<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<FILENAME>ex99.txt
<DESCRIPTION>SUN COMMUNITY FINANCIAL REPORT
<TEXT>
EXHIBIT 99
[LOGO] SUN COMMUNITY BANCORP LIMITED
2001 Financial Report
2777 East Camelback Road
Suite 375
Phoenix, AZ 85016
(602) 955-6100
<PAGE>
TABLE OF CONTENTS
Selected Consolidated Financial Data...........................................2
Information Regarding Sun's Common Stock.......................................3
Responsibility For Financial Statements........................................4
Cautionary Statement Regarding Forward-Looking Statements......................4
Management's Discussion and Analysis of Financial Condition and
Results of Operations:
The Business of Sun and its Banks.........................................5
Sun's Structure ..........................................................6
Recent Developments.......................................................8
Banking Technology at Sun.................................................8
2001 Financial Overview...................................................8
Changes in Consolidated Financial Position................................9
Consolidated Results of Operations.......................................13
Liquidity, Capital Resources and Capital Adequacy........................14
Trends Affecting Operations..............................................18
New Accounting Standards.................................................21
Report of Independent Auditors................................................23
Consolidated Financial Statements:
Consolidated Balance Sheets..............................................24
Consolidated Statements of Operations....................................25
Consolidated Statements of Changes in Stockholders' Equity...............26
Consolidated Statements of Cash Flows....................................27
Notes to Consolidated Financial Statements...............................28
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in $1,000s, except per share data)
<TABLE>
<CAPTION>
As of and for the Year Ended December 31
-------------------------------------------------------------
2001(1) 2000(2) 1999(3) 1998(4) 1997(5)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
For the year:
Interest income $ 58,536 $ 40,005 $ 17,920 $ 7,344 $ 2,871
Interest expense 22,109 14,417 5,368 2,280 914
Net interest income 36,427 25,588 12,552 5,064 1,957
Provision for loan losses 3,979 3,926 1,753 379 268
Noninterest income 1,555 1,011 759 334 125
Noninterest expense 29,807 21,841 14,503 5,330 2,037
Income (loss) before cumulative effect of change
in accounting principle 2,290 807 (1,207)(6) 57 (72)
Net income (loss) 2,290 807 (1,593) 57 (72)
Net income (loss) per share:
Basic .38 .14 (.34) .02 (.05)
Diluted .37 .14 (.34) .02 (.05)
At end of year:
Total assets $ 780,161 $ 526,833 $ 300,390 $ 135,578 $ 55,007
Total earning assets 733,906 490,540 291,783 130,640 52,901
Portfolio loans 638,736 422,344 206,232 68,080 31,236
Deposits 665,692 442,563 225,007 98,782 42,899
Debt obligations 11,212 -- -- -- --
Minority interests in consolidated subsidiaries 26,036 27,246 21,384 9,411 2,010
Stockholders' equity 72,346 52,694 50,003 26,627 9,690
Quarterly Results of Operations
-------------------------------------------------
Total for Fourth Third Second First
the Year Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
Year ended December 31, 2001:(1)
Interest income $ 58,536 $ 15,025 $ 14,978 $ 14,688 $ 13,845
Interest expense 22,109 5,244 5,653 5,729 5,483
Net interest income 36,427 9,781 9,325 8,959 8,362
Provision for loan losses 3,979 1,209 908 981 881
Net income 2,290 838 657 479 316
Net income per share:
Basic .38 .12 .11 .08 .06
Diluted .37 .12 .11 .08 .06
Year ended December 31, 2000:(2)
Interest income $ 40,005 $ 12,506 $ 10,939 $ 9,317 $ 7,243
Interest expense 14,417 4,859 4,083 3,230 2,245
Net interest income 25,588 7,647 6,856 6,087 4,998
Provision for loan losses 3,926 1,259 965 1,070 632
Net income 807 302 244 146 115
Net income per share:
Basic .14 .05 .04 .03 .02
Diluted .14 .05 .04 .03 .02
</TABLE>
(1) Includes Sunrise Bank of San Diego, effective January 2001 (located in San
Diego, California and majority-owned by Sunrise Capital Corporation which
is majority-owned by Sun).
(2) Includes Black Mountain Community Bank effective March 2000 (located in
Henderson, Nevada and majority-owned by Nevada Community Bancorp Limited),
Sunrise Bank of Albuquerque effective April 2000 (located in Albuquerque,
New Mexico and majority-owned by Sunrise Capital Corporation), Arrowhead
Community Bank effective September 2000 (located in Glendale, Arizona and
majority-owned by Sun) and Yuma Community Bank effective December 2000
(located in Yuma, Arizona and majority-owned by Sun).
(3) Includes East Valley Community Bank effective June 1999 (located in
Chandler, Arizona and majority-owned by Sun), Desert Community Bank (August
1999) and Red Rock Community Bank (November 1999), both located in Las
Vegas, Nevada and majority-owned by Nevada Community Bancorp Limited
(formed in 1999 and majority-owned by Sun).
(4) Includes Camelback Community Bank (effective May 1998), Southern Arizona
Community Bank (effective August 1998), Mesa Bank (effective October 1998)
and Sunrise Bank of Arizona (effective December 1998), all majority-owned
by Sun. These three banks became wholly-owned by Sun in 2001.
(5) Includes Valley First Community Bank (effective June 1997), majority-owned
by Sun and which became wholly-owned by Sun in 2000.
(6) Implementation of a new accounting standard requiring the write-off of
previously capitalized start-up costs resulted in a one-time charge of
$386,000 (net of income tax effect) or $.08 per share effective January 1,
1999.
2
<PAGE>
INFORMATION REGARDING SUN'S COMMON STOCK
Sun's common stock is traded on the National Market Tier of the Nasdaq Stock
Market(SM) under the symbol "SCBL". Market quotations regarding the range of
high and low sales prices of Sun's common stock, which reflect inter-dealer
prices without retail mark-up, mark-down or commissions, were as follows:
2001 2000
----------------- -----------------
Low High Low High
------- ------- ------- -------
Quarter Ended:
March 31 $ 6.250 $ 8.875 $ 7.125 $ 9.750
June 30 6.650 11.000 8.875 11.125
September 30 8.800 12.250 6.500 11.000
December 31 9.250 11.250 6.000 8.250
Sun has paid no cash dividends to date. Capitol Bancorp Ltd. owns approximately
50% of Sun's common stock.
In November 2001, the boards of directors of Sun and Capitol entered into a
proposed plan of share exchange. The proposed plan of share exchange is subject
to the approval of the shareholders of both Sun and Capitol at special meetings
scheduled to be held in late March 2002. The proposed share exchange, if
consummated, would result in Capitol issuing .734 shares of its previously
unissued common stock for each common share of Sun's common stock held by
shareholders other than Capitol, and Sun would become wholly-owned by Capitol.
As of February 19, 2002, there were 1,613 beneficial holders of Sun's common
stock, based on information supplied to Sun from its stock transfer agent and
other sources. At that date, 7,406,838 shares of common stock were outstanding.
Sun's stock transfer agent is Computershare Investor Services, 12039 West
Alameda Parkway, Suite Z-2, Lakewood, Colorado 80228 (telephone 303/986-5400).
3
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Sun's management is responsible for the preparation of the consolidated
financial statements and all other information appearing in this annual report.
The financial statements have been prepared in accordance with generally
accepted accounting principles and prevailing practices within the financial
institution industry.
Sun's management is also responsible for establishing and maintaining the
internal control structure of Sun, its banks and its bank development
subsidiaries. The general objectives of the internal control structure are to
provide management with reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, and that transactions are recorded in
accordance with generally accepted accounting principles. In fulfilling this
objective, management has various control procedures in place which include, but
are not limited to, review and approval of transactions, a code of ethical
conduct for employees, internal auditing and an annual audit of Sun's
consolidated financial statements performed by a qualified independent audit
firm. Management believes the internal control structure of Sun to be adequate
and that there are no material weaknesses in internal control.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report, including the consolidated
financial statements, management's discussion and analysis of financial
condition and results of operations and other portions of this report that are
not historical facts, including, without limitation, statements of performance
and other forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, are subject to known and unknown
risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of Sun and/or its subsidiaries and other
operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend", "expect", "project", "estimate",
"predict", "anticipate", "should", "will", "may", "believe", and similar
expressions also are intended to identify forward-looking statements. Important
factors which may cause actual results to differ from those contemplated in such
forward-looking statements include, but are not limited to: (i) the results of
Sun's efforts to implement its business strategy, (ii) changes in interest
rates, (iii) legislation or regulatory requirements adversely impacting Sun's
banking business and/or expansion strategy, (iv) adverse changes in business
conditions or inflation, (v) general economic conditions, either nationally or
regionally, which are less favorable than expected and that result in, among
other things, a deterioration in credit quality and/or loan performance and
collectability, (vi) competitive pressures among financial institutions, (vii)
changes in securities markets, (viii) actions of competitors of Sun's banks and
Sun's ability to respond to such actions, (ix) the cost of capital, which may
depend in part on Sun's asset quality, prospects and outlook, (x) changes in
governmental regulation, tax rates and similar matters, (xi) changes in
management, (xii) the proposed share exchange between Sun and Capitol Bancorp
Limited, and (xiii) other risks detailed in Sun's other filings with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated. All subsequent written
or oral forward-looking statements attributable to Sun or persons acting on its
behalf are expressly qualified in their entirety by the foregoing factors.
Investors and other interested parties are cautioned not to place undue reliance
on such statements, which speak as of the date of such statements. Sun
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of unanticipated events.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Most of this section discusses items of importance regarding Sun's financial
statements which appear elsewhere in this report. In order to obtain a full
understanding of this discussion, it is important to read it with those
financial statements. However, before discussing the financial statements and
related highlights, an introductory section includes some important background
information about the business of Sun and its banks, Sun's structure and recent
developments.
THE BUSINESS OF SUN AND ITS BANKS
Sun defines itself as a BANK DEVELOPMENT COMPANY. In the highly regulated
business of banking, it is viewed by governmental agencies as a bank holding
company. Sun views bank DEVELOPMENT as a much more dynamic activity than the
regulatory label for bank holding companies.
Bank development at Sun is the business of mentoring, monitoring and managing
its investments in community banks. Bank development is also the activity of
adding new banks through start-up, or DE NOVO, formation or through other
affiliation efforts, such as acquiring existing banks.
The banks have similar characteristics:
* Each bank has an on-site president and management team, as local
decision makers.
* Each bank has a local board of directors which has actual authority
over the bank.
* Each bank generally operates from only one office location.
* Each bank can fully meet customers' needs anywhere, anytime through
bankers-on-call, courier services, Internet and telephone banking and
other delivery methods.
* Each bank has access to an efficient back-room processing facility and
leading-edge technology through shared resources.
Sun's banks seek the profitable customer relationships which are often displaced
through mergers, mass marketing, megabanks and an impersonal approach to
handling customers. The banks are focused on commercial banking activities,
emphasizing business customers, although they also offer a complete array of
financial products and services.
Each bank has a separate charter. A bank charter is similar to articles of
incorporation and enables each bank to exist as a distinct legal entity. Sun's
banks are state-chartered which means they are organized under a particular
state's banking laws. All of the banks are FDIC insured. Banks are highly
regulated by state and federal agencies. Because each bank has its own charter,
each bank is examined by both state and federal agencies as a separate and
distinct legal entity for safety, soundness and compliance with banking laws and
regulations.
