 of the Notes to Consolidated Financial Statements included in the Annual Report.

Enforcement Powers of Federal Banking Agencies. Federal banking agencies possess broad powers to take corrective and other supervisory action as deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends on whether the institution in question is considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” At December 31, 2006, the Bank exceeded the required ratios for classification as “well capitalized.” The classification of depository institutions is primarily for the purpose of applying the federal banking agencies’ prompt corrective action and other supervisory powers and is not intended to be, and should not be interpreted as, a representation of the overall financial condition or prospects of any financial institution.

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

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

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

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

At December 31, 2006, the Bank’s total and Tier 1 risk-based capital ratios and leverage ratios exceeded the minimum regulatory capital requirements. See Note 22 of the Notes to Consolidated Financial Statements included in the Annual Report.

13

Item 1A. Risk Factors.

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

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

The Bank’s commercial and industrial and commercial real estate loan portfolios totaled $1.95 billion at December 31, 2006, comprising 82.4% of total loans. Commercial and industrial loans generally carry larger loan balances and involve a greater degree of risk of nonpayment or late payment than home equity loans or residential mortgage loans. Any significant failure to pay or late payments by the Bank’s customers would hurt the Bank’s earnings. The increased credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. A significant portion of the Bank’s commercial real estate and commercial and industrial loan portfolios includes a balloon payment feature. A number of factors may affect a borrower’s ability to make or refinance a balloon payment, including the financial condition of the borrower, the prevailing local economic conditions and the prevailing interest rate environment.

Furthermore, the repayment of these loans is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, the Bank may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may to a greater extent than residential loans be subject to adverse conditions in the real estate market or economy.

The concentration of the Bank’s commercial and industrial loans and commercial real estate loans in specific business sectors and geographic areas exposes it to the risk of a possible economic downturn affecting those sectors and areas.

A significant portion of Bank’s commercial and industrial loans and commercial real estate loans are concentrated in the hospitality, entertainment and leisure industries. Many of these industries are dependent upon seasonal business and other factors beyond the control of the industries, such as weather and beach conditions along the New Jersey seashore. Any significant or prolonged adverse weather or beach conditions along the New Jersey seashore could have an adverse impact on the borrowers’ ability to repay loans. In addition, because these loans are concentrated in southern and central New Jersey, a decline in the general economic conditions of southern or central New Jersey could have a material adverse effect on the Bank’s financial condition, results of operations and cash flows.

14

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

The risk of loan losses varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value of the collateral for the loan. Based upon factors such as historical experience, an evaluation of economic conditions and a regular review of delinquencies and loan portfolio quality, the Bank’s management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses. At December 31, 2006, the Bank’s allowance for loan losses was $25.7 million which represented 1.09% of total loans and 175.50% of nonperforming loans. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future credit losses, or if the bank regulatory authorities require the Bank to increase its allowance for loan losses, its earnings could be significantly and adversely affected.

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

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

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

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

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

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

The most significant component of the Company’s net income is net interest, which accounted for 83.4% of total revenue in 2006 and 84.2% in 2005. Net interest income is the difference between the interest income generated on interest-earning assets, such as loans and investments and the interest expense paid on the funds required to support earning assets, namely deposits and borrowed funds. Interest income, which represents income from loans, investment securities and short-term investments is dependent on many factors including the volume of earning assets, the level of interest rates, the interest rate sensitivity of the earning assets and the levels of nonperforming loans. The cost of funds is a function of the amount and type of funds required to support the earning assets, the rates paid to attract and retain deposits, rates paid on borrowed funds and the levels of non-interest bearing demand deposits.

15

Interest rate sensitivity is a measure of how our assets and liabilities react to changes in market interest rates. The Company expects that this interest sensitivity will not always be perfectly balanced. This means that either the Company’s interest-earning assets will be more sensitive to changes in market interest rates than its interest bearing liabilities, or vice versa. If more interest-earning assets than interest -bearing liabilities reprice or mature during a time when interest rates are declining, then the Company’s net interest income may be reduced. If more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising, then the Company’s net income may be reduced. At December 31, 2006, total interest-earning assets maturing or repricing within one year exceeded interest-bearing liabilities maturing or repricing during the same period by $52.8 million. As a result, the yield on its interest-earning assets should adjust to changes in interest rates at a faster rate than the cost of its interest-bearing liabilities and its net interest income may be reduced when interest rates decrease significantly for long periods of time.

The Company manages its interest rate risk from changes in market rates by controlling to the extent possible, the mix of interest sensitive assets and interest rate sensitive liabilities. Commencing in mid 2005 and throughout 2006 the Federal Reserve Board increased short-term interest rates 13 times. In general, when short-term rates increase, the Company expects improvements to net interest income. However, the flattening of the yield curve during 2005 and the actual curve inversion for most of 2006 has and will continue to put significant pressure in 2007 on the Company’s ability to maintain or increase net interest income as the increasing funding costs of either deposits or borrowings results in further interest spread compression.

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

Under the purchase method of accounting for all business combinations, if the purchase price of an acquired company exceeds the fair value of the company’s net assets, the excess is carried on the acquiror’s balance sheet as goodwill and identifiable intangible assets. At December 31, 2006, the Company had $156.7 million of goodwill and identifiable intangible assets on its balance sheet. With the acquisition of Advantage Bank on January 19, 2006, goodwill and identifiable intangible assets increased by approximately $27 million. Companies must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment are to be charged to the results of operations in the period in which the impairment is determined. Based on tests of goodwill and identifiable intangible assets impairment, the Company has concluded that there has been no impairment during 2006 and 2005, and no write-downs have been recorded. There can be no assurance that the future evaluations of goodwill and identifiable intangible assets will not result in determinations of impairment and write-downs.

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

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

16

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

The amount of common stock held by the Company’s executive officers and directors gives them significant influence over the election of the Company’s board of directors and other matters that require shareholder approval.

As of March 5, 2007, a total of 6.2 million shares, or approximately 30% of the Company’s outstanding common stock, are beneficially owned by its directors and executive officers, not including exercisable options. Therefore, if they vote together, the Company’s directors and executive officers have the ability to exert significant influence over the election of the board of directors and other corporate actions requiring shareholder approval, including a tender offer, business combination or other transaction, or, the adoption of proposals made by shareholders. As a result, shareholders who might desire to participate in a takeover transaction may not have an opportunity to do so. The effect of these provisions could be to limit the trading price potential of the Company’s common shares.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

At December 31, 2006, the Company operated from its main office in Vineland, New Jersey and 75 Community Banking Centers. The Bank leases its main office and 43 Community Banking Centers. The remainder of the community banking centers are owned by the Bank.

Item 3. Legal Proceedings.

The Company or the Bank is periodically involved in various claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the Company’s and the Bank’s business. While the ultimate outcome of these proceedings cannot be predicated with certainty, management, after consultation with counsel representing the Company in these proceedings, does not expect that the resolution of these proceedings will have a material effect on the Company’s financial condition, results of operations or cash flows. In addition, management was not aware of any pending or threatened material litigation as of December 31, 2006.

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

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

17

PART II

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

The information contained under the caption “Price Range of Common Stock and Dividends” in the Company’s 2006 Annual Report to Shareholders, filed as Exhibit 13 to this Report (the “Annual Report”), is incorporated herein by reference.

Item 6. Selected Financial Data.

The information contained under the caption “Selected Financial Data” in the Company’s Annual Report is incorporated herein by reference.

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

The information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report is incorporated herein by reference.

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

The information contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Gap Analysis” and “ -- Net Interest Income Simulation” in the Company’s Annual Report are incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data.

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

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

Not applicable.

Item 9A. Controls and Procedures.

(a)Disclosure Controls and Procedures

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

(b)Internal Control over Financial Reporting

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

Management’s report on the Company’s internal control over financial reporting appears in the Company’s Annual Report filed as Exhibit 13 and is incorporated herein by reference.

2.Attestation Report of Independent Public Accounting Firm.

The attestation report of Deloitte & Touche LLP on management’s assessment of the Company’s internal control over financial reporting appears in the Company’s Annual Report filed as Exhibit 13 and is incorporated herein by reference.

3. Changes in Internal Control Over Financial Reporting.

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

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information contained under the sections captioned “Additional Information About Directors and Executive Officers - Section 16(a) Beneficial Ownership Reporting Compliance” and “Proposal I - Election of Directors” in the Company’s Proxy Statement for its 2007 Annual Meeting of Shareholders (the “Proxy Statement”) is incorporated herein by reference.

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

Item 11. Executive Compensation.

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

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

(a)Security Ownership of Certain Beneficial Owners

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

(b)Security Ownership of Management

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

(c)Changes in Control

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

(d)Securities Authorized for Issuance Under Equity Compensation Plans

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Set forth below is information as of December 31, 2006 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.

EQUITY COMPENSATION PLAN INFORMATION
	(a)	(b)		(c)
	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by shareholders(1)	3,053,266	$	10.28	286,944
Equity compensation plans not approved by shareholders(2)	-		-	-
Total	3,053,266	$	10.28	286,944

____________

(1) Plans approved by shareholders include the 1995 Stock Option Plan, the 1997 Stock Option Plan, the 2002 Stock Option Plan and the 2004 Stock Based-Incentive Plan. The amount of securities includes options for 316,377 shares of our common stock as a result of our assuming obligations under stock option plans of Advantage Bank in connection with an acquisition in 2006 and Community Bancorp of New Jersey in connection with an acquisition in 2004. While we assumed the obligations existing under these plans as of the time of merger, we have not and will not in the future, use them to make further grants.

(2) Not applicable.

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

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

Item 14. Principal Accounting Fees and Services.

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

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a)The following documents are filed as a part of this report:

(1) The following consolidated financial statements and the report of independent registered public accounting firm of the Registrant included in the Registrant’s Annual Report to Shareholders are incorporated herein by reference and also in Item 8 hereof.

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition as of

December 31, 2006 and 2005

Consolidated Statements of Income for the Years Ended

December 31, 2006, 2005 and 2004

Consolidated Statements of Shareholders’ Equity for the Years Ended

December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the Years Ended

December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

(2) There are no financial statements schedules that are required to be included in Part II, Item 8.

(b)The following exhibits are filed as part of this report:

3(i) Amended and Restated Certificate of Incorporation of Sun Bancorp, Inc⁽¹⁾

3(ii) Amended and Restated Bylaws of Sun Bancorp, Inc⁽²⁾

10.1 1995 Stock Option Plan⁽³⁾

10.2 Amended and Restated 1997 Stock Option Plan⁽⁴⁾

10.3 2002 Stock Option Plan⁽⁵⁾

10.4 Directors Stock Purchase Plan⁽⁶⁾

10.5 Form of Change in Control Severance Agreement⁽⁷⁾

10.6 Severance Agreement between Thomas A. Bracken and Sun National Bank⁽⁸⁾

10.7 2004 Stock-Based Incentive Plan⁽⁹⁾

11 Computation regarding earnings per share⁽¹⁰⁾

13 2006 Annual Report to Shareholders

21 Subsidiaries of the Registrant

23 Consent of Deloitte & Touche LLP

31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

_____________________

(1)Incorporated by reference to Exhibit 3(i) to the Company’s Registration Statement on Form S-3 (File No. 333-109636) filed with the SEC on October 10, 2003.

(2)Incorporated by reference to Exhibit 3(ii) to the Company’s Registration Statement on Form S-3 (File No. 333-109636) filed with the SEC on October 10, 2003.

(3)Incorporated by reference to Exhibit 10 to the Company’s Registration Statement on Form 10 filed with the SEC on June 28, 1996 (File No. 0-20957).

(4)Incorporated by reference Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 0-20957).

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(5)Incorporated by reference to Appendix A to the Company’s Proxy Statement for the 2002 Annual Meeting of Shareholders filed with the SEC on April 16, 2002 (File No. 0-20957).

(6)Incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8, filed with the SEC on August 1, 1997 (File No. 333-32681).

(7)Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-20957).

(8)Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 0-20957).

(9) Incorporated by reference to Exhibit H to the Company’s Joint Proxy Statement for the 2004 Annual Meeting of Shareholders in the Company’s Registration Statement on Form S-4, filed with the SEC on April 29, 2004 (File No. 0-20957).

(10) Incorporated by reference to Note 21 of the Notes to Consolidated Financial Statements of the Company included in Exhibit 13 hereto.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 16, 2007.

	SUN BANCORP, INC.
By:	/s/ Sidney R. Brown
	Sidney R. Brown
	Acting President and Chief Executive Officer
	(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 16, 2007.

/s/ Bernard A. Brown	/s/ Sidney R. Brown
Bernard A. Brown	Sidney R. Brown
Chairman	Acting President and Chief Executive Officer,
	Vice Chairman, Secretary and Treasurer
	(Principal Executive Officer)
/s/ Anat Bird	/s/ Thomas A. Bracken
Anat Bird	Thomas A. Bracken
Director
/s/ Irwin J. Brown	/s/ Jeffrey S. Brown
Irwin J. Brown	Jeffrey S. Brown
Director	Director
/s/ John A. Fallone	/s/ Peter Galetto, Jr
John A. Fallone	Peter Galetto, Jr
Director	Director
/s/ Douglas J. Heun	/s/ Charles P. Kaempffer
Douglas J. Heun	Charles P. Kaempffer
Director	Director
/s/ Anne E. Koons	/s/ Eli Kramer
Anne E. Koons	Eli Kramer
Director	Director
/s/ Alfonse M. Mattia	/s/ George A. Pruitt
Alfonse M. Mattia	George A. Pruitt
Director	Director
/s/ Anthony Russo, III	/s/ Edward H. Salmon
Anthony Russo, III	Edward H. Salmon
Director	Director
/s/ Dan A. Chila
Dan A. Chila
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-13

Exhibit 13

SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
At or for the Years Ended December 31,		2006			2005			2004			2003			2002
Selected Balance Sheet Data
Total assets	$	3,325,563		$	3,107,889		$	3,053,587		$	2,599,487		$	2,112,172
Cash and investments		675,190			814,528			952,779			1,058,096			800,425
Loans receivable, net of allowance for loan losses		2,359,616			2,027,753			1,847,721			1,364,465			1,217,008
Total deposits		2,667,997			2,471,648			2,430,363			2,111,125			1,690,462
Borrowings and securities sold under agreements to repurchase		160,622			248,967			254,310			222,398			205,280
Junior subordinated debentures(1)		108,250			77,322			77,322			72,167			-
Guaranteed preferred beneficial interest in Company’s subordinated debt(1)		-			-			-			-			59,274
Shareholders’ equity		342,227			295,653			279,220			185,718			145,623
Selected Results of Operations
Interest income	$	183,950		$	153,229		$	124,269		$	108,062		$	112,894
Net interest income		99,078			97,515			89,318			72,287			65,038
Provision for loan losses		3,807			2,310			2,075			4,825			4,175
Net interest income after provision for loan losses		95,271			95,205			87,243			67,462			60,863
Non-interest income		19,746			18,288			19,119			17,356			13,178
Non-interest expense		89,393			84,660			81,152			66,036			58,965
Net income		17,274			19,521			17,629			13,336			10,378
Per Share Data(2)
Earnings Per Share:
Basic	$	0.85		$	1.02		$	1.03		$	0.93		$	0.71
Diluted		0.81			0.96			0.96			0.86			0.68
Book Value		16.69			15.50			14.80			12.07			10.71
Selected Ratios:
Return on average assets		0.53	%		0.63	%		0.63	%		0.59	%		0.50	%
Return on average equity		5.28			6.76			7.80			8.71			7.63
Ratio of average equity to average assets		10.09			9.27			8.08			6.79			6.55
(1) Effective December 31, 2003, the Company adopted new accounting standards which required the deconsolidation of the Company’s wholly-owned trusts which issued capital securities.
(2) Data is adjusted for a 5% stock dividend declared in April 2006.

1

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)

ORGANIZATION OF INFORMATION 

Management’s Discussion and Analysis provides a narrative on the Company’s financial condition and results of operations that should be read in conjunction with the accompanying consolidated financial statements. It includes the following sections:

·   OVERVIEW

·   CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

·   RECENT ACCOUNTING PRINCIPLES

·   RESULTS OF OPERATIONS

·   LIQUIDITY AND CAPITAL RESOURCES

·   FINANCIAL CONDITION

·   FORWARD-LOOKING STATEMENTS

OVERVIEW

Sun Bancorp, Inc. (the “Company”) is a multi-state Bank Holding Company headquartered in Vineland, New Jersey. The Company’s principal subsidiary is Sun National Bank (the “Bank”). At December 31, 2006, the Company had total assets of $3.33 billion, total deposits of $2.67 billion and total shareholders’ equity of $342.2 million. The Company’s principal business is to serve as a holding company for the Bank. As a registered holding company, the Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System.

In January 2006, the Company completed the acquisition of Advantage Bank (“Advantage”), which solidified our network in two key strategic counties in New Jersey, Hunterdon and Somerset and added five new branches with approximately $148 million of deposits. 

Through the Bank, the Company provides consumer and business banking services. As of December 31, 2006, the Bank had 75 community banking centers located in 13 counties in Southern and Central New Jersey, in the contiguous New Castle County market in Delaware, and in Philadelphia, Pennsylvania. During the first quarter of 2007, the Company sold three of its community banking centers, including two in New Jersey and its Philadelphia, Pennsylvania location.

The Bank offers a comprehensive array of lending, depository and financial services to its business and individual customers throughout the marketplace. The Bank’s lending services to businesses include commercial and commercial real estate loans, Small Business Administration (“SBA”) guaranteedloans and small business loans. The Bank has Preferred Lender status with the SBA, offers equipment leasing and is a designated Preferred Lender with the New Jersey Economic Development Authority. The Bank’s commercial deposit services include business checking accounts, and cash management services such as electronic banking, sweep accounts, lockbox services, internet banking, PC banking, remote deposit and controlled disbursement services.

The Bank’s lending services to retail customers include home equity loans, residential mortgage loans, and other basic types of consumer loans. During the first quarter of 2006, the Company organized a wholly-owned subsidiary of the Bank, Sun Home Loans, Inc., which originates residential mortgages. Prior to the launch of Sun Home Loans, Inc., the Company utilized a third-party correspondent to originate residential mortgages. The Bank’s retail deposit services include checking accounts, savings accounts, money market deposit accounts, certificates of deposit and individual retirement accounts. Through a third-party arrangement, the Bank also offers mutual funds, securities brokerage, annuities and investment advisory services.

The Bank funds its lending activities primarily through retail deposits, the scheduled maturities of its investment portfolio, repurchase agreements with customers and advances from the Federal Home Loan Bank (“FHLB”).

As a financial institution with a primary focus on traditional banking activities, the Company generates the majority of its revenue through net interest income, which is defined as the difference between interest income earned on loans and investments and interest paid on deposits and borrowings.

2

Growth in net interest income is dependent upon our ability to prudently manage the balance sheet for growth, combined with how successfully we maintain or increase net interest margin, which is net interest income as a percentage of average interest-earning assets.

The Company also generates revenue through fees earned on the various services and products offered to its customers and through sales of loans, primarily SBA and residential mortgages. Offsetting these revenue sources are provisions for credit losses on loans, administrative expenses and income taxes.

The Company’s net income for 2006 was $17.3 million, or $.81 per share - diluted compared to $19.5 million, or $.96 per share - diluted in 2005. Included in 2006 results are approximately $1.6 million (pre-tax) or $.05 per share - assuming dilution in branch rationalization and severance related charges which were incurred in connection with the Company’s initiative to improve profitability and reduce overhead expenses. The following is an overview of key factors affecting the Company’s results for 2006:

·   Total assets grew 7.0% to $3.33 billion.

·   On January 19, 2006, the Company acquired Advantage for $17.3 million in cash and approximately 832,000 shares of the Company’s common stock. Included in the acquisition was net loans receivable of approximately $124 million and deposits of approximately $148 million.

·   Total loans before allowance for loan losses grew approximately 16.3% to $2.39 billion. Organic loan growth remained strong; adjusted for approximately $125 million in loans receivable acquired in the Advantage acquisition, organic loan growth was approximately 10.2%.

·   Total deposits increased 7.9% to $2.67 billion. During 2006 and continuing into 2007, the Company began to focus on its retail transformation initiative which includes a new senior retail executive, instituting a new sales culture, sales tracking, a sales incentive system, product evaluation and simplification, and product pricing. Organic deposit growth, adjusted for approximately $148 million in deposits acquired in the Advantage acquisition, was approximately 2.0%.

