================================================================================
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, 2000
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 Identification
organization) Number)
2777 EAST CAMELBACK ROAD, SUITE 375
PHOENIX, ARIZONA
(Address of principal executive offices)
85016
(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: 5,809,317 shares outstanding as of October 31,
2000.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including Sun'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 Sun 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 Sun's efforts to
implement its business strategy, (ii) changes in interest rates, (iii)
legislation or regulatory requirements adversely impacting Sun'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 Sun's banks and their ability to
respond to such actions, (ix) the cost of capital, which may depend in part on
Sun'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 Sun'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 Sun 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. Sun 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.
Page
----
Item 1. Financial Statements:
Consolidated balance sheets - September 30, 2000
and December 31, 1999. 3
Consolidated statements of income - Three months
and nine months ended September 30, 2000 and 1999. 4
Consolidated statements of changes in stockholders' equity -
Nine months ended September 30, 2000 and 1999. 5
Consolidated statements of cash flows -
Nine months ended September 30, 2000 and 1999. 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. 16
Item 2. Changes in Securities. 16
Item 3. Defaults Upon Senior Securities. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
Page 2 of 17
<PAGE>
PART I, ITEM I
SUN COMMUNITY BANCORP LIMITED
Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 24,039,391 $ 8,578,000
Interest-bearing deposits with banks 16,262,559 11,537,608
Federal funds sold 30,261,000 28,699,050
------------- -------------
Total cash and cash equivalents 70,562,950 48,814,658
Loans held for resale 4,356,914 1,295,977
Investment securities available for sale,
carried at market value 14,697,048 35,439,821
Portfolio loans:
Commercial 356,242,088 191,824,802
Real estate mortgage 12,038,571 7,458,649
Installment 8,652,021 6,948,662
------------- -------------
Total portfolio loans 376,932,680 206,232,113
Less allowance for loan losses (4,632,000) (2,371,000)
------------- -------------
Net portfolio loans 372,300,680 203,861,113
Premises and equipment, net 5,915,729 5,308,423
Accrued interest income 2,295,220 1,352,719
Other assets 6,429,413 4,317,706
------------- -------------
TOTAL ASSETS $ 476,557,954 $ 300,390,417
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 80,089,890 $ 49,650,744
Interest-bearing 313,686,141 175,356,132
------------- -------------
Total deposits 393,776,031 225,006,876
Federal funds purchased 1,050,000 --
Accrued interest on deposits and other liabilities 3,843,073 3,996,658
------------- -------------
Total liabilities 398,669,104 229,003,534
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 25,321,138 21,384,108
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
issued and outstanding--5,809,317 shares
at September 30, 2000 and 5,503,870 shares
at December 31, 1999 54,959,627 51,867,516
Retained-earnings deficit (1,267,478) (1,772,622)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) (62,427) (92,119)
------------- -------------
53,629,722 50,002,775
Less treasury stock (1,062,010) --
------------- -------------
Total stockholders' equity 52,567,712 50,002,775
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 476,557,954 $ 300,390,417
============= =============
</TABLE>
Page 3 of 17
<PAGE>
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 1999 and 2000
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 9,736,447 $ 3,935,909 $ 24,089,988 $ 9,252,965
Loans held for resale 99,537 29,434 192,165 81,876
Taxable investment securities 258,377 511,942 973,450 932,548
Federal funds sold 636,739 336,166 1,746,456 1,225,137
Interest-bearing deposits with banks and other 208,460 174,588 497,370 275,634
------------ ------------ ------------ ------------
Total interest income 10,939,560 4,988,039 27,499,429 11,768,160
Interest expense:
Demand deposits 1,659,175 836,382 4,103,305 2,091,703
Savings deposits 7,272 3,250 17,754 9,260
Time deposits 2,416,307 580,608 5,436,029 1,398,176
Other 414 5,077 1,353 5,385
------------ ------------ ------------ ------------
Total interest expense 4,083,168 1,425,317 9,558,441 3,504,524
------------ ------------ ------------ ------------
Net interest income 6,856,392 3,562,722 17,940,988 8,263,636
Provision for loan losses 965,215 526,834 2,667,480 1,061,834
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 5,891,177 3,035,888 15,273,508 7,201,802
Noninterest income:
Service charges on deposit accounts 180,094 112,636 476,605 291,755
