UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 000-26191
SUN COMMUNITY BANCORP LIMITED
(Exact name of registrant as specified in its charter)
Arizona 86-0878747
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2777 East Camelback Road, Suite 101
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
(602) 955-6100
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, No par value: 5,503,870 shares outstanding as of October 31, 1999.
Page 1 of 19
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Forward-Looking Statements
Certain of the statements contained in this document, including the
Corporation's interim consolidated financial statements, Management's Discussion
and Analysis of Financial Condition and Results of Operations and in documents
incorporated into this document by reference that are not historical facts,
including, without limitation, statements of future expectations, projections of
results of operations and financial condition, statements of future economic
performance and other forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, are subject to known and
unknown risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of the Corporation and/or its subsidiaries
and other operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend", "expect", "project", "estimate",
"predict", "anticipate", "should", "believe", and similar expressions also are
intended to identify forward-looking statements. Important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of the Corporation's
efforts to implement its business strategy, (ii) changes in interest rates,
(iii) legislation or regulatory requirements adversely impacting the
Corporation's banking business and/or expansion strategy, (iv) adverse changes
in business conditions or inflation, (v) general economic conditions, either
nationally or regionally, which are less favorable than expected and that result
in, among other things, a deterioration in credit quality and/or loan
performance and collectability, (vi) competitive pressures among financial
institutions, (vii) changes in securities markets, (viii) actions of competitors
of the Corporation's banks and the Corporation's ability to respond to such
actions, (ix) the cost of the Corporation's capital, which may depend in part on
the Corporation's asset quality, prospects and outlook, (x) changes in
governmental regulation, tax rates and similar matters, (xi) "Year 2000"
computer, imbedded chip and data processing issues, and (xii) other risks
detailed in the Corporation's other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. All subsequent written or oral forward-looking
statements attributable to the Corporation or persons acting on its behalf are
expressly qualified in their entirety by the foregoing factors. Investors and
other interested parties are cautioned not to place undue reliance on such
statements, which speak as of the date of such statements. The Corporation
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of unanticipated events.
Item 1. Financial Statements:
Consolidated balance sheets - September 30, 1999
and December 31, 1998. 3
Consolidated statements of income - Three months and nine
months ended September 30, 1999 and 1998. 4
Consolidated statements of changes in stockholders' equity -
Nine months ended September 30, 1999 and 1998. 5
Consolidated statements of cash flows - Nine months ended
September 30, 1999 and 1998. 6
Notes to consolidated financial statements. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 2. Changes in Securities. 18
Item 3. Defaults Upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 18
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 20
Page 2 of 19
<PAGE>
PART I, ITEM I
SUN COMMUNITY BANCORP LIMITED
Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998
September 30 December 31
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 13,357,839 $ 9,902,458
Interest-bearing deposits with banks 5,328,800 858,955
Federal funds sold 19,200,000 37,600,000
------------ ------------
Total cash and cash equivalents 37,886,639 48,361,413
Loans held for resale 1,794,598 1,275,788
Investment securities available for sale,
carried at market value 36,106,747 12,922,539
Portfolio loans:
Commercial 147,102,855 60,366,282
Real estate mortgage 6,944,827 4,371,401
Installment 5,819,009 3,342,226
------------ ------------
Total portfolio loans 159,866,691 68,079,909
Less allowance for loan losses (1,730,000) (696,000)
------------ ------------
Net portfolio loans 158,136,691 67,383,909
Premises and equipment, net 4,401,413 2,753,721
Accrued interest income 1,035,780 448,331
Other assets 3,436,974 2,432,336
------------ ------------
TOTAL ASSETS $242,798,842 $135,578,037
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 44,001,714 $ 28,033,128
Interest-bearing 129,562,429 70,748,676
------------ ------------
Total deposits 173,564,143 98,781,804
Accrued interest on deposits
and other liabilities 2,025,537 757,879
