[LOGO]
Sun Community Bancorp Limited
Marketing Section
of
1999 Annual Report to Shareholders
2777 East Camelback Road
Suite 101
Phoenix, AZ 85016
(602) 955-6100
Sun Community Bancorp
To Our Shareholders
Rarely does a company experience the growth and transformation that Sun
Community Bancorp enjoyed during 1999. Even more remarkable is such change for a
company that began just two years ago. As a bank development company, however,
this change responds directly to our core mission - growth of the community bank
concept. Sun Community's banks are driven with the ability to customize credit
solutions and offer competitive deposit products, within an environment that is
sensitive to the local culture and committed to personalized service. Quite
simply, the Sun Community difference is Smaller Banks, Bigger Service.
Sun stands alone as a model of success in an industry that is otherwise wrought
with dissatisfaction and uncertainty. On one hand, big banks continue to reel
with mergers and consolidation. On the other hand, small, independent banks
struggle with the difficulties and expense of ever-changing technology,
regulation and administration. In contrast, our shared administrative services
and back office support allow for economies of scale that give our banks'
customers the best of both worlds. Our small banks are big on service and,
consequently, big on customer loyalty.
Growing with the Power of Sun
As 1999 began, Sun Community's family included six banks in Arizona, up from two
at the beginning of the prior year. Each bank achieved significant milestones
during the year. Bank of Tucson, now three years old, achieved a return on
assets of 1.48% and a return of equity of 16.63%. Valley First Community Bank,
which celebrated its second anniversary in June, achieved overall profitability
for 1999. In addition, Valley First received an outstanding Community
Reinvestment Act rating; an acknowledgment of the bank's commitment to serving
the credit needs of its community. Camelback Community Bank's president, Barbara
Ralston, was elected to the American Bankers Association Board of Directors, the
first woman Arizonan to be elected to the national board in 12 years. She
accomplished this while leading her new bank to profitability in the fourth
quarter of 1999.
Neil Barna, president of Mesa Bank, announced the bank's first month of
profitability during the tenth full month of operation - a record for a Sun
Community bank. Southern Arizona Community Bank in Tucson grew assets by over
105% and loans by an impressive 600%. Sunrise Bank of Arizona received its
preferred lender (PLP) status from the Small Business Administration (SBA) in
November, making it the only bank in Arizona to receive this designation in
1999. The PLP program allows Sunrise to underwrite and approve SBA loans with
minimal review from the SBA office, speeding the funding of loans for customers.
By year-end 1999, our bank development strategy had led to three new operating
banks and five banks in organization. East Valley Community Bank, the latest
Arizona bank, opened in Chandler in June, with President Becky Jackson at the
helm. Becky, a career banker with tremendous marketing acumen and a wealth of
contacts and experience, has formed a successful strategy to capture the small
and medium sized business customers in the Valley's fastest growing area. At
year-end, Sun had moved forward on plans to open a community bank in the western
part of the Phoenix metropolitan area, by mid-year 2000.
The success of Sunrise Bank of Arizona, a real-estate focused bank specializing
in SBA small business lending for owner-occupied commercial facilities, led Sun
to establish Sunrise Capital Corporation, a bank development company which will
open additional Sunrise banks in key markets throughout the Southwest with a
similar focus. Its second bank, Sunrise Bank of Albuquerque (in organization) is
targeted to open in the first quarter of 2000 and a third bank, to be located in
San Diego, will open by mid-year 2000.
Our plans of spreading the Sun Community vision throughout the western United
States moved forward in 1999. In Las Vegas, Nevada Community Bancorp Limited,
led by Tom Mangione, opened two new banks and organized a third for opening in
early 2000. Desert Community Bank opened in August with Jim Howard as president
and Red Rock Community Bank began operations in November under Steve Mallory's
leadership. Both banks received outstanding receptions in their respective
markets.
Sun completed formation of two California bank development companies, First
California Northern Bancorp and First California Southern Bancorp, with
impressive leadership teams. Board members include nationally prominent banking
leaders Joe Stiglich, former vice chair of Wells Fargo, Kathleen Lucier, who
headed Wells Fargo's Southwest operations, and Kathy Munro, formerly President
of Bank of America Southwest Region. With their guidance, we expect to identify
exceptional opportunities for new community banks in California.
Operational Expansion
The efficiencies of our individual banks are enhanced by the infrastructure Sun
Community provides. In 1999, we identified the need for growth and leadership in
the operations and information arenas. We recruited Dave Dutton as executive
vice president and chief information officer for Sun Community operations, as
well as those of our parent company, Capitol Bancorp. In his first months on
board, Dave restructured the processing center and directed the planning and
oversight for construction of a state-of-the-art operations center to support
our anticipated growth in new banks and future technology advancements.
With Y2K uncertainty wreaking havoc on our industry, Sun Community was well
prepared with a strong team, proactive strategy and open communications. While
bank presidents with large banks and many small community banks found themselves
distracted by the Y2K problem, Sun Community's approach allowed our banks to
focus on the customer, knowing that the issue was in good hands. As a result of
our planning, the critical Y2K dates passed without incident.
Electronic commerce initiatives received a great deal of attention in 1999.
Customers were surveyed to determine their specific needs, in order that our
energies could be focused properly. Integrated telephone, Internet and PC
banking options will be available in 2000, with cash management products and
web-based services that are responsive to customer demands.
In our efforts to better serve our banks and increase efficiency of regulatory
and administrative functions, Sun Community added an experienced compliance/CRA
officer, a full-time auditor, additional loan review personnel and legal staff.
The personnel demands of individual banks led to the hiring of a human resources
director to assist in identification and recruitment of staff, as well as
development and evaluation of performance criteria.
Performance
As predicted in our 1998 annual report letter, 1999 proved to be a dramatic year
for corporate growth. The size of Sun more than doubled from $136 million to
$300 million. Our investment in the operational and support functions of Sun
improved our position and effectiveness in our core business. With the added new
bank units, we anticipate moving to profitability during the current year.
A most noteworthy event for Sun in 1999 was the initial public offering of its
common stock on the NASDAQ exchange. On July 2, 1999, Sun completed its IPO,
raising over $25 million to support our aggressive growth strategy. Relatively
all financial stocks, particularly those of regional and community bank
companies, have been hit hard in recent months. As more of our banks mature, we
believe Sun's shares will begin to reflect more appropriate valuation. Our
strategy is to continue aggressive growth during the course of this calendar
year.
As we enter our third year of operation, we believe Sun Community is positioned
to continue to capture an increasingly desirable market segment within the
financial services arena. Through our affiliation and commitment, we have
created a new class of banking that we are confident will prove profitable, not
only for our customers, but also for you, our shareholders.
Sincerely,
Joseph D. Reid
Chairman and CEO
John S. Lewis
President
Board of Directors
Michael J. Devine
Attorney at Law
Richard N. Flynn
President
Flynn & Associates
Michael F. Hannley
President and CEO
Bank of Tucson
Michael J. Harris
Broker
Tucson Realty & Trust Company
Gary W. Hickel
President
Valley First Community Bank
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
John S. Lewis
President
Sun Community Bancorp Limited
Humberto S. Lopez
President
HSL Properties, Inc.
Kathryn L. Munro
Partner
Tahoma Venture Fund
Joseph D. Reid
Chairman, President and CEO
Capitol Bancorp Ltd. and
Chairman and CEO
Sun Community Bancorp Limited
Ronald K. Sable
CEO
Concord Solutions, L.L.C.
Officers
Joseph D. Reid
Chairman of the Board
and CEO
Michael L. Kasten
Vice Chairman
Richard N. Flynn
Secretary
John S. Lewis
President
David J. Dutton
Executive Vice President and
Chief Information Officer
Michael F. Hannley
Executive Vice President
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Gary W. Hickel
Executive Vice President
Gerry J. Smith
Executive Vice President
Cristin Reid English
General Counsel
Patricia L. Stone
Senior Vice President
Leonard C. Zazula
Senior Vice President
Katherine P. Bowden
Vice President and
Regional Controller
Paige E. Mulhollan
Vice President and
Corporate Controller
Greg E. Patten
Vice President
Darryl Tenenbaum
Vice President
Bank of Tucson
4400 E. Broadway * Tucson, AZ 85711 * (520) 321-4500
Bank of Tucson's motto is "Small Bank, Big Difference." As a result of our
affiliation with the Sun family of banks, we can be as small as we want to be
and as large as we need to be. Our customers receive major advantages not
available in big bank environments because of our unique corporate structure.
During the past year, Bank of Tucson continued to add to its already significant
loan portfolio in the form of commercial real estate, residential and
construction loans. By participating loans with our affiliates, we recently
provided construction financing of a $6.5 million Holiday Inn Express and a $4.5
million office project, while giving equal attention to the renovation of a
small medical complex and many other loans requiring creative financing.
Bank of Tucson has exceeded what most three-year old banks would hope to
achieve. Yet, we aren't even close to our potential. We have dubbed the coming
year "Success 2000 - Reaching New Heights." Keep an eye on Bank of Tucson -
we're focused on being the best!
Michael F. Hannley
President and CEO
Board of Directors
Bruce I. Ash
Vice President
Paul Ash Management, L.L.C.
Slivy Edmonds Cotton
Chairman and CEO
Perpetua, Inc.
Michael J. Devine
Attorney at Law
Brian K. English
Attorney at Law
The English Law Firm
William A. Estes, Jr.
President
TEM Corp.
Richard N. Flynn
President
Flynn & Associates
Michael F. Hannley
President and CEO
Bank of Tucson
Michael J. Harris
Broker
Tucson Realty and Trust Company
Richard F. Imwalle
President
University of Arizona Foundation
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Burton J. Kinerk
Attorney at Law
Kinerk, Beal, Schmidt & Dyer, P.C.
Humberto S. Lopez
President
HSL Properties, Inc.
Lyn M. Papanikolas
Business Consultant
Officers
Richard F. Imwalle
Chairman of the Board
Michael J. Devine
Vice Chairman
Richard N. Flynn
Secretary
Michael F. Hannley
President and CEO
C. David Foust
Executive Vice President and CCO
Barbara A. Sadler
Vice President
Charlene F. Schumaker
Vice President
Sandi L. Smithe
Vice President
Camelback Community Bank
2777 E. Camelback Rd. * Phoenix, AZ 85016 * (602) 224-5800
Since 1999 marked our first full year in operation, it was particularly
gratifying to end the year profitably. With the support of the Sun Community
family, Camelback Community Bank proved once again that the strategy of autonomy
and affiliation brings powerful results.
We are particularly proud of our community involvement, most notably of our
Investing Heart in our Community awards, which recognize young people for their
volunteer activities. The participation by nonprofit organizations who nominated
teens, community leaders who chose the winners and the teens themselves, was
amazing. Our staff's community service throughout the year was equally amazing,
and included involvement in organizations to assist with issues ranging from
domestic violence, children and cancer prevention. As the 1998 Athena Award
recipient, I spoke to dozens of community groups, providing many opportunities
to position our bank as a community leader.
Through my recent election to the American Bankers Association Board of
Directors, I am committed to ensuring that community banking grows and prospers
in the years to come. Our affiliation with Sun Community Bancorp ensures that
Camelback Community Bank will be at the forefront of that opportunity.
Barbara J. Ralston
President
Board of Directors
Shirley A. Agnos
President
Arizona Town Hall
Michael J. Devine
Attorney at Law
Cristin Reid English
General Counsel
Sun Community Bancorp Limited
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Gregory M. Kruzel
Attorney at Law
Braun-Becker-Kruzel
John S. Lewis
President
Sun Community Bancorp Limited
Tammy A. Linn
Special Projects
Governor Jane Dee Hull
Susan C. Mulligan
Certified Public Accountant
Miller Wagner Business Services, Inc.
Earl A. Petznik
President and CEO
Northside Hay Company
William J. Post
CEO
Arizona Public Service Co.
Barbara J. Ralston
President
Camelback Community Bank
Dan A. Robledo
President and CEO
Lawyer's Title of Arizona, Inc.
Mary Jane Rynd
CPA and Partner
Rynd, Carneal and Ewing
Jacqueline J. Steiner
Community Volunteer
Officers
Dan A. Robledo
Chairman of the Board
Joseph D. Reid
Chief Executive Officer
Barbara J. Ralston
President
Rob Boosman
Executive Vice President
and CCO
Betty L. Cornish
Vice President
Tim Himstreet
Vice President
Sondra K. Koskela
Vice President
Patrick B. Westman
Vice President
Desert Community Bank
3740 S. Pecos-McLeod * Las Vegas, NV 89121 * (702) 938-0500
Desert Community Bank is the first bank opened by Nevada Community Bancorp
Limited, an affiliate of Capitol Bancorp and Sun Community Bancorp. If our
experience is any indication, the Sun Community model is a welcome addition to
the Las Vegas business community. Our efforts in the first four months of
operation attracted about $18 million in assets. After year-end 1999, our
business development efforts culminated in attracting the two largest single
accounts in Sun Community history - both in the same day.
