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 SEPTEMBER 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 NOVEMBER 12, 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INDEX
PART I.FINANCIAL RESULTS Page No.
- ------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- September 30, 2002 and December 31, 2001. . . . . . 3
Condensed Consolidated Statements of Income -- Nine months ended
September 30, 2002 and 2001 and three
Months ended September 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Shareholders' Equity
and Comprehensive Income --
Nine months ended September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows --
Nine months ended September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis or Plan of Operation. . . . . . . . . . . . . . . . . .9-15
Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(a) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(b) Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-20
SUN BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------ ------------
ASSETS: (Unaudited)
Cash and cash equivalents:
Cash and due from banks $ 1,256,202 $ 1,025,008
Federal funds sold 1,654,000 1,304,000
------------ ------------
Total cash and cash equivalents 2,910,202 2,329,008
------------ ------------
Investment securities:
Securities available-for-sale 7,230,741 4,384,229
Nonmarketable equity securities 195,000 195,000
------------ ------------
Total investment securities 7,425,741 4,579,229
------------ ------------
Loans receivable: 23,962,701 16,238,315
Less allowance for loan losses (279,787) (164,787)
------------ ------------
Loans, net 23,682,914 16,073,528
Premises, furniture and equipment, net 2,190,964 1,661,354
Accrued interest receivable 154,291 122,234
Other assets 807,036 583,689
------------ ------------
Total assets $37,171,148 $25,349,042
============ ============
LIABILITIES:
Deposits:
Noninterest-bearing transaction accounts $ 6,437,936 $ 4,210,483
Interest-bearing transaction accounts 1,262,525 878,031
Savings 7,462,401 4,038,849
Time deposits $100,000 and over 7,569,357 4,911,008
Other time deposits 9,044,332 5,161,743
------------ ------------
Total deposits 31,776,551 19,200,114
Securities sold under agreement to repurchase - 500,000
Accrued interest payable 169,544 188,144
Other liabilities 69,597 18,501
------------ ------------
Total liabilities 32,015,692 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 September 30, 2002 and December 31, 2001 6,779,216 6,779,216
Retained earnings (deficit) (1,652,564) (1,350,396)
Accumulated other comprehensive income 28,804 13,463
------------ ------------
Total shareholders' equity 5,155,456 5,442,283
------------ ------------
Total liabilities and shareholders' equity $37,171,148 $25,349,042
============ ============
3
SUN BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ---------------------
2002 2001 2002 2001
----------- ----------- --------- ----------
INTEREST INCOME
Loans, including fees $1,138,418 $ 452,813 $421,004 $ 230,560
Investment securities, taxable 157,840 78,262 57,512 34,225
Nonmarketable Securities 11,700 5,850 5,850 5,850
Federal funds sold 37,280 179,728 16,265 58,116
----------- ----------- --------- ----------
Total income 1,345,238 716,653 500,631 328,751
----------- ----------- --------- ----------
INTEREST EXPENSE
Time deposits $100,000 and over 223,812 102,306 83,868 68,730
Other deposits 319,926 150,764 114,469 85,301
Other borrowings 2,445 - - -
----------- ----------- --------- ----------
Total 546,183 253,070 198,337 154,031
----------- ----------- --------- ----------
NET INTEREST INCOME 799,055 463,583 302,294 174,720
Provision for loan losses 115,000 105,000 35,000 35,000
----------- ----------- --------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 684,055 358,583 267,294 139,720
----------- ----------- --------- ----------
OTHER INCOME
Service charges on deposit accounts 90,678 18,393 36,837 9,166
Gain on sale of securities 33,783 - 17,265 -
Residential mortgage origination fees 50,809 14,058 30,162 10,234
Other service charges, commissions, and fees 24,885 10,305 1,990 6,039
----------- ----------- --------- ----------
Total 200,155 42,756 86,254 25,439
----------- ----------- --------- ----------
OTHER OPERATING EXPENSES
Salaries and employee benefits 617,694 529,824 195,269 209,921