·   Net interest income (on a tax-equivalent basis) for 2006 increased $1.7 million or 1.7% over 2005. There was a compression in the net interest margin of 6 basis points from 3.50% for 2005 to 3.44% for 2006, reflecting the impact of increasing rates, continued intense market competitiveness for both loans and deposits, and the inversion of the yield curve.

·   Select fee enhancements were implemented early in the year which was the primary contributor to the increase in non-interest income of 8.0% or $1.5 million.

·   A stronger focus on profitability, including an 8% work force reduction and the consolidation of two branch offices in 2006. The Company’s efficiency ratio trended favorably in the later quarters of 2006 in comparison to 2005 and it is anticipated to continue to improve in 2007. Three branch offices were sold during the first quarter of 2007.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The discussion and analysis of the financial condition and results of operations are based on the 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, liabilities, revenue and expenses. Management evaluates these estimates and assumptions on an ongoing basis, including those related to the allowance for loan losses, income taxes, stock-based compensation and goodwill. 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 basis 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 under different assumptions or conditions.

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.

3

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.

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, which 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. In June 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, effective for fiscal years beginning after December 15, 2006. FIN No. 48 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. FIN No. 48 must be applied to all existing tax positions upon initial adoption. The Company incorporated FIN No. 48 with its existing accounting policy on January 1, 2007.

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 undiscounted future cash flows and measure the amount of impairment based on fair value.

4

Stock-Based Compensation.The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment. The Company adopted SFAS No. 123(R) on January 1, 2006 using a modified prospective approach. Under the fair value provisions of SFAS No. 123(R), 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. Prior to January 1, 2006, the Company had 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 Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding stock-based compensation expense.

RECENT ACCOUNTING PRINCIPLES 

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 is currently evaluating the impact of SFAS No. 159.

In September 2006, the Securities and Exchange Commission (the “SEC”) Staff issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements. SAB No. 108 requires the use of two alternative approaches in quantitatively evaluating materiality of misstatements. SAB No. 108 requires that registrants quantify errors using both a balance sheet and income statement approach. If the misstatement as quantified under either approach is material to the current year financial statements, the misstatement must be corrected. If the effect of correcting the prior year misstatements, if any, in the current year income statement is material, the prior year financial statements should be corrected. SAB No. 108 is effective for the annual financial statement covering the first fiscal year ending after November 15, 2006. In the year of adoption, the misstatements may be corrected as an accounting change by adjusting opening retained earnings rather than being included in the current year income statement. The Company adopted SAB No. 108 on January 1, 2007 and there was no impact to 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 September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. FASB Technical Bulletin (“FTB”) 85-4, Accounting for Purchases of Life Insurance requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset. In practice, this statement means that the cash value asset is reported on the statement of financial position at this realizable amount and the change in cash surrender value during the period is an adjustment in determining the income (or expense) to be recognized for the period. The pronouncement is effective for fiscal years beginning after December 15, 2006. The Company will adopt EITF Issue No. 06-5 on January 1, 2007 and does not expect that the guidance will have an impact on the Company’s financial position or results of operations.

5

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 is greater than fifty percent likely of being realized upon ultimate settlement. FIN No. 48 must be applied to all existing tax positions upon initial adoption. FIN No. 48 is 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 a material impact to the Company’s financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140. SFAS No. 140 establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. Under SFAS No. 156, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. Adoption of SFAS No. 156 is required as of the beginning of the first fiscal year that begins after September 15, 2006. Upon adoption, the Company will apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions. The Company adopted SFAS No. 156 on January 1, 2007 and the guidance did not have a material impact to the Company’s financial position or results of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 155 on January 1, 2007 and the guidance did not have a material impact to the Company’s financial position or results of operations.

RESULTS OF OPERATIONS

The following discussion focuses on the major components of the Company's operations and presents an overview of the significant changes in the results of operations during the past three fiscal years. This discussion should be reviewed in conjunction with the Consolidated Financial Statements and notes thereto presented elsewhere in this Annual Report. All earnings per share amounts are presented assuming dilution.

Net Interest Income. Net interest income is the most significant component of the Company’s income from operations. Net interest income is the difference between interest earned on total interest-earning assets (primarily loans and investment securities), on a fully taxable equivalent basis, where appropriate, and interest paid on total interest-bearing liabilities (primarily deposits and borrowed funds). Fully taxable equivalent basis represents income on total interest-earning assets that is either tax-exempt or taxed at a reduced rate, adjusted to give effect to the prevailing incremental federal tax rate, and adjusted for nondeductible carrying costs and state income taxes, where applicable. Yield calculations, where appropriate, include these adjustments. Net interest income depends on the volume and interest rate earned on interest-earning assets and the volume and interest rate paid on interest-bearing liabilities.

Table 1 provides further detail regarding the Company’s average daily balances with corresponding interest income and interest expense as well as yield and cost information for the years ended December 31, 2006, 2005 and 2004. Table 2 sets forth certain information regarding changes in interest income and interest expense of the Company for the years ended December 31, 2006, 2005 and 2004.

6

TABLE 1: STATEMENTS OF AVERAGE BALANCES, INCOME OR EXPENSE, YIELD OR COST

Year Ended December 31,		2006					2005						2004
	Average		Income/		Yield/		Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Cost		Balance		Expense		Cost		Balance		Expense		Cost
Interest-earning assets:
Loans receivable (1), (2):
Commercial and industrial	$	1,880,475	$	133,312	7.09	%	$	1,659,713	$	106,915	6.44	%	$	1,352,307	$	82,871	6.13	%
Home equity		202,072		13,326	6.59			134,375		7,617	5.67			102,661		4,075	3.97
Second mortgage		74,184		4,642	6.26			47,670		2,979	6.25			50,352		3,193	6.34
Residential real estate		30,264		2,460	8.13			27,572		2,215	8.03			30,730		2,225	7.24
Other		86,505		7,136	8.25			72,938		5,430	7.44			57,447		4,253	7.40
Total loans receivable		2,273,500		160,876	7.08			1,942,268		125,156	6.44			1,593,497		96,617	6.06
Investment securities (3)		595,474		22,032	3.70			824,755		27,412	3.32			881,547		28,134	3.19
Interest-earning deposits with banks		14,676		702	4.78			6,833		195	2.85			13,737		134	0.98
Federal funds sold		23,938		1,172	4.90			34,888		1,172	3.36			29,675		385	1.30
Total interest-earning assets		2,907,588		184,782	6.36			2,808,744		153,935	5.48			2,518,456		125,270	4.97
Non-interest-earning assets:
Cash and due from banks		80,241						79,713						77,050
Bank properties and equipment		43,099						37,186						35,828
Goodwill and intangible assets		157,082						136,552						100,981
Other assets		57,321						53,091						62,638
Total non-interest-earning assets		337,743						306,542						276,497
Total assets	$	3,245,331					$	3,115,286					$	2,794,953
Interest-bearing liabilities:
Interest-bearing deposit accounts:
Interest-bearing demand deposits	$	841,288	$	23,587	2.80	%	$	874,577	$	16,099	1.84	%	$	792,470	$	7,200	0.91	%
Savings deposits		365,932		6,687	1.83			423,747		4,986	1.18			429,077		3,440	0.80
Time deposits		889,192		36,618	4.12			684,892		20,342	2.97			562,265		13,421	2.39
Total interest-bearing deposit accounts		2,096,412		66,892	3.19			1,983,216		41,427	2.09			1,783,812		24,061	1.35
Short-term borrowings:
Federal funds purchased		4,277		231	5.40			3,619		118	3.26			3,990		70	1.75
Repurchase agreements with customers		45,726		1,985	4.34			76,894		2,008	2.61			63,727		471	0.74
Long-term borrowings:
FHLB advances		147,017		6,833	4.65			167,830		6,996	4.17			159,466		6,734	4.22
Junior subordinated debentures		106,894		8,409	7.87			77,534		5,165	6.66			74,646		3,615	4.84
Obligation under capital lease		5,356		522	7.31			15		-	-			-		-	-
Total borrowings		309,270		17,980	5.81			325,892		14,287	4.38			301,829		10,890	3.61
Total interest-bearing liabilities		2,405,682		84,872	3.53			2,309,108		55,714	2.41			2,085,641		34,951	1.68
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		494,488						503,197						460,990
Other liabilities		17,851						14,134						22,390
Total non-interest-bearing liabilities		512,339						517,331						483,380
Total liabilities		2,918,021						2,826,439						2,569,021
Shareholders’ equity		327,310						288,847						225,932
Total liabilities and shareholders’ equity	$	3,245,331					$	3,115,286					$	2,794,953
Net interest income			$	99,910					$	98,221					$	90,319
Interest rate spread (4)					2.83	%					3.07	%					3.29	%
Net interest margin (5)					3.44	%					3.50	%					3.59	%
Ratio of average interest-earning assets to average interest-bearing liabilities					120.86	%					121.64	%					120.75	%
(1)  Average balances include non-accrual loans (see "Non-Performing and Problem Assets").
(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.

7

TABLE 2: RATE-VOLUME VARIANCE ANALYSIS⁽¹⁾

Year Ended December 31,	2006 vs. 2005									2005 vs. 2004
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans receivable:
Commercial and industrial	$	15,035		$	11,362		$	26,397		$	19,625		$	4,419		$	24,044
Home equity		4,311			1,398			5,709			1,485			2,057			3,542
Second mortgage		1,659			4			1,663			(168	)		(46	)		(214	)
Residential real estate		219			26			245			(241	)		231			(10	)
Other		1,079			627			1,706			1,154			23			1,177
Total loans receivable		22,303			13,417			35,720			21,855			6,684			28,539
Investment securities		(8,234	)		2,854			(5,380	)		(1,859	)		1,137			(722	)
Interest-earning deposits with banks		319			188			507			(94	)		155			61
Federal funds sold		(436	)		436			-			78			709			787
Total interest-earning assets		13,952			16,895			30,847			19,980			8,685			28,665
Interest expense:
Interest-bearing deposit accounts:
Interest-bearing demand deposits		(635	)		8,123			7,488			816			8,083			8,899
Savings deposits		(755	)		2,456			1,701			(43	)		1,589			1,546
Time deposits		7,090			9,186			16,276			3,265			3,656			6,921
Total interest-bearing deposit accounts		5,700			19,765			25,465			4,038			13,328			17,366
Short-term borrowings:
Federal funds purchased		25			88			113			(7	)		55			48
Repurchase agreements with customers		(1,019	)		996			(23	)		116			1,421			1,537
Long-term borrowings:
FHLB advances		(919	)		756			(163	)		349			(87	)		262
Junior subordinated debentures		2,195			1,049			3,244			145			1,405			1,550
Obligation under capital lease		-			522			522			-			-			-
Total borrowings		282			3,411			3,693			603			2,794			3,397
Total interest-bearing liabilities		5,982			23,176			29,158			4,641			16,122			20,763
Net change in net interest income	$	7,970		$	(6,281	)	$	1,689		$	15,339		$	(7,437	)	$	7,902
(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 the prior year rate) and (ii) changes in rate (changes in rate multiplied by the prior year 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.

The Company’s net interest margin and interest rate spread decreased in 2006 to 3.44% and 2.83%, respectively, as compared to 3.50% and 3.07%, respectively, for 2005 and 3.59% and 3.29%, respectively, for 2004. The decrease in the net interest margin and interest rate spread reflects continued market competitiveness for both loans and deposits as well as the current interest rate environment.

From June 2004 to June 2006, the Federal Reserve Board increased overnight interest rates by 425 basis points to a target rate of 5.25%. During the same period and through the remainder of 2006, long-term interest rates have experienced significantly smaller increases leading to a flattening of the yield curve in 2005 and an actual curve inversion for most of 2006.

From a traditional balance sheet gap analysis, the Company remained narrowly interest sensitive at December 31, 2006. The more robust net interest income simulation analysis (see Liquidity and Capital Resources) shows a position that is relatively neutral to benefiting slightly from declines in interest rates. The change in position from 2005 to 2006 was impacted by changes in depositor preferences, moving from liquid deposits to higher yielding short term time accounts and continued borrower preferences for fixed or longer term adjustable loans.

Net interest income (on a tax-equivalent basis) increased $1.7 million or 1.7% to $99.9 million for 2006 compared to $98.2 million for 2005. Interest income (on a tax-equivalent basis) increased $30.9 million from 2005 to $184.8 million for 2006 while interest expense increased $29.2 million from 2005 to $84.9 million.

8

Interest income increased $30.9 million for 2006 as average loans receivable grew $331.2 million or 17.1% which were partially funded by calls or maturities of lower yielding investment securities. Average investment securities decreased $229.3 million during 2006 and the Company expects that the utilization of its investment portfolio as a primary source of liquidity will decrease in 2007 and that it will rely on deposit growth and wholesale borrowings to support its loan demand. This will place continued pressure on the net interest margin due to the continued intense market competitiveness for deposits and the expected interest rate environment. The rates earned on average loan receivables and average investment securities increased 64 basis points and 38 basis points, respectively.

Interest expense increased $29.2 million as average interest-bearing deposits grew $113.2 million offset by a decrease in average borrowings of $16.6 million. The cost of average interest-bearing deposits increased 110 basis points which reflects the continued market competition for retail deposits. The Company feels that this interest rate trend as well as continued competition will remain intense through 2007. The interest paid on average borrowings increased 143 basis points from 2005.

Net interest income (on a tax-equivalent basis) increased $7.9 million or 8.7% to $98.2 million for 2005 compared to $90.3 million for 2004. Through the acquisition of Community Bancorp of New Jersey (“Community”) in 2004 and the Bank’s continued growth in its core lending business, average interest-earning assets increased $290.3 million or 11.5% for 2005. This significant growth in average interest-earning assets resulted in an increase in interest income of $20.0 million. Interest income increased an additional $8.7 million in 2005 from an increase in overall yield on interest-earning assets of 51 basis points to 5.48% for 2005 compared to 4.97% for 2004. This increase was due to the impact of rising rates on the variable-rate loans, new loans and repricing on resetting loans.

Average total interest-bearing liabilities increased $223.5 million or 10.7% for 2005 compared to 2004. Average interest-bearing deposits for 2005 increased $199.4 million or 11.2%. Average non-interest-bearing deposits increased $42.2 million or 9.2% over 2004. The increase in average deposits was partially attributable to approximately $342 million in deposits acquired in the Community acquisition in July 2004 and a successful deposit gathering campaign in May 2005. The campaign was designed to create new relationships and strengthen existing relationships. As a result of this campaign, the Bank generated approximately $200 million in deposits with over 50% coming from new customers.

This increase in average deposits increased interest expense by $4.0 million in 2005 over 2004. More significantly, the cost of average interest-bearing deposits increased 74 basis points to 2.09% for 2005 compared to 1.35% for 2004, or an increase in interest expense of $13.3 million. This increase in the cost of deposits reflected the increasing short-term interest rates and the intense competitive environment for retaining and attracting deposits. Through 2004 and 2005, the Company had supplemented its funding needs with the liquidity of the investment portfolio and did not have to price aggressively for deposits.

Provision for Loan Losses. The Company recorded a provision for loan losses of $3.8 million for 2006, as compared to $2.3 million for 2005 and $2.1 million for 2004. The Company’s loans receivable, adjusted for approximately $125 million in loans receivable acquired with Advantage in January 2006, grew 10.2% or $210.1 million to $2.39 billion at December 31, 2006 as compared to $2.05 billion and $1.87 billion at December 31, 2005 and 2004, respectively. The ratio of allowance for loan losses to loans receivable was 1.08% at December 31, 2006 compared to 1.10% and 1.18% at December 31, 2005 and 2004, respectively. Overall credit quality remained stable through 2006. The decrease in the 2005 ratio reflects the improved credit quality trends within the Company’s classified loan portfolio and a decrease in the Company’s non-performing loans which decreased 29.4% to $10.1 million at December 31, 2005 from $14.3 million at December 31, 2004.

At least quarterly, management performs an analysis to identify the inherent risk of loss in the Company’s loan portfolio. This analysis includes a qualitative evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio (including loans being specifically monitored by management), estimated fair value of underlying collateral, delinquencies, and other factors.

Non-Interest Income. Non-interest income increased $1.5 million or 8.0% to $19.7 million for 2006 as compared to $18.3 million and $19.1 million for 2005 and 2004, respectively. The increase for 2006 was primarily a result of an increase of $2.2 million in service charges on deposit accounts offset by a decrease in gain on sale of investment securities of $794,000. During the fourth quarter of 2006, the Company entered into an agreement to sell a parcel of land that the Company acquired in conjunction with the Community acquisition. The agreement for the sale of land resulted in the Company recording an estimated loss at December 31, 2006 of $294,000. In addition, during the fourth quarter of 2006, the Company announced that it had entered into agreements to sell three branch offices to three separate buyers. The sales of the branch offices, including approximately $40 million of aggregate deposits and approximately $18 million of aggregate loans receivable, were completed during the first quarter of 2007. The Company will recognize a net pre-tax gain on sales of approximately $1.4 million during the first quarter of 2007. These branch sales are part of the Company’s on-going branch rationalization to improve profitability.

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During the first quarter of 2006, the Company organized a wholly-owned subsidiary of the Bank, Sun Home Loans, Inc. (“Sun Home Loans”). Sun Home Loans originates residential mortgages through dedicated loan originators utilizing our existing branch network as well as generating business through non-customers. Prior to the closing of a mortgage, Sun Home Loans will generally have a commitment to sell the loan with servicing released in the secondary market. The Company also generates income through the sale of SBA loans. The gain on sale of loans, which includes mortgages and SBA loans, increased 14.0% to $1.1 million for 2006 compared to $989,000 for 2005 and $289,000 for 2004.

Non-interest income decreased $831,000, or 4.3% for 2005 compared to 2004. The decrease was in part the result of a $2.4 million decrease in gain on sale of bank properties and equipment and a $634,000 decrease in gain on sale of investment securities. Partially offsetting these decreases was a combined year over year increase of $2.1 million resulting from two of the Company’s 2005 strategic initiatives. These initiatives, sale of SBA loans and customer derivative income produced increases of $700,000 and $1.4 million, respectively.

Non-Interest Expenses. Non-interest expenses increased $4.7 million, or 5.6% to $89.4 million for 2006 as compared to $84.7 million and $81.2 million for 2005 and 2004, respectively. Of the increase for 2006, approximately $2.9 million is due to the incremental expenses resulting from the January 2006 Advantage acquisition.

Non-interest expense, excluding the expenses of Advantage, increased $1.8 million or 2.1% for 2006 as compared to 2005. The increase was primarily a result of $680,000 in severance related to the work force reduction and $495,000 related to the consolidation of two branch offices which were primarily lease-buyout charges. The work-force reduction and branch rationalization charges were completed in connection with the Company’s initiative to improve profitability and reduce expense overhead. In addition, the Company recognized $170,000 in stock option expenses during 2006 which were directly related to the adoption of SFAS No. 123(R) on January 1, 2006.

Non-interest expenses increased approximately $3.5 million, or 4.3% to $84.7 million for 2005 as compared to $81.2 million for 2004. Salaries and employee benefits increased $2.5 million primarily due to a year over year increase of $1.7 million which reflects a full year of salary expenses relating to the July 2004 Community acquisition. The remaining $800,000 increase in salary expense was due to increased staffing and annual merit increases. Occupancy expense increased $772,000 of which, $967,000 was related to a full year of expenses related to the branches purchased in the Community acquisition offset by a decrease in expenses from branches sold or closed during 2004 as part of the Company’s branch rationalization program. Equipment expense increased $671,000 of which $374,000 was related to a full year of expenses related to the Community acquisition. These increases were offset by a $769,000 decrease in amortization of intangibles. The decrease in amortization of intangibles was a result of expenses not incurred in 2005 due to the 2004 branch closures offset by a full year of amortization expense related to the acquisition of Community in July 2004.

Income Tax Expense. Income taxes decreased $962,000 to $8.4 million for 2006 from $9.3 million for 2005. The decrease for 2006 was due to a lower 2006 pretax income while the effective tax rate for 2006 remained relatively flat from 2005. Income taxes increased $1.7 million from $7.6 million for 2004 to $9.3 million for 2005. The increase for 2005 was due to a larger 2005 pretax income and an increase in the effective tax rate from 30.1% to 32.3%. The increase in the effective tax rate for 2005 was primarily due to decreased interest income from non-taxable investment securities.