Sun became a bank holding company in 1997 when it acquired Bank of Tucson in a
share exchange transaction. Bank of Tucson had been formed in 1996 by a group of
individuals which included some of the same organizers of Sun. A second start-up
bank was added in 1997. Four start-up banks were added in 1998, three in 1999
and four in 2000. One new bank was added in 2001.
5
<PAGE>
At December 31, 2001, Sun consisted of 14 community banks, with operations in
four states.
Sun's bank development philosophy is one of "SHARED VISION", which encompasses a
commitment to community banking emphasizing local leadership and investment,
with the shared resources of efficient management. Sun provides shared resources
to its banks which includes common data processing systems, centralized item
processing, loan review, internal audit, credit administration, accounting and
risk management.
SUN'S STRUCTURE
Sun is a 50%-owned subsidiary of Capitol Bancorp Limited. Capitol is a bank
development company headquartered in Lansing, Michigan. It has consolidated
total assets of about $2.0 billion, which includes Sun's consolidated assets.
Sun's financial statements are included in Capitol's because of Capitol's
ownership of Sun. A proposed share exchange transaction is pending which, if
approved by shareholders of Sun and Capitol, would result in Sun becoming
wholly-owned by Capitol.
The organizational structure of Sun is complex. It is a mixture of banks which
Sun owns directly and others which are owned indirectly through subsidiary bank
development companies. Additionally, Sun's direct and indirect ownership
percentages of these entities differ.
Headquartered in Phoenix, Arizona, Sun became a public company in 1999 and is
carrying out all of its current bank development activities in the Southwestern
region of the United States. At year-end 2001, its consolidated assets were $780
million ($527 million at year-end 2000). It is comprised of a combination of
directly-owned banks and bank development subsidiaries:
<TABLE>
<S> <C> <C>
Sun Community Bancorp Limited
Approx. 50% owned by Capitol Bancorp
|
+--------------------------------------------------+------------------------------------------------+
| | |
Arizona bank development Nevada bank development through Sunrise Capital Corporation, multi-
through 8 majority- Nevada Community Bancorp Limited and state bank development emphasizing
owned community banks its 3 majority-owned community banks specialized lending (SBA) through 3
majority-owned community banks
</TABLE>
The current group of banks comprising bank development in Arizona follows:
Arizona Bank Development
(direct subsidiaries of
Sun Community Bancorp Limited)
|
| Valley First
Bank of Tucson | Community Bank
(Tucson -- 1996)-------------------+------------------(Scottsdale -- 1997)
100% ownership by Sun | 100% ownership by Sun
|
| Camelback
Mesa Bank | Community Bank
(Mesa -- 1998)--------------------+-------------------(Phoenix -- 1998)
100% ownership by Sun | 100% ownership by Sun
|
Southern Arizona | East Valley
Community Bank | Community Bank
(Tucson -- 1998)-------------------+-------------------(Chandler -- 1999)
100% ownership by Sun | 85% ownership by Sun
|
Arrowhead | Yuma
Community Bank | Community Bank
(Glendale -- 2000)------------------+---------------------(Yuma -- 2000)
87% ownership by Sun 51% ownership by Sun
6
<PAGE>
All of these banks are young. The most mature bank of the group, Bank of Tucson,
completed its 60th month of operation in June 2001. The youngest bank, Yuma
Community Bank, opened in December 2000. These banks ranged in size from $23
million in assets to $121 million at year-end 2001. Five of the banks are
located in or near greater Phoenix, while two are located in Tucson.
Bank development activities in Nevada are carried out through Nevada Community
Bancorp Limited, which is 54% owned by Sun, and was formed in 1999:
Nevada Community Bancorp Limited
54% ownership by Sun
|
+----------------------------+------------------------------+
| | |
Black Mountain Desert Community Bank Red Rock Community Bank
Community Bank (Las Vegas -- 1999) (Las Vegas -- 1999)
(Henderson -- 2000) 51% ownership by NCBL 51% ownership by NCBL
51% ownership by NCBL
Two of the Nevada banks opened in the second half of 1999 and the Henderson (Las
Vegas area) bank opened in the first half of 2000. The three banks' combined
total assets was $193 million at year-end 2001 ($106 million in 2000). A fourth
51%-owned bank, Bank of Las Vegas, opened in February 2002.
Sunrise Capital Corporation was formed in 1999 and is approximately 71% owned by
Sun at year-end 2001. It is focused on developing banks in several states with a
slightly different emphasis on commercial lending than the other bank affiliates
of Sun. Its banks are focused on offering loan products structured through and
partially guaranteed by the U.S. Small Business Administration (SBA), in
addition to the full array of typical bank products:
Sunrise Capital Corporation
SBA Bank Development
(Approx. 71% owned by Sun)
|
+-----------------------------+---------------------------+
| | |
Sunrise Bank of Arizona Sunrise Bank of Albuquerque Sunrise Bank of San Diego
Phoenix, Arizona Albuquerque, New Mexico San Diego, California
(1998) (2000) (2001)
100% ownership by SCC 87% ownership by SCC 64% ownership by SCC
In 2000, a loan production office of Sunrise Bank of Arizona was established in
San Diego, California. It subsequently evolved into Sunrise Bank of San Diego,
which opened in early January 2001.
All of these banks and subsidiary bank development companies are combined, or
consolidated, for financial reporting purposes because Sun has ownership control
of them. Current accounting rules require consolidated reporting when one entity
has majority voting control of another. The reporting entity is the parent
organization and entities which are majority-owned by the parent are
subsidiaries. In the circumstances of Sun, this parent and subsidiary
relationship applies also to second tier subsidiaries which have consolidated
subsidiaries of their own.
7
<PAGE>
The accounting rules in this area inhibit an understanding of consolidated
financial statements. For example, the consolidated balance sheets include all
of the combined entities' assets and liabilities. On the other hand,
consolidated net income includes all of the combined entities' operating
results, but net income or loss only to the extent of the parent's ownership
percentage.
RECENT DEVELOPMENTS
Because of the number of banks and bank development companies added in recent
years, comparing annual financial results is difficult.
In early 2001, Sun's board of directors decided to reduce the annual number of
new bank start-ups in contrast to the preceding three years. This decision was
based, in part, on the objective of reducing the impact of start-up costs and
early-period operating losses which tend to negatively impact consolidated
earnings. One new bank was added in 2001.
At December 31, 2001, applications were pending for permission to form two new
banks in early 2002, one in California and one in Nevada. Both of these new
banks (Napa Community Bank and Bank of Las Vegas) opened in early 2002.
In November 2001, the boards of directors of Sun and Capitol entered into a
proposed plan of share exchange. The proposed plan of share exchange is subject
to the approval of the shareholders of both Sun and Capitol at special meetings
scheduled to be held in late March 2002. The proposed share exchange, if
consummated, would result in Capitol issuing .734 shares of its previously
unissued common stock for each common share of Sun's common stock held by
shareholders other than Capitol, and Sun would become wholly-owned by Capitol.
BANKING TECHNOLOGY AT SUN
The use of high technology banking systems is key to the delivery of accurate
and timely customer service. Sun currently operates one data processing site,
located in Tempe, Arizona, which processes all activity for its banks. Sun's
data processing systems are similar to and shared with Capitol's. Sun's and
Capitol's separate data processing sites operate under common management.
2001 FINANCIAL OVERVIEW
Sun completed 2001 with total assets of $780 million, an increase of more than
48% over the year-end 2000 level of $527 million.
Consolidated net income for 2001 was $2.3 million compared to $807,000 in 2000.
The net loss for 1999 was $1.6 million. The 1999 net loss resulted primarily
from the early period operating losses of start-up and young bank subsidiaries
and an accounting change which required the write-off of previously capitalized
start-up costs. The growth in consolidated earnings in 2001 and 2000 is the
byproduct of the evolving results of Sun's banks.
8
<PAGE>
CHANGES IN CONSOLIDATED FINANCIAL POSITION
Total assets have grown significantly from $55 million at the beginning of 1998,
reaching $780 million at the end of 2001. This rapid asset growth is the result
of adding new banks and the growth and evolution of Sun's young banks.
TOTAL ASSETS
($ millions)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
55 136 300 527 780
At year-end 2001, total assets of the four banks formed in 2000 approximated
$144 million. The three banks formed in 1999 reported total assets of $173
million at year-end 2001 ($114 million at year-end 2000). The four banks formed
in 1998 reported total assets of $238 million at the end of 2001, an increase of
$48 million during the year. The most mature bank, formed in 1996, reported
total assets of $121 million at year-end 2001, an increase of about 23% for the
year.
The total assets of each bank, the consolidated totals and ownership percentages
are summarized below, as of year-end 2001 (in $1,000s):
<TABLE>
<CAPTION>
Percentage Ownership By Total Assets Total Revenues
----------------------- ------------------- -------------------
Sun 2nd Tier 2001 2000 2001 2000
----- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Arrowhead Community Bank 87% $ 33,658 $ 8,091 $ 1,804 $ 154
Bank of Tucson 100% 121,075 98,285 10,516 9,479
Camelback Community Bank 100% 67,210 49,364 5,161 3,853
East Valley Community Bank 85% 39,591 34,392 3,261 1,776
Mesa Bank 100% 52,308 36,529 4,277 3,230
Southern Arizona Community Bank 100% 55,423 40,156 4,107 3,340
Valley First Community Bank 100% 58,625 53,081 4,694 4,707
Yuma Community Bank 51% 23,202 5,064 1,244 22
Nevada Community Bancorp Limited (NCBL): 54%
Black Mountain Community Bank 51% 50,909 26,060 3,259 1,095
Desert Community Bank 51% 56,844 35,511 4,341 2,905
Red Rock Community Bank 51% 84,971 44,193 5,659 3,171
-------- -------- -------- --------
Consolidated NCBL 193,212 106,155 13,258 7,180
Sunrise Capital Corporation (SCC): 71%
Sunrise Bank of Albuquerque 87% 35,984 19,762 2,851 944
Sunrise Bank of Arizona 100% 63,141 63,930 6,466 5,451
Sunrise Bank of San Diego 64% 37,912 2,658
-------- -------- -------- --------
Consolidated SCC 137,232 84,908 11,975 6,429
Other, net (692) 10,808 (207) 889
-------- -------- -------- --------
Consolidated totals $780,161 $526,833 $ 60,091 $ 41,016
======== ======== ======== ========
</TABLE>
9
<PAGE>
Most of the consolidated assets consist of loans. Portfolio loans approximated
$639 million at year-end 2001, or about 82% of total consolidated assets ($422
million or 80% at year-end 2000).
TOTAL LOANS
($ millions)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
31 68 206 422 639
The banks emphasize commercial loans, consistent with their focus on serving
small to mid-sized business customers. Commercial loans comprised $604 million
or 95% of total portfolio loans at year-end 2001, (94% in 2000). Loan growth in
2001 was significant--$216 million or a growth rate of 51% for the year (105% or
$216 million in 2000).