------------ ------------
Total liabilities 175,589,680 99,539,683
MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES 16,858,899 9,411,272
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized; issued
and outstanding:
September 30, 1999 -- 5,503,870 shares
December 31, 1998 -- 3,847,060 shares 51,867,516 26,795,416
Retained-earnings deficit (1,430,741) (179,673)
Market value adjustment (net of tax effect)
for investment securities available for sale
(accumulated other comprehensive income) (86,512) 11,339
------------ ------------
Total stockholders' equity 50,350,263 26,627,082
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $242,798,842 $135,578,037
============ ============
Page 3 of 19
<PAGE>
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 3,935,909 $ 1,405,190 $ 9,252,965 $3,477,310
Loans held for resale 29,434 9,072 81,876 9,072
Taxable investment securities 511,942 193,172 932,548 606,006
Federal funds sold 336,166 386,134 1,225,137 865,805
Interest-bearing deposits with
banks and other 174,588 10,898 275,634 19,516
----------- ----------- ----------- ----------
Total interest income 4,988,039 2,004,466 11,768,160 4,977,709
Interest expense:
Demand deposits 836,382 410,284 2,091,703 986,361
Savings deposits 3,250 2,522 9,260 6,358
Time deposits 580,608 226,127 1,398,176 543,038
Other 5,077 -- 5,385 16
----------- ----------- ----------- ----------
Total interest expense 1,425,317 638,933 3,504,524 1,535,773
----------- ----------- ----------- ----------
Net interest income 3,562,722 1,365,533 8,263,636 3,441,936
Provision for loan losses 526,834 129,000 1,061,834 240,000
----------- ----------- ----------- ----------
Net interest income after provision
for loan losses 3,035,888 1,236,533 7,201,802 3,201,936
Noninterest income:
Service charges on deposit accounts 112,636 67,122 291,755 154,014
Mortgage broker fees 13,389 14,093 54,667 33,285
Other 41,247 10,066 87,220 36,309
----------- ----------- ----------- ----------
Total noninterest income 167,272 91,281 433,642 223,608
Noninterest expense:
Salaries and employee benefits 2,129,522 726,948 5,177,294 1,600,614
Occupancy 355,944 156,516 881,927 312,365
Equipment rent, depreciation
and maintenance 329,810 156,475 871,056 351,876
Other 1,502,929 339,829 2,732,694 839,151
----------- ----------- ----------- ----------
Total noninterest expense 4,318,205 1,379,768 9,662,971 3,104,006
----------- ----------- ----------- ----------
Income (loss) before federal income taxes,
minority interest and cumulative effect
of change in accounting principle (1,115,045) (51,954) (2,027,527) 321,538
Federal income taxes (credit) (213,000) 27,000 (367,000) 196,000
----------- ----------- ----------- ----------
Income (loss) before minority interest
and cumulative effect of change in
accounting principle (902,045) (78,954) (1,660,527) 125,538
Credit resulting from minority interest
in net losses of consolidated subsidiaries 437,867 93,580 795,687 157,380
----------- ----------- ----------- ----------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (464,178) 14,626 (864,840) 282,918
Cumulative effect of change in accounting
principle -- Note B -- -- (386,228) --
----------- ----------- ----------- ----------
NET INCOME (LOSS) $ (464,178) $ 14,626 $(1,251,068) $ 282,918
=========== =========== =========== ==========
NET INCOME (LOSS) PER SHARE -- Note D
</TABLE>
Page 4 of 19
<PAGE>
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Deficit Income Total
----------- ----------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 1998:
<S> <C> <C> <C> <C>
Balances at January 1, 1998 $ 9,863,512 $ (236,351) $ 62,725 $ 9,689,886
Net proceeds from issuance of 954,546
shares of common stock for cash
consideration of $7.3333 per share 7,000,004 7,000,004
Components of comprehensive income:
Net income for the period 282,918 282,918
Market value adjustment for
Investment securities available
for sale (net of tax effect) (38,398) (38,398)
------------
Comprehensive income for the period 244,520
----------- ----------- -------- ------------
BALANCES AT
SEPTEMBER 30, 1998 $16,863,516 $ 46,567 $ 24,327 $ 16,934,410
=========== =========== ======== ============
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Balances at January 1, 1999 $26,795,416 $ (179,673) $ 11,339 $ 26,627,082
Net proceeds from issuance of 6,810
shares of common stock for cash
consideration of $10.00 per share 68,100 68,100
Net proceeds from issuance of 1,650,000
shares of common stock for cash
consideration of $16.00 per share 25,004,000 25,004,000
Components of comprehensive income:
Net loss for the period (1,251,068) (1,251,068)
Market value adjustment for
investment securities available
for sale (net of tax effect) (97,851) (97,851)
------------
Comprehensive loss for the period (1,348,919)
----------- ----------- -------- ------------
BALANCES AT
SEPTEMBER 30, 1999 $51,867,516 $(1,430,741) $(86,512) $ 50,350,263
=========== =========== ======== ============
</TABLE>
