UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number 000-26191
SUN COMMUNITY BANCORP LIMITED
(Exact name of registrant as specified in its charter)
ARIZONA 86-0878747
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
2777 EAST CAMELBACK ROAD, SUITE 375
PHOENIX, ARIZONA
(Address of principal executive offices)
85016
(Zip Code)
(602) 955-6100
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common stock, No par value: 6,090,849 shares outstanding as of July 31,
2001.
Page 1 of 19
INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including Sun's interim
consolidated financial statements, Management's Discussion and Analysis of
Financial Condition and Results of Operations and in documents incorporated into
this document by reference that are not historical facts, including, without
limitation, statements of future expectations, projections of results of
operations and financial condition, statements of future economic performance
and other forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, are subject to known and unknown
risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of Sun and/or its subsidiaries and other
operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend", "expect", "project", "estimate",
"predict", "anticipate", "should", "believe", and similar expressions also are
intended to identify forward-looking statements. Important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of Sun's efforts to
implement its business strategy, (ii) changes in interest rates, (iii)
legislation or regulatory requirements adversely impacting Sun's banking
business and/or expansion strategy, (iv) adverse changes in business conditions
or inflation, (v) general economic conditions, either nationally or regionally,
which are less favorable than expected and that result in, among other things, a
deterioration in credit quality and/or loan performance and collectability, (vi)
competitive pressures among financial institutions, (vii) changes in securities
markets, (viii) actions of competitors of Sun's banks and their ability to
respond to such actions, (ix) the cost of capital, which may depend in part on
Sun's asset quality, prospects and outlook, (x) changes in governmental
regulation, tax rates and similar matters, and (xi) other risks detailed in
Sun's other filings with the Securities and Exchange Commission. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated. All subsequent written or oral forward-looking statements
attributable to Sun or persons acting on its behalf are expressly qualified in
their entirety by the foregoing factors. Investors and other interested parties
are cautioned not to place undue reliance on such statements, which speak as of
the date of such statements. Sun undertakes no obligation to release publicly
any revisions to these forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
unanticipated events.
Page
----
Item 1. Financial Statements:
Consolidated sheets - June 30, 2001 and December 31, 2000. 3
Consolidated statements of income - Three months and six
months ended June 30, 2001 and 2000. 4
Consolidated statements of changes in stockholders' equity
- Six months ended June 30, 2001 and 2000. 5
Consolidated statements of cash flows - Six months ended
June 30, 2001 and 2000. 6
Notes to consolidated financial statements. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 2. Changes in Securities and Use of Proceeds. 18
Item 3. Defaults Upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 18
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
Page 2 of 19
PART I, ITEM 1
SUN COMMUNITY BANCORP LIMITED
Consolidated Balance Sheets
As of June 30, 2001 and December 31, 2000
June 30 December 31
2001 2000
------------- -------------
ASSETS
Cash and due from banks $ 28,465,037 $ 25,464,080
Interest-bearing deposits with banks 20,787,481 15,949,167
Federal funds sold 48,773,000 32,027,090
------------- -------------
Total cash and cash equivalents 98,025,518 73,440,337
Loans held for resale 11,608,413 6,610,065
Investment securities available for sale,
carried at market value 12,137,635 13,609,399
Portfolio loans:
Commercial 518,774,357 399,056,329
Real estate mortgage 14,589,709 13,712,563
Installment 12,087,873 9,575,197
------------- -------------
Total portfolio loans 545,451,939 422,344,089
Less allowance for loan losses (7,270,000) (5,440,000)
------------- -------------
Net portfolio loans 538,181,939 416,904,089
Premises and equipment, net 6,114,219 5,959,724
Accrued interest income 2,934,601 2,701,454
Other assets 8,179,172 7,607,448
