UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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: 6,235,312 shares outstanding as of October 31, 2001.
Page 1 of 20
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 balance sheets -
September 30, 2001 and December 31, 2000. 3
Consolidated statements of income - Three months
and nine months ended September 30, 2001 and 2000. 4
Consolidated statements of changes in stockholders'
equity - Nine months ended September 30, 2001 and 2000. 5
Consolidated statements of cash flows - Nine months ended
September 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. 19
Item 2. Changes in Securities and Use of Proceeds. 19
Item 3. Defaults Upon Senior Securities. 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
Page 2 of 20
PART I, ITEM 1
SUN COMMUNITY BANCORP LIMITED
Consolidated Balance Sheets
As of September 30, 2001 and December 31, 2000
September 30 December 31
2001 2000
------------- -------------
ASSETS
Cash and due from banks $ 29,240,740 $ 25,464,080
Interest-bearing deposits with banks 17,410,381 15,949,167
Federal funds sold 56,051,000 32,027,090
------------- -------------
Total cash and cash equivalents 102,702,121 73,440,337
Loans held for resale 10,187,528 6,610,065
Investment securities available for sale,
carried at market value 13,185,430 13,609,399
Portfolio loans:
Commercial 560,931,114 399,056,329
Real estate mortgage 16,114,003 13,712,563
Installment 16,348,096 9,575,197
------------- -------------
Total portfolio loans 593,393,213 422,344,089
Less allowance for loan losses (7,903,000) (5,440,000)
------------- -------------
Net portfolio loans 585,490,213 416,904,089
Premises and equipment, net 5,834,634 5,959,724
Accrued interest income 3,055,706 2,701,454
Other assets 12,368,595 7,607,448
------------- -------------
TOTAL ASSETS $ 732,824,227 $ 526,832,516
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 111,373,005 $ 85,880,783
Interest-bearing 522,207,676 356,682,317
------------- -------------
Total deposits 633,580,681 442,563,100
Debt obligations 8,287,500
Accrued interest on deposits and
other liabilities 5,318,204 4,329,495
------------- -------------
Total liabilities 647,186,385 446,892,595
MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES 25,886,713 27,245,878
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
6,373,412 shares issued and outstanding
in 2001 and 5,809,317 in 2000 60,510,358 54,959,627
Retained-earnings (deficit) 486,481 (965,582)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) 68,393 (11,418)
Less treasury stock (1,314,103) (1,288,584)
------------- -------------
Total stockholders' equity 59,751,129 52,694,043
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 732,824,227 $ 526,832,516
============= =============
Page 3 of 20
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 2001 and 2000
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest income:
Portfolio loans (including fees) $ 14,135,667 $ 9,736,447 $ 40,208,098 $ 24,089,988
Loans held for resale 180,118 99,537 532,684 192,165
Taxable investment securities 147,048 258,377 496,616 973,450
Federal funds sold and other 515,402 845,199 2,273,779 2,243,826
------------ ------------ ------------ ------------
Total interest income 14,978,235 10,939,560 43,511,177 27,499,429
Interest expense:
Demand deposits 1,937,661 1,659,175 5,655,330 4,103,305
Savings deposits 11,273 7,272 32,123 17,754
Time deposits 3,695,899 2,416,307 11,082,393 5,436,029
Debt obligations and other 8,883 414 95,422 1,353
------------ ------------ ------------ ------------
Total interest expense 5,653,716 4,083,168 16,865,268 9,558,441
------------ ------------ ------------ ------------
Net interest income 9,324,519 6,856,392 26,645,909 17,940,988
Provision for loan losses 907,832 965,215 2,769,613 2,667,480
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 8,416,687 5,891,177 23,876,296 15,273,508
Noninterest income:
Service charges on deposit accounts 338,061 180,094 916,364 476,605
Other 103,432 57,585 229,679 218,501
------------ ------------ ------------ ------------
Total noninterest income 441,493 237,679 1,146,043 695,106
Noninterest expense:
Salaries and employee benefits 4,469,788 3,224,645 13,063,260 8,921,897
Occupancy 703,962 557,129 2,006,090 1,435,009
Equipment rent, depreciation and
maintenance 506,681 454,227 1,568,180 1,222,392
Other 1,671,324 1,484,013 5,572,075 3,999,751
------------ ------------ ------------ ------------
Total noninterest expense 7,351,755 5,720,014 22,209,605 15,579,049
------------ ------------ ------------ ------------
Income before federal income taxes and
minority interest 1,506,425 408,842 2,812,734 389,565
Federal income taxes 444,000 130,000 899,000 134,000
------------ ------------ ------------ ------------
Income before minority interest 1,062,425 278,842 1,913,734 255,565
Credit (charge) resulting from minority interest in
net losses (income) of consolidated subsidiaries (405,853) (35,108) (461,671) 249,579
------------ ------------ ------------ ------------
NET INCOME $ 656,572 $ 243,734 $ 1,452,063 $ 505,144
============ ============ ============ ============
NET INCOME PER SHARE - Note D