Page 5 of 19
<PAGE>
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,251,068) $ 282,918
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Minority interest in net losses of consolidated
subsidiaries (1,099,555) (157,380)
Provision for loan losses 1,061,834 240,000
Depreciation of premises and equipment 641,767 215,916
Net accretion of investment security discounts (205,616) (17,783)
Cumulative effect of change in accounting principle 386,228 --
Origination and purchases of loans held for resale (25,519,052) (5,300,994)
Proceeds from sales of loans held for resale 25,000,242 3,531,372
Increase in accrued interest income and other assets (1,545,102) (1,676,765)
Increase in accrued interest and other liabilities 1,267,658 442,214
------------- ------------
NET CASH USED BY OPERATING ACTIVITIES (1,262,664) (2,440,502)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities
available for sale 15,420,000 13,000,000
Purchases of investment securities available for sale (38,957,490) (12,452,700)
Net increase in portfolio loans (91,786,782) (22,645,410)
Purchases of premises and equipment (2,289,459) (1,385,283)
------------- ------------
NET CASH USED BY INVESTING ACTIVITIES (117,613,731) (23,483,393)
FINANCING ACTIVITIES
Resources provided by minority interests 8,547,182 4,126,766
Net proceeds from issuance of common stock 25,072,100 7,000,004
Net increase in demand deposits, NOW accounts
and savings accounts 48,758,664 10,284,730
Net increase in certificates of deposit 26,023,675 25,678,883
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 108,401,621 47,090,383
------------- ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (10,474,774) 21,166,488
Cash and cash equivalents at beginning of period 48,361,413 10,131,093
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,886,639 $ 31,297,581
============= ============
</TABLE>
Page 6 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SUN COMMUNITY BANCORP LIMITED
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Sun
Community Bancorp Limited (Sun) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q. Accordingly, they do not include all information and
footnotes necessary for a fair presentation of consolidated financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles.
The statements do, however, include all adjustments of a normal
recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which
Sun considers necessary for a fair presentation of the interim periods.
The results of operations for the nine-month period ended September 30,
1999 are not necessarily indicative of the results to be expected for the year
ending December 31, 1999.
The consolidated balance sheet as of December 31, 1998 was derived from
audited consolidated financial statements as of that date. Certain 1998 amounts
have been reclassified to conform to the 1999 presentation.
NOTE B - IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
AICPA Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES, requires start-up, preopening and organizational costs to be charged
to expense when incurred. The initial application of this statement, which
became effective January 1, 1999, also requires the write-off of any such costs
previously capitalized. Implementation of this new statement is shown as a
cumulative effect adjustment in the first quarter of 1999.
NOTE C - INITIAL PUBLIC OFFERING OF COMMON STOCK
In early July 1999, Sun completed an initial public offering of
1,650,000 shares of common stock at $16.00 per share. In that offering, Capitol
Bancorp Limited, purchased 850,000 shares at the same share price as the public,
aggregating $13.6 million, maintaining its 51% ownership of Sun.
Page 7 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SUN COMMUNITY BANCORP LIMITED - CONTINUED
NOTE D - NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator--net income (loss) for the period $ (464,178) $ 14,626 $(1,251,068) $ 282,918
========== ========== =========== ==========
Denominator:
Weighted average number of common
shares Outstanding (denominator
for basic earnings per share) 5,485,935 2,853,870 4,403,870 2,853,870
Effect of dilutive securities - stock options -- (1) 140,868 -- (1) 57,123
---------- ---------- ----------- ----------
Denominator for dilutive net income per share--
Weighted average number of common
shares and potential dilution 5,485,935 2,994,738 4,403,870 2,910,993
========== ========== =========== ==========
Net income (loss) per share:
Before cumulative effect of change in
accounting principle:
Basic $ (0.08) $ 0.01 $ (0.20) $ 0.10
========== ========== =========== ==========
Diluted $ (0.08) $ 0.01 $ (0.20) $ 0.10
========== ========== =========== ==========
After cumulative effect of change in
accounting principle:
Basic $ (0.08) $ 0.01 $ (0.28) $ 0.10
========== ========== =========== ==========
Diluted $ (0.08) $ 0.01 $ (0.28) $ 0.10
========== ========== =========== ==========
</TABLE>
(1) Antidilutive for period presented.
