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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-87481
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CALIFORNIA COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3339505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE MARITIME PLAZA, SUITE 825
SAN FRANCISCO, CALIFORNIA 94111
(Address of principal executive offices)
Registrant's telephone number: (415) 434-1236
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 10, 2000: 26,312,576 shares of common stock, no par
value.
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TABLE OF CONTENTS
PAGE
--------
FORWARD-LOOKING STATEMENTS........................................... 3
PART I--FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited)............... 4
Unaudited Condensed Consolidated Balance Sheets............. 4
Unaudited Condensed Consolidated Statements of Operations... 5
Unaudited Condensed Consolidated Statements of Cash Flows... 6
Supplemental Disclosure for Acquisition of Subsidiaries..... 7
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 22
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 22
ITEM 2. Changes in Securities and use of Proceeds................... 22
ITEM 3. Defaults Upon Senior Securities............................. 22
ITEM 4. Submission of Matters to a Vote of Security Holders......... 22
ITEM 5. Other Information........................................... 22
ITEM 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURES........................................................... 23
2
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT, INCLUDING, BUT NOT LIMITED TO, "NOTE 3--UNAUDITED
SUMMARY PRO FORMA DATA" AND "ITEM II- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONTAINS STATEMENTS RELATING TO
FUTURE RESULTS OF THE COMPANY THAT ARE CONSIDERED TO BE "FORWARD LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARDED-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG
OTHERS, (1) COMPETITIVE PRESSURE IN THE BANKING INDUSTRY INCREASES
SIGNIFICANTLY; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCES MARGINS; (3)
GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE
THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT
QUALITY; (4) CHANGES IN THE REGULATORY ENVIRONMENT; (5) CHANGES IN BUSINESS
CONDITIONS AND INFLATION; AND (6) CHANGES IN SECURITIES MARKETS. THEREFORE, THE
INFORMATION SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS SHOULD BE CAREFULLY
CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF THE COMPANY. THESE
STATEMENTS RELATE TO, AMONG OTHER THINGS, CREDIT LOSS RESERVE ADEQUACY,
SIMULATION OF CHANGES IN INTEREST RATES AND LITIGATION RESULTS, AS WELL AS OTHER
RISKS AND UNCERTAINTIES DETAILED ELSEWHERE IN THIS QUARTERLY REPORT OR FROM TIME
TO TIME IN THE FILINGS OF THE COMPANY WITH THE SECURITIES EXCHANGE COMMISSION.
SUCH FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE ON WHICH SUCH
STATEMENTS ARE MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON
WHICH SUCH STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED
EVENTS.
MOREOVER, WHENEVER PHRASES SUCH AS, OR SIMILAR TO, "IN MANAGEMENT'S
OPINION", "MANAGEMENT BELIEVES", OR "MANAGEMENT CONSIDERS" ARE USED, SUCH
STATEMENTS ARE AS OF, AND BASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THE TIME
MADE AND ARE SUBJECT TO CHANGE BY THE PASSAGE OF TIME AND OR SUBSEQUENT EVENTS,
AND ACCORDINGLY SUCH STATEMENTS ARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES
NOTED ABOVE WITH RESPECT TO FORWARD LOOKING STATEMENTS.
3
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
ASSETS
Cash and due from banks..................................... $ 55,953 $ 39,569
Federal funds sold and securities purchased under agreements
to resell................................................. 54,973 20,791
---------- --------
Total cash and cash equivalents......................... 110,926 60,360
Interest-bearing deposits with other banks.................. 5,077 2,576
Investment securities available for sale, at fair value..... 96,181 57,656
Investment securities held to maturity, at amortized cost... 68,394 70,592
Investment in Federal Home Loan Bank and Federal Reserve
Bank stock, at cost....................................... 4,300 4,112
Loans and leases receivable, net of allowance for loan and
lease losses of $9,461 at March 31, 2000 and $6,750 at
December 31, 1999......................................... 710,396 551,399
Real estate owned, net...................................... 4,563 5,001
Premises and equipment, net................................. 23,847 20,874
Accrued interest receivable................................. 5,816 4,644
Cash surrender value of life insurance...................... 6,007 1,471
Goodwill and other intangible assets........................ 87,902 61,868
Other assets................................................ 6,100 2,626
---------- --------
TOTAL ASSETS............................................ $1,129,509 $843,179
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits.............................. $ 222,841 $151,121
Interest-bearing deposits................................. 742,113 561,641
---------- --------
Total deposits.......................................... 964,954 712,762
Accrued interest and other liabilities.................... 5,110 5,889
Deferred income tax liabilities, net...................... 8,876 6,694
Trust preferred securities................................ 18,500 18,500
---------- --------
Total liabilities....................................... 997,440 743,845
Minority interest in subsidiaries:
Placer Capital Co. Preferred Stock issued to Placer
Capital Funding LLC--$0.01 par value; 25,000,000
authorized; one share issued and outstanding at
March 31, 2000 and December 31, 1999.................... 3,500 3,500
Commitments and contingencies
Stockholders' equity:
Common stock--$0.01 par value; 75,000,000 shares
authorized; 26,312,576 shares issued and outstanding at
March 31, 2000, and 21,267,483 shares issued and
outstanding at December 31, 1999........................ 132,850 99,450
Accumulated other comprehensive loss...................... (449) (342)
Accumulated deficit....................................... (3,832) (3,274)
---------- --------
Total stockholders' equity.............................. 128,569 95,834
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $1,129,509 $843,179
========== ========
See "Notes to Unaudited Condensed Consolidated Financial Statements."