Other 57,585 54,636 218,501 141,887
------------ ------------ ------------ ------------
Total noninterest income 237,679 167,272 695,106 433,642
Noninterest expense:
Salaries and employee benefits 3,224,645 2,129,522 8,921,897 5,177,294
Occupancy 557,129 355,944 1,435,009 881,927
Equipment rent, depreciation and maintenance 788,513 329,810 1,222,392 871,056
Other 1,149,727 1,502,929 3,999,751 2,732,694
------------ ------------ ------------ ------------
Total noninterest expense 5,720,014 4,318,205 15,579,049 9,662,971
------------ ------------ ------------ ------------
Income (loss) before federal income taxes, minority
interest and cumulative effect of change in
accounting principle 408,842 (1,115,045) 389,565 (2,027,527)
Federal income taxes (credit) 130,000 (213,000) 134,000 (367,000)
------------ ------------ ------------ ------------
Income (loss) before minority interest and cumulative
effect of change in accounting principle 278,842 (902,045) 255,565 (1,660,527)
Credit (charge) resulting from minority interest in
net losses (income) of consolidated subsidiaries (35,108) 437,867 249,579 795,687
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 243,734 (464,178) 505,144 (864,840)
Cumulative effect of change in accounting principle
- Note B -- -- -- (386,228)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 243,734 $ (464,178) $ 505,144 $ (1,251,068)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - Note E
</TABLE>
Page 4 of 17
<PAGE>
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 1999 and 2000
<TABLE>
<CAPTION>
Accumulated
Retained- Other
Earnings Comprehensive Treasury
Common Stock Deficit Income (Loss) Stock Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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 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 (loss):
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) $ -0- $ 50,350,263
============ ============ ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Balances at January 1, 2000 $ 51,867,516 $ (1,772,622) $ (92,119) $ 50,002,775
Purchase of 105,200 shares of common stock
for treasury $ (1,062,010) (1,062,010)
Net proceeds from issuance of 7,500 shares
of common stock upon exercise of stock
options 42,240 42,240
Issuance of 297,947 shares of common stock
upon acquisition of minority interest in
consolidated bank subsidiary 3,049,871 3,049,871
Components of comprehensive income:
Net income for the period 505,144 505,144
Market value adjustment for investment
securities available for sale (net of
tax effect) 29,692 29,692
------------
Comprehensive income for the period 534,836
------------ ------------ ------------ ------------ ------------
BALANCES AT SEPTEMBER 30, 2000 $ 54,959,627 $ (1,267,478) $ (62,427) $ (1,062,010) $ 52,567,712
============ ============ ============ ============ ============
</TABLE>
Page 5 of 17
<PAGE>
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 505,144 $ (1,251,068)
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Minority interest in net losses of consolidated subsidiaries (249,579) (795,687)
Provision for loan losses 2,667,480 1,061,834
Depreciation of premises and equipment 1,006,204 641,767
Net accretion of investment security discounts (51,831) (205,616)
Cumulative effect of change in accounting principle 386,228
Originations and purchases of loans held for resale (41,981,618) (25,519,052)
Proceeds from sales of loans held for resale 38,920,681 25,000,242
Decrease (increase) in accrued interest income and other assets 1,722,430 (1,848,970)
Increase (decrease) in accrued interest expense and other liabilities (153,585) 1,267,658
------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,385,326 (1,262,664)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 44,444,649 15,420,000
Purchases of investment securities available for sale (23,605,199) (38,957,490)
Net increase in portfolio loans (170,700,567) (91,786,782)
Purchases of premises and equipment (1,613,510) (2,289,459)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (151,474,627) (117,613,731)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts 79,308,035 48,758,664
Net increase in certificates of deposit 89,461,120 26,023,675
Net increase in federal funds purchased 1,050,000 --
Net proceeds from issuance of common stock 42,240 25,072,100
Purchase of common stock for treasury (1,062,010)
Resources provided by minority interests 2,038,208 8,547,182
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 170,837,593 108,401,621
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,748,292 (10,474,774)
Cash and cash equivalents at beginning of period 48,814,658 48,361,413
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 70,562,950 $ 37,886,639
============= =============
</TABLE>
Page 6 of 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2000 are not necessarily indicative of the results to be expected for the year
ending December 31, 2000.