------------- -------------
TOTAL ASSETS $ 677,181,497 $ 526,832,516
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 106,171,274 $ 85,880,783
Interest-bearing 478,477,025 356,682,317
------------- -------------
Total deposits 584,648,299 442,563,100
Debt obligations 3,887,500
Accrued interest on deposits and
other liabilities 4,348,239 4,329,495
------------- -------------
Total liabilities 592,884,038 446,892,595
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 28,147,018 27,245,878
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized; 6,089,849 shares issued
and outstanding in 2001 and 5,809,317 in 2000 57,596,067 54,959,627
Retained-earnings deficit (170,091) (965,582)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) 38,568 (11,418)
Less treasury stock (1,314,103) (1,288,584)
------------- -------------
Total stockholders' equity 56,150,441 52,694,043
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 677,181,497 $ 526,832,516
============= =============
Page 3 of 19
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 2001 and 2000
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income:
Portfolio loans (including fees) $ 13,529,288 $ 8,076,006 $ 26,072,431 $ 14,353,541
Loans held for resale 169,656 64,753 352,566 92,628
Taxable investment securities 142,653 354,170 349,568 715,073
Federal funds sold 586,949 660,249 1,227,689 1,109,717
Interest-bearing deposits with banks
and other 258,762 161,853 530,688 288,910
------------ ------------ ------------ ------------
Total interest income 14,687,308 9,317,031 28,532,942 16,559,869
Interest expense:
Demand deposits 1,875,916 1,365,505 3,717,669 2,444,130
Savings deposits 10,924 6,335 20,850 10,482
Time deposits 3,788,126 1,856,884 7,386,494 3,019,722
Debt obligations and other 53,236 939 86,539 939
------------ ------------ ------------ ------------
Total interest expense 5,728,202 3,229,663 11,211,552 5,475,273
------------ ------------ ------------ ------------
Net interest income 8,959,106 6,087,368 17,321,390 11,084,596
Provision for loan losses 980,431 1,069,813 1,861,781 1,702,265
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 7,978,675 5,017,555 15,459,609 9,382,331
Noninterest income:
Service charges on deposit accounts 309,918 161,612 578,303 296,511
Other 85,083 52,339 126,247 160,916
------------ ------------ ------------ ------------
Total noninterest income 395,001 213,951 704,550 457,427
Noninterest expense:
Salaries and employee benefits 4,417,203 2,986,327 8,593,472 5,697,252
Occupancy 674,885 451,396 1,302,128 877,880
Equipment rent, depreciation and
maintenance 566,638 433,879 1,061,499 768,165
Other 1,659,485 1,360,167 3,900,751 2,515,738
------------ ------------ ------------ ------------
Total noninterest expense 7,318,211 5,231,769 14,857,850 9,859,035
------------ ------------ ------------ ------------
Income (loss) before federal income taxes
and minority interest 1,055,465 (263) 1,306,309 (19,277)
Federal income taxes 224,000 10,000 455,000 4,000
------------ ------------ ------------ ------------
Income (loss) before minority interest 831,465 (10,263) 851,309 (23,277)
Credit (charge) resulting from minority interest in
net losses (income) of consolidated subsidiaries (352,311) 155,824 (55,818) 284,687
------------ ------------ ------------ ------------
NET INCOME $ 479,154 $ 145,561 $ 795,491 $ 261,410
============ ============ ============ ============
NET INCOME PER SHARE - Note D
Page 4 of 19
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2000 and 2001
Accumulated
Retained- Other
Earnings Comprehensive Treasury
Common Stock Deficit Income Stock Total
------------ ------------ ------------ ------------ ------------
SIX MONTHS ENDED JUNE 30, 2000:
Balances at January 1, 2000 $ 51,867,516 $ (1,772,622) $ (92,119) $ 50,002,775
Purchase of 102,500 shares of common
stock for treasury $ (1,033,500) (1,033,500)
Net proceeds from issuance of 7,500 shares of
common stock upon exercise of stock options 42,240 42,240
Issuance of 297,947 shares of common stock
upon acquisition of minority interest in
consolidated bank subsidiary 3,050,330 3,050,330
Components of comprehensive income:
Net income for the period 261,410 261,410
Market value adjustment for investment
securities available for sale (net of tax effect) (17,823) (17,823)
------------
Comprehensive income for the period 243,587
------------ ------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 2000 $ 54,960,086 $ (1,511,212) $ (109,942) $ (1,033,500) $ 52,305,432
============ ============ ============ ============ ============
