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 JUNE 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 of (I.R.S. Employer
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 [ ] No [X]
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 July 31, 1999.
Page 1 of 20
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INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including the
Corporation's 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 - June 30, 1999 and
December 31, 1998. 3
Consolidated statements of income - Three months and
six months ended June 30, 1999 and 1998. 4
Consolidated statements of changes in stockholders' equity -
Six months ended June 30, 1999 and 1998. 5
Consolidated statements of cash flows - Six months ended
June 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. 19
Item 2. Changes in Securities. 19
Item 3. Defaults Upon Senior Securities. 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
Page 2 of 20
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PART I, ITEM I
SUN COMMUNITY BANCORP LIMITED
Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998
June 30 December 31
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 10,261,983 $ 9,902,458
Interest-bearing deposits with banks 8,675,043 858,955
Federal funds sold 36,350,000 37,600,000
------------ ------------
Total cash and cash equivalents 55,287,026 48,361,413
Loans held for resale 2,309,497 1,275,788
Investment securities available for sale,
carried at market value 14,812,426 12,922,539
Portfolio loans:
Commercial 109,032,305 60,366,282
Real estate mortgage 5,108,113 4,371,401
Installment 5,019,510 3,342,226
------------ ------------
Total portfolio loans 119,159,928 68,079,909
Less allowance for loan losses (1,231,000) (696,000)
------------ ------------
Net portfolio loans 117,928,928 67,383,909
Premises and equipment, net 3,266,078 2,753,721
Accrued interest income 799,855 448,331
Other assets 3,745,098 2,432,336
------------ ------------
TOTAL ASSETS $198,148,908 $135,578,037
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 35,849,622 $ 28,033,128
Interest-bearing 118,153,630 70,748,676
------------ ------------
Total deposits 154,003,252 98,781,804
Accrued interest on deposits and other liabilities 3,517,898 757,879
------------ ------------
Total liabilities 157,521,150 99,539,683
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 14,792,600 9,411,272
STOCKHOLDERS' EQUITY
Common stock, no par value: 10,000,000 shares
authorized; isuued and outstanding:
1999 -- 3,853,870 shares
1998 -- 3,847,060 shares 26,863,516 26,795,416
Retained-earnings deficit (966,563) (179,673)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) (61,795) 11,339
------------ ------------
Total stockholders' equity 25,835,158 26,627,082
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $198,148,908 $135,578,037
============ ============
Page 3 of 20
<PAGE>
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 3,059,032 $ 1,159,173 $ 5,317,056 $ 2,072,120
Loans held for resale 23,967 -- 52,442 --
Taxable investment securities 220,996 227,733 420,606 412,834
Federal funds sold 428,345 242,705 888,971 479,671
Interest-bearing deposits with banks and other 72,252 8,618 101,046 8,618
----------- ----------- ----------- -----------
Total interest income 3,804,592 1,638,229 6,780,121 2,973,243
Interest expense:
Demand deposits 709,041 306,131 1,255,321 576,077
Savings deposits 2,846 2,095 6,010 3,836
Time deposits 481,429 193,989 817,568 316,911
Other -- 16 308 16
----------- ----------- ----------- -----------
Total interest expense 1,193,316 502,231 2,079,207 896,840
----------- ----------- ----------- -----------
Net interest income 2,611,276 1,135,998 4,700,914 2,076,403
Provision for loan losses 326,000 70,000 535,000 111,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 2,285,276 1,065,998 4,165,914 1,965,403
Noninterest income:
Service charges on deposit accounts 108,577 49,327 179,119 86,892
Other 39,218 24,456 87,251 45,435
----------- ----------- ----------- -----------
Total noninterest income 147,795 73,783 266,370 132,327
Noninterest expense:
Salaries and employee benefits 1,637,611 464,468 3,047,772 873,666
Occupancy 284,889 79,766 525,983 155,849
Equipment rent, depreciation and maintenance 294,906 106,765 541,246 195,401
Deposit insurance premiums 5,032 954 7,165 1,919
Other 659,080 277,027 1,222,600 497,403
----------- ----------- ----------- -----------
Total noninterest expense 2,881,518 928,980 5,344,766 1,724,238
----------- ----------- ----------- -----------
Income (loss) before federal income taxes,
minority interest and cumulative effect
of change in accounting principle (448,447) 210,801 (912,482) 373,492
Federal income taxes (90,000) 94,000 (154,000) 169,000
----------- ----------- ----------- -----------
Income (loss) before minority interest and
cumulative effect of change in accounting (358,447) 116,801 (758,482) 204,492
principle
Credit resulting from minority interest in
net losses of consolidated subsidiaries 133,538 34,058 357,820 63,800
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (224,909) 150,859 (400,662) 268,292