The consolidated balance sheet as of December 31, 1999 was derived from
audited consolidated financial statements as of that date. Certain 1999 amounts
have been reclassified to conform to the 2000 presentation.
Note B - Change in Accounting Principle
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 required 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 - Acquisition of Minority Interest in Bank
Effective June 30, 2000, Valley First Community Bank (previously a
majority-owned subsidiary of Sun) became a wholly-owned subsidiary resulting
from the minority shareholders of Valley First exchanging their Valley First
shares for shares of Sun. The exchange ratio was based on 150% of the adjusted
book value of Valley First's common stock. As a result of the share exchange,
the minority owners of Valley First became shareholders of Sun. About 298,000
new shares of Sun's common stock were issued in this transaction.
Page 7 of 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED - CONTINUED
Note D - Repurchases of Common Stock
In April 2000, Sun announced plans to purchase up to $3 million of its
common stock in open market purchases during the next several months. The shares
repurchased in this manner may be retained as treasury shares, retired, used for
implementation of an employee stock ownership plan or for other business
purposes. To the extent such share purchases are made, they will have the impact
of increasing the percentage ownership of Sun by Capitol Bancorp Ltd. As of
September 30, 2000, $1.1 million of stock purchases (105,200 shares) were made
and are reflected as treasury stock.
Note E - 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
------------------------------- ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator--net income (loss) for the period $ 243,734 $ (464,178) $ 505,144 $(1,251,068)
=========== =========== =========== ===========
Denominator:
Weighted average number of common shares
outstanding (denominator for basic
earnings per share) 5,704,267 5,485,935 5,559,335 4,403,870
Effect of dilutive securities - stock options 78,687 --(1) 77,617 --(1)
----------- ----------- ----------- -----------
Denominator for diluted net income per share --
Weighted average number of common shares
and potential dilution 5,782,954 5,485,935 5,636,952 4,403,870
=========== =========== =========== ===========
Net income (loss) per share:
Before cumulative effect of change in
accounting principle:
Basic $ 0.04 $ (0.08) $ 0.09 $ (0.20)
=========== =========== =========== ===========
Diluted $ 0.04 $ (0.08) $ 0.09 $ (0.20)
=========== =========== =========== ===========
After cumulative effect of change in
accounting principle:
Basic $ 0.04 $ (0.08) $ 0.09 $ (0.28)
=========== =========== =========== ===========
Diluted $ 0.04 $ (0.08) $ 0.09 $ (0.28)
=========== =========== =========== ===========
</TABLE>
(1) Antidilutive for period presented.
Page 8 of 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED - CONTINUED
Note F - New Banks and Pending Bank Applications
Black Mountain Community Bank, located in Henderson, Nevada, opened in
March 2000. It is majority-owned by Nevada Community Bancorp Limited which is
majority-owned by Sun.
Sunrise Bank of Albuquerque, located in Albuquerque, New Mexico, opened in
April 2000. It is majority-owned by Sunrise Capital Corporation which is
majority-owned by Sun.
Arrowhead Community Bank, located in Glendale, Arizona opened in September
2000. It is majority-owned by Sun.
At September 30, 2000, applications were pending for additional banks in
Arizona and California.