Occupancy expense 243,321 196,393 99,610 62,160
Furniture and fixture expense 87,405 59,273 35,719 21,579
Other operating expenses 415,195 415,309 119,883 153,787
----------- ----------- --------- ----------
Total 1,363,615 1,200,799 450,481 447,447
----------- ----------- --------- ----------
INCOME (LOSS) BEFORE TAXES (479,405) (799,460) (96,933) (282,288)
Income tax expense (benefit) (177,237) (298,847) (35,866) (112,762)
----------- ----------- --------- ----------
NET INCOME (LOSS) $ (302,168) $ (500,613) $(61,067) $(169,526)
=========== =========== ========= ==========
Weighted average share 715,000 715,000 715,000 715,000
EARNINGS PER SHARE
Basic earnings (losses) per share $ (0.42) $ (0.70) $ (0.09) $ (0.24)
Diluted earnings (losses) per share $ (0.42) $ (0.70) $ (0.09) $ (0.24)
4
SUN BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 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 (500,613) (500,613)
Other comprehensive income,
net of tax $18,007 30,660 30,660
-----------
Comprehensive income (loss) - - - - (469,953)
------- ---------- ------------ -------------- -----------
BALANCE, SEPTEMBER 30, 2001 715,000 $6,779,216 $(1,220,230) $ 30,660 $5,589,646
======= ========== ============ ============== ===========
BALANCE, DECEMBER 31, 2001 715,000 $6,779,216 $(1,350,396) $ 13,463 $5,442,283
Net loss for the period (302,168) (302,168)
Other comprehensive income,
net of tax $9,010 15,341 15,341
-----------
Comprehensive income (loss) - - - - (286,827)
------- ---------- ------------ -------------- -----------
BALANCE, SEPTEMBER 30, 2002 715,000 $6,779,216 $(1,652,564) $ 28,804 $5,155,456
======= ========== ============ ============== ===========
5
SUN BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
----------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (302,168) $ (500,613)
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Depreciation and amortization 112,772 77,624
Provision for loan losses 115,000 105,000
Accretion and premium amortization 17,019 (1,725)
Gain on sale of securities (33,783) -
Deferred income tax benefit (177,237) (298,848)
Increase in interest receivable (32,057) (89,270)
Increase (decrease) in interest payable (18,600) 123,570
Increase in other assets (38,205) (19,682)
Increase in other liabilities 34,179 28,498
------------- -------------
Net cash used by operating activities (323,080) (575,446)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available-for-sale (6,142,360) (4,092,753)
Maturities of securities available-for-sale 1,587,392 996,140
Proceeds from sales of securities available-for-sale 1,749,573 -
Net increase in loans made to customers (7,724,386) (11,028,386)
Purchases of premises and equipment (642,382) (1,165,598)
------------- -------------
Net cash used by investing activities (11,172,163) (15,290,597)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing transaction
accounts and savings accounts 6,035,499 6,855,090
Net increase in certificates of deposit and other time deposits 6,540,938 9,640,494
Decrease in securities sold under agreement to repurchase (500,000) -
------------- -------------
Net cash provided by financing activities 12,076,437 16,495,584
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 581,194 629,541
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 2,329,008 6,173,515
------------- -------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 2,910,202 $ 6,803,056
============= =============
CASH PAID DURING THE PERIOD FOR:
Income taxes $ - $ -
Interest $ 564,783 $ 129,499
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 September 30, 2002 and for the interim periods ended
September 30, 2002 and 2001 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 (loss) per share - basic is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Net income (loss) per
share - diluted is computed by dividing net income (loss) 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 nine
months of 2002 and 2001; therefore basic earnings per share and diluted earnings
per share were the same.
NOTE 3 - COMPREHENSIVE INCOME
- ---------------------------------
Comprehensive income includes net income (loss) 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 nine and three months period ended
September 30, 2002 and 2001.