4
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans and leases..................... $ 13,628 $ 2,410
Interest on deposits with other banks..................... 78 61
Interest on Federal funds sold and securities purchased
under agreements to resell.............................. 425 476
Interest on investment securities......................... 2,245 524
Dividends on Federal Home Loan Bank and Federal Reserve
Bank stocks............................................. 60 7
-------- -------
Total interest and dividend income...................... 16,436 3,478
INTEREST EXPENSE:
Savings, money market and demand deposits................. 1,769 305
Time certificates of deposit under $100................... 2,533 237
Time certificates of deposit of $100 and over............. 1,695 353
Other borrowings.......................................... 490 --
-------- -------
Total interest expense.................................. 6,487 895
-------- -------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE
LOSSES.................................................... 9,949 2,583
PROVISION FOR LOAN LOSSES................................... 160 60
-------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES.................................................... 9,789 2,523
NONINTEREST INCOME:
Service charges and fees.................................. 746 195
Commissions and referral fees............................. 187 6
Gain on sale of loans, net................................ 144 106
Loss on sale of securities................................ (7) --
Other income.............................................. 267 112
-------- -------
Total noninterest income................................ 1,337 419
NONINTEREST EXPENSE:
Salaries and employee benefits............................ 5,138 1,397
Occupancy and premises and equipment...................... 1,524 410
Data and item processing.................................. 462 318
Professional fees......................................... 673 438
Communications............................................ 459 110
Business Development...................................... 390 104
Amortization of intangible assets......................... 1,289 281
Other operating expenses.................................. 1,422 423
-------- -------
Total noninterest expense............................... 11,357 3,481
-------- -------
LOSS BEFORE PROVISION FOR INCOME TAXES AND MINORITY
INTERESTS................................................. (231) (539)
PROVISION FOR INCOME TAX EXPENSE............................ 234 173
-------- -------
LOSS BEFORE MINORITY INTERESTS.............................. (465) (712)
MINORITY INTERESTS:
Cost of minority interest................................. 93 --
Minority interest in loss of subsidiaries................. -- (100)
-------- -------
NET LOSS.................................................... $ (558) $ (612)
======== =======
Per share information:
Weighted average common shares outstanding:
Basic................................................... 22,983.7 6,875.8
Diluted................................................. 22,983.7 6,875.8
Net loss per share:
Basic................................................... $ (0.02) $ (0.09)
Diluted $ (0.02) $ (0.09)
- ------------------------------
a) Placer Sierra Bank and Sacramento Commercial Bank were acquired on
August 11, 1999 and February 29, 2000, respectively, using the purchase
method of accounting. Accordingly, the operating results of Placer Sierra
Bank and Sacramento Commercial Bank are only included since the date of
their respective acquisitions. Due to the relatively large size of each of
these acquisitions, any comparison of data for the period ended March 31,
1999 to data for the current period may not be meaningful. See Note 2 and
Note 3 of "Notes to Unaudited Condensed Consolidated Financial Statements".
See "Notes to Unaudited Condensed Consolidated Financial Statements."
5
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
NET LOSS.................................................... $ (558) $ (612)
CASH FLOWS FROM OPERATING ACTIVITIES:
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Provision for loan and lease losses................... 160 60
Minority interest in subsidiaries..................... -- (100)
Depreciation and amortization for premises and
equipment........................................... 655 204
Amortization of intangible assets..................... 1,289 281
Amortization of premiums (accretion) of discounts on
investment securities, net.......................... (139) 8
Amortization of deferred loan and lease fees, net..... 15 10
Gain on sale of loans................................. (144) (106)
Loss on sale of investment securities................. 7 --
Gain on the sale of other real estate owned........... (6) --
Loss from sale of premises and equipment.............. 1 --
Dividends received on FHLB and FRB stock.............. (41) (7)
Net increase in accrued interest receivable........... (189) (70)
Net increase in other assets.......................... (1,727) (2,618)
Net increase (decrease) in net deferred tax
liabilities......................................... (115) 168
Net decrease in accrued interest payable and other
liabilities......................................... (5,826) (2,835)
-------- --------
Net cash used in operating activities................. (6,618) (5,617)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in
other financial institutions............................ (2,501) 1,877
Purchases of investment securities:
Available-for-sale...................................... (14,103) (4,040)
Proceeds from calls and maturities of investment
securities:
Available-for-sale...................................... 49 2,366
Held-to-maturity........................................ -- 366
Proceeds from sales of investment securities:
Available-for-sale...................................... 494 --
Proceeds from principal repayments on mortgage backed
securities:
Available-for-sale...................................... 229 --
Held-to-maturity........................................ 2,270 --
Net disbursement of loans................................. (22,138) (12,173)
Proceeds from sale of loans............................... 4,292 1,360
Purchases of premises and equipment....................... (1,605) (133)
Proceeds from sale of other real estate owned............. 482 --
Purchase of Federal Reserve Bank stock, net............... 30 --
Additional cash paid for acquisitions..................... (361) --
Purchase of SCB, net of cash acquired..................... (13,280) --
-------- --------
Net cash used in investing activities................. (46,142) (10,377)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, interest-bearing and
savings deposits........................................ 69,926 (6,026)
Proceeds from the issuance of common stock and exercise of
stock options........................................... 33,400 --
-------- --------
Net cash provided by (used in) financing activities... 103,326 (6,026)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 50,566 (22,020)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 60,360 80,880
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $110,926 $ 58,860
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 6,349 $ 953
Income taxes............................................ $ 605 $ 5
See "Notes to Unaudited Condensed Consolidated Financial Statements."
6
CALIFORNIA COMMUNITY BANCSHARES, INC.
SUPPLEMENTAL DISCLOSURE FOR ACQUISITION OF SUBSIDIARIES
(IN THOUSANDS)
THREE MONTHS
ENDED
SACRAMENTO COMMERCIAL BANK MARCH 31, 2000
- -------------------------- ---------------
ASSETS ACQUIRED:
Cash...................................................... $ 16,339
Federal funds sold........................................ 8,500
Investment securities..................................... 25,317
Investment in Federal Reserve Bank stock.................. 177
Loans and leases.......................................... 141,181
Real estate owned......................................... 38
Premises and equipment.................................... 2,024
Accrued interest receivable............................... 983
Cash surrender value of life insurance.................... 4,519
Other assets.............................................. 1,962
Goodwill.................................................. 20,705
Favorable lease rights.................................... 346
Core deposit intangible................................... 5,713
--------
227,804
LIABILITIES ASSUMED:
Deposits.................................................. 182,265
Accrued interest and other liabilities.................... 7,420
--------
CASH PAID FOR COMMON STOCK.................................. $ 38,119
========
See "Notes to Unaudited Condensed Consolidated Financial Statements."
7
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1--BASIS OF PRESENTATION
California Community Bancshares, Inc. (the "Company") is the holding company
for Sacramento Commercial Bank ("SCB"), CalWest Bank ("CalWest"), Bank of Orange
County ("BOC") and Placer Capital Co. ("PCC"), the bank holding company for
Placer Sierra Bank ("PSB" and together with SCB, CalWest and BOC, the "Banks").
The unaudited condensed consolidated financial statements of the Company
included herein reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods indicated. Certain
reclassifications have been made to the unaudited condensed consolidated
financial statements for 1999 to conform to the 2000 presentation. Certain
information and note disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). The results of operations
for the three months ended March 31, 2000 are not necessarily indicative of the
results of operations to be expected for the remainder of the year.
The preparation of unaudited condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates subject to change include the allowance for loan losses, the
carrying value of real estate owned, and the carrying value of the deferred tax
asset.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report filed on Form 10-K for the
year ended December 31, 1999.