SIX MONTHS ENDED JUNE 30 2001:
Balances at January 1, 2001 $ 54,959,627 $ (965,582) $ (11,418) $ (1,288,584) $ 52,694,043
Purchase of 3,900 shares of common stock
for treasury (25,519) (25,519)
Issuance of 280,532 shares of common stock
upon acquisition of minority interest in
consolidated bank subsidiary 2,636,440 2,636,440
Components of comprehensive income:
Net income for the period 795,491 795,491
Market value adjustment for investment securities
available for sale (net of tax effect) 49,986 49,986
------------
Comprehensive income for the period 845,477
------------ ------------ ------------ ------------ ------------
BALANCES AT JUNE 30, 2001 $ 57,596,067 $ (170,091) $ 38,568 $ (1,314,103) $ 56,150,441
============ ============ ============ ============ ============
Page 5 of 19
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2001 and 2000
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net income $ 795,491 $ 261,410
Adjustments to reconcile net income to net
cash used by operating activities:
Minority interest in net income (loss)
of consolidated subsidiaries 55,818 (284,687)
Provision for loan losses 1,861,781 1,702,265
Depreciation of premises and equipment 841,325 649,206
Amortization of goodwill 97,358
Net accretion of investment security discounts (8,523) (10,192)
Origination and purchases of loans held for resale (80,184,793) (23,605,148)
Proceeds from sales of loans held for resale 75,186,445 19,077,541
Decrease in accrued interest income and other assets 109,924 162,233
Increase (decrease) in accrued interest and other liabilities 18,744 (793,416)
------------- -------------
NET CASH USED BY OPERATING ACTIVITIES (1,226,430) (2,840,788)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities
available for sale 12,600,000 41,444,650
Purchases of investment securities available for sale (11,200,000) (23,605,199)
Net increase in portfolio loans (123,107,850) (108,388,176)
Purchases of premises and equipment (1,011,481) (873,411)
Proceeds from sale of furniture and equipment 15,661
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (122,703,670) (91,422,136)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 64,558,685 58,190,991
Net increase in certificates of deposit 77,526,514 62,966,426
Proceeds from short-term borrowings 3,887,500
Purchase of common stock for treasury (25,519) (1,033,500)
Net proceeds from issuance of common stock 42,240
Resources provided by minority interests 2,568,101 2,038,208
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 148,515,281 122,204,365
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 24,585,181 27,941,441
Cash and cash equivalents at beginning of period 73,440,337 48,814,658
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 98,025,518 $ 76,756,099
============= =============
Page 6 of 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Sun
Community Bancorp Limited (Sun) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q. Accordingly, they do not include all information and
footnotes necessary for a fair presentation of consolidated financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles.
The statements do, however, include all adjustments of a normal recurring
nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Sun
considers necessary for a fair presentation of the interim periods.
The results of operations for the six-month period ended June 30, 2001 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2001.
The consolidated balance sheet as of December 31, 2000 was derived from
audited consolidated financial statements as of that date. Certain 2000 amounts
have been reclassified to conform to the 2001 presentation.
NOTE B - NEW BANKS AND PENDING BANK APPLICATIONS
Sunrise Bank of San Diego, located in San Diego, California, opened in
January 2001. It is majority-owned by Sunrise Capital Corporation, which is
majority-owned by Sun.
As of June 30, 2001, efforts were underway for the formation of
additional banks in California and Nevada.
NOTE C - ACQUISITION OF MINORITY INTEREST IN BANK
Effective June 30, 2001, Camelback Community Bank (previously a
majority-owned subsidiary of Sun) became a wholly-owned subsidiary resulting
from the minority shareholders of Camelback exchanging their Camelback shares
for shares of Sun. The exchange ratio was based on 150% of Camelback's adjusted
book value. As a result of the share exchange, the minority owners of Camelback
became shareholders of Sun. About 280,500 new shares of Sun's common stock were
issued in this transaction.