Our choice of geographic location did not follow the trend in Las Vegas toward
the high-growth suburban areas; rather we opted to locate in the city, avoiding
the competition rampant among banks in the suburbs and choosing to serve the
businesses who felt abandoned by this recent phenomena. These business customers
are thankful, supportive and fiercely loyal to Desert Community Bank.
Community leadership demonstrates our gratitude to Las Vegas. In particular, we
are spearheading the Coalition of Community Banks in negotiations with the city
to establish much needed low-income housing. Our participation in other
important organizations from downtown redevelopment to scouting is a critical
component of our community bank vision.
James W. Howard
President
Board of Directors
Robert J. Andrews
COO
New-Com, Inc.
Michael J. Devine
Attorney at Law
Rose M. K. Dominguez
President
Discovery Travel
Tom Grimmett
Owner
Grimmett & Company
Garry L. Hayes
President
Law Office of Garry L. Hayes
James W. Howard
President
Desert Community Bank
Charles L. Lasky
President
Lasky, Fifarek & Hogan, P.C.
Thomas C. Mangione
President and COO
Nevada Community Bancorp Limited
Greg McKinley
Vice President
Cragin & Pike, Inc.
Leland Pace
Managing Partner
Stewart, Archibald & Barney, L.L.P.
Greg J. Paulk
President
M.M.C., Inc.
Joseph D. Reid
Chairman and CEO
Sun Community Bancorp Limited
Joseph D. Soderberg, M.D.
Physician
Summit Anesthesiology
Stephen D. Stiver
President
Stiver Car Care
Officers
Joseph D. Reid
Chairman of the Board
Charles L. Lasky
Secretary
Thomas C. Mangione
Chief Executive Officer
James W. Howard
President
Kent L. Harding
Executive Vice President
and CCO
Rodney Chaney
Senior Vice President
Susan Pucciarelli
Senior Vice President
Cheryl Fricker
Vice President
Eileen Hagler
Vice President
East Valley Community Bank
1940 N. Alma School Road * Chandler, Arizona 85224 * (480) 726-6500
As the newest Sun Community bank in Arizona, East Valley Community Bank is proud
to be part of the family. Since opening our doors at mid-year, we have
concentrated on a grassroots approach to spread our message. Our involvement in
the local Chambers of Commerce, Boys and Girls Clubs, Chandler/Gilbert YMCA,
National Association of Women Business Owners and Chandler Leadership have been
excellent tools for business development, while satisfying our desire to bring
real community spirit to our bank.
Grassroots efforts were also important to our one-to-one relationship building
efforts. Our slogan, Always Rising to Meet Your Needs, was captured in our early
morning deliveries of fresh cinnamon rolls to local businesses. The cinnamon
rolls, delivered by none other than my mother, have been well received,
attracting priceless publicity and goodwill.
Located in the family-centered East Valley of metropolitan Phoenix, our approach
to banking mirrors our community. At East Valley Community Bank, banking is a
family affair.
Rebecca M. Jackson
President
Board of Directors
Mary E. Contreras
Owner and Agent
State Farm Insurance Agency
Michael J. Devine
Attorney at Law
David L. Heuermann
President
Axis Mortgage & Investments, L.L.C.
L. Christine Hutchings
Realtor
Re/Max 100 Realtors
Rebecca M. Jackson
President
East Valley Community Bank
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Martha S. Martin
Chief Executive Officer
Spectrum Astro, Inc.
Thomas A. Padilla
Fiscal Planning Analyst
Arizona State University
Darra L. Rayndon
Principal and President
Rayndon & Longfellow, P.C.
Joseph D. Reid
Chairman and CEO
Sun Community Bancorp Limited
James C. Stratton
Chief Executive Officer
Boys and Girls Clubs of Scottsdale
Joseph A. Tameron
Partner
Skinner. Tameron, & Company, L.L.P.
Officers
Joseph D. Reid
Chairman of the Board
and CEO
Rebecca M. Jackson
President
J. Dennis Kennedy
Executive Vice President
and CCO
Christina I. McCallum
Senior Vice President
James Patrick Blaine
Vice President
Charles M. Ertl
Vice President
Mesa Bank
63 East Main Street * Suite 100 * Mesa, AZ 85201 * (480) 649-5100
The Sun Community model calls for newly-chartered banks to hit black ink long
before the national average of nearly three years. The desire for excellence is
alive and well at Mesa Bank where we achieved profitability during our tenth
full month of operation. Customer confidence is soaring and the Mesa Bank team
is gearing up for an even more amazing 2000.
Success as a community bank means understanding local business needs. In this
booming economy, our customers need loans to build or expand their business
locations, finance equipment and to obtain construction loans for their homes.
Mesa Bank responded with an aggressive lending program designed to offer
affordable rates and attractive options, larger loans through participation with
our family of banks and a unique residential construction loan program that
provided assistance to over 150 proud homeowners.
Mesa Bank's track record is a testament to the entrepreneurial model that Sun
Community banks embrace. Our commitment to community, understanding of business
needs and creative service approach provides us with the tools to continue our
success.
Neil R. Barna
President
Board of Directors
Neil R. Barna
President
Mesa Bank
Michael J. Devine
Attorney at Law
Debra L. Duvall, Ed. D.
Assistant Superintendent
Mesa Public Schools
Brian K. English
Attorney at Law
The English Law Firm
Robert R. Evans, Sr.
Partner
Evans Management Company
Stewart A. Hogue
Owner
Commercial Lithographers
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Philip S. Kellis
Managing Partner
Dobson Ranch Inn and Resort
John S. Lewis
President
Sun Community Bancorp Limited
Ruth L. Nesbitt
Community Volunteer
James A. Schmidt
CPA and Executive Director
Nelson Lambson & Co., P.L.C.
Daniel P. Skinner
Owner and Manager
LeBaron and Carroll LSI, Inc.
Terry D. Turk
President
Sun American Mortgage Co.
Officers
Robert R. Evans, Sr.
Chairman of the Board
Joseph D. Reid
Chief Executive Officer
Neil R. Barna
President
David D. Fortune
Executive Vice President
and CCO
Daniel R. Laux
Vice President
Red Rock Community Bank
10000 W. Charleston, Suite 100 * Las Vegas, NV 89135 * (702) 948-7500
With just a month of operation during 1999, Red Rock Community Bank has already
experienced a tremendous outpouring of support from our community and the Sun
Community family. Las Vegas is one of the fastest growing markets in the
country, but still enjoys a small town feel within its business core. All of our
banking professionals and board members are veterans in the community, with a
loyal following. Upon opening our doors, we were inundated with customers who
couldn't wait to find a bank where personal service and stability were
available. We are proud to offer both at Red Rock Community Bank.
Our geographic location is an asset to our bank, with nearly 300 potential
customers in our office complex and several high-end housing developments in the
surrounding area. We have aligned with several developers and homebuilders in
the area to facilitate introductions to homebuyers.
As 2000 begins, Red Rock Community Bank enjoys the energy of the dynamic Sun
Community family and the tremendous opportunities ahead.
Steven E. Mallory
President
Board of Directors
Judith A. Banks
Vice President
Talbot of Nevada
Eric L. Colvin
Secretary and Treasurer
Marnell Corrao Associates, Inc.
Michael J. Devine
Attorney at Law
Molly K. Hamrick
Vice President and CFO
Coldwell Banker Premier Realty
Phillip G. Hardy, Jr.
Vice President
and Project Manager
Hardy Painting and Drywall
James Harris
Vice President
Harris Insurance Services
Kathryn D. Justyn
Chief Executive Officer
Universal Health Services
Summerlin Hospital Medical Center
Keith W. Langlands
CPA and Partner
O'Bannon Wallace Langlands
& Neuman, L.L.P.
Charles L. Lasky
President
Lasky, Fifarek & Hogan, P.C.
Steven E. Mallory
President
Red Rock Community Bank
Thomas C. Mangione
President and COO
Nevada Community Bancorp Limited
Joseph D. Reid
Chairman and CEO
Sun Community Bancorp
Limited
Frederick P. Waid
Principal
SBG Group, L.L.C.
Officers
Joseph D. Reid
Chairman of the Board
Charles L. Lasky
Secretary
Thomas C. Mangione
Chief Executive Officer
Steven E. Mallory
President
James Wojewodka
Executive Vice President
and CCO
Mary E. Davis
Senior Vice President
Susan E. Daleiden
Vice President
Theresa L. Hartke
Vice President
Southern Arizona Community Bank
6400 N. Oracle Rd * Tucson, AZ 85704 * (520) 219-5000
Growth at Southern Arizona Community Bank is a testament to the wisdom of the
Sun Community model. The bank's excellent performance this past twelve months is
evidenced by a 108% increase in assets, a 166% increase in deposits and a very
impressive 600% increase in loans outstanding. Our commitment to small and
medium sized business and professional clients proved fruitful.
Our board and staff, with a combined 400 years of banking experience, provided
solid reasons to bank at Southern Arizona Community Bank. We reached out into
the northwest Tucson community, supporting civic organizations and adopting
community causes, with the desired results. In just over one year of operation,
our bank has grown to be a sought-after resource for local businesses.
We look forward to continuing our pattern of growth in the coming year. The
foundation we have built has set a solid course for the new millennium.
John P. Lewis
President
Board of Directors
William R. Assenmacher
President
T. A. Caid Industries, Inc.
Jody A. Comstock
Physician and Owner
Skin Spectrum
Thomas F. Cordell
Marketing Media Specialist
University of Arizona, ECAT
Michael J. Devine
Attorney at Law
Robert A. Elliott
President and Owner
Robert A. Elliott, Inc.
Brian K. English
Attorney at Law
The English Law Firm
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Yoram Levy
Project Manager
Diamond Ventures, Inc.
John P. Lewis
President
Southern Arizona Community Bank
John S. Lewis
President
Sun Community Bancorp Limited
Jim Livengood
Director of Athletics
University of Arizona
James A. Mather
Certified Public Accountant
and Attorney at Law
Louise M. Thomas
President
Events Made Special
Paul A. Zucarelli
President
Gordon, Zucarelli and Handley Insurance
Officers
Paul A. Zucarelli
Chairman of the Board
Joseph D. Reid
Chief Executive Officer
John P. Lewis
President
Michael J. Trueba
Executive Vice President
and CCO
Teresa R. Gomez
Vice President
James C. Latta
Vice President
Sunrise Bank of Arizona
4350 East Camelback Road * Suite 100A * Phoenix, AZ 85018 * (602) 956-6250
1999 was a year of tremendous opportunity for Sunrise Bank of Arizona. We
continued to differentiate our bank from the competition, as well as our
affiliates, with our targeted growth strategy and emphasis on real estate
lending. The pipeline for SBA loans grew steadily and Sunrise was the only
Arizona bank to receive its preferred lender or "PLP" designation from the Small
Business Administration in 1999, speeding the approval and underwriting process.
Loan growth of $23 million was well balanced with deposit growth of nearly $26
million.
Our success and the unique nature of the Sunrise concept led to creation of
Sunrise Capital Corporation, a bank development company whose purpose is to
establish similar real estate focused banks in targeted geographic markets. In
anticipation of our second bank, we opened a loan production office in
Albuquerque, New Mexico, funding nearly $3 million in loans in late 1999. With
at least two more banks on the drawing board, we can leverage our underwriting
staff and PLP designation for greater efficiency and better margins.
2000 will bring increased focus on deposit relationships. Garth Jax, former NFL
linebacker, joined our team as Vice President and Relationship Manager, after a
distinguished career in community relations for the Arizona Cardinals. We look
forward to great things from Garth and our new banks as we enter the new
millennium.
William D. Hinz, II
President
Board of Directors
Sandra A. Abalos
President
Abalos and Associates, P.C.
Michael J. Devine
Attorney at Law
Brian K. English
Attorney at Law
The English Law Firm
Howard J. Hickey, III
Executive Vice President
Sunrise Bank of Arizona
William D. Hinz, II
President
Sunrise Bank of Arizona
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
John T. Katsenes
Manager
Katsenes Enterprises
Kevin B. Kinerk
Executive Vice President
Sunrise Bank of Arizona
G. D. "Rab" Paquette
President
Commercial Blueprint Company
Joseph D. Reid
Chairman and CEO
Sun Community Bancorp Limited
Mark Steig, D.D.S.
Orthodontist
Mark Steig, D.D.S., P.C.
James R. Wentworth
Principal
Wentworth, Webb and Postal, L.L.C.
Officers
Joseph D. Reid
Chairman of the Board and CEO
William D. Hinz, II
President
Howard J. Hickey, III
Executive Vice President
Kevin B. Kinerk
Executive Vice President
Marian B. Creel
Vice President
J. Garth Jax
Vice President
Douglas N. Reynolds
Vice President and CCO
Leonard C. Zazula
Vice President
Valley First Community Bank
7501 East McCormick Parkway * North Court, Suite 105N
Scottsdale, AZ 85258-3495 * (480) 596-0883
Valley First Community Bank marked its second anniversary in 1999. This
represents our first full calendar year of profitability. Through hard work and
sound strategy, we have positioned the Bank for continued success.
