10-Q 1 e-6807.txt QUARTERLY REPORT FOR QTR. ENDED 03/31/2001 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 MARCH 31, 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 organization) Identification Number) 2777 EAST CAMELBACK ROAD, SUITE 375 PHOENIX, ARIZONA 85016 (Address of principal executive offices) (Zip Code) (602) 955-6100 (Registrant's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, No par value: 5,809,317 shares outstanding as of April 30, 2001. Page 1 of 17 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 -- March 31, 2001 and December 31, 2000. 3 Consolidated statements of income -- Three months ended March 31, 2001 and 2000. 4 Consolidated statements of changes in stockholders' equity -- Three months ended March 31, 2001 and 2000. 5 Consolidated statements of cash flows -- Three months ended March 31, 2001 and 2000. 6 Notes to consolidated financial statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 16 Item 2. Changes in Securities and Use of Proceeds. 16 Item 3. Defaults Upon Senior Securities. 16 Item 4. Submission of Matters to a Vote of Security Holders. 16 Item 5. Other Information. 16 Item 6. Exhibits and Reports on Form 8-K. 16 SIGNATURES 17 Page 2 of 17 PART I, ITEM I SUN COMMUNITY BANCORP LIMITED Consolidated Balance Sheets As of March 31, 2001 and December 31, 2000

Page 3 of 17 SUN COMMUNITY BANCORP LIMITED Consolidated Statements of Income For the Three Months Ended March 31, 2001 and 2000 Three Months Ended March 31 ------------------------- 2001 2000 ----------- ----------- Interest income: Portfolio loans (including fees) $12,543,143 $ 6,277,535 Loans held for resale 182,910 27,875 Taxable investment securities 206,915 360,903 Federal funds sold 640,740 449,468 Interest-bearing deposits with banks and other 271,926 127,057 ----------- ----------- Total interest income 13,845,634 7,242,838 Interest expense: Demand deposits 1,841,753 1,078,625 Savings deposits 9,926 4,147 Time deposits 3,598,368 1,162,838 Other 33,303 -- ----------- ----------- Total interest expense 5,483,350 2,245,610 ----------- ----------- Net interest income 8,362,284 4,997,228 Provision for loan losses 881,350 632,452 ----------- ----------- Net interest income after provision for loan losses 7,480,934 4,364,776 Noninterest income: Service charges on deposit accounts 268,385 134,899 Fees from origination of non-portfolio residential mortgage loans 25,290 12,268 Other 15,874 96,309 ----------- ----------- Total noninterest income 309,549 243,476 Noninterest expense: Salaries and employee benefits 4,176,269 2,710,925 Occupancy 627,243 426,484 Equipment rent, depreciation and maintenance 494,861 334,286 Other 2,241,266 1,155,571 ----------- ----------- Total noninterest expense 7,539,639 4,627,266 ----------- ----------- Income before federal income taxes and minority interest 250,844 (19,014) Federal income taxes (benefit) 231,000 (6,000) ----------- ----------- Income before minority interest 19,844 (13,014) Credit resulting from minority interest in net losses of consolidated subsidiaries 296,493 128,863 ----------- ----------- NET INCOME $ 316,337 $ 115,849 =========== =========== NET INCOME PER SHARE -- Note C Page 4 of 17 SUN COMMUNITY BANCORP LIMITED Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2001 and 2000

Page 5 of 17 SUN COMMUNITY BANCORP LIMITED Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2001 and 2000