NOTE E - NEW BANKS AND PENDING BANK APPLICATIONS
East Valley Community Bank, located in Chandler, Arizona, opened on
June 30, 1999. It is majority owned by Sun. Desert Community Bank, located in
Las Vegas, Nevada, opened August 6, 1999, as a majority-owned subsidiary of
Nevada Community Bancorp Limited which is majority owned by Sun.
As of September 30, 1999, applications were pending for additional
banks in Nevada and New Mexico.
Page 8 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SUN COMMUNITY BANCORP LIMITED - CONTINUED
NOTE F - PROSPECTIVE IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
FASB Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income, or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new standard will become effective in 2001
and, because Sun and its banks have not typically entered into derivative
contracts either to hedge existing risks or for speculative purposes, is not
expected to have a material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Sun's financial statements.
[The remainder of this page intentionally left blank]
Page 9 of 19
<PAGE>
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets approximated $242.8 million at September 30, 1999, an
increase of $107.2 million from the December 31, 1998 level of $135.6 million.
The consolidated balance sheets include Sun and its majority-owned subsidiaries.
In May 1999, Nevada Community Bancorp Limited was added to the consolidated
group. Sun is the majority owner of Nevada Community Bancorp Limited, which is
the majority owner of Desert Community Bank, both located in Las Vegas, Nevada.
Desert Community Bank commenced operations on August 6, 1999. Previously, on
June 30, 1999, East Valley Community Bank in Chandler, Arizona, commenced
operations as a majority-owned banking subsidiary.
Portfolio loans increased during the nine-month period by approximately
$91.8 million. Loan growth was funded primarily by higher levels of time
deposits. The majority of portfolio loan growth occurred in commercial loans,
which increased approximately $86.7 million, consistent with the banks' emphasis
on commercial lending activities.
The allowance for loan losses at September 30, 1999 approximated $1.7
million or 1.08% of total portfolio loans, an increase from the year-end 1998
ratio of 1.02%.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses inherent in the loan portfolio
at the balance sheet date. Management's determination of the adequacy of the
allowance is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentrations of
credit), past loss experience, current economic conditions, loan commitments
outstanding and other factors.
[The remainder of this page intentionally left blank]
Page 10 of 19
<PAGE>
The table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the nine-month periods (in thousands):
1999 1998
-------- --------
Allowance for loan losses at January 1 $ 696 $ 317
Loans charged-off 28 --
Recoveries -- --
Additions to allowance charged to expense 1,062 240
-------- --------
Allowance for loan losses at September 30 $ 1,730 $ 557
======== ========
Average total portfolio loans for period
ended September 30 $151,432 $ 29,413
======== ========
For internal purposes, management allocates the allowance to all loan
classifications. The amounts allocated in the following table (in thousands),
which includes all loans for which management has concerns based on Sun's loan
rating system, should not be interpreted as an indication of future charge-offs.
In addition, amounts allocated are not intended to reflect the amount that may
be available for future losses.
