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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 JUNE 30, 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
------------------------
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 August 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 Statements of Comprehensive Income (Loss)......... 6
Unaudited Condensed Consolidated Statements of Cash Flows... 7
Supplemental Disclosure for Acquisition of Subsidiaries..... 8
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 9
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 29
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 29
ITEM 2. Changes in Securities and use of Proceeds................... 29
ITEM 3. Defaults Upon Senior Securities............................. 29
ITEM 4. Submission of Matters to a Vote of Security Holders......... 29
ITEM 5. Other Information........................................... 29
ITEM 6. Exhibits and Reports on Form 8-K............................ 30
SIGNATURES........................................................... 31
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
FORWARD-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 ALLOWANCE 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)
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
ASSETS
Cash and due from banks..................................... $ 58,927 $ 39,569
Federal funds sold and securities purchased under agreements
to resell................................................. 61,727 20,791
---------- --------
Total cash and cash equivalents......................... 120,654 60,360
Interest-bearing deposits with other banks.................. 1,586 2,576
Investment securities available-for-sale, at fair value..... 104,402 57,656
Investment securities held-to-maturity, at amortized cost... 65,475 70,592
Investments in Federal Home Loan Bank and Federal Reserve
Bank stock, at cost....................................... 7,790 4,112
Loans and leases receivable, net of allowance for loan and
lease losses of $9,774 at June 30, 2000 and $6,750 at
December 31, 1999......................................... 729,114 551,399
Real estate owned, net...................................... 4,642 5,001
Premises and equipment, net................................. 23,878 20,874
Accrued interest receivable................................. 6,210 4,644
Cash surrender value of life insurance...................... 2,323 1,471
Goodwill and other intangible assets........................ 85,964 61,868
Other assets................................................ 5,279 2,626
---------- --------
TOTAL ASSETS............................................ $1,157,317 $843,179
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits.............................. $ 229,655 $151,121
Interest-bearing deposits................................. 762,169 561,641
---------- --------
Total deposits.......................................... 991,824 712,762
Accrued interest and other liabilities.................... 6,849 5,889
Deferred income tax liabilities, net...................... 8,681 6,694
Trust preferred securities................................ 18,500 18,500
---------- --------
Total liabilities....................................... 1,025,854 743,845
Minority interest in subsidiaries........................... 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
June 30, 2000, and 21,267,483 shares issued and
outstanding at December 31, 1999........................ 132,847 99,450
Accumulated other comprehensive loss...................... (398) (342)
Accumulated deficit....................................... (4,486) (3,274)
---------- --------
Total stockholders' equity.............................. 127,963 95,834
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $1,157,317 $843,179
========== ========
See "Notes to Unaudited Condensed Consolidated Financial Statements."
4
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(a)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans and leases..................... $ 16,778 $ 2,756 $ 30,406 $ 5,166
Interest on deposits with other banks..................... 54 59 132 120
Interest on Federal funds sold and securities purchased
under agreements to resell.............................. 885 304 1,310 780
Interest on investment securities......................... 2,545 478 4,790 1,002
Dividends on Federal Home Loan Bank and Federal Reserve
Bank stocks............................................. 127 8 187 15
--------- -------- --------- --------
Total interest and dividend income...................... 20,389 3,605 36,825 7,083
INTEREST EXPENSE:
Savings, money market and demand deposits................. 2,325 313 4,094 618
Time certificates of deposit under $100................... 3,140 263 5,673 500
Time certificates of deposit of $100 and over............. 2,181 297 3,876 650
Interest on long-term borrowings.......................... 428 -- 918 --
--------- -------- --------- --------
Total interest expense.................................. 8,074 873 14,561 1,768
--------- -------- --------- --------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND LEASE
LOSSES.................................................... 12,315 2,732 22,264 5,315
PROVISION FOR LOAN AND LEASE LOSSES......................... 285 91 445 151
--------- -------- --------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES.................................................... 12,030 2,641 21,819 5,164
NONINTEREST INCOME:
Service charges and fees on deposits...................... 779 168 1,458 365
Loan servicing fees....................................... 199 9 300 15
Loan referral fees........................................ 28 57 152 104
Commissions on investment products........................ 252 -- 439 --
Gain on sale of loans, net................................ 222 104 366 211
Loss on sale of securities................................ -- -- (7) --
Other income.............................................. 238 115 363 177
--------- -------- --------- --------
Total noninterest income................................ 1,718 453 3,071 872
NONINTEREST EXPENSE:
Salaries and employee benefits............................ 5,803 1,453 10,964 2,846
Occupancy, premises and equipment......................... 1,695 406 3,222 816
Data and item processing.................................. 671 173 1,120 385