In addition to the dedication of our Board of Directors, the Bank has benefited
significantly from its Business Advisory Council made up of local business
owners and professionals, who serve as our ambassadors within the city of
Scottsdale. Like our Board, the Advisory Council has provided significant
guidance toward our success.
Our emphasis on profitability has not compromised our parallel commitment to
this community. Banks are routinely graded on their community citizenship under
the authority of the Community Reinvestment Act which is administered by our
primary regulators. I am pleased to report to you that Valley First Community
Bank received a CRA rating of Outstanding. Among the many community activities
in which we are involved, we are especially pleased with the efforts of our
employees. For the second year, our employees teamed with customers to make the
holidays brighter for children from domestic violence situations.
As we enter the third calendar year of operations as a start-up bank, we are
encouraged by the many opportunities for success which exist in our community.
Unlike large institutions, our focus is business retention more than growth.
This is a part of our operating philosophy "Smaller Bank - Bigger Service."
Gary W. Hickel
President
Board of Directors
W. Craig Berger
President
W. Craig Berger Financial Services, Ltd.
Marilyn D. Cummings
Realtor
Russ Lyon Realty Company
Michael J. Devine
Attorney at Law
W. Randy Fitzpatrick
Certified Public Accountant
Fitzpatrick , Hopkins, Kelly and Leonhard, P.L.C.
Patrick J. Harris
Skill Golf, Inc.
Gary W. Hickel
President
Valley First Community Bank
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
John S. Lewis
President
Sun Community Bancorp Limited
Donald J. Mahoney
Managing Director
Trammel Crow Company
Gordon D. Murphy
Chairman
Esperanca, Inc.
Harry Rosenzweig, Jr.
Co-Owner
Harry's Fine Jewelry
Patricia B. Ternes
Certified Financial Planner
Dain Rauscher Incorporated
Officers
Gordon D. Murphy
Chairman of the Board
Joseph D. Reid
Chief Executive Officer
Patrick J. Harris
Secretary
Gary W. Hickel
President
Edward T. Williams
Executive Vice President
and CCO
Jeffrey S. Birkelo
Vice President
Lance K. Wise
Vice President
Nevada Community Bancorp Limited
3740 S. Pecos-McLeod o Suite A
Las Vegas, NV 89121-4253
(702) 938-0521
Board of Directors
Glenn C. Christenson
EVP, CFO and CAO
Station Casinos, Inc.
Michael J. Devine
Attorney at Law
Cristin Reid English
General Counsel
Nevada Community Bancorp Limited
Joel I. Ferguson
Chairman
Ferguson Development, L.L.C.
Michael F. Hannley
President and CEO
Bank of Tucson
Mark A. James
Senior Partner/State Senator
James, Driggs, Walch, Santoro, Kearney, Johnson & Thompson
Lewis D. Johns
President
Mid-Michigan Investment Company
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Larry W. Kifer
Chairman and CEO
Algiers Hotel
John S. Lewis
President
Sun Community Bancorp Limited
Humberto S. Lopez
President
HSL Properties, Inc.
Thomas C. Mangione
President and COO
Nevada Community Bancorp Limited
Joseph D. Reid
Chairman and CEO
Nevada Community Bancorp Limited
Edward D. Smith
President
Smith-Christensen Enterprises
Officers
Joseph D. Reid
Chairman and CEO
Michael J. Devine
Vice Chairman
Michael F. Hannley
Secretary
Thomas C. Mangione
President and
Chief Operating Officer
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Cristin Reid English
General Counsel
Sunrise Capital Corporation
225 Gold SW
Albuquerque, NM o 87102
(505) 244-8000
Board of Directors
Michael J. Devine
Attorney at Law
Cristin Reid English
General Counsel
Sunrise Capital Corporation
Gary W. Hickel
President
Valley First Community Bank
William D. Hinz, II
President
Sunrise Bank of Arizona
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
John S. Lewis
President
Sun Community Bancorp Limited
Joseph D. Reid
Chairman and CEO
Sunrise Capital Corporation
Douglas N. Reynolds
Vice President and CCO
Sunrise Bank of Arizona
Officers
Joseph D. Reid
Chairman, President and CEO
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
William D. Hinz, II
Executive Vice President
and COO
Cristin Reid English
General Counsel
Other Corporate Information
Corporate Office
2777 E. Camelback Rd.
Suite 375
Phoenix, AZ 85016
(602) 955-6100
www.suncommunity.com
Independent Auditors
BDO Seidman, LLP
Grand Rapids, Michigan
Shareholder Information
Annual Meeting
Sun's Annual Meeting of Shareholders will be held on Friday, May 26, 2000 at
9:00 a.m. at Sun's corporate offices located at 2777 E. Camelback Road, Phoenix,
Arizona.
Common Stock Trading Information
Sun's common stock trades on the National Market Tier of The Nasdaq Stock
MarketSM under the trading symbol SCBL.
The following brokerage firms make a market in Sun's common stock:
First Union Securities
Richmond, Virginia
M.H. Meyerson & Company
Jersey City, New Jersey
Sandler O'Neill & Partners
New York, New York
Sherwood Securities Corporation
New York, New York
Spear, Leeds & Kellogg
New York, New York
Stifel, Nicolaus & Company, Inc.
St. Louis, Missouri
Stock Transfer Agent
American Securities Transfer & Trust, Inc.
12039 West Alameda Parkway
Lakewood, CO 80228
(303) 986-5400
[MAP GRAPHIC]
TABLE OF CONTENTS
Selected Consolidated Financial Data...........................................2
Information Regarding Sun's Common Stock.......................................3
Availability of Form 10-K and Certain Other Reports............................3
Responsibility For Financial Statements........................................4
Cautionary Statement Regarding Forward-Looking Statements......................4
Management's Discussion and Analysis of Financial Condition and Results
of Operations:
The Business of Sun and its Banks..........................................5
Sun's Structure............................................................6
Recent Developments........................................................8
Banking Technology at Sun..................................................8
1999 Financial Overview....................................................8
Changes in Consolidated Financial Position.................................8
Consolidated Results of Operations........................................10
Liquidity, Capital Resources and Capital Adequacy.........................12
Trends Affecting Operations...............................................13
Century Date Change.......................................................16
New Accounting Standards..................................................17
Report of Independent Auditors................................................18
Consolidated Financial Statements:
Consolidated Balance Sheets...............................................19
Consolidated Statements of Operations.....................................20
Consolidated Statements of Changes in Stockholders' Equity................21
Consolidated Statements of Cash Flows.....................................22
Notes to Consolidated Financial Statements................................23
1
SELECTED CONSOLIDATED FINANCIAL DATA
(in $1,000s, except per share data)
As of and for the Year Ended December 31
-------------------------------------------------
1999(1) 1998(2) 1997(3) 1996(4)
--------- --------- --------- ---------
For the year:
Interest income $ 17,920 $ 7,344 $ 2,871 $ 354
Interest expense 5,368 2,280 914 123
Net interest income 12,552 5,064 1,957 231
Provision for loan losses 1,753 379 268 49
Noninterest income 759 334 125 10
Noninterest expense 14,503 5,330 2,037 440
Income (loss) before cumulative effect of change in
accounting principle (1,207)(5) 57 (72) (164)
Net income (loss) (1,593) 57 (72) (164)
Net income (loss) per share:
Basic (.34) .02 (.05) (.14)
Diluted (.34) .02 (.05) (.14)
At end of year:
Total assets $ 300,390 $ 135,578 $ 55,007 $ 17,276
Total earning assets 291,783 130,640 52,901 16,639
Portfolio loans 206,232 68,080 31,236 4,850
Deposits 225,007 98,782 42,899 12,021
Debt obligations -- -- -- --
Minority interests in consolidated subsidiaries 21,384 9,411 2,010 --
Stockholders' equity 50,003 26,627 9,690 5,189
Quarterly Results of Operations
----------------------------------------------
First Second Third Fourth Total for
Quarter Quarter Quarter Quarter the Year
-------- -------- -------- -------- --------
Year ended December 31, 1999:(1)
Interest income $ 2,976 $ 3,804 $ 4,988 $ 6,152 $ 17,920
Interest expense 886 1,193 1,425 1,864 5,368
Net interest income 2,090 2,611 3,563 4,288 12,552
Provision for loan losses 209 326 527 691 1,753
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (240) (315) (677) (504) (1,736)
Income (loss) before cumulative effect
of change in accounting principle (176)(5) (225) (464) (342) (1,207)
Net income (loss) (562) (225) (464) (342) (1,593)
Net income (loss) per share:
Basic (.15) (.06) (.08) (.06) (.34)
Diluted (.15) (.06) (.08) (.06) (.34)
Year ended December 31, 1998:(2)
Interest income $ 1,335 $ 1,638 $ 2,004 $ 2,367 $ 7,344
Interest expense 395 502 639 744 2,280
Net interest income 940 1,136 1,365 1,623 5,064
Provision for loan losses 41 70 129 139 379
Income (loss) before income taxes 133 245 41 (333) 86
Net income (loss) 117 151 15 (226) 57
Net income (loss) per share:
Basic .04 .05 .01 (.08) .02
Diluted .04 .05 .01 (.08) .02
(1) Includes East Valley Community Bank effective June 1999 (located in
Chandler, Arizona and majority-owned by Sun); Desert Community Bank (August
1999) and Red Rock Community Bank (November 1999), both located in Las
Vegas, Nevada and majority-owned by Nevada Community Bancorp Limited
(formed in 1999 and majority-owned by Sun).
(2) Includes Camelback Community Bank (effective May 1998), Southern Arizona
Community Bank (effective August 1998), Mesa Bank (effective October 1998)
and Sunrise Bank of Arizona (effective December 1998), majority-owned by
Sun.
(3) Includes Valley First Community Bank, effective June 1997, which is
majority-owned by Sun.
(4) 1996 period represents Bank of Tucson amounts from date of inception (June
1996). Bank of Tucson became wholly-owned by Sun in 1997 through a share
exchange transaction. Prior to the share exchange transaction, Sun had no
assets or operations.
(5) Implementation of a new accounting standard which required the write-off of
previously capitalized start-up costs resulted in a one-time charge of
$386,000 (net of income tax effect) or $.08 per share effective January 1,
1999.
2
INFORMATION REGARDING SUN'S COMMON STOCK
Sun's common stock is traded on the National Market Tier of The Nasdaq Stock
MarketSM under the symbol "SCBL". Market quotations regarding the range of high
and low sales prices of Sun's common stock, which reflect inter-dealer prices
without retail mark-up, mark-down or commissions, were as follows for periods
after Sun's July 1999 initial public offering of common stock:
1999
----------------------
Low High
------- -------
Quarter Ended:
September 30 $10.375 $20.000
December 31 8.000 12.500
Sun has paid no cash dividends to date. Capitol Bancorp Ltd. owns 51% of Sun's
common stock.
As of February 22, 2000, there were 1,088 beneficial holders of Sun's common
stock, based on information supplied to Sun from its stock transfer agent and
other sources. At that date, 5,503,870 shares of common stock were outstanding.
Sun's stock transfer agent is American Securities Transfer & Trust, Inc., 12039
West Alameda Parkway, Lakewood, Colorado 80228 (telephone 303-986-5400).
AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS
A copy of Sun's 1999 report on Form 10-K, without exhibits, is available to
holders of its common stock without charge, upon written request. Form 10-K
includes certain statistical and other information regarding Sun and its
business. Requests to obtain Form 10-K should be addressed to Cristin Reid
English, General Counsel, Sun Community Bancorp Limited, 2777 East Camelback
Road, Suite 101, Phoenix, Arizona 85016.
Form 10-K, and certain other periodic reports, are filed with the Securities and
Exchange Commission (SEC). The SEC maintains an internet web site that contains
reports, proxy and information statements and other information regarding
companies which file electronically (which includes Sun). The SEC's web site
address is http:\\www.sec.gov. Sun's filings with the SEC can also be accessed
through Sun's web site, http:\\www.suncommunity.com.
3
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Sun's management is responsible for the preparation of the consolidated
financial statements and all other information appearing in this annual report.
The financial statements have been prepared in accordance with generally
accepted accounting principles.
Sun's management is also responsible for establishing and maintaining the
internal control structure of Sun, its banks and its bank development
subsidiaries. The general objectives of the internal control structure are to
provide management with reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, and that transactions are executed in
accordance with generally accepted accounting principles. In fulfilling this
objective, management has various control procedures in place which include, but
are not limited to, review and approval of transactions, a code of ethical
conduct for employees, internal auditing and an annual audit of Sun's
consolidated financial statements performed by a qualified independent audit
firm. Management believes the internal control structure of Sun to be adequate
and that there are no material weaknesses in internal control.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this annual report, including the
consolidated financial statements, management's discussion and analysis of
financial condition and results of operations and other portions of this annual
report that are not historical facts, including, without limitation, statements
of 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", "will", "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
Sun's 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) changes in
management, 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.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Most of this section discusses items of importance regarding Sun's financial
statements which appear elsewhere in this report. In order to obtain a full
understanding of this discussion, it is important to read it with those
financial statements. However, before discussing the financial statements and
related highlights, an introductory section includes some important background
information about the business of Sun and its banks, Sun's structure and recent
developments.