September 30, 1999 December 31, 1998
--------------------- -------------------
Percent Percent
of Total of Total
Portfolio Portfolio
Loans Loans
--------------------- -------------------
Commercial $ 831 0.52% $ 314 0.46%
Real estate mortgage 41 0.03 28 0.04
Installment 27 0.02 20 0.03
Unallocated 831 0.52 334 0.49
-------- ------ -------- -----
Total allowance for loan losses $ 1,730 1.08% $ 696 1.02%
======== ====== ======== =====
Total portfolio
Loans outstanding $159,867 $ 68,080
======== ========
Page 11 of 19
<PAGE>
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
September 30 December 31
1999 1998
------------ -----------
Nonaccrual loans:
Commercial $ 21 $ --
Real estate -- --
Installment -- --
---- ----
Total nonaccrual loans 21 --
Past due (>90 days) loans:
Commercial $122 $ --
Real estate -- --
Installment 3 --
---- ----
Total past due loans 125 --
---- ----
Total nonperforming loans $146 $ --
==== ====
The following comparative analysis summarizes each bank's total
portfolio loans, allowance for loan losses, nonperforming assets and allowance
ratios (dollars in thousands):
<TABLE>
<CAPTION>
Allowance as a
Total Allowance for Nonperforming Percentage of Total
Portfolio Loans Loan Losses Loans Portfolio Loans
------------------ --------------- --------------- -------------------
Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank of Tucson $ 52,149 $37,899 $ 648 $ 392 $ 122 $ -- 1.24% 1.03%
Camelback Community Bank 19,753 3,246 198 33 -- -- 1.00 1.02
East Valley Community Bank (1) 2,810 -- 29 -- -- -- 1.03 --
Mesa Bank 15,772 1,386 158 14 -- -- 1.00 1.01
Southern Arizona Community Bank 13,335 2,925 134 30 -- -- 1.00 1.03
Sunrise Bank of Arizona 16,407 1,745 165 18 -- -- 1.01 1.03
Valley First Community Bank 33,841 20,879 339 209 24 -- 1.00 1.00
Nevada Community Bancorp:
Desert Community Bank (2) 5,800 -- 59 -- -- -- 1.02 --
-------- ------- ------ ----- ---- ----- ----- -----
Consolidated $159,867 $68,080 $1,730 $ 696 $ 146 $ -- 1.08% 1.02%
======== ======= ====== ===== ===== ===== ===== =====
</TABLE>
As a condition of charter approval, each bank is required to maintain an
allowance for loan losses of not less than 1% for the first three years of
operations. For periods after June 30, 1999, Bank of Tucson is no longer subject
to the minimum allowance for loan loss requirement.
(1) East Valley Community Bank commenced operations on June 30, 1999.
(2) Desert Community Bank commenced operations on August 6, 1999.
Noninterest-bearing deposits approximated 25.4% of total deposits at
September 30, 1999, a decrease from the December 31, 1998 level of 28.4%. Levels
of noninterest-bearing deposits fluctuate based on customers' transaction
activity.
Page 12 of 19
<PAGE>
RESULTS OF OPERATIONS
The net loss from operations (before cumulative effect of an accounting
change) for the nine months ended September 30, 1999 approximated $865,000
($0.20 per share), compared to net income of $283,000 ($0.10 per share) earned
during the corresponding period of 1998.
Operating results and total assets (in thousands) were as follows:
<TABLE>
<CAPTION>
Nine months ended September 30
-----------------------------------------------------
Net Income
before Return on Return on
Total Assets Accounting Change Beginning Equity Average Assets
------------------- ----------------- ---------------- --------------
Sept. 30 Dec 31
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank of Tucson $ 77,905 $ 63,860 $ 767 $ 571 16.95% 13.71% 1.34% 1.45%
Camelback Community Bank (1) 28,329 10,017 (385) (197) n/a n/a n/a n/a
East Valley Community Bank (2) 7,141 n/a (464) n/a n/a n/a n/a n/a
Mesa Bank (1) 22,195 6,192 (142) n/a n/a n/a n/a n/a
Southern Arizona Community Bank(1) 23,270 12,395 (350) (63) n/a n/a n/a n/a
Sunrise Bank of Arizona (1) 19,856 5,411 (375) n/a n/a n/a n/a n/a
Valley First Community Bank 37,498 36,588 154 (77) 5.16 n/a 0.58 n/a
Nevada Community Bancorp:
Desert Community Bank (3) 13,345 n/a (241) n/a n/a n/a n/a n/a
Other, net 13,260 1,115 171 49 n/a n/a n/a n/a
-------- -------- ----- ----- ----- ----- ---- ----
Consolidated $242,799 $135,578 $(865) $ 283 n/a 8.96% n/a 0.52%
======== ======== ===== ===== ===== ===== ==== ====
</TABLE>
n/a Not applicable
(1) Camelback Community Bank, Southern Arizona Community Bank, Mesa Bank, and
Sunrise Bank of Arizona commenced operations in May, August, October and
December 1998, respectively.
(2) East Valley Community Bank commenced operations on June 30, 1999.