NOTE 2--ACQUISITIONS AND MERGERS
THE COMPANY
The Company is the successor-in-interest to California Financial Bancorp
("CFB"), which was organized on September 11, 1997 as a California corporation
for the purpose of becoming a bank holding company subsidiary of the California
Community Financial Institutions Fund Limited Partnership (the "California
Fund"). CFB was merged with and into the Company on December 14, 1999, with the
Company as the surviving corporation and a wholly owned subsidiary of the
California Fund (the "CCB Merger"). In the CCB Merger, each share of CFB common
stock outstanding immediately prior to the CCB Merger was converted into the
right to receive 1.8296 shares of Company Common Stock. All share amounts herein
have been restated to give effect to the 1.8296 exchange ratio in the CCB
Merger. The CCB Merger is a combination accounted for under the "as-if"
pooling-of-interests method of accounting. Upon completion of, and as a result
of, the CCB Merger, the Company became the sole shareholder of BOC and CalWest
and the majority shareholder of National Business Bank ("NBB") and Security
First Bank ("SFB"). In conjunction with the CCB Merger, the Company acquired the
minority interest of SFB by causing SFB to be merged with and into BOC (the
"BOC/SFB Merger") and acquired the minority interest of NBB by causing NBB to be
merged with and into CalWest (the "CalWest/NBB Merger").
8
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 2--ACQUISITIONS AND MERGERS (CONTINUED)
SCB ACQUISITION
On February 29, 2000 the Company acquired SCB, a wholly owned subsidiary of
Sacramento Commercial Co. ("SCC"), a bank holding company. The Company issued
5,030,040 shares of Company Common Stock to the California Fund in exchange for
all of the outstanding shares of stock in SCC. SCC was formed by the California
Fund for the purpose of acquiring SCB, a single branch California state-
chartered commercial bank. SCC was capitalized through the sale of $33.4 million
of SCC Common Stock to the California Fund and through the sale of $4.7 million
of non-voting preferred stock to CCB. The total purchase price paid by SCC for
SCB was $37.6 million, net of a cash dividend of $4.0 million paid by SCB to
SCC. The acquisition of SCB by SCC was accounted for under the purchase method
of accounting. Consequently, the results of operations of SCB are only included
in the Company's results after the February 29, 2000 acquisition date. In
conjunction with the SCB Acquisition, the Company and SCB incurred acquisition
costs of approximately $519 thousand representing investment banking, filing and
professional fees that were capitalized as part of goodwill. SCC was merged with
and into the Company in a transaction accounted for under the "as-if"
pooling-of-interests method of accounting. See Note 3 of "Notes to Unaudited
Condensed Consolidated Financial Statements."
PLACER SIERRA BANK ACQUISITION
On August 11, 1999, PSB was acquired by PCC, a California corporation and
wholly owned subsidiary of the California Fund, which was organized for the
purpose of facilitating the acquisition of PSB by the California Fund ("the "PSB
Acquisition"). The total purchase price paid for PSB by PCC was approximately
$74.9 million net of a cash dividend of $8.0 million paid by PSB to PCC. The PSB
Acquisition was accounted for under the purchase method of accounting.
Following consummation of the PSB Acquisition, PSB was operated as an
indirect wholly-owned subsidiary of the California Fund. PCC subsequently became
a wholly owned subsidiary of the Company through an exchange of 100% of the
outstanding PCC Common Stock for shares of Company Common Stock on December 13,
1999, when the Company issued 13,040,657 shares of Company Common Stock to the
California Fund in exchange for all of the outstanding shares of PCC Common
Stock.
BOC/SFB MERGER
On December 23, 1999, the Company issued 873,286 shares of Company Common
Stock in the BOC/ SFB Merger to the minority shareholders of SFB in order to
become the sole shareholder of SFB. Each holder of SFB Common Stock, other than
the Company, received 0.0938 shares of Company Common Stock for each share of
SFB Common Stock. This part of the transaction was accounted for under the
purchase method of accounting. The merger of SFB with and into BOC, with BOC as
the surviving corporation, was accounted for under the "as-if"
pooling-of-interests method of accounting. (The Company made its initial
investment in SFB on November 14, 1997, which represented 51.88% of the then
issued and outstanding shares of SFB Common Stock and then subsequently
increased its investment to 54.69% on September 13, 1999).
In addition, the Company assumed, at the effective time of the BOC/SFB
Merger, the obligation of SFB to issue shares of SFB Common Stock upon
conversion of outstanding debentures of Pacific Inland Bancorp, SFB's former
bank holding company (the "PIB Debentures"). The PIB Debentures were issued
9
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 2--ACQUISITIONS AND MERGERS (CONTINUED)
in 1996 in the principal amount of $1.1 million, bear interest at the rate 12%
annually, expire in 2001, and were convertible on the basis of one share of SFB
Common Stock for each $0.40 in principal plus accrued, but unpaid interest.
CALWEST/NBB MERGER
On December 30, 1999 the Company issued 287,488 shares of Company Common
Stock in the CalWest/NBB Merger to the minority shareholders of NBB in order to
become the sole shareholder of NBB and during the first quarter of 2000, an
additional 15,053 shares were issued as a result of cancellation of dissenters
rights related to the CalWest/NBB Merger. Each holder of NBB Common Stock, other
than the Company, received 1.5053 shares of Company Common Stock for each share
of NBB Common Stock. This part of the transaction was accounted for under the
purchase method of accounting. The merger of NBB with and into CalWest, with
CalWest as the surviving corporation, was accounted for under the "as-if"
pooling-of-interests method of accounting. (The Company made its initial
investment in NBB on November 3, 1998 which represented 64.91% of the then
issued and outstanding of NBB Common Stock)
BANK OF ORANGE COUNTY ACQUISITION
On December 31, 1998, through a statutory merger, the Company became the
sole shareholder of BOC for an aggregate purchase price of $14.5 million, net of
a cash dividend of $375 thousand paid to the Company with BOC becoming a wholly
owned subsidiary of the Company (the "BOC Acquisition"). The BOC Acquisition was
accounted for under the purchase method of accounting. The Company funded the
purchase price in the BOC Acquisition with the issuance of 2,725,555 shares of
Company Common Stock to the California Fund in a private placement for
approximately $14.9 million.
DOWNEY BANCORP ACQUISITION
On November 25, 1998, through a statutory merger, the Company became the
sole shareholder of Downey Bancorp, a California corporation and sole
shareholder of Downey National Bank for an aggregate purchase price of $11.4
million, net of a cash dividend of $3.0 million paid to Downey Bancorp. Downey
Bancorp was then merged with and into the Company, with the Company as the
surviving corporation, and Downey National Bank becoming a wholly owned
subsidiary of the Company (the "DB Acquisition"). The DB Acquisition was
accounted for under the purchase method of accounting. Following the DB
Acquisition, Downey National Bank changed its name to CalWest Bank. The Company
funded the purchase price in the DB Acquisition with the issuance of 2,626,574
shares of Company Common Stock to the California Fund in a private placement for
approximately $14.4 million.
