U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE) FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
- ------- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
- ------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________TO_________
Commission File No. 333-30182
SUN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 58-2466380
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
4367 RIVERWOOD DRIVE
MURRELLS INLET, SC 29576-1359
(Address of principal executive
offices, including zip code)
(843) 357-7007
(Registrant's telephone number, including area code)
------------------------------------------------------
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 NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
715,000 SHARES OF COMMON STOCK, NO STATED PAR VALUE ON AUGUST 9, 2002
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PAGE 1 OF 14
EXHIBIT INDEX ON PAGE 2
SUN BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INDEX
PART I. FINANCIAL RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page No.
- ------------------------- --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- June 30, 2002 and December 31, 2001. . . . . . . . . . 3
Condensed Consolidated Statements of Income -- Six months ended June 30, 2002 and three months
ended June 30, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Shareholders' Equity and Comprehensive Income --
Six months ended June 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statement of Cash Flows -- Six months ended June 30, 2002. . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . 9-14
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(a) Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SUN BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------ --------------
ASSETS: (Unaudited)
Cash and cash equivalents:
Cash and due from banks $ 2,692,652 $ 1,025,008
Federal funds sold 6,277,000 1,304,000
------------ --------------
Total cash and cash equivalents 8,969,652 2,329,008
------------ --------------
Investment securities:
Securities available-for-sale 4,110,069 4,384,229
Nonmarketable equity securities 195,000 195,000
------------ --------------
Total investment securities 4,305,069 4,579,229
------------ --------------
Loans receivable: 20,762,905 16,238,315
Less allowance for loan losses (244,787) (164,787)
------------ --------------
Loans, net 20,518,118 16,073,528
Premises, furniture and equipment, net 1,891,173 1,661,354
Accrued interest receivable 126,762 122,234
Other assets 767,509 583,689
------------ --------------
Total assets $36,578,283 $ 25,349,042
============ ==============
LIABILITIES:
Deposits:
Noninterest-bearing transaction accounts $ 6,744,913 $ 4,210,483
Interest-bearing transaction accounts 1,192,200 878,031
Savings 6,763,029 4,038,849
Time deposits $100,000 and over 7,555,047 4,911,008
Other time deposits 8,941,449 5,161,743
------------ --------------
Total deposits 31,196,638 19,200,114
------------ --------------
Securities sold under agreement to repurchase - 500,000
Accrued interest payable 110,538 188,144
Other liabilities 59,247 18,501
------------ --------------
Total liabilities 31,366,423 19,906,759
------------ --------------
SHAREHOLDERS' EQUITY:
Preferred stock, par value not stated; 2,000,000 shares
authorized and unissued - -
Common stock, par value not stated; 10,000,000 shares authorized;
715,000 issued and outstanding at June 30, 2002 and December 31, 2001 6,779,216 6,779,216
Retained earnings (deficit) (1,591,497) (1,350,396)
Accumulated other comprehensive income 24,141 13,463
------------ --------------
Total shareholders' equity 5,211,860 5,442,283
------------ --------------
Total liabilities and shareholders' equity $36,578,283 $ 25,349,042
============ ==============
3
SUN BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended June 30, Three Months Ended June 30,
------------------------------ --------------------------------
2002 2001 2002 2001
------------ ---------------- -------------- ----------------
INTEREST INCOME
Loans, including fees $ 717,414 $ 222,253 $ 378,614 $ 151,153
Investment securities
Taxable 100,328 44,037 53,560 28,144
Nonmarketable equity securities 5,850 - - -
Federal funds sold 21,015 121,612 16,450 40,691
------------ ---------------- -------------- ----------------
Total income 844,607 387,902 448,624 219,988
------------ ---------------- -------------- ----------------
INTEREST EXPENSE
Time deposits $100,000 and over 139,944 33,576 75,446 24,183
Other deposits 205,457 65,463 115,684 37,385
Other interest expense 2,445 - - -
------------ ---------------- -------------- ----------------
Total 347,846 99,039 191,130 61,568
------------ ---------------- -------------- ----------------
NET INTEREST INCOME 496,761 288,863 257,494 158,420
Provision for loan losses 80,000 70,000 32,000 35,000
------------ ---------------- -------------- ----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 416,761 218,863 225,494 123,420