Note G - 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 17
<PAGE>
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets approximated $476.6 million at September 30, 2000, an increase
of $176.2 million from the December 31, 1999 level of $300.4 million. The
consolidated balance sheets include Sun and its majority-owned subsidiaries. In
March 2000, Black Mountain Community Bank located in Henderson, Nevada commenced
operations and was added to the consolidated group as a majority-owned
subsidiary of Nevada Community Bancorp Limited, a majority-owned subsidiary of
Sun. In April 2000, Sunrise Bank of Albuquerque commenced operations and was
added to the consolidated group as a majority-owned subsidiary of Sunrise
Capital Corporation, a majority-owned subsidiary of Sun. In September 2000,
Arrowhead Community Bank located in Glendale, Arizona commenced operations and
was added to the consolidated group as a majority-owned subsidiary of Sun.
Portfolio loans increased during the nine-month period by approximately
$170.7 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 $164.4 million, consistent with the banks'
emphasis on commercial lending activities. Year-to-date 2000 loan growth
includes $12.7 million loaned to Capitol Bancorp, Sun's parent, on a short-term
basis.
The allowance for loan losses at September 30, 2000 approximated $4.6
million or 1.23% of total portfolio loans, an increase from the year-end 1999
ratio of 1.15%.
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 table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the nine-month periods (in thousands):
2000 1999
------ ------
Allowance for loan losses at January 1 $2,371 $ 696
Loans charged-off 480 28
Recoveries 74 --
------ ------
Net charge-offs 406 28
Additions to allowance charged to expense 2,667 1,062
------ ------
Allowance for loan losses at September 30 $4,632 $1,730
====== ======
Page 10 of 17
<PAGE>
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, 2000 December 31, 1999
----------------- -----------------
Percent Percent
of Total of Total
Portfolio Portfolio
Loans Loans
-------- ------ -------- ------
Commercial $ 2,042 0.54% $ 1,006 0.49%
Real estate mortgage 5 0.00 50 0.02
Installment 105 0.03 28 0.01
Unallocated 2,480 0.66 1,287 0.63
-------- ------ -------- ------
Total allowance for loan losses $ 4,632 1.23% $ 2,371 1.15%
======== ====== ======== ======
Total portfolio
loans outstanding $376,933 $206,232
======== ========
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material in 1999 and through
September 30, 2000.
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
2000 1999
-------- --------
Nonaccrual loans:
Commercial $ 1,664 $ 34
Real estate
Installment
-------- --------
Total nonaccrual loans 1,664 34
Past due (>90 days) loans:
Commercial
Real estate
Installment
-------- --------
Total past due loans -- --
-------- --------
Total nonperforming loans $ 1,664 $ 34
======== ========
Nonperforming loans increased $1.6 million in 2000, however, continued at a
low level in relation to total loans. These consist of a small number of loans
in various stages of resolution which management believes to be adequately
collateralized or otherwise appropriately considered in its determination of the
adequacy of the allowance for loan losses.
Page 11 of 17
<PAGE>
The following comparative analysis summarizes each bank's total portfolio
loans, allowance for loan losses, nonperforming loans 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
2000 1999 2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arrowhead Community Bank(1) $ 597 $ 9 1.51%
Bank of Tucson 69,156 $ 59,088 891 $ 725 $ 387 1.29 1.23%
Camelback Community Bank 33,100 22,731 406 228 1.23 1.00
East Valley Community Bank(2) 20,219 4,335 250 44 1.24 1.01
Mesa Bank 27,415 18,884 315 189 1.15 1.00
Southern Arizona Community Bank 31,748 20,610 366 207 1.15 1.00
Valley First Community Bank 43,655 36,334 516 418 491 $ 34 1.18 1.15
Nevada Community Bancorp: 384
Black Mountain Community Bank(3) 13,596 204 1.50
Desert Community Bank(2) 27,521 11,438 413 154 50 1.50 1.35
Red Rock Community Bank(2) 35,080 7,861 526 156 1.50 1.98
Sunrise Capital Corporation: 320
Sunrise Bank of Arizona 52,314 24,952 542 250 32 1.04 1.00
Sunrise Bank of Albuquerque(4) 9,078 119 1.31
Other, net 13,454 (1) 75 0.56
--------- --------- --------- --------- --------- --------- -------- --------
Consolidated $ 376,933 $ 206,232 $ 4,632 $ 2,371 $ 1,664 $ 34 1.23% 1.15%
========= ========= ========= ========= ========= ========= ======== ========
</TABLE>
As a condition of charter approval, DE NOVO banks are required to maintain an
allowance for loan losses of not less than 1% for the first three years of
operations.