Professional fees......................................... 595 241 1,267 716
Communications............................................ 471 129 928 236
Business development...................................... 415 104 786 213
Customer services expense................................. 236 107 424 218
Amortization of intangible assets......................... 1,622 293 2,911 574
Other operating expenses.................................. 2,962 390 4,221 773
--------- -------- --------- --------
Total noninterest expense............................... 14,470 3,296 25,843 6,777
--------- -------- --------- --------
LOSS BEFORE INCOME TAXES AND MINORITY INTERESTS............. (722) (202) (953) (741)
INCOME TAXES (BENEFIT)...................................... (149) 116 85 289
--------- -------- --------- --------
LOSS BEFORE MINORITY INTERESTS.............................. (573) (318) (1,038) (1,030)
MINORITY INTERESTS:
Dividend on preferred stock of minority interest.......... 81 -- 174 --
Minority interest in loss of subsidiaries................. -- (42) -- (142)
--------- -------- --------- --------
NET LOSS.................................................... $ (654) $ (276) $ (1,212) $ (888)
========= ======== ========= ========
Per share information:
Weighted average common shares outstanding:
Basic................................................... 26,312.6 6,875.8 24,648.1 6,875.8
Diluted................................................. 26,312.6 6,875.8 24,648.1 6,875.8
Net loss per share:
Basic................................................... $ (0.02) $ (0.04) $ (0.05) $ (0.13)
Diluted................................................. $ (0.02) $ (0.04) $ (0.05) $ (0.13)
- ------------------------------
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 periods ended June 30, 1999 to
data for the current periods 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 STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
NET LOSS.................................................... $(654) $(276) $(1,212) $(888)
Other comprehensive loss, net of related taxes:
Unrealized holding losses arising during the period....... (51) (54) (50) (111)
Reclassification of realized losses included in income.... -- -- (6) --
----- ----- ------- -----
Total................................................... (51) (54) (56) (111)
----- ----- ------- -----
COMPREHENSIVE LOSS.......................................... $(705) $(330) $(1,268) $(999)
===== ===== ======= =====
See "Notes to Unaudited Condensed Consolidated Financial Statements."
6
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
----------------- -----------------
NET LOSS.................................................... $ (1,212) $ (888)
CASH FLOWS FROM OPERATING ACTIVITIES:
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Provision for loan and lease losses..................... 445 151
Minority interest in loss of subsidiaries............... -- (142)
Depreciation and amortization for premises and
equipment.............................................. 1,344 266
Amortization of intangible assets....................... 2,911 575
Amortization of premiums (accretion) of discounts on
investment securities, net............................. (320) 111
Amortization of deferred loan and lease fees, net....... 23 (79)
Gain on sale of loans................................... (366) (211)
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................ (137) --
Net increase in accrued interest receivable............. (410) (75)
Net decrease in other assets............................ 374 219
Net decrease in net deferred tax liabilities............ (330) (189)
Net decrease in accrued interest payable and other
liabilities............................................ (5,374) (3,393)
-------- --------
Net cash used in operating activities................... (3,050) (3,655)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in
other banks............................................. 990 (99)
Purchases of investment securities:
Available-for-sale...................................... (32,495) (5,800)
Held-to-maturity........................................ -- (1,825)
Proceeds from calls and maturities of investment
securities:
Available-for-sale...................................... 9,919 3,500
Held-to-maturity........................................ 500 509
Proceeds from sales of investment securities
available-for-sale...................................... 493 --
Proceeds from principal repayments on mortgage backed
securities:
Available-for-sale...................................... 723 --
Held-to-maturity........................................ 4,771 --
Net disbursement of loans................................. (60,534) (20,213)
Proceeds from sale of loans............................... 23,817 3,345
Purchases of premises and equipment....................... (2,357) (169)
Proceeds from sale of other real estate owned............. 513 --
Purchase of Federal Reserve Bank stock, net............... (3,364) (676)
Proceeds from cash surrender value of life insurance...... 3,698 --
Additional cash paid for acquisitions..................... (243) --
Purchase of Sacramento Commercial Bank, net of cash
acquired................................................ (13,280) --
-------- --------
Net cash used in investing activities................. (66,849) (21,428)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, interest-bearing and
savings deposits........................................ 96,796 (9,901)
Purchase of dissenting shares............................. (3) --
Issuance of common stock for acquisition and cancellation
of dissenters rights.................................... 33,400 --
-------- --------
Net cash provided by (used in) financing activities... 130,193 (9,901)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 60,294 (34,984)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 60,360 80,880
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $120,654 $ 45,896
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 12,497 $ 1,744
Income taxes............................................ $ 1,005 $ 5
Net change in unrealized loss on available-for-sale
securities, net of taxes 56 (116)
Acquisitions of other real estate owned through
foreclosure............................................. 80 --
See "Notes to Unaudited Condensed Consolidated Financial Statements."