LIQUIDITY AND CAPITAL RESOURCES

The liquidity of the Company is the ability to meet loan demand, to accommodate possible outflows of deposits and to take advantage of interest rate market opportunities. The ability of the Company to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate assets and the availability of alternative sources of funds. To meet the needs of the clients and manage the risk of the Bank, the Company engages in liquidity planning and management.

The major source of the Company's funding is deposits. 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 has not historically obtained deposits from the brokered market. This source of funding is currently an attractive source of funding and may be considered along with other alternative non-deposit funding sources. The Company also obtains funds from the repayment and maturities of loans as well 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. 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.

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The Company's primary uses of funds are the origination of loans and the funding of deposit withdrawals and the repayment of borrowings. Certificates of deposit scheduled to mature during the 12 months ending December 31, 2007 total $749.4 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 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. As discussed earlier, the competitive market environment for deposits has been and is expected to continue to be intense causing pressure on net interest margin. However, based on market conditions and other liquidity considerations, the Company may also avail itself to the secondary borrowings discussed above.

Net loans receivable grew $331.9 million or 16.4% during 2006 of which approximately $124 million is attributable to net loans receivable acquired from Advantage in January 2006. 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 $149.5 million, of which $103.6 million was outstanding at December 31, 2006, and other sources of approximately $19.3 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 that they deem adequate but not excessive.

The Company has a capital plan for both 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 principal 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 January 2006, the Company, through its deconsolidated trust subsidiaries, issued an additional $30.0 million of Trust Preferred Securities bringing the total Trust Preferred Securities to $105.0 million. Of the $30.0 million, approximately $17 million was used to fund the purchase of Advantage with the remaining $13 million used for general corporate purposes. In March 2007, the Company notified the holders of the outstanding capital securities of Sun Trust III of its intentions to call these securities contemporaneously with the redemption of the Sun Trust III debentures in April 2007.

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. Under these requirements the federal bank regulatory agencies have established quantitative measures to ensure that minimum thresholds for Tier 1 Capital, Total Capital and Leverage (Tier 1 Capital divided by average assets) ratios are maintained. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets and certain off-balance sheet items as calculated under regulatory accounting practices. It is the Company’s intention to maintain “well-capitalized” risk-based capital levels. Table 3 provides the regulatory capital levels for the Company and the Bank at December 31, 2006.

TABLE 3: REGULATORY CAPITAL LEVELS

						For Capital Adequacy					To Be Well-Capitalized Under Prompt Corrective
	Actual					Purposes					Action Provisions
December 31, 2006		Amount	Ratio				Amount	Ratio				Amount	Ratio
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc.	$	320,883		11.89	%	$	215,958		8.00	%		(1)
Sun National Bank		284,787		10.57			215,473		8.00		$	269,342		10.00	%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc.		294,405		10.91			107,979		4.00			(1)
Sun National Bank		258,309		9.59			107,737		4.00			161,605		6.00
Leverage Ratio:
Sun Bancorp, Inc.		294,405		9.40			125,255		4.00			(1)
Sun National Bank		258,309		8.28			124,793		4.00			155,991		5.00
(1) Not applicable to bank holding companies.

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While the capital securities are deconsolidated in accordance with GAAP, they continue to qualify as Tier 1 or core capital of the Company under federal regulatory guidelines. 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 December 31, 2006, the full amount of the Company’s $105.0 million in Trust Preferred Securities qualify as Tier 1. 

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 it capital ratios.

See Note 22 of the Notes to Consolidated Financial Statements for additional information regarding regulatory matters.

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. Interest-earning assets are considered to be interest-rate sensitive if they will mature or reprice within a specific time period, over 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.

Table 4 provides the maturity and repricing characteristics of the Company's interest-earning assets and interest-bearing liabilities at December 31, 2006.  All amounts are categorized by their actual maturity or repricing date with the exception of interest-bearing demand deposits and savings deposits.  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 into categories noted below, based on the estimated duration of those deposits.

TABLE 4: INTEREST RATE SENSITIVITY SCHEDULE

December 31, 2006	Maturity/Repricing Time Periods
		0-3 Months			4-12 Months			1-5 Years			Over 5 Years			Total
Interest-earning assets:
Loans receivable	$	999,756		$	338,835		$	938,426		$	108,257		$	2,385,274
Interest-earning deposits with banks		48,066			-			-			-			48,066
Investment securities		107,638			100,120			206,092			97,295			511,145
Federal funds sold		47,043			-			-			-			47,043
Total interest-earning assets		1,202,503			438,955			1,144,518			205,552			2,991,528
Interest-bearing liabilities:
Interest-bearing demand deposits		367,609			106,237			133,055			186,054			792,955
Savings deposits		48,919			147,336			192,038			24,680			412,973
Time certificates		210,673			538,723			206,066			5,422			960,884
FHLB advances		3,079			36,988			60,739			2,754			103,560
Securities sold under agreements to repurchase		51,740			-			-			-			51,740
Junior subordinated debentures		56,703			20,619			30,928			-			108,250
Obligation under capital lease		15			48			386			4,873			5,322
Total interest-bearing liabilities		738,738			849,951			623,212			223,783			2,435,684
Periodic gap	$	463,765		$	(410,996	)	$	521,306		$	(18,231	)	$	555,844
Cumulative gap	$	463,765		$	52,769		$	574,075		$	555,844
Cumulative gap as a % of total assets		13.95	%		1.59	%		17.26	%		16.71	%

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During most of 2006, the Company was asset sensitive which implies that the Company’s interest-earning assets had shorter maturity or repricing terms than its interest-bearing liabilities. At December 31, 2006, the Company had a positive position with respect to its exposure to interest rate risk maturing or repricing within one year. Total interest-earning assets maturing or repricing within one year exceeded interest-bearing liabilities maturing or repricing during the same time period by $52.8 million, representing a positive one-year gap ratio of 1.59%.

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.

Net interest income simulation analysis shows a position that is relatively neutral to benefiting slightly from declines in interest rates. The change in position from 2005 to 2006 was impacted by changes in depositor preferences, moving from liquid deposits to higher yielding short-term time accounts, an expectation of strong deposit pricing competition in both increasing and decreasing rate environments and continued borrower preferences for fixed or longer term adjustable loans.

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. While the net interest income simulation indicates the Company will benefit slightly in 2007 from falling short-term interest rates, any continual flattening and any inversion of the yield curve could result in further margin compression. Table 5 provides the Company’s estimated earnings sensitivity profile versus the most likely rate forecast as of December 31, 2006.

TABLE 5: SENSITIVITY PROFILE
Change in Interest Rates	Percentage Change in Net Interest Income
(Basis Points)	Year 1
+200	-1.0%
+100	-0.4%
-100	+0.1%
-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 December 31, 2006, 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.

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 change in their fair values since the inception of the hedge. Because the hedging arrangement is considered highly effective, changes in the interest rate swaps’ fair values 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.

13

Customer Derivatives. During 2006 and 2005, the Company entered into several commercial loan interest rate 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. The Company then enters into a corresponding swap agreement with a third party in order to offset its exposure on the variable and fixed-rate components of the customer agreement. As the interest rate swaps with the clients and third parties are not designated as hedges under SFAS No. 133, 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 earnings impact.

Financial derivatives involve, to varying degrees, interest rate, market and credit risk. For interest rate swaps, only periodic cash payments are exchanged. Therefore, cash requirements and exposure to credit risk are significantly less than the notional amount.  

Disclosures about Contractual Obligations and Commercial Commitments.Purchase obligations include significant contractual cash obligations. Table 6 provides the Company’s contractual cash obligations at December 31, 2006. Included in Table 6 are the minimum contractual obligations under legally enforceable contracts with contract terms that are both fixed and determinable. The majority of these amounts are primarily for services, including core processing systems and telecommunications maintenance.

TABLE 6: CONTRACTUAL CASH OBLIGATIONS

December 31, 2006	Payments Due by Period
	Total		Less than 1 Year		1 to 3 Years		4 to 5 Years		After 5 Years
Time deposits (1)	$	960,967	$	749,465	$	181,206	$	24,874	$	5,422
Long-term debt		439,598		52,404		67,391		29,575		290,228
Leases		47,364		4,705		8,498		7,024		27,137
Purchase obligations (off-balance sheet)		5,394		2,519		2,629		246		-
Total contractual cash obligations	$	1,453,323	$	809,093	$	259,724	$	61,719	$	322,787
(1) Amount represents the book value of time deposit, excluding the unamortized premium recorded as a result of the Advantage acquisition in January 2006.

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 December 31, 2006 was $63.2 million, and the portion of the exposure not covered by collateral was approximately $2.4 million. We believe that the utilization rate of these letters of credit will continue to be substantially less than the amount of these commitments, as has been our 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. The Company has been attempting to negotiate an agreement that would provide 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. To date no such agreement has been reached and it is unclear whether or when such an agreement may be entered into between the parties. The Company’s existing severance agreement with the former President and Chief Executive Officer provides for a severance benefit equal to his then current monthly base salary for a period of twelve months, plus $50,000, which will result in a charge to earnings of approximately $650,000, on a pre-tax basis, in the quarter ending March 31, 2007. The Company, however, may incur additional charges to earnings greater than the contractual amount, or may incur such additional charges in future quarters, in connection with any negotiation and settlement of this matter between the parties.

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Table 7 provides the Company’s contractual commitments (see Note 18 of the Notes to Consolidated Financial Statements for additional information) at December 31, 2006.

TABLE 7: CONTRACTUAL COMMITMENTS

December 31, 2006	Amount of Commitment Expiration Per Period
	Unfunded Commitments		Less than 1 Year		1 to 3 Years		4 to 5 Years		After 5 Years
Lines of credit	$	614,050	$	311,372	$	71,472	$	3,249	$	227,957
Commercial standby letters of credit		63,173		56,885		1,208		5,061		19
Construction funding		100,569		76,104		22,368		2,097		-
Other commitments		119,114		119,114		-		-		-
Total commitments	$	896,906	$	563,475	$	95,048	$	10,407	$	227,976
(1) Amount represents the book value of time deposit, excluding the unamortized premium recorded as a result of the Advantage acquisition in January 2006.

Impact of Inflation and Changing Prices.The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Nearly all the assets and liabilities of the Company are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

FINANCIAL CONDITION

The Company’s assets increased $217.7 million, or 7.0% to $3.33 billion at December 31, 2006 as compared to $3.11 billion at December 31, 2005. Loans receivable were up 16.3% to $2.39 billion at December 31, 2006 as compared to December 31, 2005. The investment portfolio declined $224.0 million or 30.7% to $505.1 million at December 31, 2006. Deposits increased 7.9% to $2.67 billion at December 31, 2006 as compared to December 31, 2005. Total borrowings, excluding the issuance of $30.9 million in junior subordinated debentures during January 2006, decreased $88.3 million or 35.5% to $160.6 million at December 31, 2006.

Loans. Loans receivable increased $335.1 million, or 16.3%, to $2.39 billion at December 31, 2006 from $2.05 billion at December 31, 2005. The overall increase was primarily due to increases in commercial and industrial loans of $212.9 million or 12.3%, home equity loans of $76.8 million or 49.3%, and second mortgage of $23.5 million or 43.5%. In addition to the increase as a result of the Advantage acquisition, the increase in loan receivable reflects growth developed through a team of loan origination and credit professionals which has grown over the past several years. Organic loan growth, normalized for $125 million in loans receivable acquired in the Advantage acquisition and $140.8 million in prepayments, was approximately 17.1%. Competition for loans was intense in 2006 across all products and markets and is expected to continue into 2007. Despite the competitiveness of loan pricing and terms and conditions, the Company has not compromised its underwriting credit standards and overall credit quality remained stable throughout 2006.

During the first quarter of 2006, the Company launched Sun Home Loans, a wholly owned subsidiary of the Bank. Sun Home Loans originates residential mortgages through dedicated loan originators utilizing our existing branch network as well as generating business through non-customers. Prior to the closing of a loan, Sun Home Loans generally will have a commitment to sell the loan with servicing released in the secondary market. Secondary market sales are generally scheduled to close shortly after origination. Sun Home Loans offers a fully range of mortgage loans, including an array of traditional and non-traditional mortgages, and services.

The trend of the Bank’s lending over the past several years has been diversification of commercial and industrial loans. A large portion of the total portfolio is concentrated in the hospitality, entertainment and leisure industries and general office space. Many of these industries are dependent upon seasonal business and other factors beyond the control of the industries, such as weather and beach conditions along the New Jersey seashore. Any significant or prolonged adverse weather or beach conditions along the New Jersey seashore could have an adverse impact on the borrowers’ ability to repay loans. In addition, because these loans are concentrated in southern and central New Jersey, a decline in the general economic conditions of southern or central New Jersey and the impact on discretionary consumer spending could have a material adverse effect on the Company's financial condition, results of operations and cash flows. At December 31, 2006 and 2005, no concentration of loans exceeded 10% of total loans outstanding.

15

Table 8 provides selected data relating to the composition of the Company’s loan portfolio by type of loan and type of security at December 31, 2006, 2005, 2004, 2003 and 2002.

TABLE 8: SUMMARY OF LOAN PORTFOLIO

December 31,	2006					2005						2004				2003					2002
		Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Type of Loan:
Commercial and industrial	$	1,945,135		82.43	%	$	1,732,202		85.42	%	$	1,603,868		86.80	%	$	1,169,164		85.69	%	$	1,043,885		85.77	%
Home equity		232,321		9.85			155,561		7.67			122,735		6.64			80,292		5.88			44,603		3.67
Second mortgage		77,337		3.28			53,881		2.66			50,541		2.74			51,531		3.78			47,458		3.90
Residential real estate		38,418		1.63			30,162		1.49			26,117		1.41			29,788		2.18			43,375		3.56
Other		92,063		3.90			78,410		3.87			66,497		3.60			51,304		3.76			54,095		4.45
Less: Loan loss allowance		(25,658	)	(1.09	)		(22,463	)	(1.11	)		(22,037	)	(1.19	)		(17,614	)	(1.29	)		(16,408	)	(1.35	)
Net loans receivable	$	2,359,616		100.00	%	$	2,027,753		100.00	%	$	1,847,721		100.00	%	$	1,364,465		100.00	%	$	1,217,008		100.00	%
Type of Security:
Residential real estate:
1-4 family	$	411,967		17.46	%	$	291,602		14.38	%	$	245,991		13.31	%	$	185,364		13.58	%	$	166,495		13.67	%
Other		202,791		8.59			161,043		7.94			164,184		8.89			117,479		8.61			88,465		7.27
Commercial real estate		1,264,025		53.57			1,106,038		54.55			1,030,977		55.80			784,716		57.51			721,658		59.30
Commercial business loans		412,806		17.50			418,408		20.63			358,387		19.40			229,342		16.81			210,374		17.29
Consumer		54,127		2.29			38,492		1.90			36,831		1.99			33,642		2.47			36,333		2.99
Other		39,558		1.68			34,633		1.71			33,388		1.80			31,536		2.31			10,091		0.83
Less: Loan loss allowance		(25,658	)	(1.09	)		(22,463	)	(1.11	)		(22,037	)	(1.19	)		(17,614	)	(1.29	)		(16,408	)	(1.35	)
Net loans receivable	$	2,359,616		100.00	%	$	2,027,753		100.00	%	$	1,847,721		100.00	%	$	1,364,465		100.00	%	$	1,217,008		100.00	%

Table 9 provides the estimated maturity of the Company's loan portfolio at December 31, 2006. The table does not include prepayments or scheduled principal payments. Adjustable-rate mortgage loans are shown based on contractual maturities.

TABLE 9: ESTIMATED MATURITY OF LOAN PORTFOLIO

December 31, 2006		Due Within 1 Year		Due after 1 through 5 years		Due after 5 years	Allowance for Loan Loss				Total
Commercial and industrial	$	490,066	$	701,114	$	753,955	$	(22,384	)	$	1,922,751
Home equity		1,365		-		230,956		(1,937	)		230,384
Second mortgage		1,104		18,900		57,333		-			77,337
Residential real estate		8,928		181		29,309		(174	)		38,244
Other		16,635		29,327		46,101		(1,163	)		90,900
Total	$	518,098	$	749,522	$	1,117,654	$	(25,658	)	$	2,359,616

16

Table 10 provides the dollar amount of all loans due after December 31, 2007 which have pre-determined interest rates and which have floating or adjustable interest rates.

TABLE 10: LOANS GREATER THAN 12 MONTHS

December 31, 2006	Fixed-Rates		Floating or Adjustable Rates		Total
Commercial and industrial	$	712,593	$	742,476	$	1,455,069
Home equity		4,029		226,927		230,956
Second mortgage		76,233		-		76,233
Residential real estate		25,970		3,520		29,490
Other		51,554		23,874		75,428
Total	$	870,379	$	996,797	$	1,867,176

See Note 5 of the Notes to Consolidated Financial Statements for additional information on loans.

Non-Performing and Problem Assets

Loan Delinquencies.The Company's collection procedures provide for a late charge assessment after a commercial loan is 10 days past due, or a residential mortgage loan is 15 days past due. The Company contacts the borrower and payment is requested. If the delinquency continues, subsequent efforts are made to contact the borrower. If the loan continues to be delinquent for 90 days or more, the Company usually declares the loan to be in default and payment in full is demanded. The Company will initiate foreclosure proceedings and steps will be taken to liquidate any collateral taken as security for the loan unless other repayment arrangements are made. Delinquent loans are reviewed on a case-by-case basis in accordance with the lending policy.

Interest accruals are generally discontinued when a loan becomes 90 days past due or when collection of principal or interest is considered doubtful. When interest accruals are discontinued, interest credited to income in the current year is reversed, and interest accrued in the prior year is charged to the allowance for loan losses. Generally, commercial loans are charged-off no later than 120 days delinquent and residential real estate loans are typically charged-off at 90 days delinquent, unless the loan is well secured and in the process of collection or other extenuating circumstances support collection. In all cases, loans must be placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Non-Performing Assets.Total non-performing assets increased $3.6 million from $11.6 million at December 31, 2005 to $15.2 million at December 31, 2006. The increase in non-performing loans from 2005 to 2006 was primarily a result of an increase in non-accrual loans of $4.4 million offset by an $849,000 decrease in real estate owned. The increase in commercial and industrial non-accruing loans was primarily a result of three unrelated relationships whose credits totaled $2.9 million at December 31, 2006. The Company believes that the loans are well secured and in process of collection. The Company does not believe that the increase in commercial and industrial non-accruing loans is indicative of a trend that will continue into 2007. The increase in non-accruing home equity loans is a result of an increase in the volume of the home equity portfolio which increased $76.8 million or 49.3% from December 31, 2005. The ratio of non-performing assets to net loans increased to 0.65% at December 31, 2006 compared to 0.57% at December 31, 2005.

Management of the Company believes that all loans accruing interest are adequately secured and in the process of collection.  Interest income that would have been recorded on the above non-accrual loans, under the original terms of such loans, would have totaled $841,000 for 2006.

17

Table 11 provides a summary of non-performing assets at December 31, 2006, 2005, 2004, 2003 and 2002.

TABLE 11: SUMMARY OF NON-PERFORMING ASSETS

December 31,		2006			2005			2004			2003			2002
Non-performing loans:
Loans accounted for on a non-accrual basis:
Commercial and industrial	$	12,453		$	8,823		$	12,263		$	20,308		$	8,879
Home equity		1,170			220			208			46			14
Second mortgage		109			106			-			-			100
Residential real estate		273			669			848			1,122			593
Other		317			139			138			92			377
Total non-accruing loans		14,322			9,957			13,457			21,568			9,963
Accruing loans that are contractually past due 90 days or more:
Commercial and industrial		250			85			292			125			1,837
Home equity		12			-			-			47			30
Second mortgage		-			-			-			-			122
Residential real estate		-			53			373			57			401
Other		36			30			221			19			115
Total loans 90-days past due		298			168			886			248			2,505
Total non-performing loans		14,620			10,125			14,343			21,816			12,468
Real estate owned		600			1,449			2,911			4,444			904
Total non-performing assets	$	15,220		$	11,574		$	17,254		$	26,260		$	13,372
Total non-performing loans to net loans receivable		0.62	%		0.50	%		0.78	%		1.60	%		1.02	%
Total non-performing loans to total assets		0.44	%		0.33	%		0.47	%		0.84	%		0.59	%
Total non-performing assets to net loans receivable		0.65	%		0.57	%		0.93	%		1.92	%		1.10	%
Total non-performing assets to total assets		0.46	%		0.37	%		0.57	%		1.01	%		0.63	%
Total allowance for loan losses to total non-performing loans		175.50	%		221.86	%		153.64	%		80.74	%		131.60	%

Potential Problem Loans. At December 31, 2006, there were six commercial loan relationships aggregating $6.9 million for which information exists as to the ability of the borrowers to comply with present loan repayment terms and have therefore, caused management to place them on its internally monitored loan list. The classification of these loans, however, does not imply that management expects losses, but that it believes a higher level of scrutiny is prudent under the circumstances. These loans were not classified as non-accrual and were not considered non-performing. Depending upon the state of the economy, future events, and their impact on these borrowers, these loans and others not currently so identified could be classified as non-performing assets in the future.