Asset quality has remained strong. Nonperforming loans, which consist of loans
more than 90 days past due and loans on nonaccrual status, approximated $7.1
million at year-end 2001, $1.8 million at year-end 2000 and $34,000 at year-end
1999. These increases are the expected result of the banks' loan portfolios
becoming more seasoned and changes in economic conditions. They consist of a
small number of loans which are in various stages of resolution. Management
believes the nonperforming loans at December 31, 2001 to be adequately
collateralized or otherwise appropriately considered in its determination of the
adequacy of the allowance on loan losses.
[The remainder of this page intentionally left blank]
10
<PAGE>
The banks maintain an allowance for loan losses to absorb estimated losses in
the loan portfolio at the balance sheet date. At December 31, 2001, the
allowance for loan losses approximated $8.7 million or 1.36% of portfolio loans,
compared to $5.4 million or 1.29% in 2000 and $2.4 million or 1.15% in 1999. The
allowance ratio has increased in response to higher levels of nonperforming
loans and potential problem loans. The following table summarizes portfolio
loans, the allowance for loan losses and its ratio, and nonperforming loans (in
$1,000s) at December 31:
<TABLE>
<CAPTION>
Allowance as
a % of Total
Total Portfolio Allowance for Nonperforming Portfolio
Loans Loan Losses Loans Loans
-------------------- ----------------- ---------------- --------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arrowhead Community Bank $ 30,430 $ 4,724 $ 457 $ 71 1.50% 1.50%
Bank of Tucson 88,218 75,359 1,224 1,023 $ 407 1.39% 1.36%
Camelback Community Bank 56,555 37,822 743 483 334 1.31% 1.28%
East Valley Community Bank 27,402 25,937 423 357 432 1.54% 1.38%
Mesa Bank 45,672 28,930 594 374 542 $ 27 1.30% 1.29%
Southern Arizona Community Bank 50,879 36,135 662 434 298 1.30% 1.20%
Valley First Community Bank 41,851 42,759 670 663 1,018 306 1.60% 1.55%
Yuma Community Bank 18,539 800 285 13 1.54% 1.62%
Nevada Community Bancorp Limited (NCBL):
Black Mountain Community Bank 40,111 17,052 602 257 240 241 1.50% 1.51%
Desert Community Bank 50,361 29,426 806 441 989 1,089 1.60% 1.50%
Red Rock Community Bank 67,117 38,666 1,008 586 942 1.50% 1.52%
-------- -------- ------ ------ ------ ------
Consolidated NCBL 157,589 85,144 2,416 1,284 2,171 1,330
Sunrise Capital Corporation (SCC):
Sunrise Bank of Albuquerque 28,061 16,259 379 238 614 1.35% 1.46%
Sunrise Bank of Arizona 55,730 59,465 753 650 1,329 35 1.35% 1.09%
Sunrise Bank of San Diego 32,910 455 1.38%
-------- -------- ------ ------ ------ ------
Consolidated SCC 116,701 75,833 1,587 888 1,943 144
Other, net 4,900 8,901 (401) (150)
-------- -------- ------ ------ ------ ------ ----- -----
Consolidated totals $638,736 $422,344 $8,660 $5,440 $7,145 $1,807 1.36% 1.29%
======== ======== ====== ====== ====== ====== ===== =====
</TABLE>
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
identified for monitoring because of specific performance issues or other risk
factors requiring closer management and development of specific remedial action
plans.
Loan review 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 an even more thorough
and critical review of all loans and related loan classifications.
11
<PAGE>
At December 31, 2001, potential problem loans (including nonperforming loans)
approximated $26.1 million or about 4% of total consolidated portfolio loans.
Such totals increased in 2001, in part, as a result of management's ongoing and
augmented loan review 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 identified by management in this
manner to aid in loan administration and risk management. Management believes
these 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.
Although nonperforming and other potential problem loans have increased, loan
loss experience through December 31, 2001 has been less than industry statistics
and at a low percentage based on average loans outstanding. Management's
assessment of these loans as of December 31, 2001 suggests future loss
experience will parallel past experience.
How financial institutions establish their allowance for loan losses is an
important and critical accounting policy and process. The allowance for loan
losses is maintained at a level believed adequate by management. It is analyzed
quarterly by each bank. The adequacy of the allowance is an estimate based on
evaluation of the portfolio (including volume, amount and composition, potential
impairment of individual loans and concentration of credit), past loss
experience, current economic conditions, loan commitments outstanding,
regulatory requirements and other factors.
Standard-setting bodies, regulatory agencies and the SEC (the Securities and
Exchange Commission) have, on an industry-wide basis, separately issued
proposals and other guidance in 2001 and 2000 on how the allowance for loan
losses should be estimated and documented. Estimation of requirements for the
allowance for loan losses is an inherently subjective process which involves
significant judgement by management of many variables potentially impacting
borrowers' ability to repay loans and values of underlying loan collateral.
New banks, as a condition of charter approval, are required to maintain an
allowance ratio of not less than 1% for their first three years of operations.
Because they are new banks with new or unseasoned loans and no prior loss
history, 1% is often used as a starting point for the amount of the allowance,
particularly in the earliest years of operation. As the younger banks now have
more seasoned loan portfolios and the 1% regulatory requirement represents only
an absolute minimum, loan loss allowance ratios were increased in 2001 and 2000
based on management's estimates of loss potential inherent in the loan
portfolios at the balance-sheet date.
12
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Revenue growth has been significant. In 2001, total revenues reached $60
million, a 46% increase over 2000 levels ($41 million). The rate of revenue
growth in the past three years has been dramatic and the result of growth in
both the number and size of the banks within the consolidated group. The primary
revenue source is interest income from loans. Net interest income is the
difference between total interest income on loans and other earning assets and
interest expense on deposits and borrowings. The following graph summarizes
growth in total revenue (which includes noninterest income such as some fees and
service charges):
TOTAL REVENUES
($ millions)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
3.0 7.7 18.7 41.0 60.0
Of the 2001 revenues, $15.2 million, or about 25%, came from the two banks
formed in 1996 and 1997. The four banks started in 1998 generated total revenues
of $20 million or about 33% of the 2001 consolidated total. The youngest banks,
formed in 1999, 2000 and 2001, reported total revenues of $25.1 million or 42%
of the consolidated total.
NET INTEREST INCOME
($ millions)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
2.0 5.1 12.6 25.6 36.4
Growth in the categories of interest income and interest expense, as well as
noninterest income and noninterest expense, is the result of the addition of new
banks during the periods presented and the ongoing growth of Sun's young banks.
The largest component of noninterest expense is salaries, wages and benefits,
which has increased significantly due to the larger number of banks and bank
development subsidiaries and added corporate personnel.
13
<PAGE>
The following table summarizes net income for each of the banks and on a
consolidated basis and the related rates of return on average equity and assets,
where applicable (in $1,000s):
<TABLE>
<CAPTION>
Return on Average
Net Income Return on Average Equity Assets
-------------------------- ------------------------ ----------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arrowhead Community Bank $ (386) $ (419)
Bank of Tucson 2,095 2,149 $ 1,086 22.64% 27.69% 16.63% 1.89% 2.33% 1.48%
Camelback Community Bank 534 297 (520) 10.80% 8.22% 0.93% 0.74%
East Valley Community Bank 18 (532) (673) 0.58% 0.05%
Mesa Bank 386 268 (207) 8.53% 6.77% 0.87% 0.85%
Southern Arizona Community Bank 320 169 (546) 7.42% 4.44% 0.67% 0.47%
Valley First Community Bank 328 88 36 5.94% 1.82% 0.87% 0.61% 0.18% 0.10%
Yuma Community Bank (438) (176)
Nevada Community Bancorp Limited (NCBL):
Black Mountain Community Bank 12 (468) 0.27% 0.03%
Desert Community Bank 35 (180) (358) 0.76% 0.07%
Red Rock Community Bank 635 190 (269) 7.64% 2.45% 0.96% 0.62%
------- ------- -------
Consolidated NCBL 181 (483) (469)
Sunrise Capital Corporation (SCC):
Sunrise Bank of Albuquerque 28 (386) 0.77% 0.09%
Sunrise Bank of Arizona 830 206 (634) 15.24% 4.64% 1.27% 0.43%
Sunrise Bank of San Diego (806)
------- ------- -------
Consolidated SCC (88) (243) (634)
Other, net (1,301) (311) 334
------- ------- ------- ----- ----- ----- ----- ----- -----
Consolidated totals $ 2,290 $ 807 $(1,593) 4.05% 1.57% (3.19)% 0.34% 0.20% (0.86)%
======= ======= ======= ===== ===== ===== ===== ===== =====
</TABLE>
During 1999, a new accounting standard required the write-off of previously
capitalized start-up costs, which is discussed in a later section of this
narrative. It is reflected as a cumulative effect of a change in accounting
principle in the consolidated statement of operations, and amounted to $.08 per
share.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY
Asset liquidity for financial institutions typically consists of cash and cash
equivalents, investment securities available for sale and loans held for resale.
These categories totaled $130 million at year-end 2001, or about 17% of total
assets. This compares to $93.7 million or 18% of total assets at year-end 2000.
Liquidity is important for financial institutions because of their need to meet
loan funding commitments, depositor withdrawal requests and other commitments
discussed in the accompanying notes to consolidated financial statements.
Liquidity varies significantly daily, based on customer activity. The change in
the liquidity ratio is the result of more assets being deployed into loans,
consistent with the strategy of maximizing interest income. Rates of interest
income on liquid assets are typically less than rates the banks achieve from
commercial loans.
The primary source of funds for the banks is deposits. The banks emphasize
interest-bearing time deposits as part of their funding strategy. The banks also
seek noninterest-bearing deposits, or checking accounts, which reduce the banks'
cost of funds. Noninterest-bearing deposits were about 19% of total deposits at
year-end 2001 and 2000 and increased $37 million or 43% during 2001.
14
<PAGE>
TOTAL DEPOSITS
($ millions)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
43 99 225 443 666
In recent periods, banks in general have experienced some competitive challenges
in obtaining additional deposits to fuel growth. Sun's banks have had similar
experiences in their individual markets. As depositors have wider access to the
Internet and other real-time interest rate monitoring sources, deposit pricing
has become more competitive. Deposit growth is achievable, but at a higher
price, shrinking net interest margins. The banks do not generally rely on
brokered deposits as a key-funding source ($104 million at December 31, 2001).
To supplement their funding sources, some of the banks have lines of credit from
the Federal Home Loan Bank system. At year-end 2001, a total of $11.2 million
(none at year-end 2000) was borrowed under those facilities. Some of the banks
also have smaller lines of credit with their correspondent banks. Borrowings
under these facilities are generally at short-term market rates of interest and,
although the repayment dates can be extended, are generally outstanding for
brief periods of time.
In 1999, Sun became a public company through an initial public offering (IPO) of
its common stock with net proceeds of $25 million. Capitol purchased 51% of the
offering, maintaining its ownership of Sun. As of December 31, 2001,
approximately $4.9 million of Sun's funds not yet deployed for new bank
development have been loaned to Capitol Bancorp on a short-term basis.
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 (about 45%) 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 (about 49%) of Southern Arizona Community Bank
(previously a majority-owned subsidiary of Sun), issuing about 282,600 new
shares of Sun's common stock.