------------ ---------------- -------------- ----------------
OTHER INCOME
Service charges on deposit accounts 53,841 9,227 28,130 7,196
Residential mortgage origination fees 20,647 3,824 11,014 3,824
Gain on sale of available-for sale securities 16,518 - 15,112 -
Other service charges, commissions,
and fees 22,895 4,266 11,881 2,745
------------ ---------------- -------------- ----------------
Total 113,901 17,317 66,137 13,765
------------ ---------------- -------------- ----------------
OTHER OPERATING EXPENSES
Salaries and employee benefits 422,425 319,903 194,861 155,797
Occupancy expense 143,711 134,233 74,663 63,142
Furniture and fixture expense 51,686 37,694 25,908 21,734
Other operating expenses 295,312 261,522 161,213 147,281
------------ ---------------- -------------- ----------------
Total 913,134 753,352 456,645 387,954
------------ ---------------- -------------- ----------------
LOSS BEFORE TAXES (382,472) (517,172) (165,014) (250,769)
Income tax benefit (141,371) (186,085) (65,328) (86,438)
------------ ---------------- -------------- ----------------
NET LOSS $ (241,101) $ (331,087) $ (99,686) $ (164,331)
============ ================ ============== ================
EARNINGS PER SHARE
Basic earnings (losses) per share $ (0.34) $ (0.46) $ (0.14) $ (0.23)
Diluted earnings (losses) per share $ (0.34) $ (0.46) $ (0.14) $ (0.23)
4
SUN BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Accumulated
Common Stock Other
------------------------- Retained Comprehensive
Shares Amount Earnings Income Total
------------ ----------- ------------ -------------- -----------
BALANCE, DECEMBER 31, 2000 715,000 $6,779,216 $ (719,617) $ - $6,059,599
Net loss for the period (331,087) (331,087)
Other comprehensive
income, net of tax $3,417 5,817 5,817
-----------
Comprehensive income - - - - (325,270)
------------ ----------- ------------ -------------- -----------
BALANCE, JUNE 30, 2001 715,000 $6,779,216 $(1,050,704) $ 5,817 $5,734,329
============ =========== ============ ============== ===========
BALANCE, DECEMBER 31, 2001 715,000 $6,779,216 $(1,350,396) $ 13,463 $5,442,283
Net loss for the period (241,101) (241,101)
Other comprehensive
income, net of tax $6,272 10,678 10,678
-----------
Comprehensive income - - - - (230,423)
------------ ----------- ------------ -------------- -----------
BALANCE, JUNE 30, 2002 715,000 $6,779,216 $(1,591,497) $ 24,141 $5,211,860
============ =========== ============ ============== ===========
5
SUN BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (241,101) $ (331,087)
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Depreciation and amortization 51,685 37,693
Provision for loan losses 80,000 70,000
Accretion and premium amortization 11,601 (8,668)
Deferred income tax benefit (141,371) (186,085)
Gain on sale of securities (16,518) -
Increase in interest receivable (4,528) (52,200)
Increase (decrease) in interest payable (77,606) 63,601
Decrease in other assets (34,542) (19,322)
Increase in other liabilities 26,568 12,143
------------ ------------
Net cash used by operating activities (345,812) (413,925)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (1,351,129) (2,579,858)
Proceeds from maturities of securities available-for-sale 414,848 811,931
Proceeds from sales of securities available-for-sale 1,232,307 -
Net increase in loans made to customers (4,524,590) (7,300,653)
Purchases of premises and equipment (281,504) (912,105)
------------ ------------
Net cash used by investing activities (4,510,068) (9,980,685)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing transaction
accounts and savings accounts 5,572,779 4,623,137
Net increase in certificates of deposit and other time deposits 6,423,745 8,556,213
Decrease in securities sold under agreement to repurchase (500,000) -
------------ ------------
Net cash provided by financing activities 11,496,524 13,179,350
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,640,644 2,784,740
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 2,329,008 6,173,515
------------ ------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 8,969,652 $ 8,958,255
============ ============
CASH PAID DURING THE PERIOD FOR:
Income taxes $ - $ -
Interest $ 425,452 $ 35,438
6
SUN BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying financial statements have been prepared in accordance with the
requirements for interim financial statements and, accordingly, they are
condensed and omit disclosures which would substantially duplicate those
contained in the most recent annual report to shareholders on Form 10KSB. The
financial statements as of June 30, 2002 and for the interim period ended June
30, 2002 are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation. The financial information as of December 31, 2001 has been
derived from the audited financial statements as of that date. For further
information, refer to the financial statements and the notes included in Sun
Bancshares, Inc.'s 2001 Form 10KSB.