Real Estate Owned. Real estate acquired by the Company as a result of foreclosure and bank property that is not in use is classified as real estate owned until such time as it is sold. When real estate is acquired or transferred, it is recorded at the lower of the unpaid principal balance of the related loan or its fair value less estimated disposal costs. Any subsequent write-down of real estate owned is charged to operations. Table 12 provides a summary of real estate owned at December 31, 2006 and 2005.

TABLE 12: SUMMARY OF REAL ESTATE OWNED

December 31,	2006		2005
Commercial properties	$	-	$	1,066
Residential properties		600		62
Bank properties		-		321
Total	$	600	$	1,449

During 2006, the Company sold various unrelated real estate properties with carrying values totaling $1.4 million which resulted in recognized net losses of approximately $46,000. Table 13 provides an analysis of the activity in real estate owned for the years ended December 31, 2006 and 2005.

18

TABLE 13: ANALYSIS OF REAL ESTATE OWNED

Year Ended December 31,	2006			2005
Balance, beginning of year	$	1,449		$	2,911
Additions		669			321
Transfer to bank property		-			(309	)
Write-downs		(135	)		-
Sales		(1,383	)		(1,474	)
Balance, end of year	$	600		$	1,449

See Note 9 of the Notes to Consolidated Financial Statements for additional information on real estate owned.

Allowances for Losses on Loans.The Company’s allowance for losses on loans increased to $25.7 million or 1.08% of loans receivable at December 31, 2006 compared to $22.5 million or 1.10% at December 31, 2005. Non-performing loans increased to $14.6 million at December 31, 2006 as compared to $10.1 million at December 31, 2005. The provision for loan losses was $3.8 million for 2006, $2.3 million for 2005, and $2.1 million for 2004. As a result of the January 2006 Advantage acquisition, $1.3 million of additional allowance for loan losses was assumed.

Table 14 provides information with respect to the Company's allowance for losses on loans for the years ended December 31, 2006, 2005, 2004, 2003 and 2002.

TABLE 14: ALLOWANCE FOR LOAN LOSSES

Year Ended December 31,		2006			2005			2004			2003			2002
Allowance for loan losses, beginning of year	$	22,463		$	22,037		$	17,614		$	16,408		$	13,332
Charge-offs:
Commercial		(1,838	)		(1,928	)		(796	)		(4,010	)		(1,219	)
Construction Mortgage		(22	)		(27	)		-			-			-
Mortgage		-			-			(84	)		(1	)		(20	)
Other		(653	)		(686	)		(502	)		(369	)		(371	)
Total charge-offs		(2,513	)		(2,641	)		(1,382	)		(4,380	)		(1,610	)
Recoveries:
Commercial		377			561			641			700			457
Construction Mortgage		-			84			-			-			-
Mortgage		-			8			-			-			-
Other		265			104			152			61			54
Total recoveries		642			757			793			761			511
Net charge-offs		(1,871	)		(1,884	)		(589	)		(3,619	)		(1,099	)
Purchased allowance resulting from bank acquisition		1,259			-			2,937			-			-
Provision for loan losses		3,807			2,310			2,075			4,825			4,175
Allowance for loan losses, end of year	$	25,658		$	22,463		$	22,037		$	17,614		$	16,408
Net loans charged-off as a percent of average loans outstanding		0.08	%		0.10	%		0.04	%		0.28	%		0.09	%

19

Table 15 provides the allocation of the Company's allowance for loan losses by loan category and the percent of loans in each category to loans receivable at December 31, 2006, 2005, 2004, 2003 and 2002. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses that may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.

TABLE 15: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

December 31,	2006				2005					2004			2003				2002
		Amount	%			Amount	%			Amount	%			Amount	%			Amount	%
Allowance for loan losses:
Commercial and industrial	$	22,384	87.24	%	$	19,890	88.54	%	$	19,990	90.71	%	$	15,885	90.19	%	$	14,806	90.24	%
Residential real estate		174	0.68			258	1.15			191	0.87			247	1.40			265	1.62
Home equity		1,937	7.55			1,006	4.48			739	3.35			483	2.74			263	1.60
Other		1,163	4.53			1,309	5.83			1,117	5.07			999	5.67			1,074	6.54
Total allowance for loan losses	$	25,658	100.00	%	$	22,463	100.00	%	$	22,037	100.00	%	$	17,614	100.00	%	$	16,408	100.00	%

See Note 6 of the Notes to Consolidated Financial Statements for additional information on allowance for loan losses.

Investment Securities.Investment securities available for sale and held to maturity decreased $221.7 million or 31.3% from $709.1 million at December 31, 2005 to $487.4 million at December 31, 2006. During 2006, the Company continued its strategy of redeploying maturing securities into its higher yielding loan portfolio. The estimated average life of the investment portfolio at December 31, 2006 was 2.0 years with an estimated modified duration of 1.5 years. The Company will not continue to manage the investment portfolio as a primary source of liquidity. Maturing securities in 2007 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.

The Company’s investment policy is established by senior management and approved by the Board of Directors. It is based on asset and liability management goals and is designed to provide a portfolio of high quality investments that optimizes interest income within acceptable limits of risk and liquidity.

Table 16 provides the estimated fair value and amortized cost of the Company's portfolio of investment securities at December 31, 2006, 2005 and 2004. For all debt securities classified as available for sale, the carrying value is the estimated fair value.

TABLE 16: SUMMARY OF INVESTMENT SECURITIES

December 31,		2006						2005							2004
			Net							Net							Net
			Unrealized			Estimated				Unrealized			Estimated				Unrealized			Estimated
	Amortized		Gains			Fair		Amortized		Gains			Fair		Amortized		Gains			Fair
	Cost		(Losses)			Value		Cost		(Losses)			Value		Cost		(Losses)			Value
Available for sale:
U.S. Treasury obligations	$	29,956	$	(39	)	$	29,917	$	59,237	$	(145	)	$	59,092	$	70,069	$	(308	)	$	69,761
U.S. Government agencies and mortgage-backed securities		372,864		(6,122	)		366,742		596,823		(11,142	)		585,681		662,023		(5,131	)		656,892
State and municipal obligations		63,211		106			63,317		28,050		(156	)		27,894		56,695		1,123			57,818
Other securities		1,944		-			1,944		3,963		-			3,963		35,109		(156	)		34,953
Total available for sale investment securities	$	467,975	$	(6,055	)	$	461,920	$	688,073	$	(11,443	)	$	676,630	$	823,896	$	(4,472	)	$	819,424
Held to maturity:
Mortgage-backed securities	$	24,691	$	(595	)	$	24,096	$	32,445	$	(711	)	$	31,734	$	43,048	$	(176	)	$	42,872
Other securities		750		-			750		-		-			-		-		-			-
Total held to maturity investment securities	$	25,441	$	(595	)	$	24,846	$	32,445	$	(711	)	$	31,734	$	43,048	$	(176	)	$	42,872

20

Table 17 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 December 31, 2006.

TABLE 17: ANALYSIS OF GROSS UNREALIZED LOSSES BY INVESTMENT CATEGORY

December 31, 2006	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
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 December 31, 2006, 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 over yields since the time the underlying securities were purchased. Recovery of fair value is expected as the securities approach their maturity date or if 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 December 31, 2006, the gross unrealized loss in the category 12 months or longer of $6.9 million consisted of 92 securities having an aggregate unrealized loss of 2.0% of the amortized cost. The securities represented Federal Agency issues and 22 securities currently rated AA or better by at least one bond credit rating service. At December 31, 2006, securities in a gross unrealized loss position for less than 12 months consisted of 37 securities having an aggregate unrealized loss of 0.2% of the amortized cost basis.

Expected maturities of individual securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Table 18 provides an estimated maturity summary with the carrying values and weighted average yields on the Company's portfolio of investment securities at December 31, 2006. The investment securities are presented in the table based on current prepayment assumptions. Yields on tax-exempt obligations have been calculated on a tax-equivalent basis.

TABLE 18: MATURITY DISTRIBUTION OF INVESTMENT SECURITIES

December 31,	1 Year or Less				1 to 5 Years					5 to 10 Years			More than Ten Years				Total
		Carrying Value	Yield			Carrying Value	Yield			Carrying Value	Yield			Carrying Value	Yield			Carrying Value	Yield
Available for sale:
U.S. Treasury obligations	$	24,928	4.76	%	$	4,989	4.75	%	$	-	-	%	$	-	-	%	$	29,917	4.75	%
U.S. Government agencies and mortgage-backed securities		207,841	3.60			119,635	3.68			12,254	4.49			27,012	5.68			366,742	3.81
State and municipal obligations		19,821	5.47			19,484	5.59			5,132	5.99			18,880	6.04			63,317	5.72
Other securities		878	5.63			1,045	4.01			21	-			-	-			1,944	4.69
Total available for sale investment securities	$	253,468	3.86	%	$	145,153	3.98	%	$	17,407	4.93	%	$	45,892	5.83	%	$	461,920	4.13	%
Held to maturity:
Mortgage-backed securities	$	-	-	%	$	22,161	4.02	%	$	2,530	4.65	%	$	-	-	%	$	24,691	4.09	%
Other securities		-	-			250	1.97			500	-			-	-			750	0.07
Total held to maturity investment securities	$	-	-	%	$	22,411	4.00	%	$	3,030	3.89	%	$	-	-	%	$	25,441	3.97	%

See Note 4 of the Notes to Consolidated Financial Statements for additional information on investment securities.

21

Bank Owned Life Insurance (“BOLI”). During 2006, the BOLI investment increased $1.7 million to $57.4 million at December 31, 2006 as a result of an increase in the cash value of the BOLI, which was recorded as other non-interest income in the consolidated statement of operations.

Deposits.Deposits at December 31, 2006 totaled $2.67 billion, an increase of $196.3 million or 7.9% over the December 31, 2005 balance of $2.47 billion. In January 2006, the Company acquired approximately $148 million in deposits as a result of the Advantage acquisition. Core deposits, which exclude all certificates greater than $100,000, represented 87.8% and 90.9% of total deposits at December 31, 2006 and 2005, respectively. The Company has experienced a shift in the composition of deposits with a decline in demand deposits and an increase in higher cost time deposits. The Company’s increase in rates on time deposits are commensurate with increases in short-term interest rates by the Federal Reserve during the first half of 2006 and the intense competitive environment for retaining and attracting deposits. During 2007, deposits will be the primary source of funding as the Company shifts away from its investment portfolio liquidity management strategy, as previously discussed.

Table 19 provides a summary of deposits at December 31, 2006, 2005 and 2004.

TABLE 19: SUMMARY OF DEPOSITS

December 31,		2006		2005		2004
Demand deposits	$	1,294,140	$	1,416,651	$	1,336,891
Savings deposits		412,973		386,821		452,726
Time deposits under $100,000		634,350		443,535		410,632
Time deposits $100,000 or more		326,534		224,641		230,114
Total	$	2,667,997	$	2,471,648	$	2,430,363

Consumer and commercial deposits are attracted principally from within the Company's primary market area through offering a wide compliment of deposit products that include checking, savings, money market, certificates of deposits and individual retirement accounts.  The Company continues to operate with a core deposit relationship strategy that values the importance of building a long-term stable relationship with each and every customer.   The relationship strategy employs a pricing strategy that rewards customers that establish core accounts and maintain a certain minimum threshold account balance.  Management regularly meets to evaluate internal cost of funds, to analyze the competition, to review the Company's cash flow requirements for lending and liquidity and executes any appropriate pricing changes when necessary.  The Company does not currently obtain funds through brokers, nor does it solicit funds outside the states of New Jersey, Delaware and Pennsylvania.

Table 20 provides the distribution of total deposits between core and non-core at December 31, 2006, 2005 and 2004.

TABLE 20: DISTRIBUTION OF DEPOSITS

December 31,	2006					2005					2004
		Amount	Percentage				Amount	Percentage				Amount	Percentage
Core deposits	$	2,341,463		87.8	%	$	2,247,007		90.9	%	$	2,200,249		90.5	%
Time deposits $100,000 or more		326,534		12.2			224,641		9.1			230,114		9.5
Total deposits	$	2,667,997		100.0	%	$	2,471,648		100.0	%	$	2,430,363		100.0	%

Table 21 provides a summary of certificates of deposit of $100,000 or more by remaining maturity at December 31, 2006.

TABLE 21: CERTIFICATES OF DEPOSIT OF $100,000 OR MORE

December 31, 2006		Amount
Three months or less	$	102,325
Over three through six months		95,901
Over six through twelve months		87,929
Over twelve months		40,379
Total	$	326,534

See Note 11 of the Notes to Consolidated Financial Statements for additional information on deposits.

22

Borrowings.Borrowed funds, excluding debentures held by trusts, decreased $88.3 million to $160.6 million at December 31, 2006, from $249.0 million at December 31, 2005. The Company utilized cash flows from maturities and calls of investment securities, the Advantage acquisition, and internal deposit growth to repay these borrowings.

Table 22 provides the maximum month end amount of borrowings by type for the years ended December 31, 2006 and 2005.

TABLE 22: SUMMARY OF MAXIMUM MONTH END BORROWINGS

December 31,	2006		2005
FHLB advances	$	122,831	$	143,024
FHLB repurchase agreements	$	115,000	$	70,000
FHLB overnight line of credit	$	33,000	$	50,000
Federal funds purchased	$	32,000	$	30,000
Repurchase agreements with customers	$	61,763	$	87,651

Table 23 provides information regarding FHLB advances and FHLB repurchase agreements, interest rates, approximate weighted average amounts outstanding and their approximate weighted average rates at or for the years ended December 31, 2006, 2005 and 2004.

TABLE 23: SUMMARY OF FHLB BORROWINGS

At or for the Year Ended December 31,	2006			2005			2004
FHLB convertible rate advances outstanding at year end	$	25,000		$	25,000		$	25,000
Interest rate at year end		6.49	%		6.49	%		6.49	%
Approximate average amount outstanding during the year	$	25,000		$	25,000		$	25,000
Approximate weighted average rate during the year		6.49	%		6.49	%		6.49	%
FHLB term amortizing advances outstanding at year end	$	20,360		$	41,346		$	61,469
Weighted average interest rate at year end		4.52	%		4.36	%		4.58	%
Approximate average amount outstanding during the year	$	30,003		$	50,771		$	70,427
Approximate weighted average rate during the year		4.52	%		4.34	%		4.31	%
FHLB term non-amortizing advances outstanding at year end	$	58,200		$	58,200		$	58,200
Weighted average interest rate at year end		3.87	%		3.87	%		3.46	%
Approximate average amount outstanding during the year	$	58,200		$	58,200		$	58,200
Approximate weighted average rate during the year		3.87	%		3.71	%		3.40	%
FHLB repurchase agreements outstanding at year end	$	-		$	60,000		$	50,000
Weighted average interest rate at year end		-	%		4.22	%		2.43	%
Approximate average amount outstanding during the year	$	27,589		$	23,469		$	4,440
Approximate weighted average rate during the year		4.66	%		3.01	%		1.92	%

Table 24 provides information regarding securities sold under agreements to repurchase with customers, interest rates, approximate average amounts outstanding and their approximate weighted average rates at December 31, 2006, 2005 and 2004.

23

TABLE 24: SUMMARY OF SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE WITH CUSTOMERS

December 31,		2006			2005			2004
Balance at year end	$	51,740		$	59,021		$	59,641
Weighted average interest rate at year end		4.60	%		3.51	%		1.54	%
Approximate average amount outstanding during the year	$	45,726		$	76,894		$	63,715
Approximate weighted average rate during the year		4.34	%		2.61	%		0.74	%

Deposits are the primary source of funds for the Company’s lending activities, investment activities and general business purposes. Should the need arise, the Company has the ability to access lines of credit from various sources including the Federal Reserve Bank, the FHLB and various other correspondent banks. In addition, on an overnight basis, the Company has the ability to sell securities under agreements to repurchase.

See Notes 12 and 13 of the Notes to Consolidated Financial Statements for additional information on borrowings.

Junior Subordinated Debentures Held by Trusts that Issued Capital Debt. Table 25 provides a summary of the outstanding capital securities issued by each Issuer Trust and the junior subordinated debenture issued by the Company to each Issuer Trust as of December 31, 2006.

TABLE 25: SUMMARY OF CAPITAL SECURITIES AND JUNIOR SUBORDINATED DEBENTURES

December 31, 2006	Capital Securities				Junior Subordinated Debentures
Issuer Trust	Issuance Date		Stated Value	Distribution Rate	Principal Amount		Maturity	Redeemable Beginning
Sun Trust III	April 22, 2002	$	20,000	6-mo LIBOR plus 3.70%	$	20,619	April 22, 2032	April 22, 2007
Sun Trust IV	July 7, 2002		10,000	3-mo LIBOR plus 3.65%		10,310	October 7, 2032	July 7, 2007
Sun Trust V	December 18, 2003		15,000	3-mo LIBOR plus 2.80%		15,464	December 30, 2033	December 30, 2008
Sun 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, 2003		5,000	3-mo LIBOR plus 3.35%		5,155	January 7, 2033	January 7, 2008
Sun Trust VII	January 17, 2006		30,000	6.24% Fixed		30,928	March 15, 2036	March 15, 2011
		$	105,000		$	108,250

In March 2007, the Company notified the holders of the outstanding capital securities of Sun Trust III of its intentions to call these securities contemporaneously with the redemption of the Sun Trust III debentures in April 2007. For more information regarding junior subordinated debentures held by trusts that issued capital debt, refer to Note 14 of the Notes to Consolidated Financial Statements contained herein.

Other Liabilities. Other liabilities increased $32.2 million to $46.5 million at December 31, 2006 from $14.3 million at December 31, 2005. This increase was primarily a result of an outstanding purchase of available for sale investment securities for $27.8 million which was settled in January 2007. At December 31, 2005, the Company did not have any unsettled purchases of investment securities.

24

FORWARD-LOOKING STATEMENTS

The Company may from time to time make written or oral “forward-looking statements” including statements contained in this annual report and in other communications by the Company which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as statements of the Company’s plans, objectives, expectations, estimates and intentions, involve risks and uncertainties and are subject to various important factors, some of which are beyond the Company’s control, including interest rate fluctuations, changes in financial services’ laws and regulations and competition, and which could cause the Company’s actual results to differ materially from the forward-looking statements. The Company does not undertake, and specifically disclaims any obligation, 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.

25

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13(a)-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Management, including the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment was also conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment of the Company’s internal control over financial reporting also included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for Consolidated Reports of Condition and Income for Schedules RC, RI, RI-A. Based on our evaluation under the framework in Internal Control - Integrated Framework, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006.

Management’s assertion as to the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included in the following pages.

26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Sun Bancorp, Inc.

Vineland, New Jersey

We have audited management's assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Sun Bancorp Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for Consolidated Reports of Condition and Income for Schedules RC, RI, RI-A. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have not examined and, accordingly, we do not express an opinion or any other form of assurance on management’s statements referring to compliance with laws and regulations.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2006 of the Company and our report dated March 16, 2007 expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the adoption of the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, on January 1, 2006.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania

March 16, 2007

27

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Sun Bancorp, Inc.