NOTE 3--UNAUDITED SUMMARY PRO FORMA DATA
The following table shows unaudited summary pro forma income statement
information for the three month periods ended March 31, 2000, and 1999, as if
the PSB Acquisition, SCB Acquisition, BOC/SFB Merger and CalWest/NBB Merger were
consummated as of January 1, 1999. As the PSB Acquisition and SCB Acquisition
were consummated on August 11, 1999 and February 29, 2000, respectively, the
results for the Company for the three month period ended March 31, 2000, include
the operating results of PSB for the entire quarter and SCB for the month of
March. January and February results for SCB, excluding
10
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 3--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
nonrecurring acquisition-related costs capitalized as part of goodwill, and the
additional amortization of purchase accounting adjustments are included in the
pro forma results for the three months ended March 31, 2000. The pro forma
results for the three months ended March 31, 1999, include the actual results of
the Company, the results of PSB and SCB together with the additional
amortization of purchase accounting adjustments for these acquisitions as well
as the additional amortization of goodwill arising from the purchase of the
minority interests of SFB and NBB and the effect of eliminating the minority
interest of SFB and NBB. See note 2--Acquisitions and Mergers--BOC/SFB Merger
and CalWest/NBB Merger.
The pro forma income statement adjustments included below are based on
management's estimates of costs and the fair value adjustments associated with
these transactions. The Company's cost and fair value estimates may differ in
the future, based on additional facts and information, such that actual cost
could differ and hence are forward-looking. Readers are cautioned that the type
and amount of actual costs incurred could vary materially from these estimates
if future developments differ from the underlying assumptions used by management
in determining the current estimate of these costs. The unaudited summary pro
forma income statement information is not necessarily indicative of the results
that would have occurred had the described acquisitions and mergers been
consummated on the dates indicated or that may be achieved in the future.
UNAUDITED SUMMARY PRO FORMA INCOME STATEMENT INFORMATION
UNAUDITED PRO FORMA
COMBINED SUMMARY OF
OPERATIONS
---------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Interest income.......................................... $ 19,120 $ 17,259
Interest expense......................................... $ 7,359 6,768
-------- --------
Net interest income.................................... $ 11,761 10,491
Provision for loan and lease losses...................... $ 220 435
-------- --------
Net interest income after provision for loan and lease
losses............................................... $ 11,541 10,056
Noninterest income....................................... 1,330 1,706
Noninterest expense...................................... 12,897 12,126
-------- --------
Loss before income taxes and minority interest......... (26) (364)
Income tax expense....................................... 509 419
Cost of minority interest................................ 93 94
-------- --------
Net loss............................................... $ (628) $ (877)
======== ========
Per share information:
Weighted average shares outstanding:
Basic.................................................. 26,312.6 26,312.6
Diluted................................................ 26,312.6 26,312.6
Net loss per share:
Basic.................................................. $ (0.02) $ (0.03)
Diluted................................................ $ (0.02) $ (0.03)
11
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
NOTE 4--STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources.
Comprehensive income generally includes net income, foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
investments in certain debt and equity securities (i.e., securities available
for sale). The Company's statements of comprehensive income (loss) for the
periods presented is as follows (in thousands):
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
NET LOSS.................................................... $(558) $(612)
Other comprehensive income, net of related taxes:
Unrealized holding (losses) gains arising during the
period.................................................. (113) (57)
Reclassification of realized gains included in income..... 6 --
----- -----
Total................................................... (107) (57)
----- -----
COMPREHENSIVE LOSS.......................................... $(665) $(669)
===== =====
NOTE 5--NET LOSS PER SHARE
Basic loss per share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period and excludes the effect of all potentially dilutive securities. Diluted
earnings (loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, or resulted from issuance of common stock that then share in
earnings. When an entity has a loss from continuing operations, the inclusion of
potential common shares in the denominator of a diluted per share computation
will always result in an anti-dilutive per share amount. Thus, the diluted per
share is the same as the basic loss per share amount. The following is a summary
of the calculation of basic and diluted net loss per share for the three month
periods ended March 31, 2000 and 1999:
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2000 1999
---------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net loss.............................................. $ (558) $ (612)
========== =========
Weighted average shares outstanding................... 22,983,660 6,875,776
========== =========
Basic net loss per share.............................. $ (0.02) $ (0.09)
========== =========
Weighted average shares outstanding................... 22,983,660 6,875,776
Effect of dilutive stock options and debentures....... 357,301 327,261
---------- ---------
Diluted shares outstanding............................ 23,340,961 7,203,037
========== =========
Diluted net loss per share............................ $ (0.02) $ (0.09)
========== =========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed or incorporated by reference in this Quarterly
Report on Form 10-Q are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected in the forwarded-looking statements. Such risks and uncertainties
include, but are not limited to, those described in "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION." Therefore, the information set forth therein
should be carefully considered when evaluating the business prospects of the
Company and its subsidiary banks. See "FORWARD-LOOKING STATEMENTS" herein.
OVERVIEW
The following tables and data set forth certain statistical information
relating to the Company as of March 31, 2000, and for the three month periods
ended March 31, 2000, and March 31, 1999. This discussion should be read in
conjunction with the unaudited condensed consolidated financial statements and
notes thereto as of March 31, 2000, included herein and the consolidated
financial statements and notes thereto included in the Company's Annual Report
filed on Form 10-K for the year ended December 31, 1999.
When the Company uses or incorporates by reference in this Quarterly Report
on Form 10-Q (the "Quarterly Report") the words "anticipate," "estimate,"
"expect," "project," "intend," "commit," "believe" and similar expressions, the
Company intends to identify certain forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions, including those
described in this Quarterly Report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected,
projected, intended, committed or believed.
Since December 31, 1999, the Company's total assets have increased by
approximately $286.3 million due primarily to the SCB Acquisition; SCB's assets
totaled $227.8 million, including $141.2 million in net loans and leases and
$25.3 million in securities available for sale at the date of acquisition.
Excluding the SCB Acquisition, total securities increased $11.0 million due
primarily to purchases totaling $14.1 million, offset partially by repayments of
mortgage backed securities of $2.5 million and net loans and leases increased
$17.8 million. Since December 31, 1999, the Company's total deposits have
increased by approximately $252.2 million due primarily to the SCB Acquisition;
SCB's deposits totaled $182.3 million at the date of acquisition.
Consolidated net loss for the quarter ended March 31, 2000, was $(558)
thousand or $(0.02) per diluted share. This compares with a consolidated net
loss of $(612) thousand or $(0.09) per diluted share for the quarter ended
March 31, 1999. Consolidated net income (loss), before goodwill and other
intangibles amortization and after-tax merger costs, for the same three month
periods in 2000 and 1999 was net income of $471 thousand and a net loss of
$(349) thousand, respectively, or $0.02 and $(0.05) per diluted share,
respectively.