(1) Commenced Operations in September 2000.
(2) East Valley Community Bank, Desert Community Bank and Red Rock Community
Bank commenced operations at varying dates in 1999.
(3) Commenced operations in March 2000.
(4) Commenced operations in April 2000.
Results of Operations
Operating results and total assets (in thousands) were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------------------------------------------
Total Assets Net Income Return on Return on
--------------------- (Loss) Beginning Equity Average Assets
Sept 30 Dec 31 --------------------- --------------------- --------------------
2000 1999 2000 1999(5) 2000 1999 2000 1999
--------- --------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arrowhead Community Bank(1) $ 5,651 $ (201)
Bank of Tucson 96,491 $ 82,113 1,515 $ 767 29.09% 16.95% 2.25% 1.34%
Camelback Community Bank 45,617 30,254 146 (385) 5.87 0.50
East Valley Community Bank(2) 23,778 10,757 (474) (464)
Mesa Bank 35,203 24,738 136 (142) 4.67 0.60
Southern Arizona Community Bank 41,557 25,778 88 (350) 3.16 0.35
Valley First Community Bank 51,949 45,678 183 154 5.87 5.16 0.52 0.58
Nevada Community Bancorp:
Black Mountain Community Bank(3) 19,622 (396)
Desert Community Bank(2) 33,153 17,839 (152) (241)
Red Rock Community Bank(2) 40,091 15,596 39 0.67 0.19
Sunrise Capital Corporation:
Sunrise Bank of Arizona 55,247 30,615 101 (375) 3.18 0.31
Sunrise Bank of Albuquerque(4) 13,232 (309)
Other, net 14,966 17,022 (171) 171
--------- --------- --------- --------- --------- --------- -------- --------
Consolidated $ 476,558 $ 300,390 $ 505 $ (865) 1.35% --% 0.17% --%
========= ========= ========= ========= ========= ========= ======== ========
</TABLE>
(1) Commenced operations in September 2000.
(2) East Valley Community Bank, Desert Community Bank and Red Rock Community
Bank commenced operations at varying dates in 1999.
(3) Commenced operations in March 2000.
(4) Commenced operations in April 2000.
(5) Before cumulative effect of change in accounting principle.
Page 12 of 17
<PAGE>
Net income for the three months ended September 30, 2000 approximated
$244,000 ($0.04 per share), compared to a net loss from operations of $464,000
($0.08 per share) during the corresponding period of 1999. For the nine months
ended September 30, 2000, Sun's net income approximated $505,000 ($0.09 per
share) compared to a net loss (after the cumulative effect of a change in
accounting principle) of $1,251,000 ($0.28 per share).
Net interest income increased to $17.9 million during the nine-month 2000
period versus $8.3 million in the corresponding period of 1999 primarily due to
growth in total assets and the number of banks within the consolidated group.
Noninterest income increased to $695,000 for the 2000 nine-month period, as
compared with $434,000 in 1999. Service charge revenue increased 63.4% in the
2000 period compared to the same period in 1999. This increase is primarily
related to higher transaction volume and the larger number of customers
resulting from the addition of new banks in 1999 and 2000.
Provisions for loan losses were $2.7 million for the nine months ended
September 30, 2000 compared to $1.1 million during the 1999 period. The increase
is primarily related to loan growth. 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, 2000 was $15.6
million compared with $9.7 million in 1999. The increase in noninterest expense
is associated with newly formed banks, growth and increases in general operating
costs. Increases in employee compensation and occupancy ($3.7 million and
$553,000, respectively) 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 and related facilities.
Liquidity and Capital Resources
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $168.8 million for the
nine-month 2000 period, compared to an increase of $74.8 million in the
corresponding 1999 period. 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.
Noninterest-bearing deposits approximated 20.3% of total deposits at
September 30, 2000, a slight decrease from the December 31, 1999 level of 22.1%.