Effective October 31, 2001, a similar proposed share exchange transaction was
completed regarding the minority shareholders of Mesa Bank (about 47%). Such
share exchange resulted in the issuance of about 286,800 new shares of Sun's
common stock.
15
<PAGE>
As a result of those share exchanges, Camelback Community Bank, Southern Arizona
Community Bank and Mesa Bank became 100%-owned subsidiaries of Sun.
In 1997, Sun entered into an antidilution agreement with Capitol. Under the
terms of the antidilution agreement, Capitol has the right to purchase
additional shares of Sun's common stock when Sun issues previously unissued Sun
shares to shareholders other than Capitol. Capitol is entitled to purchase
shares of Sun at a price equal to the per-share value ascribed to the shares
issued to shareholders other than Capitol, at a ratio based on 51% of the total
number of new shares being issued by Sun (including the shares to be purchased
by Capitol). Capitol's purchase price for such shares is to be paid to Sun in
cash. Capitol exercised its rights under the antidilution agreement as to the
above-mentioned share exchanges involving Camelback Community Bank, Southern
Arizona Community Bank and Mesa Bank, in 2001. In conjunction with Capitol's
exercise of those rights, Sun received cash consideration of about $8.9 million
and issued about 884,700 new shares of Sun's common stock to Capitol. Sun has
loaned some of those funds back to Capitol as of December 31, 2001.
Total stockholders' equity approximated $72.3 million at year-end 2001, an
increase of $19.7 million for the year. Stockholders' equity is net of 138,100
repurchased shares of Sun's common stock reflected as treasury stock as of
December 31, 2001. No cash dividends have been paid. Future payment of
dividends, if any, is subject to approval by Sun's board of directors, future
operating performance and management's assessment of the consolidated
organization's capitol adequacy.
Sun's capital structure consists of these primary elements:
* Minority interests in consolidated subsidiaries, and
* Stockholders' equity.
TOTAL CAPITALIZATION
($ millions)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
11.7 36.0 71.4 79.9 98.4
Total capitalization at year-end 2001 amounted to $98.4 million or 12.6% of
total assets. This compares to $79.9 million at year-end 2000.
16
<PAGE>
A significant source of capital has been investments provided by minority
shareholders in the subsidiaries which are consolidated for financial reporting
purposes. Total minority interests in consolidated subsidiaries amounted to $26
million at year-end 2001, a decrease of $1.2 million from the $27.2 million
level at year-end 2000. Changes in minority interests in these periods are the
result of Sun's strategy of starting new banks and bank development companies
with less than 100% ownership by Sun, and Sun's share exchange transactions
discussed previously.
Sun and each of its banks and bank development subsidiaries are subject to a
complex series of regulatory rules and requirements which require specific
levels of capital adequacy at the bank level and on a consolidated basis. Under
those rules and regulations, banks are categorized as WELL CAPITALIZED,
ADEQUATELY CAPITALIZED or INADEQUATELY CAPITALIZED using several ratio
measurements, including a risk-weighting approach to assets and commitments.
Banks falling into the INADEQUATELY CAPITALIZED category are subject to the
prompt corrective action provisions of the FDIC Improvement Act, which can
result in significant regulatory agency intervention and other adverse action.
Although it is permissible to maintain capital adequacy at the ADEQUATELY
CAPITALIZED level, Sun operates with the objective of its banks meeting the WELL
CAPITALIZED standard. The well capitalized banks benefit from lower FDIC deposit
insurance costs and less restrictive limitations on some banking activities.
New banks, as a condition of regulatory charter approval, are required to
maintain higher ratios of capital adequacy. Generally, they are required to keep
a ratio of capital to total assets of not less than 8% for their first three
years of operation.
In the opinion of management, all of the affiliated banks met the criteria to be
classified as WELL CAPITALIZED at year-end 2001.
[The remainder of this page intentionally left blank]
17
<PAGE>
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.
This timing difference between interest rate-sensitive assets and interest
rate-sensitive liabilities is characterized as a "gap" which is quantified by
the distribution of rate-sensitive amounts within various time periods in which
they reprice or mature. The following table summarizes the consolidated
financial position in relation to "gap" at December 31, 2001 (in $1,000s):
<TABLE>
<CAPTION>
Interest Rate Sensitivity
-------------------------------------------------
0 to 3 4 to 12 1 to 5 Over
Months Months Years 5 years Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 57,259 $ 57,259
Interest-bearing deposits with banks 4,858 $ 4,622 $ 195 9,675
Loans held for resale 11,725 11,725
Investment securities 199 10,440 $ 5,872 16,511
Portfolio loans:
Commercial 276,136 45,359 262,118 20,205 603,818
Real estate mortgage 18,248 35 431 325 19,039
Installment 6,713 3,927 5,155 84 15,879
Non-earning assets and other 46,255
--------- --------- --------- --------- ---------
Total assets $ 375,138 $ 53,943 $ 278,339 $ 26,486 $ 780,161
========= ========= ========= ========= =========
Liabilities and stockholders' equity
Interest-bearing deposits:
Time deposits over $100,000 $ 53,968 $ 98,878 $ 52,038 $ 204,884
Time deposits under $100,000 24,234 44,197 14,802 83,233
All other interest-bearing deposits 254,421 254,421
--------- --------- --------- ---------
Total interest-bearing deposits 332,623 143,075 66,840 542,538
Debt obligations 2,187 4,600 4,424 11,211
Noninterest-bearing liabilities 128,030
Minority interests in consolidated subsidiaries 26,036
Stockholders' equity 72,346
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 334,810 $ 147,675 $ 71,264 $ -- $ 780,161
========= ========= ========= ========= =========
Interest rate sensitive period gap $ 40,328 $ (93,732) $ 207,075 $ 26,486
Interest rate sensitive cumulative gap $ 40,328 $ (53,404) $ 153,671 $ 180,157
Period rate sensitive assets/period rate
sensitive liabilities 1.12 0.37 3.91 N/A
Cumulative rate sensitive assets/cumulative
rate sensitive liabilities 1.12 0.89 1.28 1.33
Cumulative gap to total assets 5.17% (6.85)% 19.70% 23.09%
</TABLE>
18
<PAGE>
The "gap" changes daily based upon changes in the underlying assets and
liabilities at the banks. Analyzing exposure to interest rate risk is prone to
imprecision because the "gap" is constantly changing, the "gap" differs at each
of the banks, and it is difficult to predict the timing, amount and direction of
future changes in market interest rates and the corresponding effect on customer
behavior.
The banks endeavor to manage and monitor interest rate risk in concert with
market conditions and risk parameters. Management strives to maintain a
reasonably balanced position of interest rate-sensitive assets and liabilities.
The banks have not engaged in speculative positions through the use of
derivatives in anticipation of interest rate movements. In, for example, periods
of relatively lower interest rates, the banks emphasize variable rate loans and
time deposits to the extent possible in a competitive environment; however,
competitive influences often result in making fixed rate loans, although the
banks seek to limit the duration of such loans. Similarly, low interest rates
generally make competition more intense for deposits, since loan demand will
typically increase during periods of lower rates and, accordingly, result in
higher interest costs on deposits, adversely impacting interest margins. Future
interest rates and the impact on earnings are difficult to predict. In addition
to interest rate risk relating to interest-bearing assets and liabilities,
changes in interest rates also can impact future transaction volume of loans and
deposits at the banks. For activities which are influenced by levels of interest
rates for transaction volume (for example, origination of residential mortgage
loans), pricing margins and demand can become impacted significantly by changes
in interest rates.
As a means of monitoring and managing exposure to interest rate risk, management
uses a computerized simulation model which is intended to estimate pro forma
effects of changes in interest rates. Using the simulation model, the following
table illustrates, on a consolidated basis, changes which would occur in annual
levels of interest income, interest expense and net interest income assuming one
hundred and two hundred basis point ("bp") parallel increases and decreases in
interest rates (in $1,000s):
<TABLE>
<CAPTION>
Pro Forma
Assuming Pro Forma Effect of Pro Forma Effect of
No Change Interest Rate Increases Interest Rate Decreases
in Interest ----------------------- -----------------------
Rates +100 bp +200 bp -100 bp -200 bp
----------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest income $49,668 $53,371 $57,189 $45,965 $42,421
Interest expense 17,189 20,745 24,300 13,634 10,842
------- ------- ------- ------- -------
Net interest income $32,479 $32,626 $32,889 $32,331 $31,579
======= ======= ======= ======= =======
</TABLE>
The pro forma analysis above is intended to quantify theoretical changes in
interest income based on stated assumptions. The pro forma analysis excludes the
effect of numerous other variables such as borrowers' ability to repay loans,
the ability of banks to obtain deposits in a radically changed interest rate
environment and how management would revise its asset and liability management
priorities in concert with rate changes.
19
<PAGE>
During 2001, the Open Market Committee of the Federal Reserve Board decreased
interbank interest rates 11 times, which was an unprecedented action to reduce
rates 475 basis points within a year. While the pro forma analysis above is
intended to estimate the impact of an immediate 100 and 200 basis point change
in rates, actual results will be different. Those results will differ (and may
be materially different) because a sudden rate change in market rates does not
result in an instantaneous parallel shift in rates on loans and deposits at
banks. Further, any financial model intended to estimate the impact of interest
rate changes will not necessarily incorporate other variables, including
management's efforts to manage its asset and liability interest rate
sensitivity, nor customer behavior.
General economic conditions also have a significant impact on both the results
of operations and the financial condition of financial institutions. Local
economic conditions, and to some extent national economic conditions, have a
significant impact on levels of loan demand as well as the ability of borrowers
to repay loans and the availability of funds for customers to make deposits. In
2000 and 1999, economic conditions continued to be favorable.
2001 marked the end of the longest peacetime economic expansion in U.S. history.
The terrorist acts of September 11, 2001, our Nation's subsequent war on
terrorism, the diagnosis of economic recession in the U.S., worldwide economic
and political instability, recent major business bankruptcies and their related
high-profile questionable accounting and financial reporting practices, raise
significant concerns over the near-term and longer-horizons for economic and
political uncertainty. The number of variables which have the potential for
having a dramatic impact, individually or collectively, is an environment not
heretofore witnessed by the United States or the world. Sun's management remains
cautiously optimistic about the future of our economy, the business of its banks
and their customers and the health and strength of its service providers.
However, management is resolute in its view that, even though there are some
positive indications of an improving economy, the environment will NOT be
BUSINESS AS USUAL anytime soon.
Continuing consolidation of the banking industry on a national basis, and in the
markets of Sun's banks, has presented opportunities for growth. As a result of
consolidation of the banking industry, coupled with the closure of branch
locations by larger institutions and conversion of customer relationships into
perceived `commodities' by the larger banks, many customer relationships have
been displaced, generating opportunities for development by the banks. For many
retail customers, banking services have become a commodity in an environment
that is dominated by larger mega-bank or mass-merchandising institutions. For
the professional, entrepreneur and other customers seeking a more
service-oriented, customized banking relationship, Sun's banks fill that need
through their focus on single-location banks with full, local decision-making
authority. As the banks focus on service delivery and keeping their size at a
manageable level, only a modest market share of deposits and loan activity is
necessary to achieve profitability and investor-oriented earnings performance.