13
RESULTS OF OPERATIONS
OPERATING INCOME. The Company defines operating income as net income before
goodwill amortization and after-tax core deposit intangible amortization and
merger costs. The following table summarizes key financial data and ratios at
and for the three months ended March 31, 2000 and 1999 for the Company.
AT AND FOR THE AT AND FOR THE
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
(DOLLARS IN THOUSANDS)
Operating income (loss):
Net loss................................................. $ (558) $ (612)
ADJUSTMENTS TO NET LOSS:
Core deposit intangible amortization................... 683 43
Tax benefit related to core deposit intangible......... (283) (18)
Goodwill amortization.................................. 606 238
---------- ---------
Operating income (loss), before after-tax merger
costs.............................................. 448 (349)
After-tax merger costs............................. 23 --
---------- ---------
Operating income (loss).............................. 471 (349)
========== =========
Revenues:
Net interest income, before provision for loan and lease
losses................................................. 9,949 2,583
Noninterest income....................................... 1,337 419
---------- ---------
Revenues............................................. 11,286 3,002
========== =========
Operating noninterest expense:
Noninterest expense...................................... 11,178 3,481
ADJUSTMENTS TO NONINTEREST EXPENSE:
Merger costs........................................... 40 --
Core deposit intangible amortization................... 683 43
Goodwill amortization.................................. 606 238
---------- ---------
Operating noninterest expense........................ $ 9,849 $ 3,200
========== =========
Per share information:
Number of shares (weighted average)...................... 22,983,660 6,875,776
Diluted shares........................................... 23,340,961 7,203,037
Basic net loss per share................................. $ (0.02) $ (0.09)
Diluted net loss per share............................... $ (0.02) $ (0.09)
Operating basic net income (loss) per share (Non-GAAP
disclosure)............................................ $ 0.02 $ (0.05)
Operating diluted net income (loss) per share (Non-GAAP
disclosure)............................................ $ 0.02 $ (0.05)
Profitability measures:
Return on average assets................................. (0.24)% (1.06)%
Return on average equity................................. (2.11)% (7.16)%
Return on equity......................................... (1.75)% (7.23)%
Efficiency ratio......................................... 99.04% 115.96%
Operating profitability measures (Non-GAAP disclosure):
Return on average tangible assets........................ 0.20% (0.65)%
Return on average equity................................. 1.69% (4.08)%
Return on equity......................................... 1.40% (4.12)%
Efficiency ratio......................................... 87.27% 106.60%
The efficiency ratio (noninterest expense divided by revenues) is a measure
of how effective the Company is at using its expense dollars. A lower or
declining ratio indicates improving efficiency. The Company's efficiency ratio
improved from 115.96% in the first quarter of 1999 to 99.04% in the first
quarter
14
of 2000. This is primarily due to the impact of the efficiency ratios of SCB and
PSB being included in the 2000 results as well as certain operating efficiencies
being achieved through the mergers of SFB and NBB into BOC and CalWest,
respectively. Based on operating profitability measures, efficiency ratios
(operating noninterest expense divided by revenues) improved to 87.27% for the
first quarter of 2000 compared to 106.60% for the first quarter of 1999. The
Company's return on average assets improved from a loss of 1.06% in the first
quarter of 1999 to a loss of 0.24% for the first quarter of 2000 while the
operating return on average tangible assets improved from a loss of 0.65% to
income of 0.20% for the same time periods.
Profitability of the Company is dependent upon retention of customer bases
through continuing to offer personalized service associated with the Company's
commitment to community banking. The Company must also realize operating
efficiencies through consolidating operating activities where such activities do
not interfere with customer relationships. Improved profitability is further
dependent upon growth in the deposit and loan customer bases within the
geographic markets of the Company's subsidiaries.
The Company believes that growth in deposit and loan customers can be
achieved while maintaining strong controls over asset quality and avoiding
unexpected additions to the allowance for loan and lease losses. This growth is
principally expected to result from inroads into the market share of competing
financial institutions who are continuing to disenfranchise customers through
their own consolidation efforts. The Company also believes that demand for loan
and deposit services will continue to increase due to continued growth in the
economies of the communities in which its subsidiaries are located. Management
believes that the Company will be able to participate in this growth which
should contribute to the Company achieving its profitability targets.
NET INTEREST INCOME. Net interest income is the difference between interest
earned on assets and interest paid on liabilities. Net interest margin is net
interest income expressed as a percentage of average interest-earning assets.
The following tables provide information concerning average interest-earning
assets and interest-bearing liabilities and yields and rates thereon for the
three months ended March 31, 2000 and March 31, 1999, respectively. Nonaccrual
loans and leases are included in the average earning assets amounts.
15
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
-------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD AVERAGE INCOME OR YIELD
BALANCE EXPENSE OR COST BALANCE EXPENSE OR COST
-------- ---------- -------- -------- ---------- --------
ASSETS
Interest-earning assets:
Loans and leases................................. $617,418 13,628 8.88% $102,267 2,410 9.56%
Investment securities............................ 143,497 2,245 6.29% 36,809 524 5.77%
Federal funds sold............................... 30,547 425 5.60% 41,930 476 4.60%
Other earning assets............................. 10,844 138 5.12% 5,019 68 5.47%
-------- ------- -------- ------
Total interest-earning assets................ 802,306 16,436 8.24% 186,025 3,478 7.58%
Non-earning assets:
Cash and demand deposits with banks.............. 37,793 9,646
Other assets..................................... 103,871 34,132
-------- --------
Total assets................................. 943,970 229,803
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand........................ 82,455 312 1.52% 14,040 44 1.26%
Money market................................... 72,956 576 3.18% 32,403 213 2.67%
Savings........................................ 135,953 881 2.61% 8,750 48 2.23%
Time........................................... 332,205 4,228 5.12% 49,274 590 4.86%
-------- ------- -------- ------
Total interest-bearing deposits.............. 623,569 5,997 3.87% 104,467 895 3.47%
Short-term borrowing............................. -- -- -- -- -- --
Long-term debt................................... 18,500 490 10.65% -- -- --
-------- ------- -------- ------
Total interest-bearing liabilities........... 642,069 6,487 4.06% 104,467 895 3.47%
Noninterest-bearing liabilities:
Demand deposits................................ 178,007 81,388
Other liabilities.............................. 13,951 5,446
-------- --------
Total liabilities............................ 834,027 191,301
Minority interest................................ 3,500 --
Shareholders' equity............................. 106,443 38,502
-------- --------
Total liabilities and shareholders' equity....... $943,970 $229,803
======== ------- ======== ------
Net interest income.............................. $ 9,949 2,583
======= ======
Net yield on interest-earning assets............. 4.99% 5.58%
===== ====
Net interest spread.............................. 4.18% 4.11%
===== ====
The net interest spread increased from 4.11% to 4.18% from first quarter of
1999 compared to the first quarter of 2000, while the net interest margin
(annualized net interest income divided by average interest-earning assets)
decreased from 5.58% to 4.99% over the same time periods. The decrease in the
net interest margin is attributed mainly to a decrease in the ratio of
noninterest-bearing demand deposits as a percentage of the Company's total
deposits from 43.8% in 1999 to 21.7% in 2000 such that the overall cost of
deposits increased from 1.95% in 1999 to 3.00% in 2000.