Vineland, New Jersey

We have audited the accompanying consolidated statements of financial condition of Sun Bancorp Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2006.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sun Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, on January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2007 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania

March 16, 2007

28

SUN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2006 and 2005
(Dollars in thousands, except share amounts)
	2006			2005
ASSETS
Cash and due from banks	$	74,991		$	74,387
Interest-earning deposits with banks		48,066			2,707
Federal funds sold		47,043			8,368
Cash and cash equivalents		170,100			85,462
Investment securities available for sale (amortized cost of $467,975 and $688,073 at December 31, 2006 and 2005, respectively)		461,920			676,630
Investment securities held to maturity (estimated fair value of $24,846 and $31,734 at December 31, 2006 and 2005, respectively)		25,441			32,445
Loans receivable (net of allowance for loan losses of $25,658 and $22,463 at December 31, 2006 and 2005, respectively)		2,359,616			2,027,753
Restricted equity investments		17,729			19,991
Bank properties and equipment, net		42,292			42,110
Real estate owned, net		600			1,449
Accrued interest receivable		17,419			15,148
Goodwill		128,117			104,891
Intangible assets, net		28,570			29,939
Deferred taxes, net		3,939			6,761
Bank owned life insurance		57,370			55,627
Other assets		12,450			9,683
TOTAL	$	3,325,563		$	3,107,889
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits	$	2,667,997		$	2,471,648
Advances from the Federal Home Loan Bank (FHLB)		103,560			124,546
Securities sold under agreements to repurchase - FHLB		-			60,000
Securities sold under agreements to repurchase - customer		51,740			59,021
Obligation under capital lease		5,322			5,400
Junior subordinated debentures		108,250			77,322
Other liabilities		46,467			14,299
Total liabilities		2,983,336			2,812,236
Commitments and contingencies (see Note 18)
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued		-			-
Common stock, $1 par value, 50,000,000 shares authorized, 20,507,549 shares and 18,168,530 shares issued at December 31, 2006 and 2005, respectively		20,508			18,169
Additional paid-in capital		304,857			264,152
Retained earnings		20,794			20,757
Accumulated other comprehensive loss		(3,932	)		(7,425	)
Total shareholders' equity		342,227			295,653
TOTAL	$	3,325,563		$	3,107,889
See Notes to Consolidated Financial Statements.

29

SUN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands, except share amounts)
		2006			2005			2004
INTEREST INCOME:
Interest and fees on loans	$	160,876		$	125,156		$	96,617
Interest on taxable investment securities		19,195			24,689			24,813
Interest on non-taxable investment securities		1,564			1,378			1,951
Dividends on restricted equity investments		1,143			834			503
Interest on federal funds sold		1,172			1,172			385
Total interest income		183,950			153,229			124,269
INTEREST EXPENSE:
Interest on deposits		66,892			41,427			24,061
Interest on funds borrowed		9,571			9,122			7,275
Interest on junior subordinated debt		8,409			5,165			3,615
Total interest expense		84,872			55,714			34,951
Net interest income		99,078			97,515			89,318
PROVISION FOR LOAN LOSSES		3,807			2,310			2,075
Net interest income after provision for loan losses		95,271			95,205			87,243
NON-INTEREST INCOME:
Service charges on deposit accounts		11,117			8,957			9,043
Other service charges		311			279			354
(Loss) gain on sale or disposal of bank properties and equipment		(330	)		42			2,467
(Loss) gain on sale of investment securities		(21	)		773			1,407
Gain on sale of loans		1,127			989			289
Gain on derivative instruments		1,178			1,462			68
Other		6,364			5,786			5,491
Total non-interest income		19,746			18,288			19,119
NON-INTEREST EXPENSES:
Salaries and employee benefits		45,079			42,627			40,177
Occupancy expense		12,136			11,380			10,608
Equipment expense		7,926			7,762			7,091
Data processing expense		4,283			4,119			3,973
Amortization of intangible assets		4,767			4,499			5,268
Advertising expense		1,683			1,631			1,443
Real estate owned expense, net		238			(48	)		60
Other		13,281			12,690			12,532
Total non-interest expenses		89,393			84,660			81,152
INCOME BEFORE INCOME TAXES		25,624			28,833			25,210
INCOME TAXES		8,350			9,312			7,581
NET INCOME	$	17,274		$	19,521		$	17,629
Basic earnings per share	$	0.85		$	1.02		$	1.03
Diluted earnings per share	$	0.81		$	0.96		$	0.96
Weighted average shares - basic		20,266,774			19,062,315			17,062,454
Weighted average shares - diluted		21,318,132			20,327,891			18,412,054
See Notes to Consolidated Financial Statements.

30

SUN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands)	Common Stock		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)				Treasury Stock			Total
BALANCE, JANUARY 1, 2004	$	13,381	$	151,631		$	20,062		$	1,690		$	(1,046	)	$	185,718
Comprehensive income:
Net income		-		-			17,629			-			-			17,629
Unrealized loss on securities available for sale net of reclassification adjustment, net of tax (See Note 2)		-		-			-			(4,455	)		-			(4,455	)
Comprehensive income																13,174
Exercise of stock options		43		370			-			-			-			413
Excess tax benefit related to stock options		-		12			-			-			-			12
Issuance of common stock		3,116		76,797			-			-			-			79,913
Stock dividends		665		15,298			(15,963	)		-			-			-
Cash paid for fractional interests resulting from stock dividend		-		-			(10	)		-			-			(10	)
BALANCE, DECEMBER 31, 2004	$	17,205	$	244,108		$	21,718		$	(2,765	)	$	(1,046	)	$	279,220
Comprehensive income:
Net income		-		-			19,521			-			-			19,521
Unrealized loss on securities available for sale net of reclassification adjustment, net of tax (See Note 2)		-		-			-			(4,660	)		-			(4,660	)
Comprehensive income																14,861
Exercise of stock options		148		(1,088	)		-			-			-			(940	)
Excess tax benefit related to stock options		-		1,437			-			-			-			1,437
Issuance of common stock		45		858			-			-			-			903
Stock dividends		771		18,657			(20,474	)		-			1,046			-
Stock-based compensation		-		180			-			-			-			180
Cash paid for fractional interests resulting from stock dividend		-		-			(8	)		-			-			(8	)
BALANCE, DECEMBER 31, 2005	$	18,169	$	264,152		$	20,757		$	(7,425	)	$	-		$	295,653
Comprehensive income:
Net income		-		-			17,274			-			-			17,274
Unrealized gain on securities available for sale net of reclassification adjustment, net of tax (See Note 2)		-		-			-			3,493			-			3,493
Comprehensive income																20,767
Exercise of stock options		473		2,400			-			-			-			2,873
Excess tax benefit related to stock options		-		1,478			-			-			-			1,478
Issuance of common stock		64		1,123			-			-			-			1,187
Common stock issued in acquisition		832		16,997		-				-			-			17,829
Stock options exchanged in acquisition		-		1,954		-				-			-			1,954
Stock dividends		970		16,247		(17,217		)		-			-			-
Stock-based compensation		-		506			-			-			-			506
Cash paid for fractional interests resulting from stock dividend		-		-			(20	)		-			-			(20	)
BALANCE, DECEMBER 31, 2006	$	20,508	$	304,857		$	20,794		$	(3,932	)	$	-		$	342,227
See Notes to Consolidated Financial Statements.

31

SUN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006, 2005 and 2004
(Dollars in thousands)	2006			2005			2004
OPERATING ACTIVITIES:
Net income	$	17,274		$	19,521		$	17,629
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,807			2,310			2,075
Depreciation and amortization		5,158			4,681			3,822
Net (accretion) amortization of investment securities		(920	)		(260	)		1,917
Amortization of intangible assets		4,767			4,499			5,268
Write down of book value of bank properties and equipment and real estate owned		189			62			177
Loss (gain) on sale of investment securities available for sale		21			(773	)		(1,407	)
Loss (gain) on sale of bank properties and equipment		330			(42	)		(2,467	)
Loss (gain) on real estate owned		46			(198	)		(220	)
Gain on sale of loans		(1,127	)		(989	)		(289	)
Increase in cash value of bank owned life insurance		(1,743	)		(1,648	)		(1,710	)
Deferred income taxes		929			175			6,407
Stock-based compensation		938			711			316
Excess tax benefits related to stock options		(1,724	)		-			-
Stock contributed to employee benefit plans		637			223			-
Loans originated for sale		(67,784	)		(71,117	)		(45,919	)
Proceeds from the sale of loans		66,448			66,929			45,554
Change in assets and liabilities which provided (used) cash:
Accrued interest receivable		(1,515	)		(2,629	)		205
Other assets		(646	)		(383	)		(921	)
Other liabilities		2,184			7,720			4,227
Net cash provided by operating activities		27,269			28,792			34,664
INVESTING ACTIVITIES:
Purchases of investment securities available for sale		(249,732	)		(253,636	)		(388,716	)
Purchases of investment securities held to maturity		(500	)		-			(46,125	)
Redemption (purchase) of restricted equity securities		2,464			(4,586	)		(1,844	)
Proceeds from maturities, prepayments or calls of investment securities available for sale		505,102			363,392			496,669
Proceeds from maturities, prepayments or calls of investment securities held to maturity		7,701			10,518			3,077
Proceeds from sale of investment securities available for sale		25,449			27,185			143,095
Net increase in loans		(210,980	)		(177,165	)		(254,489	)
Purchase of bank properties and equipment		(3,036	)		(10,185	)		(5,160	)
Proceeds from sale of bank properties and equipment		-			193			7,480
Purchase of bank owned life insurance		-			(6,800	)		(6,800	)
Proceeds from sale of real estate owned		1,337			1,672			3,127
Net (decrease) increase in cash realized from acquisitions / sales		(15,101	)		-			7,609
Net cash provided by (used in) investing activities		62,704			(49,412	)		(42,077	)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits		48,335			41,285			(22,766	)
Purchase price adjustment of branch assets purchased		-			-			219
Net (repayments) borrowings under line of credit and repurchase agreements		(88,345	)		(10,743	)		22,212
Proceeds from exercise of stock options		2,873			497			425
Excess tax benefits related to stock options		1,724			-			-
Proceeds from issuance of junior subordinated debt		30,000			-			-
Payments for fractional interests resulting from stock dividend		(20	)		(8	)		(10	)
Proceeds from issuance of common stock		98			149			118
Net cash (used in) provided by financing activities		(5,335	)		31,180			198
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		84,638			10,560			(7,215	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		85,462			74,902			82,117
CASH AND CASH EQUIVALENTS, END OF YEAR	$	170,100		$	85,462		$	74,902
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	79,679		$	54,341		$	34,070
Income taxes paid		7,425			7,974			4,987
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
Transfer of loans and bank properties to real estate owned	$	669		$	321		$	1,242
Commitments to purchase investment securities		27,759			-			-
Net assets acquired and purchase adjustments in bank acquisition		34,884			-			-
Value of shares issued in acquisition		17,829			-			62,458
Fair value of options exchanged in bank acquisitions		1,954			-			-
See Notes to Consolidated Financial Statements.

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SUN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2006, 2005 and 2004

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

1. NATURE OF OPERATIONS

Sun Bancorp, Inc. (the "Company") is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is the parent company of Sun National Bank (the “Bank”), a national bank and the Company’s principal wholly owned subsidiary. The Bank’s wholly owned subsidiaries are Med-Vine, Inc., Sun Financial Services, L.L.C., 2020 Properties, L.L.C. and Sun Home Loans, Inc.

The Company’s principal business is to serve as a holding company for the Bank. The Bank is in the business of attracting customer deposits through its Community Banking Centers and investing these funds, together with borrowed funds and cash from operations, in loans, primarily commercial real estate, small business and non-real estate loans, as well as mortgage-backed and investment securities. Med-Vine, Inc. is a Delaware holding company whose principal business is investing in securities. Med-Vine, Inc. holds a portion of the Bank’s investment portfolio. The principal business of Sun Financial Services, L.L.C. is to provide annuities and insurance products in the Bank’s Community Banking Centers through a contract with a third-party licensed insurance agent. The principal business of 2020 Properties, L.L.C. is to acquire certain loans, judgments, real estate and other assets in satisfaction of debts previously contracted by the Bank. Sun Home Loans, Inc. (“Sun Home Loans”), which was organized during the first quarter of 2006, originates residential mortgages through dedicated loan originators utilizing the Company’s existing branch networks as well as generating business through non-customers. Prior to the closing of a mortgage, Sun Home Loans generally will have a commitment to sell the loan with servicing released in the secondary market. The Company’s various capital trusts, collectively, the “Issuing Trusts” are presented on a deconsolidated basis. The Issuing Trusts are Delaware business trusts which hold junior subordinated debentures issued by the Company.

The Company and the Bank have their administrative offices in Vineland, New Jersey. As of December 31, 2006, the Bank had 75 community banking centers located throughout central and southern New Jersey, New Castle County, Delaware and in Philadelphia, Pennsylvania. The Company’s outstanding common stock is traded on the NASDAQ Stock Market under the symbol “SNBC”. The Company is subject to reporting requirements of the Securities and Exchange Commission (the "SEC"). The Bank’s primary regulatory agency is the Office of the Comptroller of the Currency (the “OCC”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accounting and reporting policies conform to generally accepted accounting principles (“GAAP”) in the United States of America and to general practices in the banking industry. 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 expenses during the reporting period. The significant estimates include the allowance for loan losses, goodwill, intangible assets, deferred tax asset valuation allowance, derivative instruments, and stock-based compensation. Actual results could differ from those estimates.

Basis of Consolidation - The consolidated financial statements include, after all significant intercompany balances and transactions have been eliminated, the accounts of the Company, its principal wholly owned subsidiary, the Bank, and the Bank's wholly owned subsidiaries, Med-Vine, Inc., Sun Financial Services, L.L.C., 2020 Properties, L.L.C. and Sun Home Loans, Inc. In accordance with the Financial Accounting Standards Board (the “FASB”) Interpretation (“FIN”) 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 and CBNJ Trust I collectively, the “Issuing Trusts”, are presented on a deconsolidated basis. 

Investment Securities - The Company’s debt securities include both those that are held to maturity and those that are available for sale. The purchase and sale of the Company’s debt securities are recorded as of trade date. At December 31, 2006 there was a $27.8 million payable for the purchase of available for sale securities which was included in other liabilities. At December 31, 2005, the Company did not have any unsettled purchase of investment securities. The following provides further information on the Company’s accounting for debt securities:

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Held to Maturity - Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.

Available for Sale - Debt securities that will be held for indefinite periods of time, including securities that may be sold in response to changes to market interest or prepayment rates, needs for liquidity, and changes in the availability of and the yield of alternative investments, are classified as available for sale. These assets are carried at the estimated fair value. Fair value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and are reported net of tax as other comprehensive income or loss until realized. Realized gains and losses on the sale of investment securities are recorded as of trade date, reported in the consolidated statement of income and determined using the adjusted cost of the specific security sold.

In accordance with FASB Staff Position (“FSP”) 115-1 and 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, the Company evaluates its securities portfolio for other-than-temporary impairment throughout the year. Each investment, which has a fair value less than the book value is reviewed on a quarterly basis by management. Management considers at a minimum the following factors that, both individually or in combination, could indicate that the decline is other-than-temporary: 1) the length of time and extent to which the market value has been less than book value; 2) the financial condition and near-term prospects of the issuer; or 3) the intent and ability of the Company to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. Among the factors that are considered in determining intent and ability is a review of capital adequacy, interest rate risk profile and liquidity at the Company. An impairment is recorded against individual securities if the review described above concludes that the decline in value is other than temporary. The securities portfolio as of December 31, 2006 contains no other-than-temporary impaired investments. The Company did not record any impairment charges during the years ended December 31, 2006, 2005 and 2004.

Loans Held for Sale -Included in loans receivable is approximately $4.1 million and $6.2 million of loans held for sale at December 31, 2006 and 2005, respectively. These loans were carried at the lower of cost or estimated fair value, on an aggregate basis.

Loan Servicing Assets -The Company originates certain Small Business Administration (“SBA”) loans for sale to institutional investors. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the cost of loan sold is allocated between the servicing rights, the retained portion of the loan and the sold portion of the loan based on the relative fair values of each. The fair value of the loan servicing rights is determined by valuation techniques.

Loan servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. Because loans are sold individually and not pooled, the Company does not stratify groups of loans based on risk characteristics for purposes of measuring impairment. Impairment is measured by estimating the fair value of each individual servicing asset.

Deferred Loan Fees - Loan fees, net of certain direct loan origination costs, are deferred and the balance is amortized to income as a yield adjustment over the life of the loan using the interest method.

Interest Income on Loans - Interest income on loans is credited to operations based upon the principal amount outstanding. Interest accruals are generally discontinued when a loan becomes 90 days past due or when principal or interest is considered doubtful of collection. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the allowance for loan losses.

Allowance for Loan Losses - The allowance for loan losses is determined by management based upon past experience, evaluation of estimated loss and impairment in the loan portfolio, current economic conditions and other pertinent factors. 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. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations.

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The provision for loan losses charged to expense is based upon past loan and loss experience and an evaluation of estimated losses in the current loan portfolio, including the evaluation of impaired loans in accordance with 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 the 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. Interest payments on impaired loans are typically applied to principal unless the ability to collect the principal amount is fully assured, in which case interest is recognized on the cash basis.

Commercial loans and commercial real estate loans are placed on non-accrual at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Generally, commercial loans and commercial real estate loans are charged-off no later than 120 days delinquent unless the loan is well secured and in the process of collection, or other extenuating circumstances support collection. Residential real estate loans are typically placed on non-accrual at the time the loan is 90 days delinquent. Other consumer loans are typically charged-off at 90 days delinquent. In all cases, loans must be placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Restricted Equity Securities - Equity securities of Bankers’ banks are classified as restricted equity securities because ownership is restricted and there is not an established market for their resale. These securities are carried at cost and are evaluated for impairment.

Bank Properties and Equipment - Land is carried at cost. Bank properties and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method based on the estimated useful lives of the assets, generally as follows:

Asset Type	Estimated Useful Life
Buildings	40 years
Leasehold improvements	Lesser of the useful life or the remaining lease term, including renewals, if applicable
Equipment	2.5 to 10 years

Bank-Owned Life Insurance - The Company has purchased life insurance policies on certain key employees. These policies are recorded at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the cash surrender value are recorded in non-interest income.

Securities Sold Under Agreements to Repurchase -The Company enters into sales of securities under agreements to repurchase with the Federal Home Loan Bank (“FHLB”) and with its customers. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. Securities pledged as collateral under agreements to repurchase are reflected as assets in the accompanying consolidated balance sheets.

Real Estate Owned - Real estate owned is comprised of property acquired through foreclosure and bank property that is not in use. The property acquired through foreclosure is carried at the lower of the related loan balance or fair value of the property based on an appraisal less estimated cost to dispose. Losses arising from foreclosure transactions are charged against the allowance for loan losses. Bank property is carried at the lower of cost or fair value less estimated cost to dispose. Costs to maintain real estate owned and gains or losses subsequent to foreclosure are included in operations.

Goodwill and Intangible Assets - Goodwill is the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination. It is not amortized but is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The Company uses a third-party appraisal to assist management in identifying impairment. The Company believes that its goodwill was not impaired during 2006 and 2005.

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Intangible assets consist of core deposit intangibles and excess of cost over fair value of assets acquired (accounted for in accordance with SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions - an amendment of APB Opinion No. 17, an interpretation of APB Opinions Nos.16 and 17, and an amendment of FASB Interpretation No. 9), net of accumulated amortization. Core deposit intangibles are amortized using the straight-line method based on the characteristics of the particular deposit type.

Long-Lived Assets - Management evaluates the carrying amount of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impaired loss for long-lived assets and intangibles with definite lives would be based on the fair value of the asset. The Company recognized impairment losses of $42,000, $65,000 and $177,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

Income Taxes - Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax liability is recognized for temporary differences that will result in taxable amounts in future years. A deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for carryforwards. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Treasury Stock - Stock held in treasury by the Company is accounted for using the cost method which treats stock held in treasury as a reduction to total shareholders’ equity. There was no treasury stock held by the Company at December 31, 2006 and 2005.

Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from banks and federal funds sold. The Bank is required to maintain an average reserve balance with the Federal Reserve Bank. The amount of the average reserve balance for the years ended December 31, 2006 and 2005 was $100,000.

Accounting for Derivative Financial Instruments and Hedging Activities - The Company recognizes all derivative instruments at fair value as either assets or liabilities in other assets or other liabilities on the balance sheet. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

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 during the year. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock and common stock equivalents outstanding decreased by the number of common shares that are assumed to have been repurchased with the proceeds from the exercise of the options (treasury stock method), the assumed tax benefit from the exercise of non-qualified options, and for 2006, the amount of unrecognized compensation cost attributed to future services. These purchases are assumed to be made at the average market price of the common stock, which is based on the average price on common shares sold. 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.

Stock Dividend - On April 20, 2006, March 17, 2005 and March 19, 2004, the Company’s Board of Directors declared 5% stock dividends, which were paid on May 18, 2006, April 20, 2005 and April 20, 2004, respectively, to shareholders of record on May 8, 2006, April 6, 2005 and April 6, 2004, respectively. Accordingly, per share information for all periods presented have been restated to reflect the increased number of shares outstanding. All stock dividends are declared at the discretion of the Board of Directors.