20
<PAGE>
Start-up banks generally incur operating losses during their early periods of
operations. Recently-formed start-up banks will detract from consolidated
earnings performance and additional start-up banks formed in 2001 and beyond
will similarly negatively impact short-term profitability. On a consolidated
basis, such operating losses reduce net income by the pro rata share of Sun's
ownership percentage in those banks. When those banks become profitable, their
operating results will contribute to consolidated earnings to the extent of
Sun's ownership percentage.
Commercial banks continue to be subject to significant regulatory requirements
which impact current and future operations. In addition to the extent of
regulatory interaction with financial institutions, extensive rules and
regulations governing lending activities, deposit gathering and capital adequacy
(to name a few), translate into a significant cost burden of financial
institution regulation. Such costs include the significant amount of management
time and expense which is incurred in maintaining compliance and developing
systems for compliance with those rules and regulations as well as the cost of
examinations, audits and other compliance activities.
Premiums for FDIC insurance have historically been significant costs of doing
business as financial institutions, but in recent years, deposit insurance
premiums have been maintained at a stable and modest level. Future deposit
insurance premium levels are difficult to predict inasmuch as deposit insurance
premiums will be determined based on general economic conditions, the relative
health of the banking and financial institution industry and other unpredictable
factors. It is reasonable to expect that deposit insurance premiums will
increase at some point in the future.
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 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.
21
<PAGE>
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. Sun's previous business
combinations (generally, acquisitions of minority interests) have been accounted
for using the purchase method. As of December 31, 2001, the net carrying amount
of goodwill (excess of cost over net assets of acquired subsidiaries)
approximated $4.1 million and other intangible assets were insignificant. Upon
implementation, this new standard is not expected to have a material effect on
Sun's consolidated financial statements, other than the elimination of goodwill
amortization ($401,000 in 2001) in future periods.
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.
Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES,
requires start-up costs and organizational costs to be charged to expense when
incurred. The initial application of the statement required a cumulative effect
adjustment for those companies that had previously capitalized start-up and
organizational costs and became effective in 1999. Implementation of this
standard has been reflected as a cumulative effect of an accounting change as of
January 1, 1999, resulting in a one-time charge of $.08 per share in the
consolidated statement of operations.
A variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to Sun's financial statements in future periods.
22
<PAGE>
Board of Directors and Stockholders
Sun Community Bancorp Limited
We have audited the accompanying consolidated balance sheets of Sun Community
Bancorp Limited and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sun Community
Bancorp Limited and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
January 31, 2002
23
<PAGE>
CONSOLIDATED BALANCE SHEETS
SUN COMMUNITY BANCORP LIMITED
<TABLE>
<CAPTION>
- December 31 -
2001 2000
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 35,560,071 $ 25,464,080
Interest-bearing deposits with banks 9,674,968 15,949,167
Federal funds sold 57,259,000 32,027,090
------------- -------------
Cash and cash equivalents 102,494,039 73,440,337
Loans held for resale 11,725,464 6,610,065
Investment securities--Note C:
Available for sale 15,817,672 13,609,399
Held for long-term investment (at amortized cost which
approximates market value) 692,960 62,500
------------- -------------
Total investment securities 16,510,632 13,671,899
Portfolio loans, less allowance for loan losses of
$8,660,000 in 2001 and $5,440,000 in 2000--Note D 630,075,810 416,904,089
Premises and equipment, net--Note F 5,717,507 5,959,724
Accrued interest income 3,060,441 2,701,454
Excess of cost over net assets of acquired subsidiaries 4,111,843 1,355,184
Other assets 6,465,540 6,189,764
------------- -------------
TOTAL ASSETS $ 780,161,276 $ 526,832,516
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 123,154,011 $ 85,880,783
Interest-bearing--Note G 542,537,634 356,682,317
------------- -------------
Total deposits 665,691,645 442,563,100
Debt obligations--Note H 11,211,500
Accrued interest expense and other liabilities 4,876,552 4,329,495
------------- -------------
Total liabilities 681,779,697 446,892,595
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES--Note A 26,035,955 27,245,878
STOCKHOLDERS' EQUITY--Notes A, I and O:
Common stock, no par value,
10,000,000 shares authorized; issued and outstanding:
2001--7,544,938 shares
2000--5,809,317 shares 72,339,075 54,959,627
Retained earnings (deficit) 1,324,833 (965,582)
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income) (4,181) (11,418)
------------- -------------
73,659,727 53,982,627
Less treasury stock (138,100 shares in 2001 and 134,200
shares in 2000) (1,314,103) (1,288,584)
------------- -------------
Total stockholders' equity 72,345,624 52,694,043
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 780,161,276 $ 526,832,516
============= =============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
SUN COMMUNITY BANCORP LIMITED
<TABLE>
<CAPTION>
- Year Ended December 31 -
2001 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 54,454,834 $ 35,281,926 $ 14,281,034
Loans held for resale 720,036 312,058 115,587
Taxable investment securities 647,456 1,186,519 1,446,522
Federal funds sold 2,139,025 2,460,197 1,594,367
Other 574,758 764,006 482,195
------------ ------------ ------------
Total interest income 58,536,109 40,004,706 17,919,705
Interest expense:
Deposits 21,927,153 14,414,240 5,361,674
Other 181,460 2,455 6,104
------------ ------------ ------------
Total interest expense 22,108,613 14,416,695 5,367,778
------------ ------------ ------------
Net interest income 36,427,496 25,588,011 12,551,927
Provision for loan losses--Note D 3,979,018 3,925,711 1,753,183
------------ ------------ ------------
Net interest income after provision for
loan losses 32,448,478 21,662,300 10,798,744
Noninterest income:
Service charges on deposit accounts 1,270,609 712,979 404,661
Other 284,202 297,787 354,255
------------ ------------ ------------
Total noninterest income 1,554,811 1,010,766 758,916
Noninterest expense:
Salaries and employee benefits 17,676,700 12,425,587 7,674,825
Occupancy 2,716,007 2,006,890 1,286,803
Equipment rent, depreciation and maintenance 2,337,683 1,705,125 1,251,662
Other 7,076,887 5,703,368 4,289,644
------------ ------------ ------------
Total noninterest expense 29,807,277 21,840,970 14,502,934
------------ ------------ ------------
Income (loss) before minority interest, federal
income taxes and cumulative effect of change in
accounting principle 4,196,012 832,096 (2,945,274)
Federal income taxes (benefit)--Note K 1,479,000 305,000 (529,000)
------------ ------------ ------------
Income (loss) before minority interest and
cumulative effect of change in accounting
principle 2,717,012 527,096 (2,416,274)
Minority interest in net losses (income) of consolidated
subsidiaries (426,597) 279,944 1,209,553
------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle 2,290,415 807,040 (1,206,721)
Cumulative effect of change in accounting principle ($.08
per share)--Note B (386,228)
------------ ------------ ------------
NET INCOME (LOSS) $ 2,290,415 $ 807,040 $ (1,592,949)
============ ============ ============
NET INCOME (LOSS) PER SHARE--Note L:
Basic $ 0.38 $ 0.14 $ (0.34)
============ ============ ============
Diluted $ 0.37 $ 0.14 $ (0.34)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SUN COMMUNITY BANCORP LIMITED
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Earnings Comprehensive Treasury
Stock (Deficit) Income Stock Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1999 $ 26,795,416 $ (179,673) $ 11,339 $ 26,627,082
Issuance of 6,810 shares of common stock
for cash consideration of $10.00 per
share 68,100 68,100
Issuance of 1,650,000 shares of common
stock for cash consideration of $16.00
per share 25,004,000 25,004,000
Components of comprehensive income:
Net loss for 1999 (1,592,949) (1,592,949)
Market value adjustment for investment
securities available for sale (net
of tax effect) (103,458) (103,458)
------------
Total comprehensive income for 1999 (1,696,407)
------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1999 51,867,516 (1,772,622) (92,119) 50,002,775
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 subsidiary--
Note Q 3,049,871 3,049,871
Purchase of 134,200 shares of common
stock for treasury $ (1,288,584) (1,288,584)
Components of comprehensive income:
Net income for 2000 807,040 807,040
Market value adjustment for investment
securities available for sale (net
of tax effect) 80,701 80,701
------------
Total comprehensive income for 2000 887,741
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2000 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 849,894 shares of common stock
upon acquisition of minority interests
in bank subsidiaries--Note Q 8,494,832 8,494,832
Proceeds from issuance of 884,727 shares to
parent pursuant to antidilution agreement 8,877,616 8,877,616
Net proceeds from issuance of 1,000 shares
of common stock upon exercise of stock
options 7,000 7,000
Components of comprehensive income:
Net income for 2001 2,290,415 2,290,415
Market value adjustment for investment
securities available for sale (net
of tax effect) 7,237 7,237
------------
Total comprehensive income for 2001 2,297,652
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2001 $ 72,339,075 $ 1,324,833 $ (4,181) $ (1,314,103) $ 72,345,624
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUN COMMUNITY BANCORP LIMITED
<TABLE>
<CAPTION>
- Year Ended December 31 -
2001 2000 1999
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,290,415 $ 807,040 $ (1,592,949)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Minority interest in net income (losses) of
consolidated subsidiaries 426,597 (279,944) (1,209,553)
Provision for loan losses 3,979,018 3,925,711 1,753,183
Net accretion of investment security discounts (44,326) (38,127) (46,149)
Depreciation of premises and equipment 1,658,751 1,391,694 942,413
Amortization of goodwill 401,152 92,034 27,953
Loss (gain) on sale of furniture and equipment (181)
Deferred income taxes (611,000) (534,000) (560,000)
Cumulative effect of change in accounting principle 386,228
Originations and purchases of loans held for resale (170,071,856) (70,098,391) (32,770,882)
Proceeds from sales of loans held for resale 164,956,457 64,784,303 32,750,693
Increase in accrued interest income and other assets (3,183,873) (4,074,209) (2,577,262)
Increase in accrued interest expense and other liabilities 547,057 332,837 3,238,779
------------- ------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 348,211 (3,691,052) 342,454
INVESTING ACTIVITIES
Proceeds from calls and maturities of investment
securities available for sale 23,172,604 48,744,650 23,338,039
Purchases of investment securities available for sale (25,327,015) (26,674,315) (46,057,490)
Purchases of investment securities held for long-term
investment (630,460) (62,500)
Net increase in portfolio loans (217,150,739) (216,111,976) (138,152,204)
Proceeds from sales of premises and equipment 14,544
Purchases of premises and equipment (1,430,897) (2,042,995) (3,497,115)
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (221,351,963) (196,147,136) (164,368,770)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings
accounts 128,858,699 101,009,401 72,687,409
Net increase in certificates of deposit 94,269,846 116,546,823 53,537,663
Net proceeds from debt obligations 11,211,500
Net proceeds from issuance of common stock 8,884,616 42,240 25,072,100
Purchase of common stock for treasury (25,519) (1,288,584)
Resources provided by minority interests 6,858,312 8,153,987 13,182,389
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 250,057,454 224,463,867 164,479,561
------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 29,053,702 24,625,679 453,245
Cash and cash equivalents at beginning of year 73,440,337 48,814,658 48,361,413
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 102,494,039 $ 73,440,337 $ 48,814,658
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
Sun Community Bancorp Limited (Sun or the "Corporation") is a bank development
company headquartered in Phoenix, Arizona. Sun is 50% owned by Capitol Bancorp
Limited, a multibank development company headquartered in Lansing, Michigan. At
December 31, 2001, a proposed share exchange was pending whereby, if approved by
shareholders, Capitol would acquire the shares of Sun it does not currently own
(see Note R).