NOTE 2 - EARNINGS PER SHARE
- ---------------------------
Net income per share - basic is computed by dividing net income by the weighted
average number of common shares outstanding. Net income per share - diluted is
computed by dividing net income by the weighted average number of common shares
outstanding and dilutive common share equivalents using the treasury stock
method. Dilutive common share equivalents include common shares issuable upon
exercise of outstanding stock options. There were no dilutive common share
equivalents outstanding during the first six months of 2002; therefore basic
earnings per share and diluted earnings per share were the same.
NOTE 2 - COMPREHENSIVE INCOME
- -----------------------------
Comprehensive income includes net income and other comprehensive income, which
is defined as non-owner related transactions in equity. The following table
sets forth the amounts of other comprehensive income included in equity along
with the related tax effect for the three and six months period ended June 30,
2002:
TAX
PRE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
-------- ---------- -----------
FOR THE SIX MONTHS ENDED JUNE 30, 2002:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 16,950 $ (6,272) $ 10,678
Plus: reclassification adjustment for gains (losses)
realized in net income - - -
-------- ---------- -----------
Net unrealized gains (losses) on securities 16,950 (6,272) 10,678
-------- ---------- -----------
Other comprehensive income $ 16,950 $ (6,272) $ 10,678
======== ========== ===========
TAX
PRE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
-------- ---------- -----------
FOR THE SIX MONTHS ENDED JUNE 30, 2001:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 9,234 $ (3,417) $ 5,817
Plus: reclassification adjustment for gains (losses)
realized in net income - - -
-------- ---------- -----------
Net unrealized gains (losses) on securities 9,234 (3,417) 5,817
-------- ---------- -----------
Other comprehensive income $ 9,234 $ (3,417) $ 5,817
======== ========== ===========
7
SUN BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - COMPREHENSIVE INCOME - (continued)
- -----------------------------
TAX
PRE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------ -----------
FOR THE THREE MONTHS ENDED JUNE 30, 2002:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 16,400 $ (6,069) $ 10,331
Plus: reclassification adjustment for gains (losses)
realized in net income - - -
---------- ------------ -----------
Net unrealized gains (losses) on securities 16,400 (6,069) 10,331
---------- ------------ -----------
Other comprehensive income $ 16,400 $ (6,069) $ 10,331
========== ============ ===========
TAX
PRE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------ -----------
FOR THE THREE MONTHS ENDED JUNE 30, 2001:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 8,684 $ (3,214) $ 5,470
Plus: reclassification adjustment for gains (losses)
realized in net income - - -
---------- ------------ -----------
Net unrealized gains (losses) on securities 8,684 (3,214) 5,470
---------- ------------ -----------
Other comprehensive income $ 8,684 $ (3,214) $ 5,470
========== ============ ===========
Accumulated other comprehensive income consists solely of the unrealized gain
(loss) on securities available-for-sale, net of the deferred tax effects.