The yield on interest-earning assets increased 66 basis points from 7.58% to
8.24% due primarily to an overall increase in market interest rates and the
proportion of average loans and leases to total interest-earning assets
increasing from 55% during the first quarter of 1999 compared to 77% during the
first quarter of 2000. This increase was tempered by a decrease in the yield on
loans and leases from 9.56% for the first quarter of 1999 to 8.88% for the first
quarter of 2000 which is attributed mainly to the impact of the yield associated
with the single-family mortgages included in PSB's loan portfolio. PSB's average
balances and results are included in the 2000 figures and not included in the
1999 figures.
The Company's overall cost of funds, excluding noninterest-bearing demand
deposits, increased 59 basis points from 3.47% during the first quarter of 1999
compared to 4.06% during the same 2000 quarter. A portion of this increase is
due to the Company's financing related to the PSB Acquisition through the
16
$18.5 million trust preferred securities, which started August 11, 1999.
Further, in a concentrated effort to maintain a loan-to-deposit ratio of
approximately 80% and to continue to attract depositors as the market interest
rates have increased, the Company has maintained competitive interest rates on
deposit products reflected in the increase of the cost of funds in each category
of deposit products from 1999 to 2000. The increase in the proportion of time
certificates of deposits to interest bearing deposits during the first quarter
of 2000 compared to the same quarter in 1999 also contributed to the overall
increase in the cost of funds; time certificates of deposit represented 53% of
interest bearing deposits in 2000 compared to 47% in 1999.
NONINTEREST INCOME. The following table sets forth the details of
noninterest income for the three months ended March 31, 2000 and March 31, 1999.
As SCB was acquired on February 29, 2000, the results for 2000 only include one
month of noninterest income from SCB and the results of SCB are not included in
the 1999 historical results of the Company. Additionally, as PSB was acquired on
August 11, 1999, the results of PSB are included in 2000, but are not included
in the 1999 historical results of the Company. For purposes of this analysis,
the "Pro Forma Company" column for 2000 combines the historical results for the
Company for the 2000 period with the historical results of SCB for the two
months ended February 29, 2000 and the "Pro Forma Company" column for 1999
combines the historical results for the Company for the 1999 period with the
historical results of SCB and PSB for the three months ended March 31, 1999.
THREE
MONTHS
THREE ENDED
MONTHS TWO MONTHS MARCH 31,
ENDED ENDED 2000 THREE MONTHS ENDED MARCH 31, 1999
MARCH 31, FEBRUARY 29, ---------- -------------------------------------------
2000 2000 PRO PRO
---------- ------------- FORMA FORMA
COMPANY SCB COMPANY COMPANY PSB SCB COMPANY CHANGE
---------- ------------- ---------- --------- -------- -------- --------- --------
Service charges and fees..... $ 746 $103 $ 849 $195 $ 498 $137 $ 830 $ 19
Commissions and referral
fees....................... 187 22 209 6 135 -- 141 68
Gain on sale of loans, net... 144 -- 144 106 175 -- 281 (137)
Gain (loss) on sale of
securities, net............ (7) (97) (104) -- 59 -- 59 (163)
Other income................. 267 (35) 232 112 222 61 395 (163)
------ ---- ------ ---- ------ ---- ------ -----
Total noninterest income..... $1,337 $ (7) $1,330 $419 $1,089 $198 $1,706 $(376)
====== ==== ====== ==== ====== ==== ====== =====
On a pro forma basis with SCB and PSB, total noninterest income decreased
$376 thousand from $1.7 million to $1.3 million from the three months ended
March 31, 1999 to the three months ended March 31, 2000 primarily due to a $137
thousand decrease in gains on sale of loans, a $163 thousand increase in the
loss on sale securities and a $163 thousand decrease in other income. Certain
SCB securities were sold in the first quarter of 2000 to conform to the
Company's overall interest rate risk and credit risk policies. The decrease in
other income includes a decrease in merchant bankcard income of $63 thousand and
a decrease of $60 thousand in dividend income on certain life insurance
policies.
NONINTEREST EXPENSE. The following table sets forth the details of
noninterest expense for the three months ended March 31, 2000 and March 31,
1999. As SCB was acquired on February 29, 2000, the results for 2000 only
include one month of noninterest expense from SCB and the results of SCB are not
included in the 1999 historical results of the Company. Additionally, as PSB was
acquired on August 11, 1999, the results of PSB are included in 2000, but are
not included in the 1999 historical results of the Company. For purposes of this
analysis, the "Pro Forma Company" column for 2000 combines the historical
results for the Company for the 2000 period with SCB's actual results for the
two months ended February 29, 2000
17
and the "Pro Forma Company" column for 1999 combines the historical results for
the Company for the 1999 period with the actual results of SCB and PSB for the
three months ended March 31, 1999.
THREE
MONTHS
THREE ENDED
MONTHS TWO MONTHS MARCH 31,
ENDED ENDED 2000 THREE MONTHS ENDED MARCH 31, 1999
MARCH 31, FEBRUARY 29, ---------- -------------------------------------------
2000 2000 PRO PRO
---------- ------------- FORMA FORMA
COMPANY SCB COMPANY COMPANY PSB SCB COMPANY CHANGE
---------- ------------- ---------- --------- -------- -------- --------- --------
Salaries and employee
benefits.................. $ 5,138 $ 869 $ 6,007 $1,397 $2,684 $1,194 $ 5,275 $ 732
Occupancy and equipment..... 1,524 174 1,698 410 754 300 1,464 234
Data and item processing.... 462 24 486 318 193 21 532 (46)
Professional fees........... 673 69 742 438 156 95 689 53
Communications.............. 459 28 487 110 339 32 481 6
Business Development........ 390 35 425 104 279 36 419 6
Customer services........... 182 -- 182 125 -- -- 125 57
Other....................... 1,021 212 1,233 298 824 477 1,599 (366)
------- ------ ------- ------ ------ ------ ------- ------
Total noninterest expense,
excluding goodwill and
other intangibles
amortization.............. 9,849 1,411 11,260 3,200 5,229 2,155 10,584 676
Merger costs................ 40 790 830 -- -- -- -- 830
Goodwill amortization....... 606 -- 606 238 -- -- 238 368
Core deposit intangible
amortization.............. 683 -- 683 43 -- -- 43 640
------- ------ ------- ------ ------ ------ ------- ------
Total noninterest expense... $11,178 $2,201 $13,379 $3,481 $5,229 $2,155 $10,865 $2,514
======= ====== ======= ====== ====== ====== ======= ======
On a pro forma basis with SCB and PSB total noninterest expense, before
merger costs and goodwill and other intangibles amortization, increased
approximately $676 thousand from $10.6 million to $11.3 million, from the three
months ended March 31, 1999 to the three months ended March 31, 2000 due
primarily to an increase in salary and occupancy and equipment expense, offset
in part by a decrease in other expenses. The salary expense increase of $732
thousand is attributed mainly to the expansion of certain lending functions at
the Banks including commercial and SBA lending at PSB, and real estate,
construction and SBA lending at BOC as well as expanding the business
development and marketing functions across the organization since the end of the
first quarter 1999. Occupancy and equipment expense increased $234 thousand due
to approximately $65 thousand of additional building depreciation per quarter
from write-up in value of certain PSB properties in the PSB Acquisition,
additional depreciation expense for equipment purchased in relation to PSB's
in-house data processing center as well as other equipment expense. The net
decrease in other operating expenses of $366 thousand is attributed mainly to
the timing in spending the advertising budget, lower regulatory fees based on
changing PSB's primary regulatory agency, and a decrease in merchant bank card
expenses.