Sun's consolidated banking subsidiaries (the "Banks") consist of the following:
<TABLE>
<CAPTION>
Percentage
Owned at
December 31, Year Formed
Affiliate Location 2001 or Acquired
--------- -------- ---- -----------
<S> <C> <C> <C>
Arrowhead Community Bank Glendale, Arizona 87% 2000
Bank of Tucson Tucson, Arizona 100% 1996
Camelback Community Bank Phoenix, Arizona 100% 1998
East Valley Community Bank Chandler, Arizona 85% 1999
Mesa Bank Mesa, Arizona 100% 1998
Southern Arizona Community Bank Tucson, Arizona 100% 1998
Valley First Community Bank Scottsdale, Arizona 100% 1997
Yuma Community Bank Yuma, Arizona 51% 2000
Nevada Community Bancorp Limited: 54% 1999
Black Mountain Community Bank Henderson, Nevada 2000
Desert Community Bank Las Vegas, Nevada 1999
Red Rock Community Bank Las Vegas, Nevada 1999
Sunrise Capital Corporation: 71% 1999
Sunrise Bank of Albuquerque Albuquerque, New Mexico 2000
Sunrise Bank of Arizona Phoenix, Arizona 1998
Sunrise Bank of San Diego San Diego, California 2001
First California Northern Bancorp Napa, California 51% 2001
</TABLE>
Sun is the majority owner of Nevada Community Bancorp Limited and Sunrise
Capital Corporation which each have majority-owned bank subsidiaries. Sun became
a public company in 1999 through an initial public offering of common stock.
The Banks provide a full range of banking services to individuals, businesses
and other customers located in their respective communities. Each of the Banks
generally operate from a single location and focus their activities on meeting
the various credit and other banking needs of entrepreneurs, professionals and
other high net worth individuals. A variety of deposit products are offered,
including checking, savings, money market, individual retirement accounts and
certificates of deposit. The principal market for the Banks' financial services
are the communities in which they are located and the areas immediately
surrounding those communities.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION--CONTINUED
Sun and its Banks are engaged in a single business activity--banking. Each bank
is viewed by management as being a separately identifiable business or segment
from the perspective of monitoring performance and allocation of financial
resources. Although the Banks operate independently and are managed and
monitored separately, each bank is substantially similar in terms of business
focus, type of customers, products and services. Further, the Banks and Sun are
subject to substantially similar laws and regulations unique to the banking
industry. Accordingly, Sun's consolidated financial statements reflect the
presentation of segment information on an aggregated basis.
The consolidated financial statements include the accounts of Sun and its
majority-owned subsidiaries, after elimination of intercompany accounts and
transactions, and after giving effect to applicable minority interests. Banks
formed during 1999, 2000 and 2001 are included in the consolidated financial
statements for periods after joining the consolidated group. Certain 2000 and
1999 amounts have been reclassified to conform to the 2001 presentation.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks (interest-bearing and noninterest-bearing) and federal
funds sold. Generally, federal funds transactions are entered into for a one-day
period.
LOANS HELD FOR RESALE: Loans held for resale represent residential real estate
mortgage loans held for sale into the secondary market. Loans held for resale
are stated at the aggregate lower of cost or market. Fees from the origination
of loans held for resale are recognized in the period the loans are originated.
INVESTMENT SECURITIES: Investment securities available for sale (generally most
debt investment securities of the Banks) are carried at market value with
unrealized gains and losses reported as a separate component of stockholders'
equity, net of tax effect (accumulated other comprehensive income). All other
investment securities are classified as held for long-term investment and are
carried at amortized cost which approximates market value (see Note C).
Investments are classified at the date of purchase based on management's
analysis of liquidity and other factors. The adjusted cost of specific
securities sold is used to compute realized gains or losses. Premiums and
discounts are recognized in interest income using the interest method over the
period to maturity.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Portfolio loans are made primarily to borrowers in the Banks'
geographic areas. Consistent with the Banks' emphasis on business lending, there
are concentrations of credit in loans secured by commercial real estate,
equipment and other business assets. The maximum potential credit risk to the
Banks and Sun, without regard to underlying collateral and guarantees, is the
total of loans and loan commitments outstanding. Management reduces Sun's
exposure to losses from credit risk by requiring collateral and/or guarantees
for loans granted and by monitoring concentrations of credit, in addition to
recording provisions for loan losses and maintaining an allowance for loan
losses.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated losses inherent in the portfolio at the balance
sheet date. Management's determination of the adequacy of the allowance is an
estimate based on evaluation of the portfolio (including potential impairment of
individual loans and concentrations of credit), past loss experience, current
economic conditions, volume, amount and composition of the loan portfolio, loan
commitments outstanding and other factors. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of portfolio
loans generally approximate the direct costs of successful loan originations.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost.
Depreciation, which relates primarily to equipment and furniture with estimated
useful lives of five years, is computed principally by the straight-line method.
Leasehold improvements are generally depreciated over the respective lease term.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED SUBSIDIARIES: Goodwill is amortized
on a straight-line basis over various periods not to exceed 15 years. Management
periodically reviews long-lived assets, including associated goodwill, for
potential impairment based upon projected undiscounted net cash flows, when
applicable, and the related amortization periods. Amortization of goodwill will
cease January 1, 2002 (see "New Accounting Standards" below).
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
OTHER REAL ESTATE: Other real estate (included as a component of other assets,
and at December 31, 2001 and 2000, approximated $79,200 and $23,000,
respectively) comprises properties acquired through a foreclosure proceeding or
acceptance of a deed in lieu of foreclosure. These properties held for sale are
carried at the lower of cost or estimated fair value at the date acquired and
are periodically reviewed for subsequent impairment.
STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded upon
granting of stock options because such stock options are accounted for under the
provisions of Accounting Principles Board (APB) Opinion 25 (and related
interpretations) and are granted at an exercise price equal to the market price
of common stock at grant date. Pro forma disclosure of alternative accounting
recognition is made in Note I.
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Banks is not included in the
consolidated balance sheet because it is not an asset of the Banks or Sun. Trust
fee income is recorded on the accrual method.
FEDERAL INCOME TAXES: Sun and subsidiaries owned 80% or more by Sun file a
consolidated federal income tax return. Deferred income taxes are recognized for
the tax consequences of temporary differences by applying enacted tax rates
applicable to future years to differences between the financial statement
carrying amount and the tax bases of existing assets and liabilities. The effect
on deferred income taxes of a change in tax laws or rates is recognized in
income in the period that includes the enactment date.
COMPREHENSIVE INCOME: Comprehensive income is the sum of net income (loss) and
certain other items which are charged or credited to stockholders' equity. For
the periods presented, Sun's only element of comprehensive income other than net
income (loss) was the net change in the market value adjustment for investment
securities available for sale. Accordingly, the elements and total of
comprehensive income are shown within the statement of changes in stockholders'
equity presented herein.
COSTS OF START-UP ACTIVITIES: In 1998, the American Institute of CPAs issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires start-up costs and organizational costs to be charged to expense
when incurred. In the circumstances of Sun and the Banks, this new accounting
standard applies to previously capitalized preopening and other start-up costs
of its bank subsidiaries which, net of amortization, approximated $1,149,000 at
December 31, 1998. Implementation of this standard was reflected as a cumulative
effect of an accounting change at January 1, 1999 (net of impact of minority
interests and income tax effect), approximating $386,000 ($.08 per share).
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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 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. Sun's previous business
combinations (generally, acquisitions of minority interests) have been accounted
for using the purchase method. As of December 31, 2001, the net carrying amount
of goodwill (excess of cost over net assets of acquired subsidiaries)
approximated $4.1 million and other intangible assets were insignificant. Upon
implementation, this new standard is not expected to have a material effect on
Sun's consolidated financial statements, other than the elimination of goodwill
amortization ($401,000 in 2001) in future periods.
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.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE C--INVESTMENT SECURITIES
Investment securities available for sale consisted of the following at December
31:
<TABLE>
<CAPTION>
2001 2000
------------------------- -------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale:
United States Treasury securities $ 198,701 $ 199,437 $ 591,103 $ 590,739
United States government agency
securities 15,625,252 15,618,235 13,035,598 13,018,660
----------- ----------- ----------- -----------
15,823,953 15,817,672 13,626,701 13,609,399
Held for long-term investment:
Federal Home Loan Bank stock 692,960 692,960 62,500 62,500
----------- ----------- ----------- -----------
$16,516,913 $16,510,632 $13,689,201 $13,671,899
=========== =========== =========== ===========
</TABLE>
At December 31, 2001, securities with a market value approximating $2 million
were pledged to secure public and trust deposits and for other purposes as
required by law. Investments in Federal Home Loan Bank stock are restricted and
may only be resold to or redeemed by the issuer.
Gross unrealized gains and losses on investment securities available for sale
were as follows at December 31:
2001 2000
----------------- -----------------
Gains Losses Gains Losses
------- ------- ------- -------
United States Treasury securities $ 736 $ -- $ -- $ 364
United States government agency
securities 67,504 74,521 8,711 25,649
------- ------- ------- -------
$68,240 $74,521 $ 8,711 $26,013
======= ======= ======= =======
Gross realized gains and losses from sales and maturities of investment
securities were insignificant for each of the periods presented.
Scheduled maturities of investment securities held as of December 31, 2001 were
as follows:
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 198,701 $ 199,437
After one year, through five years 10,418,839 10,440,384
After five years, through ten years 2,969,651 2,953,675
After ten years 2,236,762 2,224,176
Securities held for long-term investment
without stated maturities 692,960 692,960
----------- -----------
$16,516,913 $16,510,632
=========== ===========
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE D--LOANS
Portfolio loans consisted of the following at December 31:
2001 2000
------------- -------------
Commercial $ 603,817,619 $ 399,056,329
Real estate mortgage 19,038,734 13,712,563
Installment 15,879,457 9,575,197
------------- -------------
Total portfolio loans 638,735,810 422,344,089
Less allowance for loan losses (8,660,000) (5,440,000)
------------- -------------
Net portfolio loans $ 630,075,810 $ 416,904,089
============= =============
Transactions in the allowance for loan losses are summarized below:
2001 2000 1999
----------- ----------- -----------
Balance at January 1 $ 5,440,000 $ 2,371,000 $ 696,000
Provision charged to operations 3,979,018 3,925,711 1,753,183
Loans charged off (deduction) (820,520) (933,445) (78,183)
Recoveries 61,502 76,734 --
----------- ----------- -----------
Balance at December 31 $ 8,660,000 $ 5,440,000 $ 2,371,000
=========== =========== ===========
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. Nonperforming loans
(i.e., loans which are 90 days or more past due and loans on nonaccrual status)
are summarized below (in $1,000s):
December 31
-----------------------
2001 2000
------ ------
Nonaccrual loans:
Commercial $6,938 $1,807
Real estate 116
------ ------
Total nonaccrual loans 7,054 1,807
Past due (>90 days) loans:
Commercial 84
Installment 7
------ ------
Total past due loans 91
------ ------
Total nonperforming loans $7,145 $1,807
====== ======
If nonperforming loans had performed in accordance with their contractual terms
during the year, additional interest income of $283,000 and $50,000 would have
been recorded in 2001 and 2000, respectively. Interest income recognized on
loans in nonaccrual status in 2001 operations approximated $365,000 ($1,000 in
2000). At December 31, 2001, there were no material amounts of loans which were
restructured or otherwise renegotiated as a concession to troubled borrowers.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE D--LOANS--CONTINUED
The amounts of the allowance for loan losses allocated in the following
table (in $1,000s), are based on management's estimate of losses inherent in the
portfolio at the balance sheet date, and should not be interpreted as an
indication of future charge-offs:
December 31, 2001 December 31, 2000
----------------- ------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
------ ----- ------ -----
Commercial $8,199 1.28% $5,140 1.22%
Real estate mortgage 252 0.04 177 0.04
Installment 209 0.03 123 0.03
------ ---- ------ ----
Total allowance for loan losses $8,660 1.36% $5,440 1.29%
====== ==== ====== ====
NOTE E--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Banks make loans to officers and
directors of the Banks including their immediate families and companies in which
they are principal owners. At December 31, 2001, total loans to these persons
approximated $29.2 million ($12 million at December 31, 2000). During 2001,
$25.7 million of new loans were made to these persons and repayments totaled
$8.5 million. Such loans are made at the Banks' normal credit terms.