THE BUSINESS OF SUN AND ITS BANKS
Sun defines itself as a BANK DEVELOPMENT COMPANY. In the highly regulated
business of banking, it is viewed by governmental agencies as a bank holding
company. Sun views bank DEVELOPMENT as a much more dynamic activity than the
regulatory label for bank holding companies.
Bank development at Sun is the business of mentoring, monitoring and managing
its investments in community banks. Bank development is also the activity of
adding new banks through startup, or DE NOVO, formation or through other
affiliation efforts, such as acquiring existing banks.
The banks have similar characteristics:
* Each bank has an on-site president and management team, as local
decision makers.
* Each bank has a local board of directors which has actual authority
over the bank.
* Each bank generally operates from only one office location.
* Each bank can fully meet customers' needs anywhere, anytime through
bankers on call, courier services, telephone banking and other
delivery methods.
* Each bank has access to an efficient back-room processing facility and
leading edge technology through shared resources.
Sun's banks seek the profitable customer relationships which are often displaced
through mergers, mass marketing, megabanks and an impersonal approach to
handling customers. The banks are focused on commercial banking activities,
emphasizing business customers, although they also offer a complete array of
financial products and services.
Each bank has a separate charter. A bank charter is similar to articles of
incorporation and enables each bank to exist as a distinct legal entity. Sun's
banks are state-chartered which means they are organized under a particular
state's banking laws. All of the banks are FDIC insured. Banks are highly
regulated by state and federal agencies. Because each bank has its own charter,
each bank is examined by both state and federal agencies as a separate and
distinct legal entity for safety, soundness and compliance with banking laws and
regulations.
Sun became a bank holding company in 1997 when it acquired Bank of Tucson in a
share exchange transaction. Bank of Tucson had been formed in 1996 by a group of
individuals which included some of the same organizers of Sun. Sun became a
one-bank holding company through the Bank of Tucson share exchange and, as a
result, Bank of Tucson's shareholders became shareholders of Sun. Bank of Tucson
is Sun's only wholly-owned bank subsidiary. A second start-up bank, Valley First
Community Bank, was added in 1997. Four start-up banks were added in 1998 and
three in 1999.
5
At December 31, 1999, Sun consisted of 9 community banks, with locations in 3
states.
Sun's bank development philosophy is one of "SHARED VISION" which encompasses a
commitment to community banking emphasizing local leadership and investment,
with the shared resources of efficient management. Sun provides shared resources
to its banks which includes common data processing systems, centralized item
processing, loan review, internal audit, credit administration, accounting and
risk management.
SUN'S STRUCTURE
Sun is a majority-owned subsidiary of Capitol Bancorp Ltd. Capitol is a
multi-bank development company headquartered in Lansing, Michigan. It has
consolidated total assets of about $1.3 billion, which includes Sun's
consolidated assets. Sun's financial statements are included in Capitol's
because of Capitol's majority ownership of Sun.
The organizational structure of Sun is complex. It is a mixture of banks which
Sun owns directly and others which are owned indirectly through subsidiary bank
development companies. Additionally, Sun's direct and indirect ownership
percentages of these entities differ.
Headquartered in Phoenix, Arizona, Sun became a public company in 1999 and is
carrying out all of its current bank development activities in the southwestern
region of the United States. At year end 1999, its consolidated assets were $300
million ($136 million at year end 1998). It is comprised of a combination of
directly-owned banks and bank development subsidiaries:
Sun Community Bancorp Limited
51% owned by Capitol Bancorp
Arizona bank development Nevada bank development through Sunrise Capital Corporation, multi-
through 6 majority- Nevada Community Bancorp Limited and state bank development emphasizing
owned community banks its 2 majority-owned community banks specialized lending (SBA) through 1
majority-owned community bank
The current group of banks comprising bank development in Arizona follows:
Arizona Bank Development
(direct subsidiaries of
Sun Community Bancorp Limited)
Bank of Tucson Mesa Bank
(Tucson -- 1996) (Mesa -- 1998)
100% ownership by Sun 53% ownership by Sun
Valley First Camelback
Community Bank Community Bank
(Scottsdale -- 1997) (Phoenix -- 1998)
52% ownership by Sun 55% ownership by Sun
Southern Arizona East Valley
Community Bank Community Bank
(Tucson -- 1998) (Chandler -- 1999)
51% ownership by Sun 88% ownership by Sun
6
All of these banks are very young. The most mature bank of the group, Bank of
Tucson, completed its 36th month of operation in June 1999. The youngest bank,
East Valley Community Bank, opened in June 1999. These banks ranged in size from
almost $11 million in assets to $82 million at year end 1999. Four of the banks
are located in or near greater Phoenix, while two are located in Tucson.
Bank development activities in Nevada are carried out through Nevada Community
Bancorp Limited, which is 51% owned by Sun, and was formed in 1999:
Nevada Community Bancorp Limited
51% owned by Sun
Desert Community Bank Red Rock Community Bank
(Las Vegas -- 1999) (Las Vegas -- 1999)
51% ownership by NCBL 51% ownership by NCBL
Both of the Nevada banks opened in the second half of 1999 and a third Las Vegas
area bank is expected to open in the first half of 2000. For their brief period
of operation in 1999, the two banks' combined total assets was $33 million at
year end 1999.
Sunrise Capital Corporation is a newly formed subsidiary company, 57% owned by
Sun. It is focused on developing banks in several states with a slightly
different emphasis on commercial lending than the other bank affiliates of Sun.
As of year end 1999 it has one bank subsidiary, Sunrise Bank of Arizona, which
is majority-owned and located in Phoenix. As its initials would imply, Sunrise
Bank of Arizona is focused on offering loan products structured through the SBA,
or US Small Business Administration, in addition to the full array of typical
bank products. Sunrise Capital Corporation commenced operations in late 1999
when it completed a share exchange transaction involving Sunrise Bank of
Arizona, previously a 51%-owned subsidiary of Sun.
In 1999, a loan production office of Sunrise Bank of Arizona was established in
Albuquerque, New Mexico. It will evolve into Sunrise Bank of Albuquerque (in
organization), which is expected to open in the first half of 2000.
All of these banks and subsidiary bank development companies are combined, or
consolidated, for financial reporting purposes because Sun has ownership control
of them either directly or indirectly. Current accounting rules require
consolidated reporting when one entity has majority voting control of another.
The reporting entity is the parent organization and entities which are
majority-owned by the parent are subsidiaries. In the circumstances of Sun, this
parent and subsidiary relationship applies also to second tier subsidiaries
which have consolidated subsidiaries of their own.
The accounting rules in this area are also complex and complicate gaining an
understanding of consolidated financial statements. For example, consolidated
balance sheets include all of the combined entities' assets and liabilities,
without an adjustment for the percentage of ownership by the parent. On the
other hand, consolidated net income includes all of the combined entities'
operating results, but only to the extent of the parent's ownership percentage.
7
RECENT DEVELOPMENTS
Because of the number of banks and bank development companies added in 1999 and
1998, comparing financial results for those and prior periods is difficult.
In 1999, a total of 5 entities were added to the consolidated group. This number
consists of 3 new banks and 2 new bank development companies. In 1998, there
were four new banks added to the group.
At year end 1999, applications for two banks (one in Nevada and one in New
Mexico) were pending, awaiting regulatory approval and capitalization.
Management expects that at least two applications for permission to form new
banks will be filed in early 2000 (one each in the states of Arizona and
California). Additionally, two bank development companies (which will become
majority-owned subsidiaries of Sun) are expected to commence operations in two
regions within the state of California in 2000.
BANKING TECHNOLOGY AT SUN
The use of high technology banking systems is key to the delivery of accurate
and timely customer service. Sun currently operates one data processing site,
located in Phoenix, Arizona which processes all activity for its banks.
With the century date change, or Y2K, now successfully completed, implementation
of Internet-based banking capabilities is in process.
1999 FINANCIAL OVERVIEW
Sun completed 1999 with total assets exceeding $300 million, an increase of more
than 120% over the year end 1998 level.
Consolidated operating losses for 1999 were about $1.2 million compared to a
slight amount of net income, $57,000, in 1998. The net loss for 1999 was $1.6
million. The 1999 net loss resulted primarily from the early period operating
losses of start-up and young bank subsidiaries and an accounting change which
required the write-off of previously capitalized start-up costs.
CHANGES IN CONSOLIDATED FINANCIAL POSITION
Total assets have grown significantly from $55 million at the end of 1997, to
$136 million at year end 1998 and reaching $300 million at the end of 1999. This
rapid asset growth is the result of adding new banks and the growth and
evolution of Sun's young banks. Each bank reported strong asset growth in 1999.
8
TOTAL ASSETS
($ millions)
1996 1997 1998 1999
---- ---- ---- ----
17 55 136 300
At year end 1999, total assets of the three banks formed in 1999 approximated
$44 million. The four banks formed in 1998 reported total assets of $111 million
at the end of 1999, an increase of $77 million during the year. Total assets of
the bank which became two years old in 1999 grew 25% to $46 million. The most
mature bank, formed in 1996, reported total assets of $82 million at year end
1999, an increase of about 29% for the year.
The total assets of each bank, the consolidated totals and ownership percentages
are summarized below as of year end 1999 (in $1,000s):
Percentage
Ownership By Total Assets
---------------- --------------------
Sun 2nd Tier 1999 1998
---- -------- -------- --------
Bank of Tucson 100% $ 82,113 $ 63,860
Camelback Community Bank 55% 30,254 10,017
East Valley Community Bank 88% 10,757
Mesa Bank 53% 24,738 6,192
Southern Arizona Community Bank 51% 25,778 12,395
Valley First Community Bank 52% 45,678 36,588
Nevada Community Bancorp Limited: 51%
Desert Community Bank 51% 17,839
Red Rock Community Bank 51% 15,596
Sunrise Capital Corporation: 57%
Sunrise Bank of Arizona 100% 30,615 5,411
Other, net 17,022 1,115
-------- --------
Consolidated totals $300,390 $135,578
======== ========
Most of the consolidated assets consist of loans. Net portfolio loans surpassed
the $200 million mark near the end of 1999, or about 68% of total consolidated
assets at the end of the year.
The banks emphasize commercial loans, consistent with their focus on serving
small to mid-sized business customers. Commercial loans comprise $192 million or
93% of total portfolio loans at year end 1999, an increase over the 89% ratio in
1998. Loan growth in 1999 was significant--$138 million or a growth rate of 203%
for the year.
Asset quality has remained strong in this record period of economic stability
and expansion. Nonperforming loans, which consist of loans more than 90 days
past due and loans on nonaccrual status, approximated $34,000 at year end 1999,
none in 1998.
9
The banks maintain an allowance for loan losses to absorb estimated losses in
the loan portfolio at the balance sheet date. At December 31, 1999, the
allowance for loan losses approximated $2.4 million or 1.15% of portfolio loans,
compared to $696,000 or 1.02% in 1998. The following table summarizes portfolio
loans, the allowance for loan losses and its ratio, and nonperforming loans (in
$1,000s):
Allowance as a
Allowance for Nonperforming % of Total
Total Portfolio Loans Loan Losses Loans Portfolio Loans
--------------------- --------------- ------------- ---------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
Bank of Tucson $ 59,088 $37,899 $ 725 $ 392 1.23% 1.03%
Camelback Community Bank 22,731 3,246 228 33 1.00% 1.02%
East Valley Community Bank 4,335 44 1.01%
Mesa Bank 18,884 1,386 189 14 1.00% 1.01%
Southern Arizona Community Bank 20,610 2,925 207 30 1.00% 1.03%
Valley First Community Bank 36,334 20,879 418 209 $ 34 1.15% 1.00%
Nevada Community Bancorp Limited:
Desert Community Bank 11,438 154 1.35%
Red Rock Community Bank 7,861 156 1.98%
Sunrise Capital Corporation:
Sunrise Bank of Arizona 24,952 1,745 250 18 1.00% 1.03%
Other, net (1)
-------- ------- ------ ----- ---- ----- ---- ----
Consolidated totals $206,232 $68,080 $2,371 $ 696 $ 34 $ -0- 1.15% 1.02%
======== ======= ====== ===== ==== ===== ==== ====
The allowance for loan losses is maintained at a level believed adequate by
management. It is analyzed quarterly by each bank. The adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentration of
credit), past loss experience, current economic conditions, loan commitments
outstanding, regulatory requirements and other factors.