Page 7 of 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED - CONTINUED
NOTE D - NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator--net income for the period $ 479,154 $ 145,561 $ 795,491 $ 261,410
========== ========== ========== ==========
Denominator:
Weighted average number of common shares
outstanding (denominator for basic
earnings per share) 5,671,217 5,471,978 5,671,217 5,487,177
Effect of dilutive securities - stock options 71,083 83,294 63,062 77,617
---------- ---------- ---------- ----------
Denominator for diluted net income per share
Weighted average number of common shares
and potential dilution 5,742,300 5,555,272 5,734,279 5,564,794
========== ========== ========== ==========
Net income per share:
Basic $ 0.08 $ 0.03 $ 0.14 $ 0.05
========== ========== ========== ==========
Diluted $ 0.08 $ 0.03 $ 0.14 $ 0.05
========== ========== ========== ==========
NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (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 are included in income, or in
comprehensive income, depending on whether the instrument qualifies for hedge
accounting and the type of hedging instrument involved. This new standard became
effective January 1, 2001 and had no effect on Sun's financial statements.
In early July 2001, the Securities and Exchange Commission, American
Institute of Certified Public Accountants and Federal Financial Institutions
Examination Council each issued new guidance (some of which remains to be
finalized) on accounting for loan loss reserves (also known as allowances for
loan losses). While the new guidance does not change prior accounting rules in
this area, it provides additional clarification and guidance on how such
reserves and allowances may be documented by management.
In July 2001, the FASB issued Statement No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires
that all business combinations be accounted for under a prior standard of
purchase accounting, eliminating the so-called pooling-method which was used to
account for some business combinations. Statement No. 141 requires that the
purchase method be used for business combinations initiated after June 30, 2001.
This new standard is not expected to have a material effect on Sun's
consolidated financial statements.
Page 8 of 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED - CONTINUED
NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS (CONTINUED)
Statement No. 142 requires that goodwill no longer be amortized and charged
against earnings, but instead to be reviewed for impairment. Amortization of
goodwill ceases upon adoption of the Statement, which for most companies, will
be January 1, 2002. This new standard requires that goodwill be reviewed
periodically for impairment and, accordingly, impairment adjustments of goodwill
be charged against earnings, when determined. Management has not completed its
analysis of this new standard, however, its preliminary review has concluded
that, upon implementation, future amortization of goodwill will be reduced or
eliminated.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Sun's financial statements.
[The remainder of this page intentionally left blank]
Page 9 of 19
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets approximated $677.2 million at June 30, 2001, an increase of
$150.4 million from the December 31, 2000 level of $526.8 million. The balance
sheets include Sun and its consolidated subsidiaries. In January 2001, Sunrise
Bank of San Diego located in San Diego, California, commenced operations and was
added to the consolidated group as a majority-owned subsidiary of Sunrise
Capital Corporation, a majority-owned subsidiary of Sun.
Portfolio loans increased during the six-month period by approximately
$123.1 million. Loan growth was funded primarily by higher levels of time
deposits. The majority of portfolio loan growth occurred in commercial loans,
which increased approximately $120 million, consistent with the banks' emphasis
on commercial lending activities. Loans at June 30, 2001 include $3.5 million
advanced to Capitol Bancorp, Sun's principal shareholder, on a short-term basis.
The allowance for loan losses at June 30, 2001 approximated $7.3 million or
1.33% of total portfolio loans, an increase from the year-end 2000 ratio of
1.29%.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses inherent in the loan portfolio at the
balance sheet date. Management's determination of the adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentrations of
credit), past loss experience, current economic conditions, loan commitments
outstanding and other factors.
[The remainder of this page intentionally left blank]
Page 10 of 19
The table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the six-month periods (in thousands):
2001 2000
------- -------
Allowance for loan losses at January 1 $ 5,440 $ 2,371
Loans charged-off (76) (417)
Recoveries 44 16
------- -------
Net charge-offs (32) (401)
Additions to allowance charged to expense 1,862 1,702
------- -------
Allowance for loan losses at June 30 $ 7,270 $ 3,672
======= =======
For internal purposes, management allocates the allowance to all loan
classifications. The amounts allocated in the following table (in thousands),
include all loans for which management has concerns based on Sun's loan rating
system, should not be interpreted as an indication of future charge-offs. In
addition, amounts allocated are not intended to reflect the amount that may be
available for future losses.