8
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- --------------------------------------------------------------------------
The following is a discussion of our financial condition as of June 30, 2002
compared to December 31, 2001, and the results of operations for the three and
six months ended June 30, 2002. These comments should be read in conjunction
with our condensed financial statements and accompanying footnotes appearing in
this report. It should be understood that this discussion is based on the
Bank's opening for business on November 15, 2000. This report contains
"forward-looking statements" relating to, without limitation, future economic
performance, plans and objectives of management for future operations, and
projections of revenues and other financial items that are based on the beliefs
of our management, as well as assumptions made by and information currently
available to our management. The words "expect", "estimate", "anticipate", and
"believe", as well as similar expressions, are intended to identify
forward-looking statements. Our actual results may differ materially from the
results discussed in the forward-looking statements, and our operating
performance each quarter is subject to various risks and uncertainties that are
discussed in detail in our filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
- -----------------------
NET INTEREST INCOME
- ---------------------
For the six months ended June 30, 2002, net interest income increased $207,898,
or 71.97%, to $496,761 as compared to $288,863 for the same period in 2001.
Interest income from loans, including fees, increased $495,161, or 222.79%, from
the six months ended June 30, 2001 to the comparable period in 2002, as we
continued to experience growth in our loan portfolio. Interest expense for the
six months ended June 30, 2002 was $347,846 as compared to $99,039 for the same
period in 2001. The increase in interest-bearing deposits between the two
periods resulted in increased interest expense. The net interest margin
realized on earning assets decreased from 4.72% for the six months ended June
30, 2001 to 3.88% for the same period in 2002. The interest rate spread
decreased from 3.80% for the six months ended June 30, 2001 to 2.96% for the
same period in 2002.
For the quarter ended June 30, 2002, net interest income totaled $257,494, an
increase of $99,074, or 62.54%, when compared to the same quarter ended June 30,
2001. Interest income totaling $378,614 was generated from loans, including
fees, during the quarter ended June 30, 2002, as compared to $151,153 during the
comparable period in 2001. Interest expense on deposit accounts was $191,130
for the quarter ended June 30, 2002, as compared to $61,568 for the same period
in 2001. The net interest margin realized on earning assets was 3.60% for the
quarter ended June 30, 2002, as compared to 4.27% during the same period in
2001. The interest rate spread was 2.84% for the quarter ended June 30, 2002,
as compared to 3.43% for the quarter ended June 30, 2001.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------
The provision for loan losses is the charge to operating earnings that
management believes is necessary to maintain the allowance for possible loan
losses at an adequate level to reflect the losses inherent in the loan
portfolio. For the six months ended June 30, 2002, the provision charged to
expense was $80,000, as compared to $70,000 in the same period a year earlier.
Management continues to fund the allowance for loan losses at a level believed
to be adequate to match the growth in the loan portfolio. For the quarter ended
June 30, 2002, the provision charged to expense was $32,000, as compared to
$35,000 for the same period in 2001. There are risks inherent in making all
loans, including risks with respect to the period of time over which loans may
be repaid, risks resulting from changes in economic and industry conditions,
risks inherent in dealing with individual borrowers, and, in the case of a
collateralized loan, risks resulting from uncertainties about the future value
of the collateral. We maintain an allowance for loan losses based on, among
other things, historical experience, an evaluation of economic conditions, and
regular reviews of delinquencies and loan portfolio quality. Our judgment about
the adequacy of the allowance is based upon a number of assumptions about future
events, which we believe to be reasonable, but which may not prove to be
accurate. Thus, there is a risk that charge-offs in future periods could exceed
the allowance for loan losses or that substantial additional increases in the
allowance for loan losses could be required. Additions to the allowance for
loan losses would result in a decrease of our net income and, possibly, our
capital.