(3) Desert Community Bank commenced operations on August 6, 1999 as a
majority-owned subsidiary of Nevada Community Bancorp.
Net interest income increased to $8.3 million during the nine-month
1999 period versus $3.4 million in the corresponding period of 1998 primarily
due to growth in total assets and the number of banks within the consolidated
group.
Noninterest income increased to $434,000 for the 1999 nine-month
period, as compared with $224,000 in 1998. Service charge revenue increased
30.5% in the third quarter and 89.4% for the nine months ended September 30,
1999 compared to the same periods in 1998. This increase is primarily related to
higher transaction volume and the larger number of customers resulting from the
addition of new banks in 1998 and 1999.
Provisions for loan losses were $1,062,000 for the nine months ended
September 30, 1999 compared to $240,000 during the 1998 period. The increase is
primarily related to loan growth in 1999. The provisions for loan losses are
based upon management's analysis of the allowance for loan losses, as previously
discussed.
Noninterest expense for the nine months ended September 30, 1999 was
$9.7 million compared with $3.1 million in 1998. The increase in noninterest
expense is associated with newly formed banks, growth and increases in general
operating costs. Increases in employee compensation and occupancy mostly relate
to the growth in number of banks within the consolidated group and the larger
number of data processing and other administrative support staff necessary for
the increased number and size of banks.
Page 13 of 19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $74.8 million for the
nine-month 1999 period, compared to $36 million in 1998. Such growth occurred in
all deposit categories, with the majority from time deposits. The Corporation's
banks generally do not rely on brokered deposits as a key funding source.
Deposit growth in 1999 has been deployed primarily into commercial
loans, consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $37.9 million or 15.6% of total
assets at September 30, 1999 as compared with $48.4 million or 35.7% of total
assets at December 31, 1998. As liquidity levels vary continuously based on
customer activities, amounts of cash and cash equivalents can vary widely at any
given point in time. Management believes the banks' liquidity position at
September 30, 1999 is adequate to fund loan demand and meet depositor needs.
In addition to cash and cash equivalents, a source of long-term
liquidity is the banks' marketable investment securities. Sun's liquidity
requirements have not historically necessitated the sale of investments in order
to meet liquidity needs. It also has not engaged in active trading of its
investments and has no intention of doing so in the foreseeable future. At
September 30, 1999 Sun and the banks had approximately $36.1 million of
investment securities classified as available for sale which can be utilized to
meet various liquidity needs as they arise.
In early July 1999, Sun completed an initial public offering of
1,650,000 shares of common stock at $16.00 per share. Net proceeds from the
offering approximated $25 million. Of the offering, Capitol Bancorp Limited
purchased 850,000 shares, at the same share price as the public, maintaining its
51% ownership of Sun.
Sun and its banks are subject to complex regulatory capital
requirements, which require maintaining certain minimum capital ratios. These
ratio measurements, in addition to certain other requirements, are used by
regulatory agencies to determine the level of regulatory intervention and
enforcement applied to financial institutions. Sun and each of its banks are in
compliance with the regulatory requirements and management expects to maintain
such compliance.
Page 14 of 19
<PAGE>
Stockholders' equity, as a percentage of total assets, approximated
20.74% at September 30, 1999, an increase from the beginning of the year ratio
of 19.64%. Total capital funds (stockholders' equity, plus minority interests in
consolidated subsidiaries) aggregated $67.2 million or 30.13% of total assets at
September 30, 1999. The following table summarizes the amounts and related
ratios of individually significant subsidiaries (assets of $30 million or more
at the beginning of 1999) and consolidated regulatory capital position at
September 30, 1999:
Valley First
Bank of Community
Tucson Bank Consolidated
------ ---- ------------
Total capital to total assets:
Minimum required amount >$3,116 >$1,500 >$ 9,712
- - -
Actual amount $6,682 $4,132 $50,350
Ratio 8.58% 11.02% 20.74%
Tier I capital to risk-weighted assets:
Minimum required amount(1) >$2,362 >$1,434 >$ 8,926
- - -
Actual amount $6,736 $3,965 $67,232
Ratio 11.41% 11.06% 30.13%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) >$4,724 >$2,867 >$17,853
- - -
Amount required to meet "Well-Capitalized"
category(3) >$5,905 >$3,584 >$22,316
- - -
Actual amount $7,384 $4,304 $68,962
Ratio 12.51% 12.01% 30.90%
(1) The minimum required ratio of Tier I capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier I and Tier II capital to risk-weighted
assets is 8%.