June 30, 2001 December 31, 2000
--------------------- ---------------------
Percent Percent
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
-------- --------- -------- ---------
Commercial $ 3,236 0.59% $ 2,683 0.63%
Real estate mortgage 69 0.01 30 0.01
Installment 48 0.01 110 0.03
Unallocated 3,917 0.72 2,617 0.62
-------- --------- -------- ---------
Total allowance for loan losses $ 7,270 1.33% $ 5,440 1.29%
======== ========= ======== =========
Total portfolio loans outstanding $545,452 $422,344
======== ========
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material in 2000 and through
June 30, 2001.
Page 11 of 19
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
June 30 December 31
2001 2000
------ ------
Nonaccrual loans:
Commercial $2,272 $1,793
Real estate 14
Installment
------ ------
Total nonaccrual loans 2,272 1,807
Past due (>90 days) loans:
Commercial 11
Real estate
Installment
------ ------
Total past due loans 11 --
------ ------
Total nonperforming loans $2,283 $1,807
====== ======
Nonperforming loans increased $476,000 during the first half of 2001,
however, continued at a low level in relation to total loans. These consist of a
small number of loans, in various stages of resolution, which management
believes to be adequately collateralized or otherwise appropriately considered
in its determination of the adequacy of the allowance for loan losses.
The following comparative analysis summarizes each bank's total portfolio
loans, allowance for loan losses, nonperforming loans and allowance ratios
(dollars in thousands):
Allowance as a
Percentage
Total Allowance for Nonperforming of Total
Portfolio Loans Loan Losses Loans Portfolio Loans
-------------------- -------------------- --------------------- ---------------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------- --------- ---------
Arrowhead Community Bank(1) $ 17,263 $ 4,724 $ 259 $ 71 1.50% 1.50%
Bank of Tucson 83,806 75,359 1,154 1,023 1.38 1.36
Camelback Community Bank 45,837 37,822 614 483 $ 250 1.34 1.28
East Valley Community Bank(1) 26,627 25,937 423 357 225 1.59 1.38
Mesa Bank(1) 38,201 28,930 478 374 $ 27 1.25 1.29
Southern Arizona Community Bank(1) 40,218 36,135 503 434 1.25 1.20
Valley First Community Bank 42,804 42,759 697 663 185 306 1.63 1.55
Yuma Community Bank(1) 11,363 800 173 13 1.52 1.62
Nevada Community Bancorp Limited:
Black Mountain Community Bank(1) 31,600 17,052 474 257 240 241 1.50 1.51
Desert Community Bank(1) 42,912 29,426 644 441 1,290 1,089 1.50 1.50
Red Rock Community Bank(1) 56,242 38,666 844 586 1.50 1.52
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 25,844 16,259 349 238 1.35 1.46
Sunrise Bank of Arizona(1) 55,063 59,465 733 650 84 35 1.33 1.09
Sunrise Bank of San Diego(1) 24,137 326 1.35
Other, net 3,535 9,010 (401) (150) 9 109
-------- -------- -------- -------- -------- --------- --------- ---------
Consolidated $545,452 $422,344 $ 7,270 $ 5,440 $ 2,283 $ 1,807 1.33% 1.29%
======== ======== ======== ======== ======== ========= ========= =========
- ----------
(1) As a condition of charter approval, bank is required to maintain an
allowance for loan losses of not less than 1% for the first three years of
operations.
Page 12 of 19
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 2001 approximated $795,000
($0.14 per share), compared to $261,000 ($0.05 per share) during the
corresponding period of 2000. Net income of $479,000 ($.08 per share) for the
three months ended June 30, 2001 significantly surpassed the corresponding 2000
period results of $146,000 ($.03 per share).