Change in accounting principle -- Note B -- -- (386,228) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (224,909) $ 150,859 $ (786,890) $ 268,292
=========== =========== =========== ===========
</TABLE>
NET INCOME (LOSS) PER SHARE -- Note C
Page 4 of 20
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SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Deficit Income Total
----- ------- ------ -----
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Balances at January 1, 1998 $ 9,863,512 $ (236,351) $ 62,725 $ 9,689,886
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 268,292 268,292
Market value adjustment for investment
securities available for sale (net of tax effect) (48,255) (48,255)
-----------
Comprehensive income for the period 220,037
----------- ---------- --------- -----------
BALANCES AT JUNE 30, 1998 $16,863,516 $ 31,941 $ 14,470 $16,909,927
=========== ========== ========= ===========
SIX MONTHS ENDED JUNE 30, 1999
Balances at January 1, 1999 $26,795,416 $ (179,673) $ 11,339 $26,627,082
Issuance of 6,810 shares of common stock for
cash consideration of $10.00 per share 68,100 68,100
Components of comprehensive income:
Net loss for the period (786,890) (786,890)
Market value adjustment for investment
securities available for sale (net of tax effect) (73,134) (73,134)
-----------
Comprehensive income (loss) for the period (860,024)
----------- ---------- --------- -----------
BALANCES AT JUNE 30, 1999 $26,863,516 $ (966,563) $ (61,795) $25,835,158
=========== ========== ========= ===========
</TABLE>
Page 5 of 20
<PAGE>
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (786,890) $ 268,292
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Minority interest in net losses of consolidated
subsidiaries (715,854) (63,800)
Provision for loan losses 535,000 111,000
Depreciation of premises and equipment 381,283 141,750
Net accretion of investment security discounts (4,305) (5,559)
Cumulative effect of change in accounting principle 386,228 --
Originations and purchases of loans held for resale (19,011,243) --
Proceeds from sales of loans held for resale 17,977,534 --
Increase in accrued interest income and other assets (2,003,789) (834,284)
Increase (decrease) in accrued interest and
other liabilities 2,760,019 (4,471)
------------ ------------
NET CASH (USED) BY OPERATING ACTIVITIES (482,017) (387,072)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities
available for sale 11,495,000 5,500,000
Purchases of investment securities available
for sale (13,500,000) (8,500,000)
Net increase in portfolio loans (51,080,019) (11,391,485)
Purchases of premises and equipment (894,081) (324,997)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (53,979,100) (14,716,482)
FINANCING ACTIVITIES
Resources provided by minority interests 6,097,182 1,890,686
Net proceeds from issuance of common stock 68,100 7,000,004
Net increase in demand deposits, NOW accounts
and savings accounts 36,220,885 7,574,029
Net increase in certificates of deposit 19,000,563 18,125,197
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 61,386,730 34,589,916
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 6,925,613 19,486,362
Cash and cash equivalents at beginning of period 48,361,413 10,131,093
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55,287,026 $ 29,617,455
============ ============
</TABLE>
Page 6 of 20
<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 six-month period ended June 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.
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Page 7 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SUN COMMUNITY BANCORP LIMITED - CONTINUED
Note C - Net Income Per Share
The computations of basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator -- net income (loss) for the period $ (224,909) $ 150,859 $ (786,890) $ 268,292
========== ========== ========== ==========
Denominator:
Weighted average number of common shares
Outstanding (denominator for basic
earnings per share) 3,853,870 2,853,870 3,853,870 2,853,870
Effect of dilutive securities - stock options --(1) 86,638 --(1) 86,638
---------- ---------- ---------- ----------
Denominator for dilutive net income per share --
Weighted average number of common shares
and potential dilution 3,853,870 2,940,508 3,853,870 2,940,508
========== ========== ========== ==========
Net income (loss) per share:
Before cumulative effect of change in
accounting principle:
Basic $ (0.06) $ 0.05 $ (0.10) $ 0.09
========== ========== ========== ==========
Diluted $ (0.06) $ 0.05 $ (0.10) $ 0.09
========== ========== ========== ==========
After cumulative effect of change in
accounting principle:
Basic $ (0.06) $ 0.05 $ (0.20) $ 0.09
========== ========== ========== ==========
Diluted $ (0.06) $ 0.05 $ (0.20) $ 0.09
========== ========== ========== ==========
</TABLE>
(1) Antidilutive for period presented.
NOTE D - NEW BANK AND PENDING BANK APPLICATIONS
East Valley Community Bank, located in Chandler, Arizona, opened on
June 30, 1999. It is majority owned by Sun.
As of June 30, 1999, an application was pending for a new bank in
Nevada. The bank, Desert Community Bank, opened August 6, 1999.
NOTE E - 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.