Page 4 of 20
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2001 and 2000
Retained Accumulated Other
Earnings Comprehensive Treasury
Common Stock (Deficit) Income Stock Total
------------ ------------ ------------ ------------ ------------
NINE MONTHS ENDED SEPTEMBER 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 $ (1,062,010) (1,062,010)
Net proceeds from issuance of 7,500 shares of
common stock upon exercise of stock options 42,240 42,240
Issuance of 297,947 shares of common stock
upon acquisition of minority interest in
consolidated bank subsidiary 3,049,871 3,049,871
Components of comprehensive income:
Net income for the period 505,144 505,144
Market value adjustment for
investment securities available
for sale (net of tax effect) 29,692 29,692
Comprehensive income for
the period 534,836
------------ ------------ ------------ ------------ ------------
BALANCES AT SEPTEMBER 30, 2000 $ 54,959,627 $ (1,267,478) $ (62,427) $ (1,062,010) $ 52,567,712
============ ============ ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 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 563,095 shares of common
stock upon acquisition of minority
interests in consolidated bank subsidiaries 5,550,731 5,550,731
Components of comprehensive income:
Net income for the period 1,452,063 1,452,063
Market value adjustment for investment
securities available
for sale (net of tax effect) 79,811 79,811
Comprehensive income
for the period 1,531,874
------------ ------------ ------------ ------------ ------------
BALANCES AT SEPTEMBER 30, 2001 $ 60,510,358 $ 486,481 $ 68,393 $ (1,314,103) $ 59,751,129
============ ============ ============ ============ ============
Page 5 of 20
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net income $ 1,452,063 $ 505,144
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in net income (losses)
of consolidated subsidiaries 461,671 (249,579)
Provision for loan losses 2,769,613 2,667,480
Depreciation of premises and equipment 1,252,530 1,006,204
Amortization of goodwill 168,732 45,225
Net accretion of investment security discounts (7,820) (51,831)
Gain from sale of premises and equipment (181)
Origination and purchases of loans held for resale (123,051,289) (41,981,618)
Proceeds from sales of loans held for resale 119,473,826 38,920,681
Decrease (increase) in accrued interest income and other assets (3,484,700) 1,677,205
Increase (decrease) in accrued interest and other liabilities 988,709 (153,585)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,154 2,385,326
INVESTING ACTIVITIES
Proceeds from maturities of investment securities
available for sale 11,661,108 44,444,649
Purchases of investment securities available for sale (11,108,393) (23,605,199)
Net increase in portfolio loans (171,356,124) (170,700,567)
Purchases of premises and equipment (1,143,504) (1,613,510)
Proceeds from sale of premises and equipment 16,245
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (171,930,668) (151,474,627)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 107,867,110 79,308,035
Net increase in certificates of deposit 83,150,471 89,461,120
Proceeds from short-term borrowings 8,287,500 1,050,000
Purchase of common stock for treasury (25,519) (1,062,010)
Net proceeds from issuance of common stock 42,240
Purchase of minority interests (1,507,945)
Resources provided by minority interests 3,397,681 2,038,208
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 201,169,298 170,837,593
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 29,261,784 21,748,292
Cash and cash equivalents at beginning of period 73,440,337 48,814,658
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 102,702,121 $ 70,562,950
============= =============
Page 6 of 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
Note A - Basis of Presentation
The accompanying condensed consolidated financial statements of Sun
Community Bancorp Limited (Sun) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q. Accordingly, they do not include all information and
footnotes necessary for a fair presentation of consolidated financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles.
The statements do, however, include all adjustments of a normal recurring
nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Sun
considers necessary for a fair presentation of the interim periods.
The results of operations for the nine-month period ended September 30,
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 September 30, 2001, efforts were underway for the formation of
additional banks in California and Nevada.
Note C - Acquisition of Minority Interests in Bank Subsidiaries
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.
Effective September 30, 2001, Southern Arizona Community Bank (previously a
majority-owned subsidiary of Sun) became a wholly-owned subsidiary resulting
from the minority shareholders of Southern exchanging their Southern shares for
shares of Sun. The exchange ratio was based on 150% of Southern's adjusted book
value. As a result of the share exchange, the minority owners of Southern became
shareholders of Sun. About 282,600 new shares of Sun's common stock were issued
in this transaction.