Operating results and total assets (in thousands) were as follows:
Six months ended June 30
--------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
-------------------- ----------------- ---------------- --------------
June 30 Dec 31
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- ------- ------ ----- ----- ----- -----
Arrowhead Community Bank(1) $ 21,378 $ 8,091 $ (275) n/a n/a n/a n/a n/a
Bank of Tucson 111,206 98,285 1,037 982 24.24% 28.32% 2.04% 2.25%
Camelback Community Bank 56,280 49,364 208 55 10.50 3.34 .83 .31
East Valley Community Bank 37,721 34,392 (73) (396) n/a n/a n/a n/a
Mesa Bank 44,804 36,529 183 69 8.85 3.57 .91 .49
Southern Arizona Community Bank 48,172 40,156 113 36 5.79 1.95 .51 .23
Valley First Community Bank 51,443 53,081 252 50 9.56 2.43 .22 .22
Yuma Community Bank(1) 16,286 5,064 (310) n/a n/a n/a n/a n/a
Nevada Community Bancorp Limited:
Black Mountain Community Bank(1) 35,038 26,060 (49) (252) n/a n/a n/a n/a
Desert Community Bank 49,910 35,511 43 (149) 1.95 n/a .21 n/a
Red Rock Community Bank 66,608 44,193 378 (54) 9.55 n/a 1.34 n/a
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 39,020 19,762 70 (240) 3.89 n/a .49 n/a
Sunrise Bank of Arizona 63,279 63,930 238 42 9.31 1.99 .74 .21
Sunrise Bank of San Diego(2) 29,174 n/a (743) n/a n/a n/a n/a n/a
Other, net 6,862 12,415 (277) 118 n/a n/a n/a n/a
-------- -------- ------- ------ ----- ----- ----- -----
Consolidated $677,181 $526,833 $ 795 $ 261 3.02% 1.00% 0.26% 0.16%
======== ======== ======= ====== ===== ===== ===== =====
- ----------
n/a Not applicable
(1) Commenced operations as DE NOVO banks in 2000.
(2) Commenced operations as a DE NOVO bank in 2001.
Net interest income increased to $17.3 million during the six-month 2001
period versus $11.1 million in the corresponding period of 2000 primarily due to
growth in total assets and the number of banks within the consolidated group.
Noninterest income increased to $705,000 for the 2001 six-month period, as
compared with $457,000 in 2000. Service charge revenue nearly doubled in the
2001 period compared to the same period in 2000. This increase is primarily
related to higher transaction volume and the larger number of customers
resulting from the addition of new banks in 1999 and 2000.
Provisions for loan losses approximated $1.9 million for the six months
ended June 30, 2001 compared to $1.7 million during the 2000 period. The
increase is primarily related to loan growth. The provisions for loan losses are
based upon management's analysis of the allowance for loan losses, as previously
discussed.
Noninterest expense for the six months ended June 30, 2001 was $14.9
million compared with $9.9 million in 2000. The increase in noninterest expense
is associated with newly formed banks, growth and increases in general operating
costs. Increases in employee compensation and occupancy mostly relate to the
growth in number of banks within the consolidated group and the larger number of
data processing and other administrative support staff necessary for the
increased number and size of banks.
Page 13 of 19
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $142.1 million for the
six-month 2001 period, compared to $121.2 million in 2000. Such growth occurred
in all deposit categories, with the majority from time deposits. The
Corporation's banks generally do not rely on brokered deposits as a key funding
source.
Noninterest-bearing deposits approximated 18.2% of total deposits at June
30, 2001, a slight decrease from the December 31, 2000 level of 19.4%. Levels of
noninterest-bearing deposits fluctuate based on customers' transaction activity.
Deposit growth in 2001 has been deployed primarily into commercial loans,
consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $98 million or 14.5% of total assets
at June 30, 2001 as compared with $73.4 million or 13.9% of total assets at
December 31, 2000. As liquidity levels vary continuously based on customer
activities, amounts of cash and cash equivalents can vary widely at any given
point in time. Management believes the banks' liquidity position at June 30,
2001 is adequate to fund loan demand and meet depositor needs.