INCOME TAXES. The Company's normal effective income tax rate is
approximately 41.5%, representing a blend of the statutory Federal income tax
rate of 34.0% and the California franchise tax rate of 7.15%. The Company's
actual effective income tax rates were 101.3% and 32.0% for the three months
ended March 31, 2000 and 1999, respectively. The actual effective tax rates are
higher than the normal effective tax rate largely as a result of nondeductible
goodwill.
BALANCE SHEET ANALYSIS
CREDIT QUALITY. The Company defines nonperforming assets to include
(i) loans and leases on which it has ceased to accrue interest ("Nonaccrual
Loans") and (ii) assets acquired through foreclosure including other real estate
owned. "Impaired loans" are commercial, commercial real-estate, other
real-estate
18
related and individually significant mortgage and consumer loans for which it is
probable that the Company will not be able to collect all amounts due according
to the contractual terms of the loan agreement. The category of "impaired loans"
is not synonymous with the category of "nonaccrual loans," although the two
categories overlap. "Nonaccrual loans" include impaired loans and those on which
the accrual of interest is discontinued when collectibility of principal or
interest is uncertain or payments of principal or interest have become
contractually past due 90 days. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan impaired, if (i) it is probable that the Company will
collect all amounts due in accordance with the contractual terms of the loan or
(ii) the loan is a consumer loan or other homogenous type of loan that is
reviewed on a collective basis for impairment.
The following table shows the historical trends in nonperforming assets and
key credit quality statistics for the Company:
CREDIT QUALITY MEASURES
(DOLLARS IN THOUSANDS)
QTR ENDED YEAR ENDED QTR ENDED
MAR 31, DEC 31, MAR 31,
2000 1999 1999
--------- ---------- ---------
Average loans and leases outstanding........................ $617,418 $267,896 $102,267
Gross loans and leases...................................... 719,849 559,784 110,271
Nonaccrual loans, not restructured.......................... 3,465 413 554
Accruing loans past due 90 days or more..................... -- -- --
Restructured loans.......................................... -- -- --
-------- -------- --------
Total nonperforming loans ("NPLs")........................ 3,465 413 554
Other real estate owned ("OREO")............................ 38 -- 393
-------- -------- --------
Total nonperforming assets ("NPAs")..................... 3,503 413 947
======== ======== ========
Allowance for loan losses:
Balance at beginning of period........................ 6,750 1,986 1,986
Balance acquired during period........................ 2,547 4,087 --
-------- -------- --------
Loans and leases charged off during period.......... (41) (283) (59)
Recoveries during period............................ 45 141 14
-------- -------- --------
Net recoveries (charge-offs) during period........ 4 (142) (45)
Provision for loan losses............................. 160 819 60
-------- -------- --------
Balance at end of period.......................... $ 9,461 $ 6,750 $ 2,001
======== ======== ========
Selected ratios:
Net recoveries (charge-offs) to average loans and
leases.................................................. 0.003% (0.05)% (0.27)%
Provision for loan losses to average loans and leases..... 0.10% 0.31% 0.36%
Allowance at end of period to gross loans and leases
outstanding at end of period.............................. 1.31% 1.21% 1.81%
Allowance as percentage of nonperforming loans and leases... 273.04% 1,634.39% 361.19%
NPLs to total loans and leases.......................... 0.48% 0.07% 0.50%
NPAs to total loans and leases and OREO................. 0.49% 0.07% 0.86%
NPAs to total assets.................................... 0.31% 0.05% 0.42%
Gross loans and leases increased $160.1 million since December 31, 1999, of
which $143.8 million is attributed to the loan portfolio acquired in the SCB
Acquisition and net loan growth of $16.3 million or an annualized growth rate of
11.6%. Nonaccrual loans and leases increased for a total of $3.3 million at
19
March 31, 2000, a $2.9 million increase since year-end. This increase represents
the addition of $1.4 million in nonaccrual loans as result of the SCB
Acquisition and $1.3 million relates to management placing a few credits secured
by real-estate on nonaccrual. The loans on nonaccrual status are, in the opinion
of management, adequately secured. The ratio of nonaccrual loans to total loans
is relatively consistent between March 31, 2000 at 0.48% compared with 0.50% at
March 31, 1999 with a decrease in this ratio to 0.07% at December 31, 1999. The
ratio of nonperforming assets to total assets decreased from 0.42% at March 31,
1999 to 0.05% at December 31, 1999 and has increased to 0.31% as of March 31,
2000. The increase in both of these ratios during the first quarter of 2000 is
attributed mainly to the impact the SCB Acquisition. The Company does not have
any loans and leases past due 90 days and still accruing.
ALLOWANCE FOR LOAN AND LEASE LOSSES. The Company has established a
monitoring system for its loans and leases in order to identify impaired loans,
and potential problem loans and leases and to permit periodic evaluation of
impairment and the adequacy of the allowance for loan and lease losses ("ALLL")
in a timely manner. The monitoring system and ALLL methodology have evolved over
a period of years, and loan classifications have been incorporated into the
determination of the ALLL. This monitoring system and allowance methodology
include a loan-by-loan analysis for all classified loans and leases as well as
loss factors for the balance of the portfolio that are based on an analysis
relative to the Company's unclassified portfolio. This analysis includes such
factors as historical loss experience, current portfolio delinquency and trends,
and other inherent risk factors such as economic conditions, concentrations in
the portfolio risk levels of particular loan categories, internal loan review
and management oversight.