Officers and directors of the Corporation and the Banks (and their associates,
family and/or affiliates) are also depositors of the Banks. Such deposits are
similarly made at the Banks' normal terms as to interest rate, term and deposit
insurance.
The Banks purchased certain data processing and management services from Capitol
Bancorp Ltd. Amounts paid for such services are based on Capitol Bancorp's costs
of such services and were not significant for the periods presented.
Sun has loaned Capitol Bancorp a portion of its idle funds. Under the terms of
the loan agreement, amounts drawn bear interest at 7.5% (interest income of
approximately $169,000 and $820,000 was recorded by Sun in 2001 and 2000,
respectively) and are due on demand by Sun. Capitol is required to maintain
alternative credit facilities in an amount at least equal to amounts outstanding
under this arrangement so long as amounts are outstanding. $4.9 million and $8.9
million was borrowed at December 31, 2001 and 2000, respectively.
In addition to the ownership and lending relationships between Sun and Capitol,
a share exchange transaction has been proposed which, if approved by Sun's and
Capitol's shareholders, would result in Sun becoming wholly-owned by Capitol
(see Note R).
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE F--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31:
2001 2000
------------ ------------
Leasehold improvements $ 2,844,766 $ 2,369,563
Equipment and furniture 7,269,491 6,502,131
------------ ------------
10,114,257 8,871,694
Less accumulated depreciation (4,396,750) (2,911,970)
------------ ------------
$ 5,717,507 $ 5,959,724
============ ============
The Banks rent office space under operating leases. Rent expense under these
lease agreements approximated $2 million, $1.6 million and $982,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
At December 31, 2001, future minimum rental payments under operating leases that
have initial or remaining noncancelable lease terms in excess of one year were
as follows (in $1,000s):
2002 $ 1,903
2003 1,914
2004 1,928
2005 1,904
2006 1,744
2007 and thereafter 4,317
--------
Total $ 13,710
========
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $205
million and $126 million as of December 31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of such time deposits were as
follows:
2002 $ 152,846
2003 35,180
2004 6,133
2005 5,514
2006 5,211
---------
Total $ 204,884
=========
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE H--DEBT OBLIGATIONS
Debt obligations at December 31, 2001 consist of short-term borrowings from a
Federal Home Loan Bank. Such borrowings represent advances secured by certain
portfolio residential real estate mortgage loans and other eligible collateral.
Such advances are due at varying dates and bear interest at market short-term
rates (approximately 3.23% at December 31, 2001). At December 31, 2001, unused
lines of credit under these facilities approximated $600,000. For the periods
presented, interest paid on all debt obligations approximate amounts charged to
expense.
At December 31, 2001, scheduled debt maturities were as follows (in $1,000s):
2002 $ 6,787
2003 3,424
2004 1,000
--------
$ 11,211
========
NOTE I--COMMON STOCK AND STOCK OPTIONS
In 1997, Sun entered into an antidilution agreement with Capitol. Under the
terms of the antidilution agreement, Capitol has the right to purchase
additional shares of Sun's common stock, when Sun issues previously unissued Sun
shares to shareholders other than Capitol. Capitol is entitled to purchase
shares of Sun at a price equal to the per-share value ascribed to the shares
issued to shareholders other than Capitol, at a ratio based on 51% of the total
number of new shares being issued by Sun (including the shares to be purchased
by Capitol). Capitol's purchase price for such shares is to be paid to Sun in
cash. In 2001, Capitol exercised its rights under the antidilution agreement as
to Sun's 2001 acquisitions of minority interests (see Note Q). In conjunction
with Capitol's exercise of those rights, Sun received cash consideration of
about $8.9 million and issued about 884,700 new shares of Sun's common stock to
Capitol. Sun has loaned some of those funds back to Capitol as of December 31,
2001 (see Note E).
Stock options have been granted to certain officers and directors which provide
for the purchase of shares of common stock. Stock options are granted at an
exercise price equal to the fair value of common stock on the grant date, expire
ten years after grant, and are currently exercisable. Stock options granted upon
exchange of prior stock options of acquired subsidiaries retain their unexpired
term at the date of exchange.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE I--COMMON STOCK AND STOCK OPTIONS--CONTINUED
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Exercise
Outstanding Price Range Price
----------- ----------------- --------
<S> <C> <C> <C>
Outstanding at January 1, 1999 560,973 $ 4.67 to $ 10.00 $ 7.53
Granted in 1999 247,500 16.00 16.00
Exercised in 1999 -- -- --
Expired/other in 1999 -- -- --
--------- ----------------- ------
Outstanding at December 31, 1999 808,473 4.67 to 16.00 10.12
Granted in 2000 53,902 10.22 10.22
Exercised in 2000 (7,500) 4.67 4.67
Expired/other in 2000 -- -- --
--------- ----------------- ------
Outstanding at December 31, 2000 854,875 4.67 to 16.00 10.17
Granted in 2001 464,211 6.76 to 10.53 7.62
Exercised in 2001 (1,000) 6.00 6.00
Expired/other in 2001 (137,560) 12.18 12.18
--------- ----------------- ------
Outstanding at December 31, 2001 1,180,526 $ 4.67 to $ 16.00 $ 8.36
</TABLE>
As of December 31, 2001, stock options outstanding had a weighted average
remaining contractual life of 5.38 years. As of that date 1,017,193 stock
options with an exercise price of $10.00 or less had a weighted average exercise
price of $7.13 and a weighted average remaining contractual life of 4.96 years;
163,333 stock options with an exercise price of more than $10.00 had a weighted
average exercise price of $14.18 and a weighted average remaining contractual
life of 7.97 years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value method of accounting for stock options
whereby compensation expense is recognized based on the computed fair value of
the options on the grant date. However, as permitted by Statement No. 123, the
Corporation accounts for its stock options under APB 25 and, therefore, does not
recognize compensation expense.
By electing this alternative, certain pro forma disclosures of the expense
recognition provisions are required, which are as follows:
<TABLE>
<CAPTION>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Fair value assumptions:
Risk-free interest rate 5.0% 7.0% 6.25%
Dividend yield 5.0% 0% 0%
Stock price volatility .62 .76 .56
Expected option life 4.7 years 10 years 10 years
Aggregate estimated fair value of options granted $1,939,000 $464,000 $ 4,385,000
Pro forma net income (loss) $1,101,000 $501,000 $(4,487,000)
Pro forma net income (loss) per diluted share $.16 $.09 $(.96)
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE J--EMPLOYEE BENEFIT PLANS
Employees of Sun and its subsidiaries participate in a 401(k) plan, subject to
certain eligibility requirements. Employer contributions to the plan and charged
to expense in 2001, 2000 and 1999 approximated $343,000, $198,000 and $87,500,
respectively.
Effective January 1, 2001, employees of Sun and some of its subsidiaries became
eligible to participate in Capitol's noncontributory defined contribution
Employee Stock Ownership Plan (ESOP). Employer ESOP contributions charged to
expense by Sun approximated $146,000 in 2001.
NOTE K--INCOME TAXES
Federal income taxes (benefit) consist of the following components:
2001 2000 1999
----------- ----------- -----------
Current $ 2,090,000 $ 839,000 $ (439,000)
Deferred credit (611,000) (534,000) (560,000)
----------- ----------- -----------
$ 1,479,000 $ 305,000 $ (999,000)
=========== =========== ===========
Federal income tax benefit in 1999 shown above included $470,000 relating to the
cumulative effect of the change in accounting principle. Income taxes paid in
2001 and 1999 approximated $2,026,000 and $310,000, respectively; none were paid
in 2000.