Page 6 of 17 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 three-month period ended March 31, 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 March 31, 2001, efforts were underway for formation of additional banks in California and Nevada. [The remainder of this page intentionally left blank] Page 7 of 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUN COMMUNITY BANCORP LIMITED - CONTINUED Note C -- Net Income Per Share The computations of basic and diluted earnings per share were as follows: Three Months Ended March 31 --------------------------- 2001 2000 ---------- ---------- Numerator--net income for the period $ 316,337 $ 115,849 ========== ========== Denominator: Weighted average number of common shares outstanding (denominator for basic earnings per share) 5,671,217 5,503,870 Effect of dilutive securities - stock options 53,780 73,436 ---------- ---------- Denominator for dilutive net income per share-- Weighted average number of common shares and potential dilution 5,724,997 5,577,306 ========== ========== Net income per share: Basic $ 0.06 $ 0.02 ========== ========== Diluted $ 0.06 $ 0.02 ========== ========== Note D -- Impact of New Accounting Standards 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. 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 8 of 17 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Total assets approximated $612.1 million at March 31, 2001, an increase of $85.3 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 three-month period by approximately $58.4 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 $56 million, consistent with the banks' emphasis on commercial lending activities. Loans at March 31, 2001 include $3.5 million advanced to Capitol Bancorp, Sun's largest shareholder, on a short-term basis. The allowance for loan losses at March 31, 2001 approximated $6.3 million or 1.31% of total portfolio loans, a slight 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 9 of 17 The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the three month periods (in thousands): 2001 2000 ------ ------ Allowance for loan losses at January 1 $5,440 $2,371 Loans charged-off (24) (4) Recoveries -- -- Additions to allowance charged to expense 881 632 ------ ------ Allowance for loan losses at March 31 $6,297 $2,999 ====== ====== For internal purposes, management allocates the allowance to all loan classifications. The amounts allocated in the following table (in thousands), which includes all loans for which management has concerns based on Sun's loan rating system, should not be interpreted as an indication of future charge-offs. In addition, amounts allocated are not intended to reflect the amount that may be available for future losses. March 31, 2001 December 31, 2000 -------------------- -------------------- Percent Percent of Total of Total Portfolio Portfolio Amount Loans Amount Loans -------- --------- -------- --------- Commercial $ 2,433 0.51% $ 2,683 0.63% Real estate mortgage 12 0.00 30 0.01 Installment 116 0.02 110 0.03 Unallocated 3,736 0.78 2,617 0.62 -------- ----- -------- ----- Total allowance for loan losses $ 6,297 1.31% $ 5,440 1.29% ======== ===== ======== ===== Total portfolio loans outstanding $480,714 $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 March 31, 2001. Page 10 of 17 Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) are summarized below (in thousands): March 31 December 31 2001 2000 ------ ------ Nonaccrual loans: Commercial $1,863 $1,793 Real estate 13 14 Installment ------ ------ Total nonaccrual loans 1,876 1,807 Past due (>90 days) loans: Commercial Real estate Installment ------ ------ Total past due loans -- -- ------ ------ Total nonperforming loans $1,876 $1,807 ====== ====== Nonperforming loans increased $69,000 during early 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):

---------- (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 11 of 17 RESULTS OF OPERATIONS Net income for the three months ended March 31, 2001 approximated $316,000 ($0.06 per share), compared to $116,000 ($0.02 per share) during the corresponding period of 2000. Operating results and total assets (in thousands) were as follows:

---------- 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 $8.4 million during the three-month 2001 period versus $5.0 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 $310,000 for the 2001 three month period, as compared with $243,000 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 $881,000 for the three months ended March 31, 2001 compared to $632,000 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 three months ended March 31, 2001 was $7.5 million compared with $4.6 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 12 of 17 LIQUIDITY AND CAPITAL RESOURCES The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $77.1 million for the three- month 2001 period, compared to $50.5 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 19.2% of total deposits at March 31, 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 $96.9 million or 15.8% of total assets at March 31, 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 March 31, 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 March 31, 2001 Sun and the banks had approximately $8.4 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. [The remainder of this page intentionally left blank] Page 13 of 17 Stockholders' equity, as a percentage of total assets, approximated 8.7% at March 31, 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 $82.9 million or 13.5% of total assets at March 31, 2001. The following table summarizes the amounts and related ratios of individually significant subsidiaries (assets of $40 million or more at the beginning of 2000) and consolidated regulatory capital position at March 31, 2001:

---------- (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 March 31, 2001, plans were underway for 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., which currently owns about 50% of Sun's common stock. The share purchase program will be funded from Sun's existing resources, principally short-term loans and investments. Through March 31, 2001, total purchases approximated $1.3 million. Page 14 of 17 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. 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 early 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 early 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 early 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 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. A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to Sun's financial statements. Page 15 of 17 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 March 31, 2001. Page 16 of 17 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: May 15, 2001 Page 17 of 17

SUN COMMUNITY BANCORP LTD 10-Q