The ALLL increased by $2.7 million during the first quarter of 2000 due to
the acquisition of SCB, net recoveries of $4 thousand and the provision of $160
thousand. The Company's annualized ratio of net recoveries to average loans and
leases is less than 1% at March 31, 2000 compared to net charge-offs of 0.05%
and 2.04% for the years ended at December 31, 1999 and 1998, respectively.
Management is not aware of any additional significant loss potential that has
not already been included in the estimation of the allowance for loan losses.
Management believes that the allowance for loan and lease losses of $9.5 million
at March 31, 2000, is adequate based on the Company's evaluation of loan
portfolio, improved economic conditions and continued adherence to established
credit policies.
REGULATORY MATTERS. The regulatory capital guidelines as well as the actual
capitalization for BOC, CalWest, PCC, PSB, SCB and the Company on a consolidated
basis as of December 31, 1999 follow:
REQUIREMENT ACTUAL
---------------------------- -------------------------------------------------------------------
ADEQUATELY WELL CONSOLIDATED
CAPITALIZED CAPITALIZED SCB BOC CALWEST PSB PCC COMPANY
----------- ----------- -------- -------- -------- -------- -------- ------------
(GREATER THAN OR EQUAL TO)
Total risk-based capital..... 8.00% 10.00% 10.59% 10.83% 13.71% 11.36% 11.34% 11.62%
Tier 1 risk-based capital
ratio...................... 4.00% 6.00% 9.33% 9.57% 12.57% 10.19% 10.17% 10.37%
Tier 1 leverage capital
ratio...................... 4.00% 5.00% 7.24% 7.43% 10.58% 6.21% 6.19% 7.04%
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK.
LIQUIDITY MANAGEMENT. The Banks rely upon deposits as their principal
source of funds and, therefore, must be in a position to service depositors'
needs as they arise. Liquidity management is the process of planning to meet the
cash flow requirements of customers who may either be depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs.
As an overall guide to ensuring adequate liquidity, management attempts to
maintain a loan-to-deposit ratio of approximately 80% and a liquidity ratio
(liquid assets, including cash and due from banks, Federal funds sold,
interest-bearing deposits in other banks and investment securities available for
sale to total deposits) of approximately 20%. As so measured, on a consolidated
basis the Company's liquidity ratio stood at 22.0% and 16.9%, respectively, on
March 31, 2000 and December 31, 1999, while its loan to
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deposit ratio stood 74.5% and 78.3% on those same dates. At March 31, 2000,
management believes liquidity of the Banks is adequate.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The primary
function of asset and liability management is to maintain an appropriate balance
between the impact on the Company's net interest margin arising from changes in
interest rates, as well as the potential impact on both earnings and liquidity
from market risk.
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market prices and rates, foreign currently exchanges rates,
commodity prices and equity prices. The Company's market risk arises primarily
from interest rate risk inherent in its investment and loan portfolios as well
as its deposit taking activities. Though market risk sensitive instruments can
also consist of on and off balance sheet derivatives or other financial
instruments, at March 31, 2000 and December 31, 1999, the Company had no
material on or off balance sheet derivatives.
One method to measure the impact of future changes in interest rates on net
interest income is through a cumulative gap measure. The gap represents the net
position of assets and liabilities subject to repricing in a specified time
period. Generally, a liability sensitive gap position indicates that there would
be a net positive impact on net interest margin for the period measured in a
declining rate environment since the Company's liabilities would reprice to
lower market rates before its assets would. A net negative impact would result
from a increasing interest rate environment. Conversely, an asset sensitive gap
indicates that there would be a net positive impact on the net interest margin
in a rising interest rate environment since assets would reprice to higher
market interest rates before its liabilities.
At March 31, 2000, the Company had $259.3 million more interest-sensitive
liabilities repricing within a one year period than assets as compared to $252.5
million at December 31, 1999. Accordingly, the SCB Acquisition on February 29,
2000 did not materially impact the overall interest rate risk profile of the
Company. Additionally, because of the slight changes in market interest rates
since December 31, 1999, consistent contractual maturities and due to the SCB
Acquisition having been accounted for under the purchase method of accounting,
management believes that there has been no material change in the difference
between the book value of interest sensitive assets and liabilities and their
estimated fair values.
Management is continuing to take steps to reduce the negative gap position
of the Company by shortening the maturities in its investment portfolio and
originating more variable rate assets. Management is continuing to strive to
maintain a balance between its interest-earning assets and interest-bearing
liabilities in order to minimize the impact on net interest income and liquidity
due to changes in market rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS
No. 133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires recognition of all
derivative instruments as either assets or liabilities on the balance sheet and
measurement of those instruments at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value of cash flows. If
certain conditions are met, a derivative may be designated specifically as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment (a fair value hedge) or (b) a
hedge of the exposure to variable cash flows of a forecasted transactions (a
cash flow hedge). SFAS No. 133, as amended by Statement of Financial Accounting
Standards No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133--AN
AMENDMENT OF FASB STATEMENT NO. 133 ("SFAS No. 137"), is effective for all
fiscal quarters of fiscal
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years beginning after June 15, 2000. Management believes that the adoption of
SFAS No. 133 and SFAS No. 137 will not have a material impact on the Company's
results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See the section titled "Liquidity, Interest Rate Sensitivity and Market
Risk" in the Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and the Banks are party to claims and legal
proceedings arising in the ordinary course of business. Management of the
Company evaluates the Company's and/or the Banks' exposure to the cases
individually and in the aggregate and provides for potential losses on such
litigation if the amount of the loss is determinable and if the occurrence of
the loss is probable. In the opinion of management of the Company, the ultimate
disposition of these matters will not have a material adverse effect on the
consolidated financial condition of the Company. However, litigation is
inherently uncertain and no assurance can be given that any litigation will not
result in any loss which might be material to the Company and/or the Banks.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In connection with the merger of SCC with and into the Company, the
Company issued 5,030,040 shares of its common stock to the California Fund as
sole shareholder of SCC on the effective date of the merger. These shares were
issued pursuant to the exemption from the registration requirements of the
Securities Act of 1933 (the "Act") provided by Section 4(2) of the Act and
Regulation D adopted under the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
2.1 Agreement of Merger entered into as of March 1, 2000, by and
between California Community Bancshares, Inc. and Sacramento
Commercial Co.
11 Statement re: computation of per share earnings is included
in Note 5 to the unaudited condensed consolidated financial
statements of Registrant.
27 Financial Data Schedule
REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALIFORNIA COMMUNITY BANCSHARES, INC.
Date: May 17, 2000 /s/ RONALD BACHLI
-----------------------------------------
Ronald Bachli
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: May 17, 2000 /s/ DAVID HOOSTON
-----------------------------------------
David Hooston
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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