In addition to cash and cash equivalents, a source of long-term liquidity
is the banks' marketable investment securities. Sun's liquidity requirements
have not historically necessitated the sale of investments in order to meet
liquidity needs. It also has not engaged in active trading of its investments
and has no intention of doing so in the foreseeable future. At June 30, 2001 Sun
and its banks had approximately $12.1 million of investment securities
classified as available for sale which can be utilized to meet various liquidity
needs as they arise.
Sun and its banks are subject to complex regulatory capital requirements,
which require maintaining certain minimum capital ratios. These ratio
measurements, in addition to certain other requirements, are used by regulatory
agencies to determine the level of regulatory intervention and enforcement
applied to financial institutions. Sun and each of its banks are in compliance
with the regulatory requirements and management expects to maintain such
compliance.
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Page 14 of 19
Stockholders' equity, as a percentage of total assets, approximated
8.3% at June 30, 2001, a decrease from the beginning of the year ratio of 10.0%.
Total capital funds (stockholders' equity, plus minority interests in
consolidated subsidiaries) aggregated $84.3 million or 12.4% of total assets at
June 30, 2001. The following table summarizes the amounts (in thousands) and
related ratios of individually significant subsidiaries (assets of $50 million
or more at the beginning of 2001) and consolidated regulatory capital position
at June 30, 2001:
Valley First
Sunrise Bank Bank of Community
of Arizona Tucson Bank Consolidated
---------- ------ ---- ------------
Total capital to total assets:
Minimum required amount >= $ 2,531 >= $ 4,440 >= $ 2,058 >= $27,087
Actual amount $ 5,373 $ 9,228 $ 5,520 $56,150
Ratio 8.49% 8.31% 10.73% 8.29%
Tier I capital to risk-weighted assets:
Minimum required amount(1) >= $ 2,140 >= $ 3,536 >= $ 1,803 >= $23,058
Actual amount $ 5,370 $ 9,055 $ 4,533 $81,858
Ratio 10.04% 10.24% 10.06% 14.20%
Combined Tier I and Tier II capital to risk-weighted assets:
Minimum required amount(2) >= $ 4,279 >= $ 7,072 >= $ 3,606 >= $46,115
Amount required to meet "Well-Capitalized" category(3) >= $ 5,349 >= $ 8,840 >= $ 4,508 >= $57,644
Actual amount $ 6,039 $10,161 $ 5,098 $89,064
Ratio 11.29% 11.49% 11.31% 15.45%
- ----------
(1) The minimum required ratio of Tier I capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier I and Tier II capital to risk-weighted
assets is 8%.
(3) In order to be classified as a "well-capitalized" institution, the ratio of
Tier I and Tier II capital to risk-weighted assets must be 10% or more.
Sun's operating strategy continues to be focused on the ongoing growth and
maturity of its existing banks, coupled with new bank expansion in selected
markets as opportunities arise. Accordingly, Sun may invest in or otherwise add
additional banks in future periods, subject to economic conditions and other
factors, although the timing of such additional banking units, if any, is
uncertain. Such future new banks and/or additions of other operating units could
be either wholly-owned, majority-owned or otherwise controlled by Sun. At June
30, 2001, plans were underway for the formation of additional banks in
California and Nevada.
In April 2000, Sun announced plans to purchase up to $3 million of its
common stock in open market purchases. The shares repurchased in this manner may
be retained as treasury shares, retired, used for implementation of an employee
stock ownership plan or for other business purposes. To the extent such share
purchases are made, they will have the impact of increasing the percentage
ownership of Sun by Capitol Bancorp Ltd., Sun's principal shareholder. The share
purchase program will be funded from Sun's existing resources, principally
short-term loans and investments. Through June 30, 2001, total purchases
approximated $1.3 million.
Page 15 of 19
Camelback Community Bank reached its 36th month of operation in May 2001.