New banks, as a condition of charter approval, are required to maintain an
allowance ratio of not less than 1% for their first three years of operations.
Because they are new banks with new or unseasoned loans and no prior loss
history, 1% is often used as a starting point for the amount of the allowance,
particularly in the earliest years of operation. This reduces the consolidated
ratio, even though larger and more mature banks maintain higher allowance
ratios. For example, Bank of Tucson, the most mature bank, increased its
allowance ratio to 1.23% at year end 1999.
CONSOLIDATED RESULTS OF OPERATIONS
Revenue growth has been significant. In 1999, total revenues exceeded $18.7
million, a 143% increase over the 1998 revenue level of $7.7 million. The
primary revenue source is interest income from loans. Net interest income is the
difference between total interest income and interest expense on deposits and
borrowings. The following graph summarizes growth in total revenue (which
includes noninterest income like some fees and service charges):
10
TOTAL REVENUES
($ thousands)
1996 1997 1998 1999
---- ---- ---- ----
364 2,997 7,679 18,679
Of the 1999 revenues, $7.4 million, or about 40%, came from the most mature
bank, formed in 1996. The bank formed in 1997 reported 1999 revenues of $3.4
million or about 18% of the consolidated total. The four banks started in 1998
generated total revenues of $6.3 million or about one third of the 1999
consolidated total.
Growth in the categories of interest income and interest expense, as well as
noninterest income and noninterest expense, is the result of the addition of new
banks during the periods presented and the ongoing growth of Sun's young banks.
The largest component of noninterest expense is salaries, wages and benefits,
which has increased significantly due to the larger number of banks and bank
development subsidiaries and added corporate personnel.
The following table summarizes net income for each of the banks and on a
consolidated basis and the related rates of return on average assets and equity,
where applicable (in $1,000s):
Net Income (Loss) Return on Average Equity Return on Average Assets
------------------------- ------------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
Bank of Tucson $ 1,086 $ 776 $ 150 16.63% 12.73% 2.88% 1.48% 1.25% 0.47%
Camelback Community Bank (520) (370)
East Valley Community Bank (673)
Mesa Bank (207) (118)
Southern Arizona Community Bank (546) (252)
Valley First Community Bank 36 (81) (245) 0.87% 0.10%
Nevada Community Bancorp Limited:
Desert Community Bank (358)
Red Rock Community Bank (269)
Sunrise Capital Corporation:
Sunrise Bank of Arizona (634) (26)
Other, net 492 128 23
------- ----- ----- ----- ----- ----- ----- ---- -----
Consolidated totals $(1,593) $ 57 $ (72) (3.19)% 0.34% (0.97)% (0.86)% 0.06% (0.20)%
======= ===== ===== ===== ===== ===== ===== ==== =====
Provisions for loan losses also increased significantly, commensurate with the
growth in the number of banks and loans.
During 1999, a new accounting standard required the write-off of previously
capitalized start-up costs, which is discussed in a later section of this
narrative. It is reflected as a cumulative effect of a change in accounting
principle in the consolidated statement of operations, and amounted to $.08 per
share.
Income (loss) per share, before the cumulative-effect adjustment, was $(.26) per
basic and diluted share in 1999, compared to net income of $.02 per basic and
diluted share in 1998.
11
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY
Liquidity for financial institutions consists of cash and cash equivalents,
marketable investment securities and loans held for resale. These categories
totaled $86 million at year end 1999, or about 28% of total assets. This
compares to $63 million or 46% of total assets at year end 1998.
Liquidity varies significantly daily, based on customer activity. The change in
the liquidity ratio is the result of more assets being deployed into loans,
consistent with the strategy of maximizing interest income. Rates of interest
income on liquid assets are typically less than rates the banks achieve from
commercial loans.
The primary source of funds for the banks is deposits. The banks emphasize
interest-bearing time deposits as part of their funding strategy. The banks also
seek noninterest-bearing deposits, or checking accounts, which reduce the banks'
cost of funds. Noninterest-bearing deposits were about 22% of total deposits at
year end 1999 and increased $22 million during the year.
TOTAL DEPOSITS
($ millions)
1996 1997 1998 1999
---- ---- ---- ----
Interest-bearing 8.2 33.5 71.0 175.0
Noninterest-bearing 3.8 9.5 28.0 50.0
In recent periods, banks in general have experienced some difficulty in
obtaining additional deposits to fuel growth. Sun's banks have had similar
experiences in their individual markets. As deposit pricing has become more
competitively aggressive, deposit growth is achievable, but at a higher price,
shrinking net interest margins.
In July 1999, Sun became a public company through an initial public offering
(IPO) of its common stock with net proceeds of $25 million. Capitol purchased
51% of the offering, maintaining its majority ownership of Sun.
A significant source of capital has been investments provided by minority
shareholders in the subsidiaries which are consolidated for financial reporting
purposes. Total minority interests in consolidated subsidiaries amounted to
$21.4 million at year end 1999, an increase of $12 million from the $9.4 million
level at year end 1998. These minority interests approximated $2 million at the
end of 1997. The increases in these periods are the result of Sun's strategy of
starting new banks and bank development companies with less than 100% ownership
by Sun.
Total stockholders' equity approximated $50 million at year end 1999, an
increase of $23.4 million for the year. The book value per share of common stock
was $9.09 at year end 1999, compared with $6.92 at year end 1998. No cash
dividends have been paid. Future payment of dividends, if any, is subject to
approval by Sun's board of directors and capital adequacy.
12
Sun's capital structure consists of these primary elements:
* Minority interests in consolidated subsidiaries, and
* Stockholders' equity.
TOTAL CAPITALIZATION
($ millions)
1996 1997 1998 1999
---- ---- ---- ----
Stockholders' Equity 5.2 9.7 26.6 50
Minority Interests 0 2 9.4 21.4
Total capitalization at year end 1999 amounted to $71.4 million or 23.8% of
total assets. This compares to $36 million at year end 1998.
Sun and each of its banks and bank development subsidiaries are subject to a
complex series of regulatory rules and requirements which require specific
levels of capital adequacy at the bank level and on a consolidated basis. Under
those rules and regulations, banks are categorized as WELL CAPITALIZED,
ADEQUATELY CAPITALIZED or INADEQUATELY CAPITALIZED using several ratio
measurements, including a risk-weighting approach to assets and commitments.
Banks falling into the INADEQUATELY CAPITALIZED category are subject to the
prompt corrective action provisions of the FDIC Improvement Act, which can
result in significant regulatory agency intervention and other adverse action.
Although it is permissible to maintain capital adequacy at the ADEQUATELY
CAPITALIZED level, Sun operates with the objective of its banks meeting the WELL
CAPITALIZED standard. The well capitalized banks benefit from lower FDIC deposit
insurance costs and less restrictive limitations on some banking activities.
New banks, as a condition of regulatory charter approval, are required to
maintain higher ratios of capital adequacy. Generally, they are required to keep
a ratio of capital to total assets of not less than 8% for their first three
years of operation.
In the opinion of management, all of the affiliated banks met the criteria to be
classified as WELL CAPITALIZED at year end 1999.
TRENDS AFFECTING OPERATIONS
The most significant trends which can impact the financial condition and results
of operations of financial institutions are changes in market rates of interest
and changes in general economic conditions.
Changes in interest rates, either up or down, have an impact on net interest
income (plus or minus), depending on the direction and timing of such changes.
At any point in time, there is an unfavorable imbalance between interest
rate-sensitive assets and interest rate-sensitive liabilities. This means that
when interest rates change, the timing and magnitude of the effect of such
13
interest rate changes can alter the relationship between asset yields and the
cost of funds. This timing difference between interest rate-sensitive assets and
interest rate-sensitive liabilities is characterized as a "gap" which is
quantified by the distribution of rate-sensitive amounts within various time
periods in which they reprice or mature. The following table summarizes the
consolidated financial position in relation to "gap" at December 31, 1999 (in
$1,000s):
Interest Rate Sensitivity
---------------------------------------------
0 to 3 4 to 12 1 to 5 Over
Months Months Years 5 years Total
--------- --------- --------- --------- ---------
Assets
Federal funds sold $ 28,699 $ 28,699
Interest-bearing deposits with banks 8,994 $ 2,544 11,538
Loans held for resale 1,296 1,296
Investment securities 25,642 1,800 $ 7,998 35,440
Portfolio loans:
Commercial 96,634 17,717 73,031 $ 4,444 191,826
Real estate mortgage 6,968 99 335 56 7,458
Installment 2,095 1,546 2,379 930 6,950
Non-earning assets and other 17,183 17,183
--------- --------- --------- --------- ---------
Total assets $ 170,328 $ 23,706 $ 83,743 $ 22,613 $ 300,390
========= ========= ========= ========= =========
Liabilities and stockholders' equity
Interest-bearing deposits:
Time deposits over $100,000 $ 18,572 $ 28,702 $ 4,789 $ $ 52,063
Time deposits under $100,000 4,909 14,953 5,376 25,238
All other interest-bearing deposits 98,055 98,055
--------- --------- --------- --------- ---------
Total interest-bearing deposits 121,536 43,655 10,165 175,356
Noninterest-bearing liabilities 53,647 53,647
Minority interests in consolidated subsidiaries 21,384
Stockholders' equity 50,003
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 121,536 $ 43,655 $ 10,165 $ 53,647 $ 300,390
========= ========= ========= ========= =========
Interest rate sensitive period gap $ 48,792 $ (19,949) $ 73,578 $ (31,034)
Interest rate sensitive cumulative gap $ 48,792 $ 28,843 $ 102,421 $ 71,387
Period rate sensitive assets/period rate sensitive
liabilities 1.40 0.54 8.24 0.42
Cumulative rate sensitive assets/cumulative rate
sensitive liabilities 1.40 1.17 1.58 1.31
Cumulative gap to total assets 16.24% 9.60% 34.10% 23.76%
The "gap" changes daily based upon changes in the underlying assets and
liabilities at the banks. Analyzing exposure to interest rate risk is prone to
imprecision because the "gap" is constantly changing, the "gap" differs at each
of the banks, and it is difficult to predict the timing, amount and direction of
future changes in market interest rates and the corresponding effect on customer
behavior.
The banks endeavor to manage and monitor interest rate risk in concert with
market conditions and risk parameters. Management strives to maintain a
reasonably balanced position of interest rate-sensitive assets and liabilities.
The banks have not engaged in speculative positions through the use of
derivatives in anticipation of interest rate movements. In these most recent
periods of relatively lower interest rates, the banks have emphasized variable
rate loans and time deposits to the extent possible in a competitive
environment; however, competitive influences often result in making fixed rate
loans, although the banks seek to limit the duration of such loans. Similarly,
14
low interest rates generally make competition more intense for deposits, since
loan demand will typically increase during periods of lower rates and,
accordingly, result in higher interest costs on deposits, adversely impacting
interest margins. Future interest rates and the impact on earnings are difficult
to predict. In addition to interest rate risk relating to interest-bearing
assets and liabilities, changes in interest rates also can impact future
transaction volume of loans and deposits at the banks. For activities which are
influenced by levels of interest rates for transaction volume (for example,
origination of residential mortgage loans), pricing margins and demand can
become impacted significantly by changes in interest rates.
As a means of monitoring and managing exposure to interest rate risk, management
uses a computerized simulation model which is intended to estimate pro forma
effects of changes in interest rates. Using the simulation model, the following
table illustrates, on a consolidated basis, changes which would occur in annual
levels of interest income, interest expense and net interest income assuming one
hundred and two hundred basis point ("bp") parallel increases and decreases in
interest rates (in $1,000s):
Pro Forma
Assuming Pro Forma Effect of Pro Forma Effect of
No Change Interest Rate Increases Interest Rate Decreases
in Interest ----------------------- -----------------------
Rates +100 bp +200 bp -100 bp -200 bp
------- ------- ------- ------- -------
Interest income $25,441 $27,170 $28,897 $23,710 $21,978
Interest expense 8,863 10,077 11,292 7,647 6,433
------- ------- ------- ------- -------
Net interest income $16,578 $17,093 $17,605 $16,063 $15,545
======= ======= ======= ======= =======
The pro forma analysis above is intended to quantify theoretical changes in
interest income based on stated assumptions. The pro forma analysis excludes the
effect of numerous other variables such as borrowers' ability to repay loans,
the ability of banks to obtain deposits in a radically changed interest rate
environment and how management would revise its asset and liability management
priorities in concert with rate changes.
Simulation modeling techniques are inherently flawed and inaccurate due to the
number of variables and due to the fact that the actual effects of changes in
interest rates are subject to some variables (for example, customer behavior)
which simulation models cannot effectively predict. Therefore, actual future
results will differ from pro forma simulation model analyses and such
differences may be significant.