(3) In order to be classified as a "well-capitalized" institution, the ratio of
Tier I and Tier II capital to risk-weighted assets must be 10% or more.
Sun's operating strategy continues to be focused on the ongoing growth
and maturity of its existing banks, coupled with new bank expansion in selected
markets as opportunities arise. Accordingly, Sun may invest in or otherwise add
additional banks in future periods, subject to economic conditions and other
factors, although the timing of such additional banking units, if any, is
uncertain. Such future new banks and/or additions of other operating units could
be either wholly-owned, majority-owned or otherwise controlled by Sun. Plans to
form additional banks in the states of Arizona and Nevada were announced earlier
this year. At September 30, 1999, applications were pending for new banks in
Nevada and New Mexico.
Page 15 of 19
<PAGE>
YEAR 2000
The year 2000 issue confronting Sun and its suppliers, customers, and
competitors, centers on the inability of computer systems and embedded
technology to properly recognize dates near the end of and beyond the year 1999.
Sun has been actively implementing a comprehensive plan throughout 1998
and 1999, as required by bank regulatory guidelines, to address potential
impacts of the year 2000 issue on Sun's information technology (IT) and non-IT
systems. Sun's year 2000 plans are subject to modification and are revised
periodically as additional information is developed.
READINESS.
Sun has completed the inventory, assessment, remediation and planning
phases for its mission-critical IT and non-IT systems, which are those systems
that pose risks to Sun's ability to process data for its loans, deposits,
general ledger, revenues and operating results. Of the 17 mission-critical
systems, all have tested as being year 2000 compliant.
Sun recognizes that its ability to be year 2000 compliant is somewhat
dependent upon the year 2000 efforts of its vendors. Sun and its banks sent
questionnaires to its significant vendors in 1998. Follow-up letters requesting
additional information of the vendors' year 2000 readiness were sent when
necessary. All mission-critical vendors have responded to the questionnaires or
have otherwise represented that they are year 2000 compliant. Sun also routinely
monitors its non-mission-critical vendors to determine their level of year 2000
readiness.
Sun and its banks have been required by bank regulatory agencies to
update their customers on the banks' year 2000 compliance efforts. Letters and
informational brochures have been sent to customers heightening their awareness
of the year 2000 issue and notifying them of the banks' efforts in addressing
year 2000 issues. Compliance efforts are also communicated to customers on their
account statements and through brochures available in bank lobbies.
Sun and its banks are also following regulatory requirements that
require an assessment of loan customers' year 2000 readiness. Letters and
questionnaires have been utilized to assess material loan customers' readiness
based on the size of their loan type. The number of existing customers that have
not responded to the letters and questionnaires is minimal. Follow-up letters or
phone calls are being made when necessary to obtain additional information from
these customers. Of those who have responded, all material customers represented
that they are year 2000 compliant or are working toward compliance. The number
of customers still working towards year 2000 compliance is minimal and, in Sun's
opinion, their inability to become compliant will not have a material adverse
effect on Sun's business or operating results. Sun and its banks also monitor
customers applying for new loans that exceed a certain dollar amount by
requiring a written representation that the customer is year 2000 compliant.
Page 16 of 19
<PAGE>
WORST CASE SCENARIO AND CONTINGENCY PLANS.
Sun and its banks have determined the most reasonably likely worst case
scenario is the possibility of the lack of power or communication services for a
period of time in excess of one day. If this scenario were to occur, Sun and its
banks' operations could be interrupted. Sun and its banks have developed plans
and procedures to address this scenario, ranging from producing complete printed
reports from the core banking systems prior to January 1, 2000, to ensure that a
hard copy of the data is available in the event of a failure, to preparations
for failures of voice and data communications through the use of manual posting
and courier services, use of generators, alternative customer service locations
and/or reduced lobby hours.