Page 8 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SUN COMMUNITY BANCORP LIMITED - CONTINUED
NOTE E - PROSPECTIVE IMPACT OF NEW ACCOUNTING STANDARDS NOT YET
ADOPTED - CONTINUED
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.
NOTE F - SUBSEQUENT EVENT
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 Ltd., purchased 850,000 shares at the same share price as the public,
aggregating $13.6 million, maintaining its 51% ownership of Sun.
[The remainder of this page intentionally left blank]
Page 9 of 20
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PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets approximated $198.1 million at June 30, 1999, an increase
of $62.5 million from the December 31, 1998 level of $135.6 million. The
consolidated balance sheets include Sun and its majority-owned subsidiaries. On
June 30, 1999, one newly formed bank, East Valley Community Bank in Chandler,
Arizona, was added to the consolidated group.
Portfolio loans increased during the six-month period by approximately
$51 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 $48.7 million, consistent with the banks' emphasis on
commercial lending activities.
The allowance for loan losses at June 30, 1999 approximated $1.2
million or 1.03% of total portfolio loans, a slight 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 20
<PAGE>
The table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the six-month periods (in thousands):
1999 1998
-------- --------
Allowance for loan losses at January 1 $ 696 $ 49
Loans charged-off -- --
Recoveries -- --
Additions to allowance charged to expense 535 379
-------- --------
Allowance for loan losses at June 30 $ 1,231 $ 428
======== ========
Average total portfolio loans for period
ended June 30 $ 89,861 $ 36,934
======== ========
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.
June 30, 1999 December 31, 1998
----------------- -----------------
Percent Percent
of Total of Total
Portfolio Portfolio
Loans Loans
----- -----
Commercial $ 596 0.50% $ 314 0.46%
Real estate mortgage 34 0.03 28 0.04
Installment 26 0.02 20 0.03
Unallocated 575 0.48 334 0.49
-------- ----- ------- -----
Total allowance for loan losses $ 1,231 1.03% $ 696 1.02%
======== ===== ======= =====
Total portfolio
Loans outstanding $119,160 $68,080
======== =======
Page 11 of 20
<PAGE>
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
June 30 Dec 31
1999 1998
---- ----
Nonaccrual loans:
Commercial $ 25 $ --
Real estate --
Installment -- --
----- -----
Total nonaccrual loans 25 --
Past due (>90 days) loans:
Commercial -- --
Real estate -- --
Installment -- --
----- -----
Total past due loans -- --
----- -----
Total nonperforming loans $ 25 $ --
===== =====
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
------------------- ---------------- ---------------- -----------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank of Tucson $ 45,653 $37,899 $ 480 $ 392 $ -- $ -- 1.05% 1.03%
Camelback Community Bank 13,777 3,246 138 33 -- -- 1.00 1.02
Mesa Bank 11,550 1,386 116 14 -- -- 1.00 1.01
Southern Arizona Community Bank 9,410 2,925 95 30 -- -- 1.01 1.03
Sunrise Bank of Arizona 9,402 1,745 95 18 -- -- 1.01 1.03
Valley First Community Bank 29,368 20,879 307 209 25 -- 1.05 1.00
-------- ------- ------ ----- ----- ------ ----- ----
Consolidated $119,160 $68,080 $1,231 $ 696 $ 25 $ -- 1.03% 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. As of June 30, 1999, Bank of Tucson is no longer subject to the
minimum allowance for loan loss requirement.
Noninterest-bearing deposits approximated 23.3% of total deposits at June
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 20
<PAGE>
RESULTS OF OPERATIONS
The net loss from operations (before cumulative effect of an accounting
change) for the six months ended June 30, 1999 approximated $401,000 ($(0.06)
per basic share), compared to net income of $268,000 ($0.09 per basic share)
earned during the corresponding period of 1998.
Operating results and total assets (in thousands) were as follows:
<TABLE>
<CAPTION>
Six months ended June 30
----------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
------------------ -------------- ---------------- ---------------
June 30 Dec 31
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank of Tucson $ 76,731 $ 63,860 $ 558 $ 371 18.44% 13.71% 1.55% 1.35%
Camelback Community Bank (1) 26,414 10,017 (298) (45) n/a n/a n/a n/a
East Valley Community Bank (2) 4,406 n/a 2 n/a n/a n/a n/a n/a
Mesa Bank (1) 17,669 6,192 (150) n/a n/a n/a n/a n/a
Southern Arizona Community Bank (1) 19,373 12,395 (274) n/a n/a n/a n/a n/a
Sunrise Bank of Arizona (1) 15,033 5,411 (240) n/a n/a n/a n/a n/a
Valley First Community Bank 36,984 36,588 96 (90) 4.81 n/a .50 n/a
Nevada Community Bancorp Limited 10,000 n/a -- n/a n/a n/a n/a n/a
Other, net (8,461) 1,115 (95) 32 n/a n/a n/a n/a
-------- -------- ----- ----- ----- ------ ---- ----
Consolidated $198,149 $135,578 $(401) $ 268 10.73% 8.96% .50% .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.