7
CALIFORNIA COMMUNITY BANCSHARES, INC.
SUPPLEMENTAL DISCLOSURE FOR ACQUISITION OF SUBSIDIARIES
(IN THOUSANDS)
SIX MONTHS
ENDED
Sacramento Commercial Bank JUNE 30, 2000
-------------------------- -------------
ASSETS ACQUIRED:
Cash...................................................... $ 16,339
Federal funds sold........................................ 8,500
Investment securities available-for-sale.................. 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."
8
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1--BASIS OF PRESENTATION
California Community Bancshares, Inc. (the "Company") is the holding company
for Bank of Orange County ("BOC"), Sacramento Commercial Bank ("SCB"), and
Placer Capital Co. ("PCC"), the bank holding company for Placer Sierra Bank
("PSB" and together with BOC and SCB, 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 six and three months ended June 30, 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 a transaction accounted for under the
"as-if" pooling-of-interests method of accounting. 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. Upon completion of, and as a result of, the CCB Merger,
the Company became the sole shareholder of BOC and CalWest Bank ("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"). CalWest was
subsequently merged with and into BOC (the "BOC/CalWest Merger") effective
July 14, 2000.
9
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 2--ACQUISITIONS AND MERGERS (CONTINUED)
ACQUISITION AND MERGER SYNOPSIS
BOC/CALWEST MERGER
The Company merged CalWest with and into BOC effective July 14, 2000, using
the "as-if" pooling-of-interest method of accounting. In conjunction with the
BOC/CalWest Merger, the Company incurred merger-related costs of approximately
$375 thousand representing severance costs, system conversion costs, contract
termination costs and professional fees.
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
10
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 2--ACQUISITIONS AND MERGERS (CONTINUED)
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 (the "SFB Initial
Investment").
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 in
1996 in the principal amount of $1.1 million, bear interest at the rate of 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 second 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 (the "NBB Initial Investment").
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.
11
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 2--ACQUISITIONS AND MERGERS (CONTINUED)
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 statements of
operations information for the six month periods ended June 30, 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 six month period ended
June 30, 2000, include the operating results of PSB for the entire period and
SCB since the date of acquisition. January and February results for SCB,
excluding 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 six months ended June 30, 2000. The
pro forma results for the six months ended June 30, 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 statements of operations 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 statements of operations 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.
12
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 3--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
UNAUDITED SUMMARY PRO FORMA STATEMENTS OF OPERATIONS INFORMATION
SIX MONTHS
ENDED JUNE 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Interest income............................................. $ 39,509 $ 35,226
Interest expense............................................ 15,433 13,458
-------- --------
Net interest income....................................... 24,076 21,768
Provision for loan and lease losses......................... 505 970
-------- --------
Net interest income after provision for loan and lease
losses.................................................. 23,571 20,798
Noninterest income.......................................... 3,108 3,702
Noninterest expense......................................... 24,386 20,895
Amortization of intangibles................................. 3,220 2,841
-------- --------
Loss before income taxes and minority interest............ (927) 764
Income tax expense.......................................... 181 1,259
Dividend on preferred stock of minority interest and
minority interest in loss of subsidiaries................. 174 94
-------- --------
Net loss.................................................. $ (1,282) $ (589)
======== ========
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..................................................... $ (0.05) $ (0.02)
Diluted................................................... $ (0.05) $ (0.02)
NOTE 4--NET LOSS PER SHARE
Basic loss per share is calculated by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted 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 loss per share amount is the same as the basic loss per share amount.