9
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
NONINTEREST INCOME
- -------------------
Noninterest income increased $96,584, or 557.74% to $113,901 for the six months
ended June 30, 2002 as compared to the same period ended June 30, 2001. The
primary source of this income was the increase in service charges on deposit
accounts of $44,614, or 483.52%, to $53,841 for the period ended June 30, 2002,
when compared to the same period in 2001. In addition, income from residential
mortgage origination fees increased $16,823 to $20,647 for the period ended June
30, 2002 as compared to the same period in 2001. Gains on sales of
available-for-sale securities totaled $16,518 for the six months ended June 30,
2002, there were no gains during the same period in 2001.
For the quarter ended June 30, 2002, noninterest income was $66,137, an increase
of $52,372, or 380,47% from the same period ended June 30, 2001. The largest
component of noninterest income was service charges on deposit accounts, which
totaled $28,130 for the quarter ended June 30, 2002, as compared to $7,196 for
the quarter ended June 30, 2001. Income from residential mortgage origination
fees totaled $11,014 for the quarter ended June 30, 2002, as compared to $3,824
for the same period in 2001. Income from gains on sales of available-for-sale
securities totaled $15,112 for the quarter ended June 30, 2002, there were no
gains during the same period in 2001.
NONINTEREST EXPENSE
- --------------------
For the period ended June 30, 2002, noninterest expense was $913,134, an
increase of $159,782, or 21.21% when compared to the same period ended June 30,
2001. The largest increase was in salaries and employee benefits, which
increased from $319,903 for the six months ended June 30, 2001 to $422,425 for
the six months ended June 30, 2002. The increase was largely the result of an
increase in personnel in support functions for the Georgetown office.
For the quarter ended June 30, 2002, noninterest expense increased $68,691, or
17.71% as compared to the same period ended June 30, 2001. The largest
increase, increased from $155,797 for the quarter ended June 30, 2001 to
$194,861 for the quarter ended June 30, 2002. This increase was largely the
result of an increase in personnel in support functions for the Georgetown
office.
INCOME TAXES
- -------------
The income tax benefit for the six months ended June 30, 2002 was $141,371 as
compared to $186,085 for the same period in 2001. The loss before income taxes
decreased from $517,172 for the six months ended June 30, 2001 to $382,472 for
the same period in 2002. The effective tax rate was 37% for the six months
ended June 30, 2002, as compared to an effective tax rate of 36% for the six
months ended June 30, 2001. The effective tax rate was 40% for the quarter
ended June 30, 2002 and 34% for the quarter ended June 30, 2001.
NET INCOME (LOSS)
- -------------------
The combination of the above factors resulted in a net loss for the six months
ended June 30, 2002 of $241,101 as compared to $331,087 for the same period in
2001. The net loss before taxes of $382,472 was partially offset by the income
tax benefit of $141,371 during the six months ended June 30, 2002. The net loss
before taxes for the same period in 2001 was $517,172, which was partially
offset by the income tax benefit of $186,085. For the quarter ended June 30,
2002, the net loss was $99,686, as compared to $164,331 for the same period in
2001.
10
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
ASSETS AND LIABILITIES
- ------------------------
The growth in assets and liabilities was significant in most areas since the
Bank opened for business on November 15, 2000. During the first six months of
2002, total assets increased $11,229,241 or 44.30%, when compared to December
31, 2001. The primary sources of growth in assets were federal funds sold which
increased $4,973,000, or 381.37% from the December 31, 2001 amount of
$1,304,000, and gross loans which increased $4,524,590, or 27.87% from the
December 31, 2001 amount of $16,238,315. Total deposits increased $11,996,524
or 62.49% from the December 31, 2001 amount of $19,200,114. Within the deposit
area, other time deposits increased $3,779,706 or 73.23% from December 31, 2001
to June 30, 2002. Time deposits $100,000 and over increased $2,644,039 or
53.84% during the first six months of 2002. Noninterest-bearing deposits and
savings deposits increased $2,534,430 and $2,724,180, respectively, from
December 31, 2001 to June 30, 2002.