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 tax. Reclassifications are made to avoid double counting in comprehensive income items which are displayed as part of net income for the period. These reclassifications for the years ended December 31, 2006, 2005 and 2004 are as follows:

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DISCLOSURE OF RECLASSIFICATION AMOUNTS, NET OF TAX

Year Ended December 31,		2006			2005			2004
Unrealized holding gain (loss) on securities available for sale during the year	$	5,367		$	(6,198	)	$	(5,616	)
Reclassification adjustment for net loss (gain) included in net income		21			(773	)		(1,407	)
Net change in unrealized loss on securities available for sale		5,388			(6,971	)		(7,023	)
Tax effect		(1,895	)		2,311			2,568
Net unrealized gain (loss) on securities available for sale, net of tax	$	3,493		$	(4,660	)	$	(4,455	)

Stock-Based Compensation - The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No 123(R)”). The Company adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective approach. Under the fair value provisions of SFAS No. 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate vesting period using the straight-line method. 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.

In accordance with SFAS No. 123(R), the fair value of the stock options granted are estimated on the date of grant using the Black-Scholes option pricing model which uses the assumptions noted in the table below. The risk-free rate of return is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the stock option is estimated using historical exercise behavior of employees at a particular level of management who were granted options with a ten year term. Stock 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 was not representative of the Company’s view of its current stock volatility.

Prior to January 1, 2006, the Company accounted for stock-based compensation in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, adopted prospectively on January 1, 2003 and in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees.

Significant weighted average assumptions used to calculate the fair value of the option awards for the years ended December 31, 2006, 2005 and 2004 are as follows:

WEIGHTED AVERAGE ASSUMPTIONS USED IN BLACK-SCHOLES OPTION PRICING MODEL

Year Ended December 31,	2006			2005			2004(1)
Fair value of options granted during the year	$	6.13		$	6.71		$	-
Risk-free rate of return		5.01	%		4.40	%		-	%
Expected option life in months		112			96			-
Expected volatility		28	%		30	%		-	%
Expected dividends (2)		-			-			-
(1) There were no stock options granted during 2004.
(2) To date, the Company has not paid cash dividends on its common stock.

The following table illustrates the impact of implementing SFAS No. 123(R) for the year ended December 31, 2006.

IMPACT OF IMPLEMENTATION OF SFAS No. 123(R)

Year Ended December 31, 2006	Amount
Stock-based compensation calculated under the expensing provisions of SFAS No. 123 (adopted prospectively January 1, 2003)	$	336
Incremental stock-based compensation required under the expensing provisions of SFAS No. 123(R) (unvested portion granted prior to January 1, 2003)		170
Total stock-based compensation (pre-tax)	$	506

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At December 31, 2006, the Company had six stock-based employee compensation plans, which are described more fully in Note 15. The following table illustrates the effect on net income and earnings per share for the years ended December 31, 2005 and 2004 if the Company had applied the fair value recognition provisions of SFAS No. 123 using the Black-Scholes option pricing model to stock-based employee compensation to all stock-based awards.

PRO FORMA NET INCOME AND EARNINGS PER SHARE

Year Ended December 31,	2005			2004
Reported net income available to common shareholders	$	19,521		$	17,629
Add: Total stock-based employee compensation expense included in reported net income (net of tax)		108			29
Deduct: Total stock-based employee compensation expense determined under fair value method (net of tax)		(419	)		(616	)
Pro forma net income available to common shareholders	$	19,210		$	17,042
Earnings per share:
Basic - as reported	$	1.02		$	1.03
Basic - pro forma	$	1.01		$	1.00
Diluted - as reported	$	0.96		$	0.96
Diluted - pro forma	$	0.95		$	0.93

Segment Information - The Company has one reportable segment, “Community Banking.”  All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others.  For example, lending is dependent upon the ability of the Bank to fund itself with deposits and other borrowings and manage interest rate and credit risk.  Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit. 

Recent Accounting Principles - 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 is currently evaluating the impact of SFAS No. 159.

In September 2006, the Securities and Exchange Commission (the “SEC”) Staff issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements. SAB No. 108 requires the use of two alternative approaches in quantitatively evaluating materiality of misstatements. SAB No. 108 requires that registrants quantify errors using both a balance sheet and income statement approach. If the misstatement as quantified under either approach is material to the current year financial statements, the misstatement must be corrected. If the effect of correcting the prior year misstatements, if any, in the current year income statement is material, the prior year financial statements should be corrected. SAB No. 108 is effective for the annual financial statement covering the first fiscal year ending after November 15, 2006. In the year of adoption, the misstatements may be corrected as an accounting change by adjusting opening retained earnings rather than being included in the current year income statement. The Company adopted SAB No. 108 on January 1, 2007 and there was no impact to 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 September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. FASB Technical Bulletin (“FTB”) 85-4, Accounting for Purchases of Life Insurance requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset. In practice, this statement means that the cash value asset is reported on the statement of financial position at this realizable amount and the change in cash surrender value during the period is an adjustment in determining the income (or expense) to be recognized for the period. The pronouncement is effective for fiscal years beginning after December 15, 2006. The Company will adopt EITF Issue No. 06-5 on January 1, 2007 and does not expect that the guidance will have an impact on the Company’s financial position or results of operations.

In June 2006, the FASB issued FASB Interpretation (“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 is greater than fifty percent likely of being realized upon ultimate settlement. FIN No. 48 must be applied to all existing tax positions upon initial adoption. FIN No. 48 is 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 a material impact to the Company’s financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140 (“SFAS No. 156”). SFAS No. 140 establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. Under SFAS No. 156, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. Adoption of SFAS No. 156 is required as of the beginning of the first fiscal year that begins after September 15, 2006. Upon adoption, the Company will apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions. The Company adopted SFAS No. 156 on January 1, 2007 and the guidance did not have a material impact to the Company’s financial position or results of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 155 on January 1, 2007 and the guidance did not have a material impact to the Company’s financial position or results of operations.

3. ACQUISITIONS, CONSOLIDATIONS AND SALES

In December 2006, the Company consolidated two branch offices. As a result of the consolidations, the Company recognized lease buy-out charges and other related charges of $531,000, pre-tax. Also during the fourth quarter of 2006, the Company announced that it had entered into agreements to sell three branch offices to three separate buyers. The sales of the branch offices, including approximately $40 million of aggregate deposits and approximately $18 million of aggregate loans receivable, were completed during the first quarter of 2007. The Company will recognize a net pre-tax gain on sales of approximately $1.4 million during the first quarter of 2007.

On January 19, 2006, the Company acquired Advantage Bank (“Advantage”). The merger agreement permitted Advantage shareholders to elect to receive either $19.00 in cash or 0.87 shares of common stock of the Company subject to adjustment or proration under certain circumstances. The merger agreement also provided for an overall requirement that 50 percent of the outstanding Advantage shares be exchanged for the Company’s common stock. Accordingly, the Company paid Advantage stockholders $17.3 million in cash and issued approximately 832,000 shares of the Company’s common stock. On the date of the merger, Advantage’s assets totaled approximately $164 million, net loans receivable were approximately $124 million, investment securities were approximately $29 million and total deposits were approximately $148 million. The Company recorded $23.4 million in goodwill. Included in goodwill was $2.0 million relating to the fair value of stock options exchanged. Core deposit intangible of $3.4 million was recorded and will be amortized over approximately nine years on a straight-line basis.

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On July 8, 2004, the Company acquired Community Bancorp of New Jersey (“Community”) in a stock-for-stock exchange merger. In the merger, Community shareholders received 0.8715 shares of common stock of the Company for each issued and outstanding share of Community common stock. Approximately 3,096,000 shares of the Company’s common stock were issued. On the date of the merger, Community’s assets totaled approximately $374 million, net loan receivables were approximately $230 million, investments securities were approximately $115 million and total deposits were approximately $342 million. The Company recorded $54.4 million in goodwill. Core deposit intangible of $13.8 million was recorded and will be amortized over approximately nine years on a straight-line basis.

4. INVESTMENT SECURITIES

The amortized cost of investment securities and the approximate fair value at December 31, 2006 and 2005 were as follows:

SUMMARY OF INVESTMENT SECURITIES

		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
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		1,944		-		-			1,944
Total available for sale		467,975		380		(6,435	)		461,920
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	$	493,416	$	380	$	(7,030	)	$	486,766
December 31, 2005
Available for sale
U.S. Treasury obligations	$	59,237	$	-	$	(145	)	$	59,092
U.S. Government agencies and mortgage-backed securities		596,823		-		(11,142	)		585,681
State and municipal obligations		28,050		198		(354	)		27,894
Other		3,963		-		-			3,963
Total available for sale		688,073		198		(11,641	)		676,630
Held to maturity
Mortgage-backed securities		32,445		-		(711	)		31,734
Total held to maturity		32,445		-		(711	)		31,734
Total investment securities	$	720,518	$	198	$	(12,352	)	$	708,364

During 2006, called or sold securities of $27.5 million resulted in a gross loss of $21,000. During 2005, called or sold securities of $60.2 million resulted in a gross gain and gross loss of $843,000 and $70,000, respectively. During 2004, called or sold securities of $194.6 million resulted in a gross gain and gross loss of $1.4 million and $22,000, respectively.

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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 December 31, 2006 and 2005:

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
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	)
December 31, 2005
U.S. Treasury obligations	$	48,963	$	(35	)	$	10,129	$	(110	)	$	59,092	$	(145	)
U.S. Government agencies and mortgage-backed securities		102,670		(1,003	)		514,745		(10,850	)		617,415		(11,853	)
State and municipal obligations		15,975		(238	)		3,381		(116	)		19,356		(354	)
Total	$	167,608	$	(1,276	)	$	528,255	$	(11,076	)	$	695,863	$	(12,352	)

At December 31, 2006, 99.9% of the gross unrealized losses in the security portfolio were comprised of securities issued by U.S. Government agencies, U.S. Government 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 over yields since the time the underlying securities were purchased. Recovery of fair value is expected as the securities approach their maturity date or if 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 December 31, 2006, the gross unrealized loss in the category 12 months or longer of $6.9 million consisted of 92 securities having an aggregate unrealized loss of 2.0% of the amortized cost. The securities represented Federal Agency issues and 22 securities currently rated AA or better by at least one bond credit rating service. At December 31, 2006, securities in a gross unrealized loss position for less than 12 months consisted of 37 securities having an aggregate unrealized loss of 0.2% of the amortized cost basis.

The amortized cost and estimated fair value of the investment securities, by contractual maturity, at December 31, 2006 are shown below. Actual maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

CONTRACTUAL MATURITIES OF INVESTMENT SECURITIES

December 31, 2006	Available for Sale				Held to Maturity
		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	144,409	$	143,631	$	-	$	-
Due after one year through five years		67,051		65,981		250		250
Due after five years through ten years		823		844		500		500
Due after ten years		37,914		38,157		-		-
Total investment securities, excluding mortgage-backed securities		250,197		248,613		750		750
Mortgage-backed securities		217,778		213,307		24,691		24,096
Total investment securities	$	467,975	$	461,920	$	25,441	$	24,846

At December 31, 2006, $148.5 million of U.S. Treasury Notes and U.S. Government Agency securities was pledged to secure public deposits.

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5. LOANS

The components of loans were as follows:

LOAN COMPONENTS

December 31,		2006			2005
Commercial and industrial	$	1,945,135		$	1,732,202
Home equity		232,321			155,561
Second mortgages		77,337			53,881
Residential real estate		38,418			30,162
Other		92,063			78,410
Total gross loans		2,385,274			2,050,216
Allowance for loan losses		(25,658	)		(22,463	)
Loans, net	$	2,359,616		$	2,027,753
Non-accrual loans	$	14,322		$	9,957

There were no irrevocable commitments to lend additional funds on non-accrual loans at December 31, 2006. The gross interest income that would have been recorded if the above non-accrual loans had been current in accordance with their original terms was $841,000, $755,000 and $1.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. The amount of interest included in net income on these loans for the years ended December 31, 2006, 2005 and 2004 was $120,000, $119,000 and $274,000, respectively.

Certain officers, directors and their associates (related parties) have loans and conduct other transactions with the Company. Such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for other non-related party transactions. The aggregate dollar amount of these loans to related parties as of December 31, 2006 and 2005, along with an analysis of the activity for the years ended December 31, 2006 and 2005, is summarized as follows:

SUMMARY OF LOANS TO RELATED PARTIES

Year Ended December 31,		2006			2005
Balance, beginning of year	$	59,383		$	43,744
Additions		29,104			18,545
Repayments		(19,552	)		(2,906	)
Balance, end of year	$	68,935		$	59,383

Under approved lending decisions, the Company had commitments to lend additional funds totaling approximately $896.9 million and $875.4 million at December 31, 2006 and 2005, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on an individual basis. The type and amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower.

Most of the Company’s business activity is with customers located within its local market area. Generally, commercial real estate, residential real estate and other assets secure loans. The ultimate repayment of loans is dependent, to a certain degree, on the local economy and real estate market.

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6. ALLOWANCE FOR LOAN LOSSES

An analysis of the change in the allowance for loan losses is as follows:

ALLOWANCE FOR LOAN LOSSES

Year Ended December 31,		2006			2005			2004
Balance, beginning of year	$	22,463		$	22,037		$	17,614
Charge-offs		(2,513	)		(2,641	)		(1,382	)
Recoveries		642			757			793
Net charge-offs		(1,871	)		(1,884	)		(589	)
Provision for loan losses		3,807			2,310			2,075
Purchased allowance resulting from bank acquisition		1,259			-			2,937
Balance, end of year	$	25,658		$	22,463		$	22,037

Loans collectively evaluated for impairment include consumer loans and residential real estate loans, and are not included in the data that follow:

COMPONENTS OF IMPAIRED LOANS

December 31,		2006		2005
Impaired loans with related allowance for loan losses calculated under SFAS No. 114	$	7,975	$	7,954
Impaired loans with no related allowance for loan losses calculated under SFAS No. 114		4,774		10,061
Total impaired loans	$	12,749	$	18,015
Valuation allowance related to impaired loans	$	2,267	$	2,381

ANALYSIS OF IMPAIRED LOANS

Year Ended December 31,	2006		2005		2004
Average impaired loans	$	16,634	$	31,181	$	35,991
Interest income recognized on impaired loans	$	534	$	994	$	2,315
Cash basis interest income recognized on impaired loans	$	117	$	494	$	209

7. RESTRICTED EQUITY INVESTMENTS

The cost of restricted equity investments was as follows:

RESTRICTED EQUITY INVESTMENTS

December 31,	2006		2005
Federal Reserve Bank stock	$	9,248	$	8,122
Federal Home Loan Bank stock		8,333		11,761
Atlantic Central Bankers Bank stock		148		108
Total	$	17,729	$	19,991

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8. BANK PROPERTIES AND EQUIPMENT

Bank properties and equipment consist of the following major classifications:

SUMMARY OF BANK PROPERTIES AND EQUIPMENT

December 31,	2006			2005
Land	$	6,803		$	5,366
Buildings		18,827			17,503
Capital lease		5,400			5,400
Leasehold improvements and equipment		36,392			34,003
Total bank properties and equipment		67,422			62,272
Accumulated depreciation		(25,130	)		(20,162	)
Bank properties and equipment, net	$	42,292		$	42,110

9. REAL ESTATE OWNED

Real estate owned consisted of the following:

SUMMARY OF REAL ESTATE OWNED

December 31,	2006		2005
Commercial properties	$	-	$	1,066
Residential properties		600		62
Bank properties		-		321
Total	$	600	$	1,449

Expenses applicable to real estate owned include the following:

REAL ESTATE OWNED EXPENSES

Year Ended December 31,	2006		2005			2004
Net loss (gain) on sales of real estate	$	46	$	(198	)	$	(220	)
Write-down of real estate owned		135		-			-
Operating expenses, net of rental income		57		150			280
Total	$	238	$	(48	)	$	60

10. GOODWILL AND INTANGIBLE ASSETS 

In January 2006, the Company acquired Advantage in a cash and stock merger. Accordingly, the Company paid Advantage $17.3 million in cash and issued approximately 832,000 shares of the common stock of the Company. Goodwill of approximately $23.4 million was recorded in conjunction with this transaction and, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, will be reviewed at least annually for impairment. Included in goodwill was $2.0 million relating to the fair value of options exchanged. Core deposit intangible of $3.4 million was recorded and will be amortized over approximately nine years on a straight-line basis.

In July 2004, the Company acquired Community in a stock-for-stock exchange merger valued at approximately $69 million. Goodwill of approximately $54.4 million was recorded in conjunction with this transaction and, in accordance with SFAS No. 142, will be reviewed at least annually for impairment. Core deposit intangible of $13.8 million was recorded and will be amortized over approximately nine years on a straight-line basis.

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In the fourth quarter of 2006 and 2005, the Company performed, with the assistance of an independent third party other than its independent auditors, its annual impairment test of goodwill as required under the SFAS Nos. 142 and 147. Such testing is based upon a number of factors, which are based upon assumptions and management judgments. These factors include among other things, future growth rates, discount rates and earnings capitalization rates. The test indicated that no impairment charge was necessary for 2006 or 2005.

Changes in the carrying amount of goodwill are as follows:

GOODWILL

Year Ended December 31,		2006		2005
Balance, beginning of year	$	104,891	$	104,969
Net additions related to business acquisition (1)		23,226		-
Purchase price adjustments		-		(78	)
Balance, end of year	$	128,117	$	104,891
(1) In accordance with SFAS No. 123(R), goodwill includes adjustments for the tax benefit resulting from the exercise of awards issued in a business combination.

Information regarding the Company’s intangible assets subject to amortization is as follows:

SUMMARY OF INTANGIBLE ASSETS

December 31,	2006						2005
		Carrying Amount	Accumulated Amortization			Net	Carrying Amount			Accumulated Amortization	Net
Core deposit premium	$	49,530	$	26,684	$	22,846	$	46,132	$	22,671	$	23,461
Excess of cost over fair value of assets acquired		17,698		11,974		5,724		17,698		11,220		6,478
Total intangible assets	$	67,228	$	38,658	$	28,570	$	63,830	$	33,891	$	29,939

Changes in the carrying amount of Company’s intangible assets for the years ended December 31, 2006 and 2005 are as follows:

ANALYSIS OF INTANGIBLE ASSETS

December 31,		2006			2005
Balance, beginning of year	$	29,939		$	34,753
Addition related to business acquisition		3,398			-
Intangible assets associated with sold branch		-			(315	)
Amortization expense		(4,767	)		(4,499	)
Balance, end of year	$	28,570		$	29,939

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Information regarding the Company’s amortization expense follows:

AMORTIZATION OF INTANGIBLE ASSETS

	Amount
Actual for Year Ended December 31,
2004	$	5,268
2005		4,499
2006		4,767
Expected for Year Ended December 31,(1)
2007		4,714
2008		4,709
2009		4,453
2010		3,685
2011		3,685
Thereafter		6,947
Total	$	28,193
(1) Expected amortization excludes approximately $377,000 of intangibles which were written off in conjunction with a branch sale during the first quarter of 2007 (see Note 3 for further information on branch sales).

11. DEPOSITS

Deposits consist of the following major classifications:

SUMMARY OF DEPOSITS

December 31,		2006		2005
Interest-bearing demand deposits	$	792,955	$	886,773
Non-interest-bearing demand deposits		501,185		529,878
Savings deposits		412,973		386,821
Time deposits under $100,000		634,350		443,535
Time deposits $100,000 or more		326,534		224,641
Total	$	2,667,997	$	2,471,648

A summary of time deposits by year of maturity is as follows:

MATURITIES OF TIME DEPOSITS

Year Ended December 31,	Amount
2007	$	749,396
2008		137,075
2009		44,113
Thereafter		30,300
Total	$	960,884

A summary of interest expense on deposits is as follows:

SUMMARY OF INTEREST EXPENSE

Year Ended December 31,	2006		2005		2004
Savings deposits	$	6,687	$	4,986	$	3,440
Time deposits		36,618		20,342		13,421
Interest-bearing demand deposits		23,587		16,099		7,200
Total	$	66,892	$	41,427	$	24,061

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12. ADVANCES FROM THE FEDERAL HOME LOAN BANK

The Company’s advances from the FHLB consists of borrowings with an original maturity of one year or more. At December 31, 2006 and 2005, the Company had fixed-rate advances from FHLB of $103.6 million and $124.5 million, respectively, which mature through 2018. At December 31, 2006 and 2005, the interest rates on these fixed-rate advances from FHLB ranged from 3.30% to 6.49%. The weighted average interest rate for the years ended December 31, 2006 and 2005 was 4.63% and 4.56%, respectively. Interest expense on advances from FHLB was $5.5 million, $6.3 million and $6.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. Included in the advances from FHLB was one $25.0 million fixed-rate advance which was convertible on October 12, 2005. This advance remained fixed at December 31, 2006 and 2005, however the FHLB has the option to convert this advance to floating at the current market rates at each quarter until it matures in 2007. The Company has the option of replacing the funding or repaying the advance.