Levels of noninterest-bearing deposits fluctuate daily based on customers'
transaction activity.
Deposit growth in 2000 has been deployed primarily into commercial loans,
consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $70.6 million, or 14.8% of total
assets, at September 30, 2000 as compared with $48.8 million or 16.3% of total
assets at December 31, 1999. 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, 2000 is adequate to fund loan demand and meet depositor needs.
Page 13 of 17
<PAGE>
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,
2000, Sun and its banks had approximately $14.7 million of investment securities
classified as available for sale which can be utilized to meet various liquidity
needs as they arise.
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.
Stockholders' equity, as a percentage of total assets, approximated 11.0%
at September 30, 2000, a decrease from the beginning of the year ratio of 16.6%.
Total equity capital (stockholders' equity plus minority interests in
consolidated subsidiaries) aggregated $77.9 million or 16.3% of total assets at
September 30, 2000. The following table summarizes the amounts and related
ratios of individually significant subsidiaries (assets of $30 million or more
at the beginning of 2000) and consolidated regulatory capital position at
September 30, 2000:
Valley First
Bank of Community
Tucson Bank Consolidated
------- ------- -------
Total capital to total assets:
Minimum required amount >=$ 3,809 >=$ 2,076 >=$19,062
Actual amount $ 7,912 $ 5,311 $52,568
Ratio 8.31% 10.23% 11.03%
Tier I capital to risk-weighted assets:
Minimum required amount(1) >=$ 2,710 >=$ 1,662 >=$16,062
Actual amount $ 7,912 $ 4,270 $76,514
Ratio 10.85% 9.44% 19.06%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) >=$ 5,421 >=$ 3,323 >=$32,123
Amount required to meet
"Well-Capitalized" category(3) >=$ 6,776 >=$ 4,154 >=$40,154
Actual amount $ 8,803 $ 4,786 $81,146
Ratio 12.08% 10.59% 20.21%
(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 for
additional bank development activities in the states of Arizona and California
were announced previously.
Page 14 of 17
<PAGE>
In April 2000, Sun announced plans to purchase up to $3 million of its
common stock in open market purchases during the next several months. The shares
repurchased in this manner may be retained as treasury shares, retired, used for
implementation of an employee stock ownership plan or for other business
purposes. To the extent such share purchases are made, they will have the impact
of increasing the percentage ownership of Sun by Capitol Bancorp Ltd. The share
purchase program will be funded from Sun's existing resources, principally
short-term loans and investments. As of September 30, 2000, $1.1 million
(105,200 shares) of stock purchases were made and are reflected as treasury
stock.
When Valley First Community Bank reached its 36th month of operation in
June 2000, Sun offered the minority owners of Valley First an opportunity to
exchange their Valley First shares for shares of Sun. The exchange ratio was
based on 150% of the adjusted book value of Valley First's common stock and was
completed effective June 30, 2000. As a result of the share exchange, the
minority owners of Valley First became shareholders of Sun. About 298,000 new
shares of Sun's common stock were issued in this transaction.
Century Date Change
Throughout 1999, significant attention was drawn to the century date change
and concerns about whether banks were prepared. What was predicted by some media
to become a catastrophic disaster of computer failures, proved to be a nonevent.
Sun and its banks were well prepared, far in advance of the regulatory
initiatives, and were pleased to celebrate the new year without any significant
problems.
Bank regulatory agencies have advised that they remain somewhat concerned
about the banking industry on this matter for the remainder of 2000 and are
likely to perform some limited follow-up examinations during the period.
Management estimates additional future costs relating to the century date change
will be minimal.
Impact of New Accounting Standards
As discussed elsewhere herein, a new accounting standard which required the
write-off of previously capitalized start-up and preopening costs was
implemented effective January 1, 1999. That standard requires that such costs
thereafter be charged to expense, when incurred.
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 15 of 17
<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:
None.
Page 16 of 17
<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
Executive Vice President and
Chief Financial Officer
Date: November 14, 2000
Page 17 of 17
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