SECURITIES AVAILABLE-FOR-SALE
- ------------------------------
Investment securities decreased from $4,384,229 at December 31, 2001 to
$4,110,069 at June 30, 2002. All of our marketable investment securities were
designated as available-for-sale at June 30, 2002.
NONMARKETABLE EQUITY SECURITIES
- ---------------------------------
Nonmarketable equity securities include the cost of our investment in the stock
of the Federal Reserve Bank. The stock has no quoted market value and no ready
market exists. Investment in Federal Reserve Bank stock is required by law of
every national bank. At June 30, 2002 and December 31, 2001 our investment in
this stock totaled $195,000.
LOANS
- -----
We continued our trend of growth during the first six months of 2002, especially
in the loan area. Net loans increased $4,444,590, or 27.66%, during the period.
As shown below, the main component of growth in the loan portfolio was
commercial and industrial loans which increased 32.87%, or $2,847,338, from
December 31, 2001 to June 30, 2002. Balances within the major loans receivable
categories as of June 30, 2002 and December 31, 2001 are as follows:
June 30, December 31,
2002 2001
----------- -------------
Real estate:
Construction $ 996,301 $ 996,432
Mortgage - residential 5,954,765 4,700,606
Commercial and industrial 11,510,715 8,663,377
Consumer and other 2,301,124 1,877,900
----------- -------------
$20,762,905 $ 16,238,315
=========== =============
11
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
RISK ELEMENTS IN THE LOAN PORTFOLIO
- ----------------------------------------
There were no risk elements identified in our loan portfolio as of June 30, 2002
and 2001.
Activity in the Allowance for Loan Losses is as follows:
June 30, June 30,
2002 2001
------------ -----------
Balance, January 1, $ 164,787 $ 15,000
Provision for loan losses for the period 80,000 70,000
Net loans (charged-off) recovered for the period - -
------------ -----------
Balance, end of period $ 244,787 $ 85,000
============ ===========
Gross loans outstanding, end of period $20,762,905 $8,205,800
Allowance for loan losses to loans outstanding 1.18% 1.04%
DEPOSITS
- --------
During the first six months of 2002, total deposits increased by $11,996,524, or
62.49%, from December 31, 2001. The largest increase was in other time deposits
which increased $3,779,706 or 73.23%, from December 31, 2001 to June 30, 2002.
Time deposits $100,000 and over increased $2,644,039, or 53.84% and non-interest
bearing demand deposits increased $2,534,430 or 60.20%. Savings deposits
increased $2,724,180 or 67.45%. Expressed as a percentage, total interest
bearing deposits increased 63.12%.
Balances within the major deposit categories as of June 30, 2002 and December
31, 2001 were as follows:
June 30, December 31,
2002 2001
----------- -------------
Noninterest-bearing demand deposits $ 6,744,913 $ 4,210,483
Interest-bearing demand deposits 1,192,200 878,031
Savings deposits 6,763,029 4,038,849
Time deposits $100,000 and over 7,555,047 4,911,008
Other time deposits 8,941,449 5,161,743
----------- -------------
$31,196,638 $ 19,200,114
=========== =============
LIQUIDITY
- ---------
We meet our liquidity needs through scheduled maturities of loans and
investments on the asset side and through pricing policies on the liability side
for interest-bearing deposit accounts. The level of liquidity is measured by
the loan-to-total borrowed funds ratio which was at 66.56% at June 30, 2002 and
84.58% at December 31, 2001.
Securities available-for-sale, which totaled $4,110,069 at June 30, 2002, serve
as a ready source of liquidity. We also have lines of credit available with
correspondent banks to purchase federal funds for periods from one to seven
days. At June 30, 2002, unused lines of credit totaled $4,241,000.