General economic conditions also have a significant impact on both the results
of operations and the financial condition of financial institutions. Economic
conditions nationally and in the banks' local markets have remained relatively
stable and positive. Local economic conditions, and to some extent national
economic conditions, have a significant impact on levels of loan demand as well
as the ability of borrowers to repay loans and the availability of funds for
customers to make deposits. Throughout 1999, 1998 and 1997, the U.S. economy
continued to produce the longest peacetime economic expansion in history. With
worldwide economic conditions currently unstable, the duration of the current
economic expansion period in the United States is questionable.
15
Continuing consolidation of the banking industry on a national basis, and in the
markets of Sun's banks, has presented opportunities for growth. As a result of
consolidation of the banking industry, coupled with the closure of branch
locations by larger institutions and conversion of customer relationships into
perceived `commodities' by the larger banks, many customer relationships have
been displaced, generating opportunities for development by the banks. For many
retail customers, banking services have become a commodity in an environment
that is dominated by larger mega-bank or mass-merchandising institutions. For
the professional, entrepreneur and other customers seeking a more
service-oriented, customized banking relationship, Sun's banks fill that need
through their focus on single-location banks with full, local decision-making
authority. As the banks focus on service delivery and keeping their size at a
manageable level, only a modest market share of deposits and loan activity is
necessary to achieve profitability and investor-oriented earnings performance.
Start-up banks generally incur operating losses during their early periods of
operations. Recently-formed start-up banks will detract from consolidated
earnings performance and additional start-up banks formed in 2000 and beyond
will similarly negatively impact short-term profitability. On a consolidated
basis, such operating losses reduce net income by the pro rata share of Sun's
ownership percentage in those banks. When those banks become profitable, their
operating results will contribute to consolidated earnings to the extent of
Sun's ownership percentage.
Commercial banks continue to be subject to significant regulatory requirements
which impact current and future operations. In addition to the extent of
regulatory interaction with financial institutions, extensive rules and
regulations governing lending activities, deposit gathering and capital adequacy
(to name a few), translate into a significant cost burden of financial
institution regulation. Such costs include the significant amount of management
time and expense which is incurred in maintaining compliance and developing
systems for compliance with those rules and regulations as well as the cost of
examinations, audits and other compliance activities.
Premiums for FDIC insurance have historically been significant costs of doing
business as financial institutions, but in recent years, deposit insurance
premiums have been maintained at a stable and modest level. Future deposit
insurance premium levels are difficult to predict inasmuch as deposit insurance
premiums will be determined based on general economic conditions, the relative
health of the banking and financial institution industry and other unpredictable
factors. It is reasonable to expect that deposit insurance premiums will
increase at some point in the future.
The future of financial institution regulation, and its costs, is uncertain and
difficult to predict.
CENTURY DATE CHANGE
Throughout 1999, significant attention was drawn to the century date change and
concerns about whether banks were prepared. Media hype, coupled with regulatory
anxiety, reached a crescendo near the end of the year. What was predicted by
some media to become a catastrophic disaster of computer failures, proved to be
a nonevent. Throughout 1998 and 1999, each of the banks were subjected to
repeated examinations of year 2000 readiness by bank regulatory agencies and Sun
incurred consolidated costs of about $250,000 each year.
16
Sun and its banks were well prepared, far in advance of the regulatory
initiatives, and are 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.
NEW ACCOUNTING STANDARDS
Certain new accounting standards became applicable to Sun during 1999.
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 other comprehensive income, depending
on whether the instrument qualifies for hedge accounting and the type of hedging
instrument involved. This new accounting standard, as amended in June 1999, 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 the
consolidated financial statements.
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position 98-1, "Costs of Computer Software Developed or Obtained for Internal
Use." It requires capitalization of certain costs of development of software and
had no effect on Sun's financial statements when implemented in 1999.
The AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." It requires start-up costs and organizational costs to be charged
to expense when incurred. The initial application of the statement required a
cumulative effect adjustment for those companies that had previously capitalized
start-up and organization costs and became effective in 1999. Implementation of
this new standard has been reflected as a cumulative effect of an accounting
change as of January 1, 1999, resulting in a one-time charge of $.08 per share
in the consolidated statement of operations. Most of the previously capitalized
costs relate to start-up and organization costs incurred in 1998.
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 in future periods.
17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Sun Community Bancorp Limited
We have audited the accompanying consolidated balance sheets of Sun Community
Bancorp Limited and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sun Community
Bancorp Limited and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
In accordance with a new accounting standard, as more fully described in Note B
to the consolidated financial statements, the Corporation changed its method of
accounting for start-up and organization costs, effective January 1, 1999.
\s\ BDO Seidman, LLP
Grand Rapids, Michigan
January 31, 2000
18
CONSOLIDATED BALANCE SHEETS
SUN COMMUNITY BANCORP LIMITED
December 31
---------------------------
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 8,578,000 $ 9,902,458
Interest-bearing deposits with banks 11,537,608 858,955
Federal funds sold 28,699,050 37,600,000
------------ ------------
Cash and cash equivalents 48,814,658 48,361,413
Loans held for resale 1,295,977 1,275,788
Investment securities available for sale,
carried at market value--Note C 35,439,821 12,922,539
Portfolio loans, less allowance for loan
losses of $2,371,000 in 1999 and $696,000
in 1998--Note D 203,861,113 67,383,909
Premises and equipment, net--Note E 5,308,423 2,753,721
Accrued interest income 1,352,719 448,331
Other assets 4,317,706 2,432,336
------------ ------------
TOTAL ASSETS $300,390,417 $135,578,037
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 49,650,744 $ 28,033,128
Interest-bearing--Note H 175,356,132 70,748,676
------------ ------------
Total deposits 225,006,876 98,781,804
Accrued interest on deposits and other liabilities 3,996,658 757,879
------------ ------------
Total liabilities 229,003,534 99,539,683
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES--Note A 21,384,108 9,411,272
STOCKHOLDERS' EQUITY--Notes A, I and M:
Common stock, no par value,
10,000,000 shares authorized;
issued and outstanding:
1999--5,503,870 shares
1998--3,847,060 shares 51,867,516 26,795,416
Retained-earnings deficit (1,772,622) (179,673)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) (92,119) 11,339
------------ ------------
Total stockholders' equity 50,002,775 26,627,082
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $300,390,417 $135,578,037
============ ============
See notes to consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF OPERATIONS
SUN COMMUNITY BANCORP LIMITED
Year Ended December 31
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Interest income:
Portfolio loans (including fees) $14,281,034 $ 5,296,379 $ 1,845,741
Loans held for resale 115,587 30,062
Taxable investment securities 1,446,522 762,717 735,930
Federal funds sold 1,594,367 1,230,361 289,742
Interest-bearing deposits with banks and other 482,195 24,880
----------- ----------- -----------
Total interest income 17,919,705 7,344,399 2,871,413
Interest expense:
Demand deposits 3,066,878 1,427,457 625,931
Savings deposits 14,204 9,460 6,433
Time deposits 2,280,592 843,630 281,880
Other 6,104 252 338
----------- ----------- -----------
Total interest expense 5,367,778 2,280,799 914,582
----------- ----------- -----------
Net interest income 12,551,927 5,063,600 1,956,831
Provision for loan losses--Note D 1,753,183 379,000 268,000
----------- ----------- -----------
Net interest income after provision for
loan losses 10,798,744 4,684,600 1,688,831
Noninterest income:
Service charges on deposit accounts 404,661 223,812 87,326
Other 354,255 110,452 38,156
----------- ----------- -----------
Total noninterest income 758,916 334,264 125,482
Noninterest expense:
Salaries and employee benefits 7,674,825 2,673,277 1,020,608
Occupancy 1,286,803 545,639 179,055
Equipment rent, depreciation and maintenance 1,251,662 557,509 173,419
Deposit insurance premiums 14,767 5,555 749
Other 4,274,877 1,547,931 662,892
----------- ----------- -----------
Total noninterest expense 14,502,934 5,329,911 2,036,723
----------- ----------- -----------
Income (loss) before minority interest, federal
income taxes and cumulative effect of change in
accounting principle (2,945,274) (311,047) (222,410)
Federal income taxes (benefit)--Note F (529,000) 29,000 (33,000)
----------- ----------- -----------
Income before minority interest and cumulative
effect of accounting change (2,416,274) (340,047) (189,410)
Minority interest in net losses of consolidated subsidiaries 1,209,553 396,725 117,536
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle (1,206,721) 56,678 (71,874)
Cumulative effect of change in accounting principle--Note B (386,228)
----------- ----------- -----------
NET INCOME (LOSS) $(1,592,949) $ 56,678 $ (71,874)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE--Note O
See notes to consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SUN COMMUNITY BANCORP LIMITED
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Deficit Income Total
------------ ------------ ------------ ------------
Balances at January 1, 1997 $ 5,363,512 $ (164,477) $ (9,997) $ 5,189,038
Issuance of 750,000 shares of common
stock for cash consideration of
$6.00 per share 4,500,000 4,500,000
Components of comprehensive income:
Net loss for 1997 (71,874) (71,874)
Market value adjustment (net of tax
effect) for investment securities
available for sale 72,722 72,722
------------
Total comprehensive income for 1997 848
------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1997 9,863,512 (236,351) 62,725 9,689,886
Issuance of 1,947,736 shares of common
stock for cash consideration--Note I 16,931,904 16,931,904
Components of comprehensive income:
Net income for 1998 56,678 56,678
Market value adjustment (net of tax
effect) for investment securities
available for sale (51,386) (51,386)
------------
Total comprehensive income for 1998 5,292
------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1998 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--Note I 68,100 68,100
Issuance of 1,650,000 shares of common
stock for cash consideration of $16.00
per share--Note I 25,004,000 25,004,000
Components of comprehensive income:
Net loss for 1999 (1,592,949) (1,592,949)
Market value adjustment for investment
securities available for sale (net of
tax effect) (103,458) (103,458)
------------
Total comprehensive loss for 1999 (1,696,407)
------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1999 $ 51,867,516 $ (1,772,622) $ (92,119) $ 50,002,775
============ ============ ============ ============
See notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUN COMMUNITY BANCORP LIMITED
Year Ended December 31
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
OPERATING ACTIVITIES
Net income (loss) for the period $ (1,592,949) $ 56,678 $ (71,874)
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Cumulative effect of change in accounting principle 386,228
Minority interest in net losses of consolidated
subsidiaries (1,209,553) (396,725) (117,536)
Provision for loan losses 1,753,183 379,000 268,000
Net accretion of investment security premiums (46,149) (54,394) (223,841)
Depreciation of premises and equipment 942,413 421,360 141,394
Loss on sale of furniture and equipment 3,915
Deferred income taxes (560,000) (420,000) (44,000)
Originations and purchases of loans held for resale (32,770,882) (15,761,895)
Proceeds from sales of loans held for resale 32,750,693 14,486,107
Increase in accrued interest income and other assets (2,549,309) (1,531,898) (811,255)
Increase in accrued interest on deposits and other liabilities 3,238,779 679,503 251,661
------------- ------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 342,454 (2,138,349) (607,451)
INVESTING ACTIVITIES
Proceeds from sale of investment securities available
for sale 505,000
Proceeds from maturities of investment securities available
for sale 23,338,039 22,500,000 20,500,000
Purchases of investment securities available for sale (46,057,490) (24,417,336) (20,827,326)
Net increase in portfolio loans (138,152,204) (36,843,486) (26,386,402)
Proceeds from sale of furniture and equipment 10,000
Purchases of premises and equipment (3,497,115) (1,998,806) (969,597)
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (164,368,770) (40,244,628) (27,683,325)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 72,687,409 40,850,295 24,671,742
Net increase in certificates of deposit 53,537,663 15,032,938 6,205,569
Net proceeds from issuance of common stock 25,072,100 16,931,904 4,500,000
Resources provided by minority interests 13,182,389 7,798,160 2,127,373
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 164,479,561 80,613,297 37,504,684
------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 453,245 38,230,320 9,213,908
Cash and cash equivalents at beginning of year 48,361,413 10,131,093 917,185
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 48,814,658 $ 48,361,413 $ 10,131,093
============= ============= =============
See notes to consolidated financial statements.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
Sun Community Bancorp Limited (the "Corporation") is a bank development company
headquartered in the state of Arizona. The Company is 51% owned by Capitol
Bancorp Limited, a multibank holding company, headquartered in Lansing,
Michigan. The Corporation was formed in October 1996 and was inactive until May
1997. In May 1997, the Corporation entered into a share exchange agreement with
Bank of Tucson and its shareholders whereby Bank of Tucson became a wholly-owned
subsidiary of the Corporation. Because such share exchange has been accounted
for as a pooling of interests, the consolidated financial statements reflect the
merger transaction as if it had occurred at the beginning of the periods
presented (i.e., date of commencement of operations for Bank of Tucson, June
1996).