In June 2001, Sun offered the minority owners of Camelback an opportunity to
exchange their Camelback shares for shares of Sun. The exchange ratio was based
on 150% of Camelback's adjusted book value and was completed effective June 30,
2001. As a result of the share exchange, the minority owners of Camelback became
shareholders of Sun. About 280,500 new shares of Sun's common stock were issued
in this transaction. Effective June 30, 2000, Sun entered into a similar share
exchange transaction with the shareholders of Valley First Community Bank
(previously a majority-owned subsidiary of Sun), issuing about 298,000 shares of
Sun's common stock.
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 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
interest rate changes can alter the relationship between asset yields and the
cost of funds.
In January 2001, the Open Market Committee of the Federal Reserve Board
decreased interbank interest rates on two separate dates, for a total decrease
of 100 basis points. In March 2001, another 50 basis points decrease was
initiated by the Federal Reserve, followed by decreases of 50 basis points in
both April and May 2001 and 25 basis points in June 2001.
Because variable rate loans reprice more rapidly than interest-bearing
deposits, such market interest rate decreases compressed net interest margins at
Sun's banks in 2001. As the Open Market Committee continues to influence
interest rates and other economic policy in 2001, including the potential of
additional rate decreases, net interest margins may become more compressed
(having an adverse impact on earnings) as the year progresses.
Start-up banks generally incur operating losses during their early periods
of operations. Recently-formed start-up banks are expected to detract from
consolidated earnings performance and additional start-up banks formed in 2001
and beyond will similarly negatively impact short-term profitability. Sun's
Board of Directors has determined to reduce the rate of start-ups in the near
term in contrast to the previous three years.
General economic conditions also have a significant impact on both the
results of operations and the financial condition of financial institutions.
Widespread media reports of concerns about the health of the domestic
economy have continued in 2001. While local economic conditions appear to
indicate a weakening environment, loan losses in this initial period of 2001
have remained approximately level with the prior year's period. In the first
half of 2001, however, nonperforming loans have increased and it is anticipated
that levels of nonperforming loans and related loan losses may trend upward as
economic conditions, locally and nationally, evolve.
Page 16 of 19
IMPACT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (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 are included in income, or in
comprehensive income, depending on whether the instrument qualifies for hedge
accounting and the type of hedging instrument involved. This new standard became
effective January 1, 2001 and had no effect on Sun's financial statements.
In early July 2001, the Securities and Exchange Commission, American
Institute of Certified Public Accountants and Federal Financial Institutions
Examination Council each issued new guidance (some of which remains to be
finalized) on accounting for loan loss reserves (also known as allowances for
loan losses). While the new guidance does not change prior accounting rules in
this area, it provides additional clarification and guidance on how such
reserves and allowances may be documented by management.
In July 2001, the FASB issued Statement No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires
that all business combinations be accounted for under a prior standard of
purchase accounting, eliminating the so-called pooling-method which was used to
account for some business combinations. Statement No. 141 requires that the
purchase method be used for business combinations initiated after June 30, 2001.
This new standard is not expected to have a material effect on Sun's
consolidated financial statements.
Statement No. 142 requires that goodwill no longer be amortized and charged
against earnings, but instead to be reviewed for impairment. Amortization of
goodwill ceases upon adoption of the Statement, which for most companies, will
be January 1, 2002. This new standard requires that goodwill be reviewed
periodically for impairment and, accordingly, impairment adjustments of goodwill
be charged against earnings, when determined. Management has not completed its
analysis of this new standard, however, its preliminary review has concluded
that, upon implementation, future amortization of goodwill will be reduced or
eliminated.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Sun's financial statements.
Page 17 of 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Sun and its subsidiaries are parties to certain ordinary,
routine litigation incidental to their business. In the opinion of
management, liabilities arising from such litigation would not have a
material effect on Sun's consolidated financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 2001.
Page 18 of 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN COMMUNITY BANCORP LIMITED
(Registrant)
/s/ Joseph D. Reid
----------------------------------------
Joseph D. Reid
Chairman, President and
Chief Executive Officer
(duly authorized to sign on behalf
of the registrant)
/s/ Lee W. Hendrickson
----------------------------------------
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Date: August 14, 2001
Page 19 of 19