Tax
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
--------- ---------- ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 58,134 $ (21,510) $ 36,624
Reclassification adjustment for (gains) realized in net income (33,783) 12,500 (21,283)
--------- ---------- ------------
Net unrealized gains (losses) on securities 24,351 (9,010) 15,341
--------- ---------- ------------
Other comprehensive income $ 24,351 $ (9,010) $ 15,341
========= ========== ============
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 48,667 $ (18,007) $ 30,660
Plus: reclassification adjustment for (gains)
realized in net income - - -
--------- ---------- ------------
Net unrealized gains (losses) on securities 48,667 (18,007) 30,660
--------- ---------- ------------
Other comprehensive income $ 48,667 $ (18,007) $ 30,660
========= ========== ============
7
SUN BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - COMPREHENSIVE INCOME - (continued)
- ---------------------------------
Tax
Pre-tax (Expense) Net-of-tax
Amount Benefit Amount
--------- ---------- ------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 24,666 $ (9,126) $ 15,540
Reclassification adjustment for (gains)
realized in net income (17,265) 6,388 (10,877)
--------- ---------- ------------
Net unrealized gains (losses) on securities - - -
--------- ---------- ------------
Other comprehensive income $ 7,401 $ (2,738) $ 4,663
========= ========== ============
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ 39,433 $ (14,590) $ 24,843
Plus: reclassification adjustment for (gains)
realized in net income - - -
--------- ---------- ------------
Net unrealized gains (losses) on securities 39,433 (14,590) 24,843
--------- ---------- ------------
Other comprehensive income $ 39,433 $ (14,590) $ 24,843
========= ========== ============
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 September 30,
2002 compared to December 31, 2001, and the results of operations for the three
and nine months ended September 30, 2002 compared to the three and nine months
ended September 30, 2001. These comments should be read in conjunction with our
condensed financial statements and accompanying footnotes appearing in this
report. It should be understood in reading this discussion and comparing the
periods presented that the Bank opened 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 nine months ended September 30, 2002, net interest income increased
$335,472 or 72.37%, to $799,055 as compared to $463,583 for the same period in
2001.
Interest income for the nine months ended September 30, 2002 totaled $1,345,238,
an increase of 628,585 or 87.71% when compared to the same period in 2001. The
main component of interest income was interest and fees derived from loans.
Interest income from loans, including fees, increased $685,605, or 151.41%, from
the nine months ended September 30, 2001 to $1,138,418 for the comparable period
in 2002. This increase is mainly attributable to the continued growth in our
loan portfolio.
Interest expense for the nine months ended September 30, 2002 was $546,183 as
compared to $253,070 for the same period in 2001. The increase in the volume of
interest-bearing deposits between the two periods was the primary reason for the
increase in interest expense.
The net interest margin realized on earning assets decreased from 4.58% for the
nine months ended September 30, 2001 to 3.83% for the same period in 2002. The
interest rate spread increased from 2.61% for the nine months ended September
30, 2001 to 3.05% for the same period in 2002.
For the quarter ended September 30, 2002, net interest income totaled $302,294,
an increase of $127,574, or 73.02%, when compared to the same quarter ended
September 30, 2001.
Total interest income for the quarter ended September 30, 2002 and 2001 was
$500,631 and $328,751, respectively. Interest income totaling $421,004 was
generated from loans, including fees, during the quarter ended September 30,
2002, as compared to $230,560 during the comparable period in 2001.
Total interest expense for the quarter ended September 30, 2002 and 2001 was
$198,337 and $154,031, respectively. Interest expense for both periods
consisted only of interest expense on deposit accounts.
The net interest margin realized on earning assets was 3.75% for the quarter
ended September 30, 2002, as compared to 3.45% during the same period in 2001.
The interest rate spread was 3.11% for the quarter ended September 30, 2002, as
compared to 1.70% for the quarter ended September 30, 2001.
9
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
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 nine months ended September 30, 2002, the provision charged
to expense was $115,000, as compared to $105,000 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 September 30, 2002, the provision charged to expense was $35,000,
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.
NONINTEREST INCOME
- -------------------
Noninterest income increased $157,399, or 368.13% to $200,155 for the nine
months ended September 30, 2002 as compared to the same period ended September
30, 2001. The primary source of this income was the increase in service charges
on deposit accounts of $72,285, or 393.00%, to $90,678 for the period ended
September 30, 2002, when compared to the same period in 2001. In addition,
income from residential mortgage origination fees increased $36,751 to $50,809
for the period ended September 30, 2002 as compared to the same period in 2001.
Gains on sales of available-for-sale securities totaled $33,783 for the nine
months ended September 30, 2002, there were no gains during the same period in
2001.
For the quarter ended September 30, 2002, noninterest income was $86,254, an
increase of $60,815, or 239.06% from the same period ended September 30, 2001.