The Corporation's consolidated banking subsidiaries (the "Banks") consist of the
following:
Percentage Year Formed
Affiliate Location Owned or Acquired
--------- -------- ----- -----------
Bank of Tucson Tucson, Arizona 100% 1996
Camelback Community Bank Phoenix, Arizona 55% 1998
East Valley Community Bank Chandler, Arizona 88% 1999
Mesa Bank Mesa, Arizona 53% 1998
Southern Arizona Community Bank Tucson, Arizona 51% 1998
Valley First Community Bank Scottsdale, Arizona 52% 1997
Nevada Community Bancorp Limited: 51% 1999
Desert Community Bank Las Vegas, Nevada 1999
Red Rock Community Bank Las Vegas, Nevada 1999
Sunrise Capital Corporation: 57% 1999
Sunrise Bank of Arizona Phoenix, Arizona 1998
Sun is the majority owner of Nevada Community Bancorp Limited and Sunrise
Capital Corporation which each have majority-owned bank subsidiaries. Sun became
a public company in 1999 through an initial public offering of common stock with
net proceeds approximating $25 million, including $13 million invested by
Capitol Bancorp Limited.
The Banks provide a full range of banking services to individuals, businesses
and other customers located in their respective communities. Each of the Banks
generally operate from a single location and focus their activities on meeting
the various credit and other banking needs of entrepreneurs, professionals and
other high net-worth individuals. A variety of deposit products are offered,
including checking, savings, money market, individual retirement accounts and
certificates of deposit. The principal market for the Banks' financial services
are the communities in which they are located and the areas immediately
surrounding those communities. Mortgage banking activities are offered through
Sun Community Mortgage Company, a wholly-owned subsidiary of Bank of Tucson. In
addition, Valley First Community Bank obtained trust powers in 1998.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION--CONTINUED
The Corporation and the Banks are engaged in a single business
activity--banking. Each bank is viewed by management as being a separately
identifiable business or segment from the perspective of monitoring performance
and allocation of financial resources. Although the Banks operate independently
and are managed and monitored separately, each bank is substantially similar in
terms of business focus, type of customers, products and services. Further, the
Banks and the Corporation are subject to substantially similar laws and
regulations unique to the banking industry. Accordingly, the Corporation's
consolidated financial statements reflect the presentation of segment
information on an aggregated basis.
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after elimination of intercompany accounts
and transactions, and after giving effect to applicable minority interests.
Banks formed or otherwise acquired during 1997, 1998 and 1999 are included in
the consolidated financial statements for periods after joining the consolidated
group. Certain 1998 and 1997 amounts have been reclassified to conform to the
1999 presentation.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
transactions are entered into for a one-day period.
LOANS HELD FOR RESALE: Loans held for resale represent residential real estate
mortgage loans held for sale into the secondary market. Loans held for resale
are stated at the aggregate lower of cost or market.
INVESTMENT SECURITIES: Investment securities available for sale (generally most
debt securities investments of the Banks), are carried at market value with
unrealized gains and losses reported as a separate component of stockholders'
equity, net of tax effect. Investments are classified at the date of purchase
based on management's analysis of liquidity and other factors. The adjusted cost
of specific securities sold is used to compute realized gains or losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Portfolio loans are made primarily to borrowers in the Banks'
geographic areas. Consistent with the Banks' emphasis on business lending, there
are concentrations of credit in loans secured by commercial real estate,
equipment and other business assets. The maximum potential credit risk to the
Corporation, without regard to underlying collateral and guarantees, is the
total of loans and loan commitments outstanding. Management reduces the
Corporation's exposure to losses from credit risk by requiring collateral and/or
guarantees for loans granted and by monitoring concentrations of credit, in
addition to recording provisions for loan losses and maintaining an allowance
for loan losses.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated losses in the portfolio at the balance sheet
date. Management's determination of the adequacy of the allowance is based on
evaluation of the portfolio (including potential impairment of individual loans
and concentrations of credit), past loss experience, current economic
conditions, volume, amount and composition of the loan portfolio, loan
commitments outstanding and other factors. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of loans
approximate related costs incurred.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost.
Depreciation is computed principally by the straight-line method based upon
estimated useful lives of the respective assets. Leasehold improvements are
generally depreciated over the respective lease term.
OTHER REAL ESTATE: Other real estate (included as a component of other assets
and which, at December 31, 1999, approximated $307,000) comprises properties
acquired through a foreclosure proceeding or acceptance of a deed in lieu of
foreclosure. These properties held for sale are carried at the lower of cost or
estimated fair value at the date acquired and are periodically reviewed for
subsequent impairment.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded upon
granting of stock options because such stock options are accounted for under the
provisions of Accounting Principles Board (APB) Opinion 25 and are granted at an
exercise price equal to the market price of common stock at grant date. Pro
forma disclosure of alternative accounting recognition is made elsewhere herein
(see Note I).
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Banks is not included in the
consolidated balance sheet because it is not an asset of the Banks or the
Corporation. Trust fee income is recorded on the accrual method.
FEDERAL INCOME TAXES: The Corporation and subsidiaries owned 80% or more by the
Corporation file a consolidated federal income tax return. Deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted tax rates applicable to future years to differences between the
financial statement carrying amount and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax laws or
rates is recognized in income in the period that includes the enactment date.
COMPREHENSIVE INCOME: Comprehensive income is the sum of net income (loss) and
certain other items which are charged or credited to stockholders' equity. For
the periods presented, the Corporation's only element of comprehensive income
other than net income (loss) was the net change in the market value adjustment
for investment securities available for sale. Accordingly, the elements and
total of comprehensive income are shown within the statement of changes in
stockholders' equity presented herein.
COSTS OF START-UP ACTIVITIES: In 1998, the American Institute of CPAs issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." It
requires start-up costs and organizational costs to be charged to expense when
incurred. The initial application of the statement required a cumulative effect
adjustment for those companies that had previously capitalized start-up and
organization costs and became effective in 1999. In the circumstances of the
Corporation and the Banks, this new accounting standard applies to previously
capitalized preopening and other start-up costs of its bank subsidiaries which,
net of amortization, approximated $1,149,000 at December 31, 1998 and were
classified as a component of other assets in the consolidated balance sheet.
Implementation of this standard is reflected as a cumulative effect of an
accounting change at January 1, 1999 (net of impact of minority interests and
income tax effect). Most of the previously capitalized costs relate to start-up
and organization costs incurred in 1998.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE C--INVESTMENT SECURITIES
Investment securities available for sale consisted of the following at December
31:
1999 1998
------------------------- -------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
United States Treasury
securities $ -- $ -- $ 1,499,981 $ 1,504,843
United States government
agency securities 35,579,253 35,439,821 11,405,378 11,417,696
----------- ----------- ----------- -----------
$35,579,253 $35,439,821 $12,905,359 $12,922,539
=========== =========== =========== ===========
At December 31, 1999, securities with a market value approximating $4,086,000
were pledged to secure public and trust deposits and for other purposes as
required by law.
Gross unrealized gains and losses on investment securities available for sale
were as follows at December 31:
1999 1998
------------------- -------------------
Gains Losses Gains Losses
-------- -------- -------- --------
United States Treasury securities $ -- $ -- $ 4,862 $ --
United States government agency
securities 13,009 152,441 17,437 5,119
-------- -------- -------- --------
$ 13,009 $152,441 $ 22,299 $ 5,119
======== ======== ======== ========
Gross realized gains and losses from sales and maturities of investment
securities were insignificant for each of the periods presented.
Scheduled maturities of investment securities as of December 31, 1999 follows:
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $27,580,996 $27,570,480
After one year, through five years 7,998,257 7,869,341
----------- -----------
$35,579,253 $35,439,821
=========== ===========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE D--LOANS
Portfolio loans consisted of the following at December 31:
1999 1998
------------- -------------
Commercial $ 191,824,802 $ 60,366,282
Real estate mortgage 7,458,649 4,371,401
Installment 6,948,662 3,342,226
------------- -------------
Total portfolio loans 206,232,113 68,079,909
Less allowance for loan losses (2,371,000) (696,000)
------------- -------------
Net portfolio loans $ 203,861,113 $ 67,383,909
============= =============
Transactions in the allowance for loan losses are summarized below:
1999 1998 1997
----------- ----------- -----------
Balance at beginning of period $ 696,000 $ 317,000 $ 49,000
Provision charged to operations 1,753,183 379,000 268,000
Loans charged off (deduction) (78,183) -- --
Recoveries -- -- --
----------- ----------- -----------
Balance at December 31 $ 2,371,000 $ 696,000 $ 317,000
=========== =========== ===========
At December 31, 1999 and 1998, 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.
NOTE E--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31:
1999 1998
----------- -----------
Leasehold improvements $ 1,880,355 $ 819,620
Equipment and furniture 4,948,343 2,511,963
----------- -----------
6,828,698 3,331,583
Less accumulated depreciation (1,520,275) (577,862)
----------- -----------
$ 5,308,423 $ 2,753,721
=========== ===========
The Banks rent office space under operating leases. Rent expense under these
lease agreements approximated $982,000, $362,000 and $158,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Future minimum rental
payments under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 1999 aggregate $7.8
million, due approximately $900,000 annually in each of the years 2000, 2001,
2002, 2003 and 2004 and $3.3 million thereafter.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE F--INCOME TAXES
Federal income taxes (benefit) consist of the following components:
1999 1998 1997
--------- --------- ---------
Current $(439,000) $ 449,000 $ 11,000
Deferred credit (560,000) (420,000) (44,000)
--------- --------- ---------
$(999,000) $ 29,000 $ (33,000)
========= ========= =========
Federal income tax benefit in 1999 shown above includes $470,000 relating to the
cumulative effect of the change in accounting principle. Income taxes paid in
1999 and 1998 approximated $310,000 and $387,000, respectively.
Differences between federal income tax expense recorded and amounts computed
using the statutory tax rate are reconciled below:
1999 1998 1997
----------- ----------- -----------
Federal income tax computed at
statutory rate of 34% $(1,001,000) $ (106,000) $ (76,000)
Tax effect of:
Minority interests in net losses
of consolidated subsidiaries 411,000 134,000 40,000
Cumulative effect of change in
accounting principle (470,000)
Nondeductible expenses (44,000)
Other 105,000 1,000 3,000
----------- ----------- -----------
$ (999,000) $ 29,000 $ (33,000)
=========== =========== ===========
Net deferred income tax assets consisted of the following at December 31:
1999 1998
---------- ----------
Allowance for loan losses $ 780,000 $ 227,000
Portion of subsidiaries operating losses
applicable to minority interests (586,000) (134,000)
Net operating loss carryforwards of subsidiaries 828,000 417,000
Cash to accrual temporary differences (45,000) (45,000)
Market value adjustments for investment
securities available for sale 47,000 6,000
Other, net 25,000 (23,000)
---------- ---------
Net deferred tax assets $1,049,000 $ 448,000
========== =========
Certain consolidated subsidiaries have net operating loss carryforwards which
may reduce income taxes payable in future periods. Such carryforwards
approximate $4.1 million at December 31, 1999, have been recognized for
financial reporting purposes and expire at varying dates through 2019.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE G--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Banks make loans to officers and
directors of the Banks including their immediate families and companies in which
they are principal owners. At December 31, 1999, total loans to these persons
approximated $5.7 million ($4.7 million at December 31, 1998). During 1999, $3.1
million of new loans were made to these persons and repayments totaled $2.1
million. Such loans are made at the Banks' normal credit terms.
Such officers and directors of the Corporation and the Banks (and their
associates, family and/or affiliates) are also depositors of the Banks. Such
deposits are similarly made at the Banks' normal terms as to interest rate, term
and deposit insurance.
The Banks purchased certain data processing and management services from Capitol
Bancorp Ltd. Amounts paid for such services aggregated $105,000 in 1997 (none in
1999 and 1998).
NOTE H--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $52
million and $15.5 million as of December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of time deposits of $100,000 or
more were as follows:
2000 $47,274,000
2001 4,322,000
2002 200,000
2003 267,000
-----------
$52,063,000
Total ===========
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE I--COMMON STOCK AND STOCK OPTIONS
In September 1998 a 3-for-1 stock split occurred. All share and per share data
have been restated to reflect the stock split as if it had occurred at the
beginning of the periods presented.
In January 1998, the Corporation completed a private offering of 954,546 shares
of common stock at a price of $7.33 per share. In December 1998, the Corporation
sold 993,190 shares of common stock at $10.00 per share in a private offering of
1,000,000 shares; 6,810 shares of common stock were subsequently sold in early
1999, completing the offering. In July 1999, the Corporation sold 1,650,000
shares of common stock in a public offering at $16.00 per share. The proceeds
from the offering, net of underwriting commissions and expenses, approximated
$25 million.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE I--COMMON STOCK AND STOCK OPTIONS--CONTINUED
Stock options have been granted to certain officers which provide for the
purchase of shares of common stock. Stock options are granted at an exercise
price equal to the fair value of common stock on the grant date, expire ten
years after grant, and are currently exercisable.