Differences between federal income tax expense recorded and amounts computed
using the statutory tax rate are reconciled below:
<TABLE>
<CAPTION>
2001 2000 1999
----------- ---------- -------------
<S> <C> <C> <C>
Federal income tax (benefit) computed
at statutory rate of 34% $ 1,427,000 $ 283,000 $ (1,001,000)
Tax effect of:
Amortization of goodwill 136,000 31,000 10,000
Minority interest (145,000) 95,000 411,000
Cumulative effect of change in
accounting principle (470,000)
Nondeductible expenses 55,000 67,000 (44,000)
Other 6,000 (171,000) 95,000
----------- --------- -----------
$ 1,479,000 $ 305,000 $ (999,000)
=========== ========= ===========
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE K--INCOME TAXES--CONTINUED
Net deferred income tax assets consisted of the following at December 31:
2001 2000
----------- -----------
Allowance for loan losses $ 1,662,000 $ 956,000
Net operating loss carryforwards of subsidiaries 891,000 1,190,000
Accrual to cash temporary differences (281,000) (297,000)
Accumulated depreciation, amortization and
similar items (347,000) (332,000)
Organization and start-up costs 802,000 791,000
Market value adjustment for investment securities
available for sale 2,000 6,000
Other, net (580,000) (772,000)
----------- -----------
Net deferred tax assets $ 2,149,000 $ 1,542,000
=========== ===========
Certain consolidated subsidiaries have net operating loss carryforwards, which
may reduce income taxes payable in future periods. Such carryforwards
approximate $2.6 million at December 31, 2001, have been recognized for
financial reporting purposes and expire at the following dates and amounts (in
$1,000s):
2019 $ 326
2020 1,013
2021 1,282
--------
$ 2,621
========
NOTE L--NET INCOME (LOSS) PER SHARE
The computations of basic and diluted net income (loss) per share were as
follows:
<TABLE>
<CAPTION>
2001 2000 1999
----------- ----------- -----------
<S> <C> <C> <C>
Numerator--net income (loss) $ 2,290,415 $ 807,040 $(1,592,949)
=========== =========== ===========
Denominator:
Weighted average number of shares outstanding net of
treasury stock (denominator for basic earnings per share) 6,052,917 5,591,192 4,674,386
Effect of dilutive stock options 88,264 73,810 --
----------- ----------- -----------
Denominator for net income (loss) per share--weighted average
number of shares and potential dilution 6,141,181 5,665,002 4,674,386
=========== =========== ===========
Number of antidilutive stock options excluded from net
income (loss) per share computation 682,711 580,375 808,473
=========== =========== ===========
</TABLE>
Additional disclosures regarding stock options are set forth in Note I.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE M--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments were as
follows at December 31 (in $1,000s):
<TABLE>
<CAPTION>
2001 2000
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 102,494 $ 102,494 $ 73,440 $ 73,440
Loans held for resale 11,725 11,725 6,610 6,610
Investment securities:
Available for sale 15,818 15,818 13,609 13,609
Held for long-term investment 693 693 63 63
--------- --------- --------- ---------
16,511 16,511 13,672 13,672
Portfolio loans:
Fixed rate 391,575 391,496 110,103 111,637
Variable rate 247,161 249,056 312,241 310,829
--------- --------- --------- ---------
Total portfolio loans 638,736 640,552 422,344 422,466
Less allowance for loan losses (8,660) (8,660) (5,440) (5,440)
--------- --------- --------- ---------
Net portfolio loans 630,076 631,892 416,904 417,026
Financial Liabilities:
Deposits:
Noninterest-bearing deposits 123,154 123,154 85,881 85,881
Interest-bearing deposits:
Demand accounts 254,421 254,415 162,835 162,704
Time certificates of deposit less
than $100,000 83,233 82,189 67,642 68,364
Time certificates of deposit
$100,000 or more 204,884 206,490 126,205 127,282
--------- --------- --------- ---------
Total interest-bearing deposits 542,538 543,094 356,682 358,350
--------- --------- --------- ---------
Total deposits 665,692 666,248 442,563 444,231
</TABLE>
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates of financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest unless quoted market values or
other fair value information is more readily available. Such estimates of fair
value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial
reporting requirements.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE N--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of the Banks' customers. Such loan commitments
include stand-by letters of credit, lines of credit, and various commitments for
other commercial, consumer and mortgage loans. Stand-by letters of credit, when
issued, commit the Banks to make payments on behalf of customers when certain
specified future events occur and are used infrequently ($3.4 million and $2
million outstanding at December 31, 2001 and 2000, respectively). Other loan
commitments outstanding consist of unused lines of credit and approved, but
unfunded, specific loan commitments ($175.6 million and $123.8 million at
December 31, 2001 and 2000, respectively). These loan commitments (stand-by
letters of credit and unfunded loans) generally expire within one year and are
reviewed periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the Banks' normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
Sun's banking subsidiaries are required to maintain average reserve balances in
the form of cash on hand and balances due from the Federal Reserve Bank and
certain correspondent banks. The amount of reserve balances required as of
December 31, 2001 was $872,000.
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
Current banking regulations restrict the ability to transfer funds from
subsidiaries to their parent in the form of cash dividends, loans or advances.
Subject to various regulatory capital requirements, bank subsidiaries' current
and retained earnings (if any) are available for distribution as dividends to
Sun (and other bank shareholders, as applicable) without prior approval from
regulatory authorities. Substantially all of the remaining net assets of the
subsidiaries are restricted as to payments to Sun.
Sun and its Banks are subject to certain other capital requirements. Federal
financial institution regulatory agencies have established certain risk-based
capital guidelines for banks and bank holding companies. Those guidelines
require all banks and bank holding companies to maintain certain minimum ratios
and related amounts based on `Tier 1' and `Tier 2' capital and `risk-weighted
assets' as defined and periodically prescribed by the respective regulatory
agencies. Failure to meet these capital requirements can result in severe
regulatory enforcement action or other adverse consequences for a depository
institution, and, accordingly, could have a material impact on Sun's
consolidated financial statements.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgments by regulatory agencies about
components, risk weighting, and other factors.
As of December 31, 2001, the most recent notification received by the Banks from
regulatory agencies have advised that the Banks are classified as
'well-capitalized' as that term is defined by the applicable agencies. There are
no conditions or events since those notifications that management believes would
change the regulatory classification of the Banks.
Management believes, as of December 31, 2001, that Sun and its Banks meet all
capital adequacy requirements to which they are subject.
[The remainder of this page intentionally left blank]
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
The various amounts of regulatory capital (in $1,000s) and related ratios of the
individually significant subsidiaries (assets of $90 million or more as of
December 31, 2000) and consolidated regulatory capital position as of December
31, 2001 and 2000 are summarized below:
<TABLE>
<CAPTION>
Nevada
Community Sunrise
Bancorp Capital Sun
Limited Corporation Consolidated
----------- ----------- ------------
<S> <C> <C> <C>
December 31, 2001
-----------------
Tier 1 capital to average total assets:
Minimum required amount >= $ 6,544 >= $ 5,242 >= $ 26,701
Actual amount $20,851 $15,783 $ 94,271
Ratio 12.74% 12.04% 14.12%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >= $ 6,961 >= $ 4,685 >= $ 27,586
Actual amount $20,851 $15,783 $ 94,271
Ratio 11.98% 13.48% 13.67%
Combined Tier 1 and Tier 2 capital to risk-weighted assets:
Minimum required amount(2) >= $13,921 >= $ 9,369 >= $ 55,171
Amount required to meet 'Well-Capitalized' category(3) >= $17,402 >= $11,712 >= $ 68,964
Actual amount $23,029 $17,248 $102,892
Ratio 13.23% 14.73% 14.92%
December 31, 2000
-----------------
Tier 1 capital to average total assets:
Minimum required amount >= $ 3,266 >= $ 2,561 >= $ 16,606
Actual amount $20,301 $ 8,255 $ 78,566
Ratio 24.87% 12.90% 18.92%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >= $ 3,675 >= $ 2,944 >= $ 17,719
Actual amount $20,301 $ 8,255 $ 78,566
Ratio 22.10% 11.22% 17.74%
Combined Tier 1 and Tier 2 capital to risk-weighted assets:
Minimum required amount(2) >= $ 7,349 >= $ 5,888 >= $ 35,439
Amount required to meet 'Well-Capitalized' category(3) >= $ 9,186 >= $ 7,360 >= $ 44,299
Actual amount $21,449 $ 9,143 $ 84,006
Ratio 23.35% 12.42% 18.96%
</TABLE>
(1) The minimum required ratio of Tier 1 capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted
assets is 8%.
(3) In order to be classified as a 'well-capitalized' institution, the ratio of
Tier 1 and Tier 2 capital to risk-weighted assets must be 10% or more.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE P--PARENT COMPANY ONLY INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- December 31 -
2001 2000
----------- -----------
<S> <C> <C>
Assets:
Funds on deposit with subsidiary banks $ 5,127,582 $ 1,518,735
Investments in subsidiaries 60,238,174 38,819,028
Loans to affiliates 6,707,596 10,755,000
Equipment and furniture, net 765,101 991,909
Other assets 1,246,500 797,657
----------- -----------
Total assets $74,084,953 $52,882,329
=========== ===========
Liabilities and Stockholders' Equity:
Accounts payable, accrued expenses and other liabilities $ 1,739,329 $ 188,286
Stockholders' equity 72,345,624 52,694,043
----------- -----------
Total liabilities and stockholders' equity $74,084,953 $52,882,329
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- Year Ended December 31 -
2001 2000 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Intercompany fees $ 4,669,628 $ 3,105,959 $ 1,705,609
Dividends from subsidiary 800,000 800,000 200,000
Interest 308,955 851,608 785,439
Other 4,875 5,774
----------- ----------- -----------
5,783,458 4,763,341 2,691,048
Expenses:
Salaries and employee benefits 3,609,069 3,009,024 1,657,914
Occupancy 381,464 370,768 195,338
Equipment rent, depreciation and maintenance 665,869 515,597 428,523
Interest 9,370
Other 822,997 2,880,980 1,066,481
----------- ----------- -----------
5,488,769 6,776,369 3,348,256
----------- ----------- -----------
294,689 (2,013,028) (657,208)
Equity in undistributed net earnings (losses) of
consolidated subsidiaries 1,743,726 2,611,068 (919,741)
Federal income taxes (credit) (252,000) (209,000) 16,000
----------- ----------- -----------
Net income (loss) $ 2,290,415 $ 807,040 $(1,592,949)
=========== =========== ===========
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE P--PARENT COMPANY ONLY INFORMATION--CONTINUED
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
- Year Ended December 31 -
2001 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,290,415 $ 807,040 $ (1,592,949)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Equity in net losses (earnings) of subsidiaries (1,743,726) (2,611,068) 919,741
Depreciation and amortization 470,957 351,184 260,772
Net amortization (accretion) of investment security premiums
(discount) 39,228 (39,228)
Decrease (increase) in other assets (566,751) 1,383,813 (518,664)
Increase (decrease) in accounts payable, accrued expenses and
other liabilities 1,551,043 (2,451,873) 2,635,874
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,001,938 (2,481,676) 1,665,546
INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 15,664,650 8,918,039
Purchases of investment securities available for sale (105,199) (24,457,490)
Net decrease (increase) in loans to affiliates 4,047,404 (10,755,000)
Net cash investment in subsidiaries (11,180,588) (7,621,713) (10,834,536)
Purchases of equipment and furniture (119,004) (308,939) (911,907)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (7,252,188) (3,126,201) (27,285,894)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 8,884,616 42,240 25,072,100
Purchase of common stock for treasury (25,519) (1,288,584)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 8,859,097 (1,246,344) 25,072,100
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,608,847 (6,854,221) (548,248)
Cash and cash equivalents at beginning of year 1,518,735 8,372,956 8,921,204
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,127,582 $ 1,518,735 $ 8,372,956
============ ============ ============
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE Q--ACQUISITION OF MINORITY INTERESTS
During 2001, three banks which were previously majority-owned by Sun (Camelback
Community Bank, Southern Arizona Community Bank and Mesa Bank) became
wholly-owned, resulting from share exchange transactions with the banks'
minority shareholders. Had these acquisitions of minority interests occurred at
the beginning of 2001, consolidated net income would have approximated $2.5
million and diluted earnings per share would have been $.38.
During 2000, Valley First Community Bank also became wholly-owned through a
similar share exchange transaction with its minority shareholders.
Each of these acquisitions have been accounted for under the purchase method of
accounting. Goodwill arising from these transactions is generally amortized,
through December 31, 2001, on a straight-line basis over a period of 15 years
after the acquisition date.
NOTE R--PROPOSED ACQUISITION BY CAPITOL BANCORP LIMITED
In November 2001, the boards of directors of Sun and Capitol Bancorp Limited
entered into a proposed plan of share exchange. The proposed plan of share
exchange is subject to the approval of the shareholders of both Sun and Capitol.
The proposed share exchange, if consummated, would result in Capitol issuing
.734 shares of its previously unissued common stock for each common share of
Sun's common stock held by shareholders other than Capitol.
NOTE S--PENDING APPLICATIONS FOR NEW BANKS
At December 31, 2001, applications were pending for the formation of two new
banks, Bank of Las Vegas (to become a majority-owned subsidiary of Nevada
Community Bancorp Limited) and Napa Community Bank (to become a majority-owned
subsidiary of First California Northern Bancorp).
Both of these banks are expected to open in 2002.
47
</TEXT>
</DOCUMENT>