The contractual maturities of the Company’s fixed-rate, advances from FHLB at December 31, 2006 is as follows:

CONTRACTUAL MATURITIES OF ADVANCES FROM THE FHLB

Year Ended December 31,		Amount
2007	$	35,041
2008		41,293
2009		8,640
2010		10,000
2011		-
Thereafter		8,586
Total long-term debt	$	103,560

13. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company has overnight repurchase agreements with customers as well as repurchase agreements with the FHLB. At December 31, 2006 and 2005, customer repurchase agreements were $51.7 million and $59.0 million, respectively with interest rates ranging from 4.25% to 5.03% and 3.13% to 3.95%, respectively. Interest expense on customer repurchase agreements was $2.0 million, $2.0 million and $471,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Collateral for customer repurchase agreements consisted of U.S. Treasury notes or securities issued or guaranteed by one of the Government Sponsored Enterprises. The fair value of the collateral was approximately equal to the amounts outstanding.

The Company did not have any FHLB repurchase agreements at December 31, 2006 as compared to $60.0 million in FHLB repurchase agreements with a weighted average interest rate of 4.22% at December 31, 2005. Interest expense on FHLB repurchase agreements was $1.3 million, $707,000 and $68,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Collateral for the FHLB repurchase agreements consisted of securities issued or guaranteed by one of the Government Sponsored Enterprises. The fair value of the collateral was approximately equal to the amount outstanding.

14. JUNIOR SUBORDINATED DEBENTURES HELD BY TRUSTS THAT ISSUED CAPITAL DEBT

The Company has established Issuer Trusts that have issued guaranteed preferred beneficial interests in the Company’s junior subordinated debentures. Prior to FIN 46 and FIN 46 (R), the Company classified its Issuer Trusts after total liabilities and before shareholders’ equity on its consolidated statement of financial position under the caption “Guaranteed Preferred Beneficial Interest in Company’s Subordinated Debt” and the retained common capital securities of the Issuer Trusts were eliminated against the Company’s investment in the Issuer Trusts. Distributions on the preferred securities were recorded as interest expense on the consolidated statement of income.

As a result of the adoption of FIN 46 and FIN 46 (R), all the Issuer Trusts outstanding at December 31, 2006 and 2005 are deconsolidated. The junior subordinated debentures issued by the Company to the Issuer Trusts at December 31, 2006 and 2005 of $108.3 million and $77.3 million, respectively, are reflected in the Company’s consolidated statement of financial position in the liabilities section at December 31, 2006 and 2005, respectively, under the caption “Junior subordinated debentures.” The Company records interest expense on the corresponding debentures in its consolidated statements of income. The Company also recorded the common capital securities issued by the Issuer Trusts in “Other assets” in its consolidated statement of financial position at December 31, 2006 and 2005.

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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 Issuer Trust as of December 31, 2006.

SUMMARY OF CAPITAL SECURITIES AND JUNIOR SUBORDINATED DEBENTURES

December 31, 2006	Capital Securities				Junior Subordinated Debentures
Issuer Trust	Issuance Date		Stated Value	Distribution Rate	Principal Amount		Maturity	Redeemable Beginning
Sun Trust III	April 22, 2002	$	20,000	6-mo LIBOR plus 3.70%	$	20,619	April 22, 2032	April 22, 2007
Sun Trust IV	July 7, 2002		10,000	3-mo LIBOR plus 3.65%		10,310	October 7, 2032	July 7, 2007
Sun Trust V	December 18, 2003		15,000	3-mo LIBOR plus 2.80%		15,464	December 30, 2033	December 30, 2008
Sun 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, 2003		5,000	3-mo LIBOR plus 3.35%		5,155	January 7, 2033	January 7, 2008
Sun Trust VII	January 17, 2006		30,000	6.24% Fixed		30,928	March 15, 2036	March 15, 2011
		$	105,000		$	108,250

While the capital securities have been deconsolidated in accordance with GAAP, they continue to qualify as Tier 1 capital under federal regulatory guidelines. The change in accounting guidance did not have an impact on the current Tier 1 regulatory capital of either the Company or the Bank. 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.

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 Trust III variable annual rate will not exceed 11.00% through five years from its issuance. Sun Trust IV variable annual rate will not exceed 11.95% through five years from its issuance. Sun Trust V and Sun Trust VI do not have interest rate caps. As a result of the July 2004 Community acquisition, the Company assumed CBNJ Trust I. The CBNJ Trust I variable annual rate will not exceed 12.5% through five years from issuance. In January 2006, the Company issued an additional $30.0 million of Trust Preferred Securities (Sun Trust VII) of which the annual rate will be fixed at 6.24% until March 2011. Of the $30.0 million, approximately $17 million was used to fund the purchase of Advantage with the remaining $13 million being used for general corporate purposes. In March 2007, the Company notified the holders of the outstanding capital securities of Sun Trust III of its intentions to call these securities contemporaneously with the redemption of the Sun Trust III debentures in April 2007. The Company expects to write down approximately $540,000 of unamortized debt issuance costs of the called securities.

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15. STOCK-BASED INCENTIVE PLANS

The 2004 Stock Plan authorizes the issuance of 496,125 shares of common stock pursuant to awards that may be granted in the form of options to purchase common stock (“Options”) and awards of shares of common stock (“Stock Awards”). The maximum number of Stock Awards that may be granted over time may not exceed 55,125 shares. At December 31, 2006, the amount of shares of common stock available for future grants under the 2004 Stock Plan was 263,806 shares. At the 2007 Annual Meeting of Shareholders, the Company’s stockholders will vote on an increase in the shares available for future grant under the 2004 Stock Plan. The purpose of the 2004 Stock Plan, as with all 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 2004 Stock Plan, options expire ten years after the date of grant, unless terminated earlier under the option terms. For both Stock Options and Stock Awards, a Committee of non-employee directors has the authority to determine the conditions upon which the options granted will vest. As of March 18, 2004, the effective date of the 2004 Stock Plan, each director and advisory director of the Company received board meeting fees in the form of stock awards. All awards were immediately vested upon issuance. There were 18,305 stock awards, 15,455 stock awards and 5,329 stock awards issued from the 2004 Stock Plan for the years ended December 31, 2006, 2005 and 2004, respectively. The Company granted 82,560 options and 130,200 options for the years ended December 31, 2006 and 2005, respectively, under the 2004 Stock Plan. There were no options granted under the 2004 Stock Plan during the year ended December 31, 2004. These options were granted at the then fair market value of the Company’s stock and will vest evenly over five years. There are 193,230 options outstanding under this plan at December 31, 2006.

In January 2006, as a result of the Advantage acquisition, the Company assumed stock options previously granted under the Advantage Plans. Upon merger, all stock options under the Advantage Plans became fully vested and were converted to stock options of the Company. The number of shares of common stock that may be purchased pursuant to any such option is equal to the number of shares covered by the option multiplied by the merger exchange ratio, with the exercise price of each converted option equal to the original exercise price divided by the merger exchange ratio. Stock options previously granted under the Advantage Plans are both incentive and non-qualified and expire from 2009 through 2014. There are 34,171 stock options outstanding under these plans at December 31, 2006. No additional stock options will be granted under these plans.

In July 2004, as a result of the Community acquisition, the Company assumed stock options previously granted under the Community Plans. Upon merger, all stock options under the Community Plans became fully vested and were converted to stock options of the Company. The number of shares of common stock that may be purchased pursuant to any such option is equal to the number of shares covered by the option multiplied by the merger exchange ratio, with the exercise price of each converted option equal to the original exercise price divided by the merger exchange ratio. Stock options previously granted under the Community Plans are both incentive and non-qualified and expire from 2007 through 2013. There are 282,206 stock options outstanding under these plans at December 31, 2006. No additional stock options will be granted under these plans.

Options granted under the 2002 Plan may be either qualified incentive stock options or nonqualified options as determined by the Compensation Committee of the Board of Directors or the Board of Directors. The 2002 Plan authorizes the issuance of 957,210 shares of common stock. The grant of reload options is authorized under the 2002 Plan. The award of a reload option allows the optionee to receive the grant of an additional stock option, at the then current market price, in the event that such optionee exercises all or part of an option (an “original option”) by surrendering already owned shares of common stock in full or partial payment of the option price under such original option. The exercise of an additional option issued in accordance with the reload feature will reduce the total number of shares eligible for award under the Plan. Under the 2002 Plan, the nonqualified options expire ten years and ten days after the date of grant, unless terminated earlier under the option terms. The qualified incentive options expire ten years after the date of grant, unless terminated earlier under the option terms. The vesting provision of the 2002 Plan generally allows 20% of options granted to employees to vest six months after the date of grant, and 20% for each of the next four anniversaries of the grant, subject to employment and other conditions. The vesting provision of the 2002 Plan generally allows options granted to directors to vest as of the date of grant. At December 31, 2006, there were 946,476 options outstanding with the reload feature under the 2002 Plan.

Options granted under the 1997 Plan may be either qualified incentive stock options or nonqualified options as determined by the Compensation Committee of the Board of Directors or the Board of Directors. Options granted under the 1997 Plan are at the estimated fair value at the date of grant. The 1997 Plan authorizes the issuance of 1,454,768 shares of common stock. At December 31, 2006, there were 1,334,953 options outstanding with the reload feature under the 1997 Plan.

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In 2005, the 1995 Stock Option Plan expired. As such, no additional options are permitted to be granted from this plan. Options granted under the 1995 Plan were either qualified incentive stock options or nonqualified options as determined by the Compensation Committee of the Board of Directors or the Board of Directors. Options granted under the 1995 Plan were at the estimated fair value at the date of grant. At December 31, 2006, there were 262,230 options outstanding under the 1995 Plan.

Under the 1995 and 1997 Plans, the nonqualified options expire ten years and ten days after the date of grant, unless terminated earlier under the option terms. The incentive options expire ten years after the date of grant, unless terminated earlier under the option terms. The vesting provision of the 1997 Plan generally allows for 50% of options to vest one year after the date of grant, and 50% two years after the date of grant, subject to employment and other conditions. All shares granted under the 1995 Plan were fully vested as of December 31, 2006.

There are no equity compensation plans providing for the issuance of shares of the Company which were not approved by the shareholders.

Options outstanding under the 1995, 1997, 2002, 2004, Community Plans and Advantage Plans, adjusted for 5% stock dividends granted where appropriate, are as follows:

SUMMARY OF STOCK OPTIONS GRANTED AND OUTSTANDING

	Incentive		Nonqualified		Total
Stock options granted and outstanding:
December 31, 2006 at prices ranging from $4.98 to $21.61 per share		648,706		2,404,560		3,053,266
December 31, 2005 at prices ranging from $4.55 to $21.61 per share		683,971		2,641,181		3,325,152
December 31, 2004 at prices ranging from $3.36 to $21.61 per share		570,025		2,876,102		3,446,127

Activity in the stock option plans for the years ended December 31, 2006, 2005 and 2004, respectively are as follows:

SUMMARY OF STOCK OPTION ACTIVITY

Year Ended December 31,	2006				2005				2004
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Stock options outstanding, beginning of year	3,325,152		$	9.63	3,446,127		$	8.79	3,140,378		$	8.82
Granted	82,560			18.45	130,200			20.24	-			-
Exchanged in business acquisition	168,908			7.76	-			-	368,079			9.04
Exercised	(492,586	)		5.83	(249,603	)		3.67	(47,913	)		8.61
Forfeited	(21,604	)		18.97	(1,092	)		10.81	(972	)		10.81
Expired	(9,164	)		18.04	(480	)		20.04	(13,445	)		21.82
Stock options outstanding, end of year	3,053,266		$	10.28	3,325,152		$	9.63	3,446,127		$	8.79
Stock options exercisable, end of year	2,868,375		$	9.73	2,934,965		$	9.14	2,942,556		$	8.65

The weighted average grant date fair value of options granted during the years ended December 31, 2006 and 2005 were $6.13 and $6.71, respectively. There were no options granted during the year ended December 31, 2004. The total intrinsic value (market value on date of exercise less exercise price) of options exercised during the years ended December 31, 2006, 2005 and 2004 was $6.2 million, $4.4 million and $601,000, respectively. The aggregate intrinsic value of options outstanding at December 31, 2006 and 2005 was $32.9 million and $30.8 million, respectively. The aggregate intrinsic value of options exercisable at December 31, 2006 and 2005 was $32.5 million and $28.4 million, respectively.

The amount of cash received from the exercise of stock options during the year ended December 31, 2006 was $2.9 million. The total tax benefit for the year ended December 31, 2006 was approximately $1.7 million.

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A summary of the status of the Company’s nonvested shares at December 31, 2006, 2005 and 2004, respectively, and changes during the years ended December 31, 2006, 2005 and 2004, respectively, are presented in the following table:

SUMMARY OF NONVESTED STOCK OPTION ACTIVITY

Year Ended December 31,	2006				2005				2004
	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Nonvested stock options outstanding, beginning of year	390,187		$	13.26	503,571		$	9.65	747,411		$	9.61
Granted	82,560			18.45	130,200			20.24	-			-
Vested	(257,088	)		10.26	(242,012	)		9.50	(229,423	)		8.80
Forfeited	(21,604	)		18.97	(1,092	)		10.81	(972	)		10.81
Expired	(9,164	)		18.04	(480	)		20.04	(13,445	)		21.82
Nonvested stock options outstanding, end of year	184,891		$	18.84	390,187		$	13.26	503,571		$	9.65

At December 31, 2006, there was $780,000 of total unrecognized compensation cost related to nonvested stock options granted under the stock option plans. That cost is expected to be recognized over a weighted average period of 2.5 years.

The following table summarizes stock options outstanding at December 31, 2006:

SUMMARY OF STOCK OPTIONS OUTSTANDING

December 31, 2006					Options Outstanding					Options Exercisable
Range of Exercise Prices					Number of Options	Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number of Options		Weighted- Average Exercise Price
$	4.98	-	$	7.87	660,617		1.78	$	6.65		660,617	$	6.65
	7.88	-		9.36	1,190,734		5.05		9.36		1,190,734		9.36
	9.37	-		12.69	547,969		3.02		10.38		539,102		10.37
	12.70	-		21.61	653,946		3.81		15.55		477,922		14.18
					3,053,266		3.72		10.28		2,868,375		9.73

16. EMPLOYEE AND DIRECTOR STOCK PURCHASE PLANS

In 1997, the Company adopted an Employee Stock Purchase Plan (“ESPP”) and a Directors Stock Purchase Plan (“DSPP”) (collectively, the “Purchase Plans”) wherein 339,451 shares were reserved for issuance pursuant to the Purchase Plans. Under the terms of the Purchase Plans, the Company grants participants an option to purchase shares of Company common stock with an exercise price equal to 95% of market prices. Under the ESPP, employees are permitted, through payroll deduction, to purchase up to $25,000 of fair market value of common stock per year. Under the DSPP, directors are permitted to remit funds, on a regular basis, to purchase up to $25,000 of fair market value of common stock per year. Participants incur no brokerage commissions or service charges for purchases made under the Purchase Plans. For the years ended December 31, 2006 and 2005, there were 6,891 shares and 7,681 shares, respectively, purchased through the ESPP. For the years ended December 31, 2006 and 2005, there were 2,720 shares and 2,516 shares, respectively, purchased through the DSPP. At December 31, 2006, there were 210,763 and 9,715 shares remaining in the ESPP and DSPP, respectively.

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17. BENEFITS

The Company has established a 401(k) Retirement Plan (the “401(k) Plan”) for all qualified employees. Employees are eligible to participate in the 401(k) Plan following completion of 90 days of service and attaining age 21. The Company’s match begins after one year of service. Vesting in the Company’s contribution accrues over four years at 25% each year. Pursuant to the 401(k) Plan, employees can contribute up to 75% of their compensation to a maximum allowed by law. The Company matches 50% of the employee contribution, up to 6% of compensation. The Company match consists of a contribution of Company common stock, at market value. Prior to August 2005, the Company’s contributions were purchased through a broker by the directed trustee. Beginning in August 2005, the Company issued shares of its common stock as its contribution. The Company’s contribution to the 401(k) Plan was $638,000, $566,000 and $486,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The Company expensed $11,000, $36,000 and $26,000 during the years ended December 31, 2006, 2005 and 2004, respectively, to administer and audit the 401(k) Plan. These expenses were recorded to non-interest expense.

18. COMMITMENTS AND CONTINGENT LIABILITIES

The Company, from time to time, may be a defendant in legal proceedings related to the conduct of its business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial statements.

Letters of Credit

In the normal course of business, the Bank has various commitments and contingent liabilities, such as customers' letters of credit (including standby letters of credit of $63.2 million and $67.8 million at December 31, 2006 and 2005, respectively), which are not reflected in the accompanying consolidated financial statements. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the judgment of management, the financial position of the Company will not be affected materially by the final outcome of any contingent liabilities and commitments.

Leases

Certain office space of the Company and the Bank is leased from companies affiliated with the Chairman of the Company’s Board of Directors under separate agreements with the Company. Terms of these three agreements at December 31, 2006 are as follows.

SUMMARY OF LEASES WITH AFFILIATES TO THE CHAIRMAN OF THE BOARD OF DIRECTORS

December 31, 2006	Annual Rental Payment		Renewal Option Remaining	Annual Rental Increases
Expiration date:
March 2010	$	41	N/A	Fixed
October 2017	$	1,125	N/A	CPI
August 2025 (1)	$	450	4 five-year terms	Fixed
(1) This lease is recorded as a $5.3 million obligation under capital lease at December 31, 2006.

The following is a schedule by years of future minimum lease payments for the $5.3 million obligation under capital leases together with the present value of the net minimum lease payments as of December 31, 2006:

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FUTURE MINIMUM LEASE PAYMENTS UNDER OBLIGATION UNDER CAPITAL LEASE

Year Ended December 31,	Amount
2007	$	450
2008		450
2009		450
2010		469
2011		506
Thereafter		7,908
Total minimum lease payments		10,233
Less: amount representing interest		4,911
Present value of minimum lease payment, net	$	5,322

Certain office space of the Bank is leased from companies affiliated with certain Directors under separate agreements with the Bank. Terms of these two agreements at December 31, 2006 are as follows:

SUMMARY OF LEASES WITH AFFILIATES TO THE DIRECTORS

December 31, 2006	Annual Rental Payment		Renewal Option Remaining	Annual Rental Increases
Expiration date:
February 2010	$	96	N/A	Fixed
December 2011	$	132	2 five-year terms	Fixed

The Company believes that each of the related party transactions described above were on terms as fair to the Company as could have been obtained from unaffiliated third parties.

The following table shows future minimum payments under non-cancelable leases with initial terms of one year or more at December 31, 2006. Future minimum receipts under sub-lease agreements are not material.

FUTURE MINIMUM PAYMENTS UNDER NONCANCELABLE OPERATING LEASES

Year Ended December 31,	Amount
2007	$	4,255
2008		4,006
2009		3,592
2010		3,137
2011		2,913
Thereafter		19,229
Total minimum lease payments	$	37,132

Rental expense included in occupancy expense for all leases was $5.1 million, $4.8 million and $4.8 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Other Contractual Commitments

On February 6, 2007, the Board of Directors of the Company terminated the employment of the Company’s President and Chief Executive Officer. The Company has been attempting to negotiate an agreement that would provide 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. To date no such agreement has been reached and it is unclear whether or when such an agreement may be entered into between the parties. The Company’s existing severance agreement with the former President and Chief Executive Officer provides for a severance benefit equal to his then current monthly base salary for a period of twelve months, plus $50,000, which will result in a charge to earnings of approximately $650,000, on a pre-tax basis, in the quarter ending March 31, 2007. The Company, however, may incur additional charges to earnings greater than the contractual amount, or may incur such additional charges in future quarters, in connection with any negotiation and settlement of this matter between the parties.