Contingency planning, including the type discussed above, is an
integral part of Sun's year 2000 readiness plan. Sun's contingency plans address
alternative courses of action in the event that mission-critical systems do not
function properly with the date change. Development of the contingency plan was
completed earlier this year. The year 2000 contingency plans were tested during
the third quarter of 1999 to validate the effectiveness of contingent
procedures. This validation of the contingency plans showed the plans to
operate, as designed, with no apparent problems.
COSTS.
The costs associated with Sun's year 2000 compliance are estimated at
approximately $500,000, of which approximately $450,000 has been incurred
through September 30, 1999. These costs principally relate to the added
personnel costs, the employment of external consultants, and the purchase of
software upgrades.
These estimated costs are part of Sun's information technology budget.
Sun's information technology staff and senior management have devoted
significant time and resources to year 2000 activities. While this has resulted
in allocating resources that would have otherwise been devoted to other
information technology projects, no projects have been delayed or postponed that
would have a material adverse impact on Sun or its banks' operations.
REGULATORY OVERSIGHT.
Bank regulators have issued numerous statements and guidance on year
2000 compliance issues and the responsibilities of senior management and
directors of banks and bank holding companies. In addition, the bank regulators
have issued safety and soundness guidelines to be followed by insured depository
institutions, including Sun and its banks, to ensure resolution of any year 2000
problems. Periodic year 2000 reviews are performed by various bank regulatory
agencies. Most of the recent examinations have been performed by the FDIC, and
it is expected that the FDIC will continue its frequent examinations throughout
1999. The banking regulatory agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
examinations. Consequently, Sun's or its banks' failure to address appropriately
the year 2000 issue could result in supervisory action, including the reduction
of the banks' supervisory ratings, the denial of applications for expansion, or
the imposition of civil money penalties.
Numerous regulatory on-site and over-the-telephone examinations have
taken or will take place at Sun and its banks over the last two quarters of
1999. At each examination completed thus far, Sun and its banks have been deemed
to be sufficiently following regulatory guidelines.
IMPACT OF NEW ACCOUNTING STANDARDS
As discussed elsewhere herein, a new accounting standard requiring the
write-off of previously capitalized start-up and preopening costs was
implemented effective January 1, 1999. That standard requires that such costs be
charged to expense, when incurred, in future periods.
FASB Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income, or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new standard will become effective in 2001
and, because Sun and its banks have not typically entered into derivative
contracts either to hedge existing risks or for speculative purposes, is not
expected to have a material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Sun's financial statements.
Page 17 of 19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Sun and its subsidiaries are parties to certain ordinary, routine
litigation incidental to their business. In the opinion of management,
liabilities arising from such litigation would not have a material
effect on Sun's consolidated financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
Page 18 of 19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN COMMUNITY BANCORP LIMITED
(Registrant)
/s/ Joseph D. Reid
-------------------------------------
Joseph D. Reid
Chairman and Chief Executive Officer
(duly authorized to sign on behalf
of the registrant)
/s/ Lee W. Hendrickson
-------------------------------------
Lee W. Hendrickson
Senior Vice President and
Chief Financial Officer
Date: November 15, 1999
Page 19 of 19
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,358
<INT-BEARING-DEPOSITS> 5,329
<FED-FUNDS-SOLD> 19,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,107
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 161,661
<ALLOWANCE> 1,730
<TOTAL-ASSETS> 242,799
<DEPOSITS> 173,564
<SHORT-TERM> 2,026
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 51,868
<OTHER-SE> (1,431)
<TOTAL-LIABILITIES-AND-EQUITY> 242,799
<INTEREST-LOAN> 9,335
<INTEREST-INVEST> 933
<INTEREST-OTHER> 1,501
<INTEREST-TOTAL> 11,768
<INTEREST-DEPOSIT> 3,499
<INTEREST-EXPENSE> 3,505
<INTEREST-INCOME-NET> 8,264
<LOAN-LOSSES> 1,062
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,867
<INCOME-PRETAX> (1,232)
<INCOME-PRE-EXTRAORDINARY> (865)
<EXTRAORDINARY> 0
<CHANGES> (386)
<NET-INCOME> (1,251)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
<YIELD-ACTUAL> 6.45
<LOANS-NON> 21
<LOANS-PAST> 125
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 696
<CHARGE-OFFS> 28
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,730
<ALLOWANCE-DOMESTIC> 1,730
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 831
</TABLE>