Page 7 of 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED - CONTINUED
Note C - Acquisition of Minority Interests in Bank Subsidiaries (Continued)
At September 30, 2001, a similar proposed share exchange transaction was
pending regarding Mesa Bank. At a shareholders' meeting in October 2001, Mesa's
shareholders (other than Sun) approved the proposed share exchange. Such share
exchange will be completed prior to December 31, 2001.
Note D - Net Income Per Share
The computations of basic and diluted earnings per share were as follows:
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator--net income for the period $ 656,572 $ 243,734 $1,452,063 $ 505,144
========== ========== ========== ==========
Denominator:
Weighted average number of common shares
outstanding (denominator for basic
earnings per share) 5,951,761 5,704,267 5,764,732 5,559,335
Effect of dilutive securities - stock options 142,781 78,687 79,206 77,617
---------- ---------- ---------- ----------
Denominator for diluted net income per share --
Weighted average number of common shares
and potential dilution 6,094,542 5,782,954 5,843,938 5,636,952
========== ========== ========== ==========
Net income per share:
Basic $ 0.11 $ 0.04 $ 0.25 $ 0.09
========== ========== ========== ==========
Diluted $ 0.11 $ 0.04 $ 0.25 $ 0.09
========== ========== ========== ==========
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 consolidated 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 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 the calculation, adequacy and approval of the
allowances should be documented by management.
Page 8 of 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED - CONTINUED
Note E - Impact of New Accounting Standards (Continued)
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 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, no material effect on Sun's consolidated financial
statements is expected, other than the elimination of goodwill amortization.
The FASB has also recently issued Statement No. 143 (ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS) and No. 144 (ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS). Management has not completed its review of these new
standards; however, implementation of the new guidance is not expected to have a
material effect on Sun's consolidated financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Sun's consolidated financial statements.
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Page 9 of 20
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets approximated $732.8 million at September 30, 2001, an increase
of $206.0 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 nine-month period by approximately
$171.0 million. Loan growth was funded primarily by higher levels of time
deposits and borrowings. The majority of portfolio loan growth occurred in
commercial loans, which increased approximately $161.9 million, consistent with
the banks' emphasis on commercial lending activities.
The allowance for loan losses at September 30, 2001 approximated $7.9
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.
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Page 10 of 20
The table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the nine-month periods (in thousands):
2001 2000
------ ------
Allowance for loan losses at January 1 $5,440 $2,371
Loans charged-off 355 480
Recoveries 48 74
------ ------
Net charge-offs 307 406
Additions to allowance charged to expense 2,770 2,667
------ ------
Allowance for loan losses at September 30 $7,903 $4,632
====== ======
The amounts summarized in the following table (in thousands), include all
loans for which management has concerns based on Sun's loan rating system, and
should not be interpreted as an indication of future charge-offs.
September 30, 2001 December 31, 2000
------------------ ------------------
Percent Percent
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
-------- ----- -------- -----
Commercial $ 7,493 1.26% $ 5,170 1.22%
Real estate mortgage 275 0.05 58 0.01
Installment 135 0.02 212 0.05
-------- ----- -------- -----
Total allowance for loan losses $ 7,903 1.33% $ 5,440 1.29%
======== ===== ======== =====
Total portfolio loans outstanding $593,393 $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
September 30, 2001.
Page 11 of 20
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
September 30 December 31
2001 2000
------ ------
Nonaccrual loans:
Commercial $3,017 $1,793
Real estate 14
Installment
------ ------
Total nonaccrual loans 3,017 1,807
Past due (>90 days) loans:
Commercial 263
Real estate 50
Installment
------ ------
Total past due loans 313 --
------ ------
Total nonperforming loans $3,330 $1,807
====== ======
Nonperforming loans increased $1.5 million during the first nine months of
2001; however, they 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.
In addition to the identification of nonperforming loans involving
borrowers with payment performance difficulties (i.e., nonaccrual loans and
loans past-due 90 days or more), management utilizes an internal loan review
process to identify other potential problem loans which may warrant additional
monitoring or other attention. This loan review process is a continuous activity
which periodically updates internal loan classifications. At inception, all
loans are individually assigned a classification which grade the credits on a
risk basis, based on the type and discounted value of collateral, financial
strength of the borrower and guarantors and other factors such as nature of the
borrowers' business climate, local economic conditions and other subjective
factors. The loan classification process is fluid and subjective.