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19. DERIVATIVE INTRUMENTS AND HEDGING ACTIVITIES

Beginning in 2004, the Company utilized certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. As of December 31, 2006, 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 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.

Derivative instruments are recorded at their fair values. If derivative instruments are designated as fair value hedges, both the change in the fair value of the hedge and the hedged item are included in current earnings. Because the hedging arrangement is considered highly effective, changes in the interest rate swaps’ fair values 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.

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 either 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 change in their fair values since the inception of the hedge. Because the hedging arrangement is considered highly effective, changes in the interest rate swaps’ fair values 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

December 31,		2006			2005
Notional amount	$	48,063		$	36,795
Weighted average pay rate		6.74	%		6.59	%
Weighted average receive rate		7.34	%		6.30	%
Weighted average maturity in years		6.6			7.4
Unrealized gain relating to interest rate swaps	$	640		$	450

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Customer Derivatives

During 2006 and 2005, 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 offset its exposure on the variable and fixed components of the customer agreement. At December 31, 2006 and 2005, the notional amount of such arrangements was $545.0 million and $290.2 million respectively. As the interest rate swaps with the clients and third parties are not designated as hedges under FAS No. 133, 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 earnings impact.

20. INCOME TAXES

The income tax provision consists of the following:

SUMMARY OF INCOME TAX PROVISION

Year Ended December 31,	2006		2005		2004
Current	$	7,421	$	9,137	$	1,174
Deferred		929		175		6,407
Total		8,350		9,312		7,581

Items that gave rise to significant portions of the deferred tax accounts are as follows:

DETAILS OF DEFERRED TAX ASSET

December 31,		2006			2005
Deferred tax asset:
Allowance for loan losses	$	10,682		$	9,310
Goodwill amortization		-			1,126
Unrealized loss on investment securities		2,124			4,017
Other		869			841
Total deferred tax asset		13,675			15,294
Deferred tax liability:
Core deposit intangible amortization		(5,278	)		(4,691	)
Goodwill amortization		(984	)		-
Property		(860	)		(1,632	)
Deferred loan fees		(2,146	)		(1,552	)
Other		(468	)		(658	)
Total deferred tax liability		(9,736	)		(8,533	)
Net deferred tax asset	$	3,939		$	6,761

The provision for income taxes differs from that computed at the statutory rate as follows:

RECONCILIATION OF FEDERAL STATUTORY INCOME TAX

Year Ended December 31,	2006						2005						2004
	Amount			%			Amount			%			Amount			%
Income before income taxes	$	25,624					$	28,833					$	25,210
Tax computed at statutory rate		8,969			35.0	%		10,090			35.0	%		8,824			35.0	%
Surtax exemption		-			-			-			-			(252	)		(1.0	)
(Decrease) increase in charge resulting from:
State taxes, net of federal benefit		637			2.5			436			1.5			236			0.9
Tax exempt interest (net)		(476	)		(1.8	)		(436	)		(1.5	)		(640	)		(2.5	)
Bank Owned Life Insurance		(610	)		(2.4	)		(673	)		(2.3	)		(628	)		(2.5	)
Other, net		(170	)		(0.7	)		(105	)		(0.4	)		41			0.2
Total income taxes	$	8,350			32.6	%	$	9,312			32.3	%	$	7,581			30.1	%

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21. EARNINGS PER SHARE

Earnings per share were calculated as follows:

EARNINGS PER SHARE COMPUTATION

Year Ended December 31,	2006		2005		2004
Net income available to common shareholders	$	17,274	$	19,521	$	17,629
Average common shares outstanding	20,266,774		19,062,315		17,062,454
Net effect of dilutive stock options		1,051,358		1,265,576		1,349,600
Dilutive common shares outstanding	21,318,132		20,327,891		18,412,054
Earnings per share - basic	$	0.85	$	1.02	$	1.03
Earnings per share - diluted	$	0.81	$	0.96	$	0.96
Dilutive stock options outstanding		3,020,541		3,236,162		3,285,746
Average exercise price	$	9.48	$	9.08	$	8.81
Average market price - diluted	$	18.58	$	20.21	$	20.60

There were 159,287 weighted average stock options, 62,740 weighted average stock options and 15,961 weighted average stock options outstanding during the year ended December 31, 2006, 2005 and 2004, respectively, which were not included in the computation of earnings per share - diluted as a result of the stock options’ exercise prices being greater than the average market price of the common share.

22. REGULATORY MATTERS

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 OCC. Under the requirements the federal bank regulatory agencies have estabilished quantitative measures to ensure that minimum thresholds for Tier 1 Capital, Total Capital and Leverage (Tier 1 Capital divided by average assets) ratios (set forth in the table below) are maintained. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets and certain off-balance sheet items as calculated under regulatory accounting practices.

The Company’s and Bank’s capital amounts and classifications are also subject to qualitative judgments by the federal bank regulators about components, risk weightings and other factors. At December 31, 2006 and 2005, the Company’s and the Bank’s capital exceeded all minimum regulatory requirements to which they are subject, and the Bank was “well capitalized” as defined under the federal bank regulatory guidelines. The risk-based capital ratios have been computed in accordance with regulatory accounting practices.

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REGULATORY CAPITAL LEVELS

						For Capital Adequacy					To Be Well-Capitalized Under Prompt Corrective
	Actual					Purposes					Action Provisions
		Amount	Ratio				Amount	Ratio				Amount	Ratio
December 31, 2006
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc.	$	320,883		11.89	%	$	215,958		8.00	%		(1)
Sun National Bank		284,787		10.57			215,473		8.00		$	269,342		10.00	%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc.		294,405		10.91			107,979		4.00			(1)
Sun National Bank		258,309		9.59			107,737		4.00			161,605		6.00
Leverage Ratio:
Sun Bancorp, Inc.		294,405		9.40			125,255		4.00			(1)
Sun National Bank		258,309		8.28			124,793		4.00			155,991		5.00
December 31, 2005
Total Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc.	$	266,379		11.11	%	$	191,814		8.00	%		N/A
Sun National Bank		251,410		10.50	%		191,499		8.00	%	$	239,374		10.00	%
Tier I Capital (to Risk-Weighted Assets):
Sun Bancorp, Inc.		243,196		10.14	%		95,907		4.00	%		N/A
Sun National Bank		228,227		9.53	%		95,750		4.00	%		143,624		6.00
Leverage Ratio:
Sun Bancorp, Inc.		243,196		8.20	%		118,702		4.00	%		N/A
Sun National Bank		228,227		7.70	%		118,528		4.00	%		148,160		5.00
(1) Not applicable for bank holding companies.

The ability of the Bank to pay dividends to the Company is controlled by certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits and a national bank may not declare any dividends if such declaration would leave the bank inadequately capitalized. Therefore, the ability of the Bank to declare dividends will depend on its future net income and capital requirements. Also, banking regulators have indicated that national banks should generally pay dividends only out of current operating earnings. Following this guidance, the amount available for payment of dividends to the Company by the Bank totaled $49.5 million at December 31, 2006.

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23. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

CARRYING AMOUNTS AND ESTIMATED FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

December 31, 2006	2006				2005
		Carrying Amount	Estimated Fair Value			Carrying Amount	Estimated Fair Value
Assets:
Cash and cash equivalents	$	170,100	$	170,100	$	85,462	$	85,462
Investment securities available for sale		461,920		461,920		676,630		676,630
Investment securities held to maturity		25,441		24,846		32,445		31,734
Loans receivable, net		2,359,616		2,397,115		2,027,753		2,024,915
Restricted equity investments		17,729		17,729		19,991		19,991
Liabilities:
Demand deposits		1,294,140		1,294,140		1,416,651		1,416,651
Savings deposits		412,973		412,973		386,821		386,821
Time deposits		960,884		957,162		668,176		656,864
FHLB advances		103,560		102,915		124,546		122,344
Securities sold under agreements to repurchase - customers		51,740		51,740		59,021		59,021
Securities sold under agreements to repurchase - FHLB		-		-		60,000		60,000
Obligation under capital lease		5,322		5,322		5,400		5,400
Junior subordinated debentures		108,250		108,648		77,322		84,356

Cash and cash equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Investment securities - For investment securities, fair values are based on quoted market prices.

Loans receivable - The fair value was estimated by discounting approximate cash flows of the portfolio to achieve a current market yield.

Restricted equity securities - Ownership in equity securities of bankers’ bank is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.

Demand deposits, savings deposits and certificates of deposit - The fair value of demand deposits and savings deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities.

Securities sold under agreements to repurchase - customer and FHLB - The fair value is estimated to be the amount payable at the reporting date.

Obligation under capital lease - The fair value was estimated to be the amount payable at the reporting date.

Junior subordinated debentures and FHLB advances - The fair value was estimated by discounting approximate cash flows of the borrowings to achieve a current market yield.

Commitments to extend credit and letters of credit - The majority of the Bank’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally not assignable by either the Bank or the borrowers, they only have value to the Bank and the borrowers.

58

No adjustment was made to the entry-value interest rates for changes in credit performing commercial loans and real estate loans for which there are no known credit concerns. Management segregates loans in appropriate risk categories. Management believes that the risk factor embedded in the entry-value interest rates along with the general reserves applicable to the performing commercial and real estate loan portfolios for which there are no known credit concerns result in a fair valuation of such loans on an entry-value basis.

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2006 and 2005. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since December 31, 2006 and 2005, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.

24. INTEREST RATE RISK

The Company's exposure to interest rate risk results from the difference in maturities and repricing characteristics of the interest-bearing liabilities and interest-earning assets and the volatility of interest rates.  At December 31, 2006, the Company was asset sensitive; that is, the Company’s assets had shorter maturity or repricing terms than its liabilities. Generally, an asset sensitive position will benefit the Company's earnings during periods of rising rates and will tend to negatively impact earnings during periods of declining interest rates.  Conversely, a liability sensitive position would benefit the Company during periods of declining rates and negatively impact earnings in a period of increasing interest rates.  Management monitors the relationship between the interest rate sensitivity of the Company's assets and liabilities.

25. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

The condensed financial statements of Sun Bancorp, Inc. are as follows:

CONDENSED STATEMENTS OF FINANCIAL CONDITION

December 31,	2006		2005
Assets:
Cash and due from banks	$	21,248	$	4,608
Investments in subsidiaries:
Bank subsidiaries		411,131		355,683
Non-bank subsidiaries		3,250		2,322
Accrued interest receivable and other assets		16,510		12,138
Total assets	$	452,139	$	374,751
Liabilities and Shareholders’ Equity:
Liabilities
Junior subordinated debentures		108,250		77,322
Other liabilities		1,662		1,776
Total liabilities		109,912		79,098
Shareholders' equity		342,227		295,653
Total liabilities and shareholders’ equity	$	452,139	$	374,751

CONDENSED STATEMENTS OF INCOME

Years Ended December 31,		2006			2005			2004
Net interest income	$	(8,409	)	$	(5,165	)	$	(3,614	)
Management fee		4,176			4,601			4,097
Other expenses		(3,863	)		(4,385	)		(3,927	)
Loss before equity in undistributed income of subsidiaries and income tax benefit		(8,096	)		(4,949	)		(3,444	)
Equity in undistributed income of subsidiaries		22,550			22,747			19,892
Income tax benefit		2,820			1,723			1,181
Net Income	$	17,274		$	19,521		$	17,629

59

CONDENSED STATEMENTS OF CASH FLOWS

Year Ended December 31,	2006			2005			2004
Operating activities:
Net income	$	17,274		$	19,521		$	17,629
Adjustments to reconcile net income to net cash used in operating activities:
Undistributed income of subsidiaries		(22,550	)		(22,747	)		(19,892	)
Stock-based compensation		432			503			326
Change in assets and liabilities which (used) provided cash:
Accrued interest receivable and other assets		(4,367	)		(3,402	)		(1,489	)
Accounts payable and other liabilities		(114	)		112			680
Net cash used in operating activities		(9,325	)		(6,013	)		(2,746	)
Investing activities:
Cash proceeds from bank acquisition		-			-			4,134
Dividends from subsidiary		7,861			4,685			3,454
Capital contribution to banking subsidiary		(17,270	)		(5,000	)		(12,007	)
Net cash used in investing activities		(9,409	)		(315	)		(4,419	)
Financing Activities:
Proceeds from issuance of Trust Preferred Securities		30,000			-			-
Cash received for exercise of stock options		2,873			497			425
Excess tax benefit related to stock options		1,724			-			-
Proceeds from issuance of common stock		798			903			434
Payments for fractional interests resulting from stock dividend		(20	)		(8	)		(10	)
Net cash provided by financing activities		35,375			1,392			849
Net (decrease) increase in cash		16,640			(4,936	)		(6,316	)
Cash, beginning of year		4,608			9,544			15,860
Cash, end of year	$	21,248		$	4,608		$	9,544

* * * * * *

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SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table presents summarized quarterly data for each of the last two years restated for stock dividends (amounts are in thousands, except per share amounts).

QUARTERLY DATA

Three Months Ended	December 31,		September 30,		June 30,		March 31,
2006
Interest income	$	48,536	$	46,828	$	45,564	$	43,022
Interest expense		23,991		21,829		20,451		18,601
Net interest income		24,545		24,999		25,113		24,421
Provision for loan losses		990		1,317		875		625
Non-interest income		5,012		5,268		5,070		4,396
Non-interest expense		21,889		21,590		23,641		22,273
Income before income taxes		6,678		7,360		5,667		5,919
Income taxes		2,224		2,503		1,877		1,746
Net income	$	4,454	$	4,857	$	3,790	$	4,173
Earnings per share - basic	$	0.22	$	0.24	$	0.19	$	0.21
Earnings per share - diluted	$	0.21	$	0.23	$	0.18	$	0.20
2005
Interest income	$	40,335	$	39,356	$	37,638	$	35,900
Interest expense		15,643		14,840		13,559		11,672
Net interest income		24,692		24,516		24,079		24,228
Provision for loan losses		520		500		765		525
Non-interest income		4,399		4,612		5,092		4,185
Non-interest expense		21,728		21,179		21,319		20,434
Income before income taxes		6,843		7,449		7,087		7,454
Income taxes		2,259		2,455		2,257		2,341
Net income	$	4,584	$	4,994	$	4,830	$	5,113
Earnings per share - basic	$	0.24	$	0.26	$	0.25	$	0.27
Earnings per share - diluted	$	0.23	$	0.25	$	0.24	$	0.25

Basic and diluted earnings per share are computed independently for each of the quarters presented. Consequently, the sum of the quarters may not equal the annual earnings per share.

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COMMON STOCK PRICE RANGE AND DIVIDENDS (UNAUDITED)

Shares of the Company’s common stock are quoted on the NASDAQ Stock Market under the symbol “SNBC”. The following table sets forth the high and low closing sale prices (adjusted for stock dividends) for the common stock for the calendar quarters indicated, as published by the NASDAQ Stock Market. The prices reflect inter-dealer prices, with retail markup, markdown, or commission, and may not represent actual transactions.

COMMON STOCK PRICE RANGE

	High		Low
2006
Fourth Quarter	$	21.45	$	18.36
Third Quarter	$	19.66	$	16.13
Second Quarter	$	18.46	$	16.20
First Quarter	$	20.09	$	18.19
2005
Fourth Quarter	$	20.42	$	18.21
Third Quarter	$	20.77	$	19.39
Second Quarter	$	20.84	$	18.85
First Quarter	$	22.77	$	20.17

There were 765 holders of record of the Company’s common stock as of March 12, 2007. This number does not reflect the number of persons or entities who held stock in nominee or “street” name through various brokerage firms. At March 12, 2007, there were 20,530,031 shares of the Company’s common stock outstanding.

To date, the Company has not paid cash dividends on its common stock. Future declarations of dividends by the Board of Directors would depend upon a number of factors, including the Company’s and the Bank’s financial condition and results of operations, investment opportunities available to the Company or the Bank, capital requirements, regulatory limitations, tax considerations, the amount of net proceeds retained by the Company and general economic conditions. No assurances can be given that any dividends will be paid or, if payment is made, will continue to be paid.

The ability of the Company to pay cash dividends is dependent upon the ability of the Bank to pay dividends to the Company. Because the Bank is a depository institution insured by the Federal Deposit Insurance Corporation (“FDIC”), it may not pay dividends or distribute capital assets if it is in default on any assessment due the FDIC. In addition, the OCC regulations impose certain minimum capital requirements that affect the amount of cash available for the payment of dividends by the Bank. Under Federal Reserve policy, the Company is required to maintain adequate regulatory capital and is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where it might not do so absent such a policy. This policy could have the effect of reducing the amount of cash dividends declarable by the Company.

62

STOCK PERFORMANCE (UNAUDITED)

The following table provides a stock performance graph comparing cumulative total shareholders return on the Common Stock with (a) the cumulative total shareholder return on stocks of all U.S. companies that trade on the NASDAQ Stock Market and the (b) the cumulative total shareholder return on stocks of all U.S. companies that trade on the included in the NASDAQ Bank index, as prepared for the NASDAQ by the Center for Research in Security Prices (“CRSP”) at the University of Chicago. All investment comparisons assume the investment of $100 at December 31, 2001. The cumulative returns for the NASDAQ Stock Market and the NASDAQ Bank index are computed assuming the reinvestment of dividends.

[Graphic Omitted]

CUMULATIVE TOTAL RETURN

December 31,		2001	2002			2003	2004			2005	2006
CRSP NASDAQ U.S. Companies	$	100	$	69	$	103	$	113	$	115	$	126
CRSP NASDAQ Bank index		100		102		132		151		147		165
Sun Bancorp, Inc.		100		136		287		275		234		262
(1) The cumulative return for Sun Bancorp, Inc. reflects a 5% stock dividend paid in May 2002, April 2003, April 2004, April 2005 and May 2006 and has been calculated based on the historical closing prices of $10.26, $13.30, $26.66, $24.33, $19.75 and $21.07 on December 31, 2001, 2002, 2003, 2004, 2005 and 2006, respectively.

There can be no assurance that the Company’s future stock performance will be the same or similar to the historical stock performance shown in the table. The Company neither makes nor endorses any predictions as to the stock performance.

Additional information: The Company’s Annual report on Form 10-K (excluding exhibits) for the fiscal year ended December 31, 2006 is available without charge upon written request to Sun Bancorp, Inc. Shareholder Relations, 226 Landis Avenue, Vineland, NJ 08360.

63

EX-21

Exhibit 21

	Subsidiaries of the Company
Subsidiaries	Percentage Owned	Jurisdiction of Incorporation
Sun National Bank	100%	United States
Med Vine, Inc. (1)	100%	Delaware
Sun Capital Trust III	100%	Delaware
Sun Capital Trust IV	100%	Delaware
Sun Capital Trust V	100%	Delaware
Sun Capital Trust VI	100%	Delaware
Sun Capital Trust VII)	100%	Delaware
CBNJ Capital Trust I	100%	Delaware
Sun Financial Services, L.L.C. (1)	100%	New Jersey
2020 Properties, L.L.C. (1)	100%	New Jersey
Sun Home Loans, Inc. (1)	100%	New Jersey
(1) Wholly-owned subsidiary of Sun National Bank.

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-32681, 333-89839, 333-91184, 333-118812, 333-114436, and 333-128793 on Form S-8 of our reports dated March 16, 2007, relating to the consolidated financial statements of Sun Bancorp, Inc. (which expressed an unqualified opinion and included an explanatory paragraph relating to the adoption of SFAS No. 123(R), Shared Based Payment) and management's report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Sun Bancorp, Inc. for the year ended December 31, 2006.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania

March 16, 2007

EX-31

Exhibit 31(a)

SECTION 302 CERTIFICATION

I, Sidney R. Brown, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of the Company;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: March 16, 2007	/s/ Sidney R. Brown
	Sidney R. Brown
	Acting President and Chief Executive Officer

Exhibit 31(b)

SECTION 302 CERTIFICATION

I, Dan A. Chila, certify that:

1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of the Company;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: March 16, 2007	/s/ Dan A. Chila
	Dan A. Chila
	Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the year ended December 31, 2006 (the “Report”) of Sun Bancorp, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof, we, Sidney R. Brown, Acting President and Chief Executive Officer, and Dan A. Chila, Executive Vice President, Chief Financial Officer, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2007
/s/ Sidney R. Brown	/s/ Dan A. Chila
Sidney R. Brown	Dan A. Chila
Acting President and Chief Executive Officer	Executive Vice President and Chief Financial Officer