The largest component of noninterest income was service charges on deposit
accounts, which totaled $36,837 for the quarter ended September 30, 2002, as
compared to $9,166 for the quarter ended September 30, 2001. Income from
residential mortgage origination fees totaled $30,162 for the quarter ended
September 30, 2002, as compared to $10,234 for the same period in 2001. Income
from gains on sales of available-for-sale securities totaled $17,265 for the
quarter ended September 30, 2002, there were no gains during the same period in
2001.
NONINTEREST EXPENSE
- --------------------
For the period ended September 30, 2002, noninterest expense was $1,363,615, an
increase of $162,816, or 13.56% when compared to the same period ended September
30, 2001. Salaries and employee benefits and occupancy and equipment expense
increased from $529,824 and $255,666, respectively, for the nine months ended
September 30, 2001 to $617,694 and $330,726, respectively, for the nine months
ended September 30, 2002. The increases were largely attributable to the
Georgetown office which opened in July 2001.
For the quarter ended September 30, 2002, noninterest expense increased $3,034,
or 0.68% as compared to the same period ended September 30, 2001. Occupancy and
equipment expense increased $51,590 to $135,329 for the quarter ended September
30, 2002. This increase was mainly due to the Georgetown office which opened in
July 2001.
10
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
INCOME TAXES
- -------------
The income tax benefit for the nine months ended September 30, 2002 was $177,237
as compared to $298,847 for the same period in 2001. The loss before income
taxes decreased from $799,460 for the nine months ended September 30, 2001 to
$479,405 for the same period in 2002. The effective tax rate was 37% for the
nine months ended September 30, 2002, as compared to an effective tax rate of
37% for the nine months ended September 30, 2001. The effective tax rate was
37% and 40% for the quarter ended September 30, 2002 and 2001, respectively.
NET INCOME (LOSS)
- -------------------
The combination of the above factors resulted in a net loss for the nine months
ended September 30, 2002 of $302,168 as compared to $500,613 for the same period
in 2001. The net loss before taxes of $479,405 was offset by the income tax
benefit of $177,237 during the nine months ended September 30, 2002. The net
loss before taxes for the same period in 2001 was $500,613, which was offset by
the income tax benefit of $298,847. For the quarter ended September 30, 2002,
the net loss was $61,067, as compared to $169,526 for the same period in 2001.
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 nine months of 2002, total assets increased $11,822,106 or
46.64%, when compared to December 31, 2001. The increase in investment
securities and loans accounted for the significant portion of the increase in
total assets, which increased $2,846,512 and $7,724,386, respectively, to
$7,230,741 and $23,962,701 as of September 30, 2002, respectively.
The increase in total assets was funded primarily by the increase in total
deposits, which increased by $12,576,437 or 65.50% from the December 31, 2001
amount of $19,200,114.
SECURITIES AVAILABLE-FOR-SALE
- ------------------------------
Investment securities increased from $4,384,229 at December 31, 2001 to
$7,230,741 at September 30, 2002. All of our marketable investment securities
were designated as available-for-sale at September 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 September 30, 2002 and December 31, 2001 our investment
in this stock totaled $195,000.
11
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
LOANS
- -----
We continued our trend of growth during the first nine months of 2002,
especially in the loan area. Net loans increased $7,609,386, or 47.34%, during
the period. As shown below, the main component of growth in the loan portfolio
was commercial and industrial loans which increased 55.63%, or $4,819,766, from
December 31, 2001 to September 30, 2002. Balances within the major loans
receivable categories as of September 30, 2002 and December 31, 2001 are as
follows:
September 30, December 31,
2002 2001
-------------- -------------
Real estate:
Construction $ 1,690,808 $ 996,432
Mortgage - residential 6,160,961 4,700,606
Commercial and industrial 13,483,143 8,663,377
Consumer and other 2,627,789 1,877,900
-------------- -------------
$ 23,962,701 $ 16,238,315
============== =============
RISK ELEMENTS IN THE LOAN PORTFOLIO
- ----------------------------------------
As of September 30, 2002, the only risk element identified in our loan portfolio
were criticized loans totaling $92,561. There were no risk elements identified
in our loan portfolio as of September 30, 2001.