Potential problem loans include loans which are generally performing as
agreed, however, because of loan review's and/or lending staff's risk
assessment, increased monitoring is deemed appropriate. In addition, some loans
are assigned a more adverse classification, with specific performance issues or
other risk factors requiring close management and development of specific
remedial action plans.
Loan review and loan classification activities were augmented in September
2001 in response to continued and worsening general conditions of the United
States economy, in part due to the terrorist attacks in New York, Pennsylvania
and the Nation's Capitol. With deterioration of general economic conditions
prior to September 11, 2001--the events on that date and
subsequently--management undertook a more thorough and deeper review of all
loans and related loan classifications.
Page 12 of 20
At September 30, 2001, potential problem loans (including nonperforming
loans) approximated $20.3 million or less than 4% of total consolidated
portfolio loans. Such totals doubled in the period ended September 30, 2001 as a
result of management's ongoing and augmented loan review and loan classification
activities. It is important to note that these potential problem loans do not
necessarily have significant loss exposure (nor are they necessarily deemed
'impaired'), but rather are classified by management in this manner to aid in
loan administration and risk management. Management believes such loans to be
adequately considered in its evaluation of the adequacy of the allowance for
loan losses. Management believes, however, that current general economic
conditions may result in higher levels of future loan losses, in comparison to
previous years.
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
---------------------- --------------------- ---------------------- ---------------
Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
2001 2000 2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- --------- --------- ---- ----
Arrowhead Community Bank(1) $ 26,175 $ 4,724 $ 393 $ 71 1.50% 1.50%
Bank of Tucson 84,484 75,359 1,208 1,023 1.43 1.36
Camelback Community Bank 53,993 37,822 692 483 $ 250 1.28 1.28
East Valley Community Bank(1) 27,062 25,937 423 357 219 1.56 1.38
Mesa Bank(1) 39,922 28,930 511 374 $ 27 1.28 1.29
Southern Arizona Community Bank 45,607 36,135 582 434 50 1.28 1.20
Valley First Community Bank 41,089 42,759 526 663 963 306 1.28 1.55
Yuma Community Bank(1) 15,786 800 236 13 1.49 1.62
Nevada Community Bancorp Limited:
Black Mountain Community Bank(1) 36,778 17,052 552 257 240 241 1.50 1.41
Desert Community Bank(1) 47,760 29,426 716 441 1,293 1,089 1.50 1.50
Red Rock Community Bank(1) 62,490 38,666 938 586 1.50 1.52
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 26,851 16,259 377 238 263 1.40 1.46
Sunrise Bank of Arizona(1) 57,278 59,465 770 650 52 35 1.34 1.09
Sunrise Bank of San Diego(1) 28,118 380 1.35
Other, net 9,010 (401) (150) 109
--------- --------- --------- --------- --------- --------- ---- ----
Consolidated $ 593,393 $ 422,344 $ 7,903 $ 5,440 $ 3,330 $ 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.
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Page 13 of 20
Results of Operations
Net income for the nine months ended September 30, 2001 approximated
$1,452,000 ($0.25 per share), compared to $505,000 ($0.09 per share) during the
corresponding period of 2000. Net income of $657,000 ($0.11 per share) for the
three months ended September 30, 2001 significantly surpassed the corresponding
2000 period results of $244,000 ($.04 per share).
Operating results and total assets (dollars in thousands) were as follows:
Nine months ended September 30
---------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
---------------------- ------------------ ---------------- ----------------
Sept 30 Dec 31
2001 2000 2001 2000 2001 2000 2001 2000
--------- --------- -------- ------- ----- ----- ----- ----
Arrowhead Community Bank(1) $ 29,014 $ 8,091 $ (359) $ (201) n/a n/a n/a n/a
Bank of Tucson 117,708 98,285 1,609 1,515 25.08% 29.09% 2.00% 2.25%
Camelback Community Bank 66,317 49,364 325 146 10.94 5.87 .81 .50
East Valley Community Bank 38,902 34,392 (35) (474) n/a n/a n/a n/a
Mesa Bank 46,932 36,529 302 136 9.72 4.67 .95 .60
Southern Arizona Community Bank 50,789 40,156 200 88 6.80 3.16 .58 .35
Valley First Community Bank 50,238 53,081 354 183 8.96 5.87 .86 .52
Yuma Community Bank(1) 18,788 5,064 (356) n/a n/a n/a n/a n/a
Nevada Community Bancorp Limited:
Black Mountain Community Bank(1) 48,930 26,060 (12) (396) n/a n/a n/a n/a
Desert Community Bank 54,916 35,511 100 (152) 2.99 n/a .29 n/a
Red Rock Community Bank 74,804 44,193 542 39 9.12 0.67 1.17 0.19
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 36,457 19,762 64 (309) 2.36 n/a .27 n/a
Sunrise Bank of Arizona 67,877 63,930 472 101 12.33 3.18 .97 .31
Sunrise Bank of San Diego(2) 36,857 n/a (833) n/a n/a n/a n/a n/a
Other, net (5,705) 12,415 (921) (171) n/a n/a n/a n/a
--------- --------- -------- ------- ----- ----- ----- ----
Consolidated $ 732,824 $ 526,833 $ 1,452 $ 505 3.67% 1.35% 0.31% 0.17%
========= ========= ======== ======= ===== ===== ===== ====
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 $26.6 million during the nine-month 2001
period versus $17.9 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 $1.1 million for the 2001 nine-month
period, as compared with $695,000 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 recent years.