Stock option activity is summarized as follows:
Weighted
Number of Average
Options Exercise Exercise
Outstanding Price Range Price
------- ------------------ ------
Outstanding at January 1, 1997 195,000 $ 4.67 $ 4.67
Granted in 1997 87,000 6.00 6.00
Exercised in 1997 -- -- --
Expired/other in 1997 -- -- --
------- ------------------ ------
Outstanding at December 31, 1997 282,000 4.67 to 6.00 5.08
Granted in 1998 278,973 10.00 10.00
Exercised in 1998 -- -- --
Expired/other in 1998 -- -- --
------- ------------------ ------
Outstanding at December 31, 1998 560,973 4.67 to 10.00 7.53
Granted in 1999 247,500 16.00 16.00
Exercised in 1999 -- -- --
Expired/other in 1999 -- -- --
------- ------------------ ------
Outstanding at December 31, 1999 808,473 $ 4.67 to $16.00 $10.12
As of December 31, 1999, stock options outstanding had a weighted average
remaining contractual life of 8.1 years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value method of accounting for stock options
whereby compensation expense is recognized based on the computed fair value of
the options on the grant date. However, as permitted by Statement No. 123, the
Corporation has elected to continue to account for its stock options under the
earlier accounting standard and, therefore, has not recognized compensation
expense. By electing this alternative, certain pro forma disclosures of the
expense recognition provisions are required, which are as follows:
1999 1998 1997
---- ---- ----
Fair value assumptions:
Risk-free interest rate 6.25% 5.0% 7.5%
Dividend yield 0% 0% 0%
Stock price volatility .56 0 0
Expected option life 10 years 10 years 10 years
Pro forma net loss $(4,487,000) $(668,000) $(285,000)
Pro forma net loss per diluted share $(.96) $(.22) $(.18)
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE J--EMPLOYEE BENEFIT PLANS
Employees of the Corporation and its subsidiaries participate in a 401(k) plan,
subject to certain eligibility requirements. Employer contributions to the plan
and charged to expense in 1999 and 1998 approximated $87,500 and $28,000,
respectively. There were no employer contributions to this plan charged to
expense in 1997.
NOTE K--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments were as
follows at December 31 (in $1,000s):
1999 1998
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
Financial Assets:
Cash and cash equivalents $ 48,815 $ 48,815 $ 48,361 $ 48,361
Loans held for resale 1,296 1,296 1,276 1,276
Investment securities available for sale 35,440 35,440 12,923 12,953
Portfolio loans:
Fixed rate 58,127 58,649 17,443 17,686
Variable rate 148,105 146,883 50,637 50,640
--------- --------- --------- ---------
Total portfolio loans 206,232 205,532 68,080 68,326
Less allowance for loan losses (2,371) (2,371) (696) (696)
--------- --------- --------- ---------
Net portfolio loans 203,861 203,161 67,384 67,630
Financial Liabilities:
Deposits:
Noninterest-bearing deposits 49,651 49,651 28,033 28,033
Interest-bearing deposits:
Demand accounts 98,055 97,947 46,986 47,569
Time certificates of deposit less
than $100,000 25,238 25,226 8,244 8,273
Time certificates of deposit
$100,000 or more 52,063 52,151 15,519 14,663
--------- --------- --------- ---------
Total interest-bearing deposits 175,356 175,324 70,749 70,505
--------- --------- --------- ---------
Total deposits 225,007 224,975 98,782 98,538
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates of financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest unless quoted market values or
other fair value information is more readily available. Such estimates of fair
value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial
reporting requirements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE L--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of the Banks' customers. Such loan commitments
include stand-by letters of credit, lines of credit, and various commitments for
other commercial, consumer and mortgage loans. Stand-by letters of credit, when
issued, commit the Banks to make payments on behalf of customers when certain
specified future events occur and are used infrequently ($1.5 million and
$511,000 outstanding at December 31, 1999 and 1998, respectively). Other loan
commitments outstanding consist of unused lines of credit and approved, but
unfunded, specific loan commitments ($64.6 million and $12.6 million at December
31, 1999 and 1998, respectively). These loan commitments (stand-by letters of
credit and unfunded loans) generally expire within one year and are reviewed
periodically for continuance or renewal. All loan commitments have credit risk
essentially the same as that involved in routinely making loans to customers and
are made subject to the Banks' normal credit policies. In making these loan
commitments, collateral and/or personal guarantees of the borrowers are
generally obtained based on management's credit assessment. Such loan
commitments are also included in management's evaluation of the adequacy of the
allowance for loan losses.
The Corporation's banking subsidiaries are required to maintain average reserve
balances in the form of cash on hand and balances due from the Federal Reserve
Bank and certain correspondent banks. The amount of reserve balances required as
of December 31, 1999 was $408,000.
NOTE M--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
Current banking regulations restrict the ability to transfer funds from
subsidiaries to their parent in the form of cash dividends, loans or advances.
Subject to various regulatory capital requirements, bank subsidiaries' current
and retained earnings (if any) are available for distribution as dividends to
the Corporation (and other bank shareholders, as applicable) without prior
approval from regulatory authorities. Substantially all of the remaining net
assets of the subsidiaries are restricted as to payments to the Corporation.
The Corporation and the Banks are subject to certain other capital requirements.
Federal financial institution regulatory agencies have established certain
risk-based capital guidelines for banks and bank holding companies. Those
guidelines require all banks and bank holding companies to maintain certain
minimum ratios and related amounts based on `Tier 1' and `Tier 2' capital and
`risk-weighted assets' as defined and periodically prescribed by the respective
regulatory agencies. Failure to meet these capital requirements can result in
severe regulatory enforcement action or other adverse consequences for a
depository institution, and, accordingly, could have a material impact on the
Corporation's consolidated financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgments by regulatory agencies about
components, risk weighting, and other factors.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE M--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
As of December 31, 1999, the most recent notification received by the Banks from
regulatory agencies have advised that the Banks are classified as
`well-capitalized' as that term is defined by the applicable agencies. There are
no conditions or events since those notifications that management believes would
change the regulatory classification of the Banks.
Management believes, as of December 31, 1999, that the Corporation and the Banks
meet all capital adequacy requirements to which they are subject.
The various amounts of regulatory capital (in $1,000s) and related ratios of the
individually significant subsidiaries (assets of $35 million or more as of
December 31, 1999 and 1998) and consolidated regulatory capital position as of
December 31, 1999 and 1998 are summarized below:
Valley First
Bank of Community
Tucson Bank Consolidated
------- ------- -------
DECEMBER 31, 1999
Total Capital to Total Assets:
Minimum Required Amount(1) >= $ 3,285 >= $ 1,827 >= $12,016
Actual Amount $ 6,937 $ 4,126 $50,003
Ratio 8.45% 9.03% 16.65%
Tier 1 Capital to Risk-Weighted Assets:
Minimum Required Amount(2) >= $ 2,516 >= $ 1,595 >= $11,089
Actual Amount $ 6,856 $ 3,958 $71,263
Ratio 10.90% 9.93% 25.71%
Combined Tier 1 and Tier 2 Capital to Risk-Weighted Assets:
Minimum Required Amount(3) >= $ 5,032 >= $ 3,190 >= $22,178
Amount Required to Meet `Well-Capitalized' Category(4) >= $ 6,290 >= $ 3,988 >= $27,723
Actual Amount $ 7,581 $ 4,376 $73,634
Ratio 12.05% 10.97% 26.56%
DECEMBER 31, 1998
Total Capital to Total Assets:
Minimum Required Amount(1) >= $ 5,109 >= $ 2,927 >= $ 5,423
Actual Amount $ 6,053 $ 3,994 $26,627
Ratio 9.48% 10.92% 19.64%
Tier 1 Capital to Risk-Weighted Assets:
Minimum Required Amount(2) >= $ 1,669 >= $ 940 >= $ 3,397
Actual Amount $ 5,945 $ 3,705 $36,038
Ratio 14.25% 15.76% 42.43%
Combined Tier 1 and Tier 2 Capital to Risk-Weighted Assets:
Minimum Required Amount(3) >= $ 3,338 >= $ 1,880 >= $ 6,795
Amount Required to Meet `Well-Capitalized' Category(4) >= $ 4,173 >= $ 2,351 >= $ 8,494
Actual Amount $ 6,337 $ 3,914 $36,734
Ratio 15.19% 16.65% 43.25%
(1) As a condition of charter approval, DE NOVO banks generally are required to
maintain a capital-to-assets ratio of not less than 8% for the first three
years of operations; such leverage ratio is otherwise required to be not
less than 4%.
(2) The minimum required ratio of Tier 1 capital to risk-weighted assets is 4%.
(3) The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted
assets is 8%.
(4) In order to be classified as a `well-capitalized' institution, the ratio of
Tier 1 and Tier 2 capital to risk-weighted assets must be 10% or more.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE N--PARENT COMPANY ONLY INFORMATION
CONDENSED BALANCE SHEETS
December 31
-------------------------
1999 1998
----------- -----------
Assets
Cash on deposit with subsidiary banks $ 696,842 $ 6,618
Money market and other interest-bearing funds on
deposit with subsidiary banks 7,676,114 8,914,586
----------- -----------
Cash and cash equivalents 8,372,956 8,921,204
Investment securities available for sale 15,510,212
Investment in subsidiaries 27,005,790 17,194,453
Equipment and furniture, net 1,034,154 383,019
Other assets 907,119 319,988
----------- -----------
TOTAL ASSETS $52,830,231 $26,818,664
=========== ===========
Liabilities and Stockholders' Equity
Accounts payable, accrued expenses
and other liabilities $ 2,827,456 $ 191,582
Stockholders' equity 50,002,775 26,627,082
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,830,231 $26,818,664
=========== ===========
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Income
Intercompany fees $ 1,705,609 $ 711,651 $ 96,000
Dividends from subsidiary 200,000
Interest 785,439 226,186 36,270
----------- ----------- -----------
2,691,048 937,837 132,270
Expenses
Salaries and employee benefits 1,657,914 581,431 109,628
Occupancy 195,338 70,906 3,585
Equipment rent, depreciation and maintenance 428,523 199,431 22,843
Other 1,066,481 305,381 79,778
----------- ----------- -----------
3,348,256 1,157,149 215,834
----------- ----------- -----------
(657,208) (219,312) (83,564)
Equity in net earnings (losses) of consolidated
subsidiaries (919,741) 348,990 (310)
Federal income taxes 16,000 73,000 12,000
----------- ----------- -----------
NET INCOME (LOSS) $(1,592,949) $ 56,678 $ (71,874)
=========== =========== ===========
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE N--PARENT COMPANY ONLY INFORMATION--CONTINUED
CONDENSED STATEMENTS OF CASH FLOW
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES
Net Income (loss) $ (1,592,949) $ 56,678 $ (71,874)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Equity in net losses (earnings) of subsidiaries 919,741 (348,990) 310
Depreciation and amortization 260,772 105,408
Net amortization of investment security premiums (39,228)
Increase in other assets (518,664) (82,774) (237,214)
Increase in accounts payable, accrued expenses and other liabilities 2,635,874 115,837 75,745
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,665,546 (153,841) (233,033)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 8,918,039
Purchases of investment securities available for sale (24,457,490)
Net cash investment in subsidiaries (10,834,536) (9,337,077) (2,298,322)
Purchases of equipment and furniture (911,907) (150,068) (338,359)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (27,285,894) (9,487,145) (2,636,681)
FINANCING ACTIVITIES--Net proceeds from issuance
of common stock 25,072,100 16,931,904 4,500,000
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (548,248) 7,290,918 1,630,286
Cash and cash equivalents at beginning of year 8,921,204 1,630,286 -0-
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,372,956 $ 8,921,204 $ 1,630,286
============ ============ ============
NOTE O--NET INCOME (LOSS) PER SHARE
The computations of basic and diluted earnings (loss) per share were as follows:
1999 1998 1997
----------- ---------- ----------
Numerator:
Income (loss) before cumulative effect of
accounting change $(1,206,721) $ 56,678 $ (71,874)
=========== ========== ==========
Net income (loss) $(1,592,949) $ 56,678 $ (71,874)
=========== ========== ==========
Denominator:
Weighted average number of shares outstanding (denominator
for basic earnings per share) 4,674,386 2,853,070 1,592,574
Effect of dilutive stock options --(1) 138,735 --(1)
----------- ---------- ----------
Denominator for diluted earnings per share--weighted average
number of shares and potential dilution 4,674,386 2,991,805 1,592,574
=========== ========== ==========
Basic earnings (loss) per share:
Income before cumulative effect of accounting change $ (0.26) $ 0.02 $ (0.05)
=========== ========== ==========
Net income $ (0.34) $ 0.02 $ (0.05)
=========== ========== ==========
Diluted earnings (loss) per share:
Income before cumulative effect of accounting change $ (0.26) $ 0.02 $ (0.05)
=========== ========== ==========
Net income $ (0.34) $ 0.02 $ (0.05)
=========== ========== ==========
(1) Antidilutive for period presented.
Additional disclosures regarding stock options are set forth in Note J.
36