Net interest income increased 126.4% to $4.7 million during the six-month
1999 period versus $2.1 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 $266,000 for the 1999 six-month period, as
compared with $132,000 in 1998. Service charge revenue increased 120% in the
second quarter and 106% for the six months ended June 30, 1999 compared to the
same periods in 1998.
Provisions for loan losses were $535,000 for the six months ended June 30,
1999 compared to $111,000 during the 1998 period. The increase is primarily
related to loan growth in 1999 and the requirement for the banks to maintain an
allowance for loan losses of not less than 1% of loans outstanding for their
first three years of operations. The provisions for loan losses are based upon
management's analysis of the allowance for loan losses, as previously discussed.
Noninterest expense for the six months ended June 30, 1999 was $5.3 million
compared with $1.7 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.
Page 13 of 20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $55.2 million for the six month
1999 period, compared to $25.7 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.
Interim 1999 deposit growth was deployed primarily into commercial
loans, consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $55.3 million or 27.9% of total
assets at June 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 June 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 June
30, 1999 Sun's banks had approximately $14.8 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. Of the offering, Capitol
Bancorp Ltd., 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 20
<PAGE>
Capital, as a percentage of total assets, approximated 13.04% at June
30, 1999, a decrease from the beginning of the year ratio of 19.64%. Total
capital funds (stockholders' equity, plus minority interests in consolidated
subsidiaries) aggregated $40.6 million or 20.5% of total assets at June 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 June 30,
1999:
<TABLE>
<CAPTION>
Valley First
Community
Bank of Tucson Bank Consolidated
-------------- ---- ------------
<S> <C> <C> <C>
Total capital to total assets: >= $3,069 >= $1,472 >= $7,926
Minimum required amount $6,533 $3,885 $25,835
Actual amount ratio 8.51% 10.56% 13.04%
Tier I capital to risk-weighted assets: >= $2,068 >= $1,266 >= $6,606
Minimum required amount(1) $6,524 $3,873 $40,618
Actual amount ratio 12.62% 12.23% 24.60%
Combined Tier I and Tier II capital to
risk-weighted assets: >= $4,136 >= $2,532 >= $13,212
Minimum required amount(2) >= $5,170 >= $3,166 >= $16,514
Amount required to meet "Well-Capitalized"
category(3) $7,004 $4,180 $41,849
Actual amount ratio 13.55% 13.20% 25.34%
</TABLE>
(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 June 30, 1999, an application was pending for a new bank in
Nevada, Desert Community Bank, which opened on August 6, 1999.
Page 15 of 20
<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 nonmission-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, and will continue to be, 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 20
<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 plans was
recently completed. The year 2000 contingency plans will be tested during the
third and fourth quarters of 1999 to validate the effectiveness of contingent
procedures and refined as additional information becomes available.
COSTS.
The costs associated with Sun's year 2000 compliance are estimated at
approximately $500,000, of which approximately $400,000 has been incurred
through June 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.
Page 17 of 20
<PAGE>
The Federal Financial Institutions Examination Council maintains an
Internet site that lists financial institutions which have been subject to
enforcement actions relating to year 2000 readiness. As of July 31, 1999, none
of Sun's banks are subject to enforcement actions for year 2000 readiness.
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 18 of 20
<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
June 30, 1999.
Page 19 of 20
<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: August 12, 1999
Page 20 of 20
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,262
<INT-BEARING-DEPOSITS> 8,675
<FED-FUNDS-SOLD> 36,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,812
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 121,469
<ALLOWANCE> 1,231
<TOTAL-ASSETS> 198,149
<DEPOSITS> 154,003
<SHORT-TERM> 3,518
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 26,864
<OTHER-SE> (967)
<TOTAL-LIABILITIES-AND-EQUITY> 198,149
<INTEREST-LOAN> 5,369
<INTEREST-INVEST> 421
<INTEREST-OTHER> 990
<INTEREST-TOTAL> 6,780
<INTEREST-DEPOSIT> 2,079
<INTEREST-EXPENSE> 2,079
<INTEREST-INCOME-NET> 4,701
<LOAN-LOSSES> 535
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,987
<INCOME-PRETAX> (555)
<INCOME-PRE-EXTRAORDINARY> (401)
<EXTRAORDINARY> 0
<CHANGES> (386)
<NET-INCOME> (787
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
<YIELD-ACTUAL> 6.23
<LOANS-NON> 25
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 696
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,231
<ALLOWANCE-DOMESTIC> 1,231
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 575
</TABLE>