Activity in the Allowance for Loan Losses is as follows:
September 30, September 30,
2002 2001
--------------- --------------
Balance, January 1, $ 164,787 $ 15,000
--------------- --------------
Provision for loan losses for the period 115,000 105,000
Net loans (charged-off) recovered for the period - -
--------------- --------------
Balance, end of period $ 279,787 $ 120,000
=============== ==============
Gross loans outstanding, end of period $ 23,962,701 $ 11,933,533
Allowance for loan losses to loans outstanding 1.17% 1.01
12
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
DEPOSITS
- --------
During the first nine months of 2002, total deposits increased by $12,576,437,
or 65.50%, from December 31, 2001. The largest increase was in other time
deposits, which increased $3,882,589 or 75.22%, from December 31, 2001 to
September 30, 2002. Time deposits $100,000 and over increased $2,658,349, or
54.13%, non-interest bearing demand deposits increased $2,227,453 or 52.90%, and
savings deposits increased $3,423,552 or 84.77%. Expressed as a percentage,
total interest bearing deposits increased 69.04%.
Balances within the major deposit categories as of September 30, 2002 and
December 31, 2001 were as follows:
September 30, December 31,
2002 2001
-------------- -------------
Noninterest-bearing demand deposits $ 6,437,936 $ 4,210,483
-------------- -------------
Interest-bearing demand deposits 1,262,525 878,031
Savings deposits 7,462,401 4,038,849
Time deposits $100,000 and over 7,569,357 4,911,008
Other time deposits 9,044,332 5,161,743
-------------- -------------
$ 31,776,551 $ 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 75.41% at September 30,
2002 and 84.57% at December 31, 2001.
Securities available-for-sale, which totaled $7,230,741 at September 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 September 30, 2002, unused lines of credit totaled $4,241,000.
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.
13
SUN BANCSHARES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- continued
- -------------------------------------------------------------------
CAPITAL RESOURCES
- ------------------
Total shareholders' equity decreased from $5,442,283 at December 31, 2001 to
$5,155,454 at September 30, 2002. The decrease is primarily due to the net loss
for the period of $302,168.
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 a capital at a
minimum level based on total average assets, which is known as the leverage
ratio. The minimum requirement for the leverage ratio is 3%, but 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 September 30, 2002.
The following table summarizes the Bank's risk-based capital at September 30,
2002:
Shareholders' equity $ 5,018,471
Less: disallowed deferred taxes (789,118)
---------------
Tier 1 capital 4,229,353
Plus: allowance for loan losses (1) 279,787
---------------
Total capital $ 4,509,140
===============
Risk-weighted assets $ 27,608,058
===============
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets) 15.32%
Total capital (to risk-weighted assets) 16.33%
Tier 1 (to total average assets) 13.47%
(1) limited to 1.25% of risk-weighted assets
The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies of less than
$150,000,000 in consolidated assets.
14
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 September 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.
15
SUN BANCSHARES, INC.
ITEM 3. CONTROLS AND PROCEDURES.
- ------------------------------------
(a) Based on their evaluation of the issuer's disclosure controls and
procedures (as defined in 17 C.F.R. Sections 240.13a-14(c) and 240.15d-14(c)) as
of a date within 90 days prior to the filing of this quarterly report, the
issuer's chief executive officer and chief financial officer concluded that such
controls and procedures are effective in timely alerting them to material
information relating to the issuer and the Bank that is required to be included
in the issuer's periodic filings with the Securities and Exchange Commission.
(b) There were no significant changes in the issuer's internal controls, to its
knowledge, or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, corrective actions with regard to
significant deficiencies or material weaknesses.
16
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
- ---------------------------------------------------------------------
Not applicable.
NOTE 5. OTHER INFORMATION
- ----------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) Exhibits
None
Reports on Form 8-K
- ----------------------
(b) Reports on Form 8-K - None
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: /s/ THOMAS BOUCHETTE
-----------------------------------
Thomas Bouchette
President & Chief Executive Officer
Date: November 13, 2002 By: /s/ RANDY L. CARMON
-----------------------------------
Randy L. Carmon
Chief Financial Officer
18
CERTIFICATIONS
I, Thomas Bouchette, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sun Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Thomas Bouchette
------------------- -------------------------------------
Thomas Bouchette
President and Chief Executive Officer
19
CERTIFICATIONS
I, Randy L. Carmon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sun Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Randy L. Carmon
-------------------- -------------------------------------
Randy L. Carmon
Chief Financial Officer
20