Provisions for loan losses approximated $2.8 million for the nine months
ended September 30, 2001 compared to $2.7 million during the 2000 period. The
provisions for loan losses are based upon management's analysis of the adequacy
of the allowance for loan losses, as previously discussed.
Noninterest expense for the nine months ended September 30, 2001 was $22.2
million compared with $15.6 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 14 of 20
Liquidity and Capital Resources
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $191 million for the nine-month
2001 period, compared to $168.8 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 17.6% of total deposits at
September 30, 2001, a 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.
Some of the banks have lines of credit with unaffiliated banks. Borrowings
thereunder approximated $8 million at September 30, 2001. These borrowings
increased in 2001 as a lower-cost funding source versus various rates and
maturities of time deposits.
Cash and cash equivalents amounted to $102.7 million or 14.0% of total
assets at September 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
September 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 September 30,
2001 Sun and its banks had approximately $13.2 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 15 of 20
Stockholders' equity, as a percentage of total assets, approximated 8.2% at
September 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 $85.6 million or 11.7% of total assets at
September 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 September 30, 2001:
Valley First
Sunrise Bank Bank of Community
of Arizona Tucson Bank Consolidated
---------- ------ ---- ------------
Total capital to total assets:
Minimum required amount >= $ 2,715 >= $ 4,708 >= $ 2,010 >= $29,313
Actual amount $ 5,608 $ 9,624 $ 5,625 $59,751
Ratio 8.26% 8.18% 11.20% 8.15%
Tier I capital to risk-weighted assets:
Minimum required amount(1) >= $ 2,219 >= $ 3,641 >= $ 1,780 >= $25,276
Actual amount $ 5,605 $ 9,460 $ 4,654 $82,107
Ratio 10.11% 10.39% 10.46% 12.99%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) >= $ 4,437 >= $ 7,281 >= $ 3,560 >= $50,551
Amount required to meet
"Well-Capitalized" category(3) >= $ 5,547 >= $ 9,102 >= $ 4,451 >= $63,189
Actual amount $ 6,299 $10,599 $ 5,180 $90,006
Ratio 11.36% 11.65% 11.64% 14.24%
- ----------
(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
September 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 September 30, 2001, total purchases
approximated $1.3 million.
Page 16 of 20
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 the Camelback share exchange transaction. Effective September 30, 2001, Sun
entered into a similar share exchange transaction with the minority shareholders
of Southern Arizona Community Bank (previously a majority-owned subsidiary of
Sun), issuing about 282,600 new shares of Sun's common stock.
At September 30, 2001, a similar proposed share exchange transaction was
pending regarding Mesa Bank. At a shareholders' meeting in October 2001, Mesa's
shareholders (other than Sun) approved the proposed share exchange. Such share
exchange will be completed prior to December 31, 2001.
Effective June 30, 2000, Sun entered into a share exchange transaction with
the minority 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
One of the most significant trends which can impact the financial condition
and results of operations of financial institutions are changes in market rates
of interest.
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. In the third quarter
of 2001, the Federal Reserve decreased interest rates 25 basis points in August
and 50 basis points in September.
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.
Page 17 of 20
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 interim period of 2001
have remained at a low level. In 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.
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 consolidated 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 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 the calculation, adequacy and approval of the
allowances should 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 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, no material effect on Sun's consolidated financial
statements is expected, other than the elimination of goodwill amortization.
The FASB has also recently issued Statement No. 143 (ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS) and No. 144 (ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS). Management has not completed its review of these new
standards; however, implementation of the new guidance is not expected to have a
material effect on Sun's consolidated financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Sun's consolidated financial statements.
Page 18 of 20
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
September 30, 2001.
Page 19 of 20
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: November 9, 2001
Page 20 of 20