12
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
- ------------------------------
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the footnotes to the consolidated financial statements at December 31, 2001
as filed on our annual report on Form 10-KSB. Certain accounting policies
involve significant judgments and assumptions by us which have a material impact
on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and
assumptions we use are based on historical experience and other factors, which
we believe to be reasonable under the circumstances. Because of the nature of
the judgments and assumptions we make, actual results could differ from these
judgments and estimates which could have a material impact on our carrying
values of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in preparation of our
consolidated financial statements. Refer to the portion of this discussion that
addresses our allowance for loan losses for a description of our processes and
methodology for determining our allowance for loan losses.
CAPITAL RESOURCES
- ------------------
Total shareholders' equity decreased from $5,442,283 at December 31, 2001 to
$5,211,860 at June 30, 2002. The decrease is primarily due to the net loss for
the period of $241,101.
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance sheet exposures, adjusted for
risk-weights ranging from 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital consists of common shareholders'
equity, excluding the unrealized gain (loss) on available-for-sale securities,
minus certain intangible assets. Tier 2 capital consists of the general reserve
for loan losses subject to certain limitations. An institutions' qualifying
capital base for purposes of its risk-based capital ratio consists of the sum of
its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for
Tier 1 and 8% for total risk-based capital.
Banks and bank holding companies are also required to maintain capital at a
minimum level based on total assets, which is known as the leverage ratio. The
minimum requirement for the leverage ratio is 3%, however all but the highest
rated institutions are required to maintain ratios 100 to 200 basis point above
the minimum. Both the Company and the Bank exceeded their minimum regulatory
capital ratios as of June 30, 2002.
The following table summarizes the Company's risk-based capital at June 30,
2002:
Shareholders' equity $ 5,187,719
Less: intangibles - Deferred Taxes (674,544)
------------
Tier 1 capital 4,513,175
Plus: allowance for loan losses (1) 244,787
------------
Total capital $ 4,757,962
============
Risk-weighted assets $22,908,402
============
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) 19.70%
Total capital (to risk-weighted assets) 20.77%
Tier 1 (to total average assets) 14.28%
(1) limited to 1.25% of risk-weighted assets
13
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--continued
- ---------------------------------------------------------------------
OFF-BALANCE SHEET RISK
- ------------------------
Through the operations of our Bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At June 30, 2002,
we had issued commitments to extend credit of $2,454,778 and standby letters of
credit of $43,000 through various types of commercial lending arrangements. We
evaluate each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by us upon extension of credit, is
based on our credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate.
REGULATORY MATTERS
- -------------------
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. We cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect us.
14
SUN BANCSHARES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- ---------------------------------------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- -----------------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
On May 13, 2002, the Company held the Annual Meeting of Shareholders for the
purpose of electing five Class I directors to serve for three-year terms.
The five nominees for director received the number of affirmative votes of
shareholders required for such nominee's election in accordance with the Bylaws
of the Company. Of the 715,000 outstanding shareholders of the Company,
shareholders voted for the election of each director as follows: Thomas
Bouchette, Edsel J. (Coupe) DeVille, John S. Divine, III, Dalton B. Floyd, Jr.
and Jeanne Louise Fourrier - Eggart all received 686,771 votes for his/her
election, 500 votes were withheld on each director and there were no abstentions
and no votes against any director.
NOTE 5. OTHER INFORMATION
- ----------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) Exhibits
Exhibit 99.1 - Certification of Chief Executive Officer and Chief Financial
Officer.
Reports on Form 8-K
- -------------------
(b) Reports on Form 8-K - None
15
SUN BANCSHARES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 13, 2002 By: /s/ THOMAS BOUCHETTE
-----------------------------------
Thomas Bouchette
President & Chief Executive Officer
By: /s/ RANDY L. CARMON
----------------------------------
Randy L. Carmon
Chief Financial Officer
16