(The number of weighted average share equivalents for options and debentures
have been provided for
13
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 4--NET LOSS PER SHARE (CONTINUED)
informational purposes only.) The following is a summary of the calculation of
basic and diluted net loss per share for the six and three month periods ended
June 30, 2000 and 1999:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
---------------------- ------------------------
2000 1999 2000 1999
---------- --------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss........................................ $ (654) $ (276) $ (1,212) $ (888)
========== ========= ========== =========
Weighted average shares outstanding............. 26,312,576 6,875,776 24,648,118 6,875,776
========== ========= ========== =========
Basic net loss per share........................ $ (0.02) $ (0.04) $ (0.05) $ (0.13)
========== ========= ========== =========
Weighted average shares outstanding............. 26,312,576 6,875,776 24,648,118 6,875,776
Effect of dilutive stock options and
debentures.................................... 578,545 334,730 578,544 334,730
---------- --------- ---------- ---------
Diluted shares outstanding...................... 26,891,121 7,210,506 25,226,662 7,210,506
========== ========= ========== =========
Diluted net loss per share...................... $ (0.02) $ (0.04) $ (0.05) $ (0.13)
========== ========= ========== =========
NOTE 5--SUBSEQUENT EVENT--CALWEST BANK QUASI-REORGANIZATION
Under a plan approved by the applicable bank regulatory agencies, the
Company effected a quasi-reorganization as of July 1, 2000 of its subsidiary
CalWest, prior to CalWest merging with and into BOC. Under the
quasi-reorganization plan, the accumulated deficit of $2.1 million of CalWest
was eliminated against CalWest's capital account and the balance sheet was
marked to its fair value.
14
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 forward-looking statements. Such risks and uncertainties
include, but are not limited to, those described in "MANAGEMENT'S DISCUSSION AND
ANALYSIS AND RESULTS OF OPERATIONS." Therefore, the information set forth herein
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 June 30, 2000, and for the six and three month
periods ended June 30, 2000, and June 30, 1999. This discussion should be read
in conjunction with the unaudited condensed consolidated financial statements
and notes thereto as of June 30, 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.
STRATEGIC EVOLUTION
During 1998 and 1999 and the first quarter of 2000, the Company's focus was
on acquiring financial institutions (i.e., the Security First Bank Initial
Investment, the National Business Bank Initial Investment, the DB Acquisition,
the BOC Acquisition, the PSB Acquisition and the SCB Acquisition). In
December of 1999 the four banking subsidiaries located in southern California
were merged with and into one another to form two banks (i.e., the BOC/SFB
Merger and the CalWest/NBB Merger) in order to achieve operating and strategic
efficiencies.
During the second quarter of 2000 the Company turned its focus on improving
the operating results of the Banks and accordingly took steps to realize
operating efficiencies, reduce its concentration on real estate-related lending
products and increase its focus on obtaining commercial loan and deposit
customers. To accomplish this, the Company undertook a reorganization of PSB and
SCB and the BOC/CalWest Merger.
PSB/SCB REORGANIZATION
PSB continues its transition from a savings and loan into a commercial bank.
The goal of this transition is to enable PSB to better focus on servicing branch
customers and local business owners. As part of this strategy, during the second
quarter PSB eliminated its home mortgage division and reduced staff in the
commercial real estate-related lending division. PSB is concentrating resources
on expanding its SBA and commercial lending while moving towards offering a
web-based credit-scoring product to better serve the small commercial loan
market that comprises the bulk of opportunities in its geographical market area
as well as consumer loan demand.
15
During the second quarter of 2000 the Company also combined certain
administrative functions between PSB and SCB in the areas of loan
administration, finance and personnel management in order to develop operational
and cost efficiencies (the "PSB/SCB Reorganization"). The PSB/SCB Reorganization
resulted in the elimination of 48 full-time equivalent staff and, in accordance
with the Company's severance program, a $1.1 million charge to second quarter
earnings to reflect the cost of this reorganization. It is anticipated that this
reorganization will produce significant ongoing pretax savings in future
periods.
BOC/CALWEST MERGER
During the six months ended June 30, 2000, the Company's southern California
banking subsidiaries engaged in a significant reorganization following the
December 23, 1999 BOC/SFB Merger and the December 30, 1999 CalWest/NBB Merger in
order to attain operational and cost efficiencies. The reorganization and
merger-related efforts have had a negative impact on current earnings but are
expected to have a proportionately larger positive impact on future
profitablity. To continue to achieve further operational efficiencies the
Company effected the BOC/CalWest Merger. During the three months ended June 30,
2000 the process of merging these two entities resulted in merger-related
charges of approximately $375 thousand. The merger-related costs relate
primarily to severance costs, system conversion costs, termination penalties to
exit certain contracts, and professional fees associated with accomplishing this
merger. It is anticipated that the mergers of the southern California
subsidiaries will enable the BOC to offer a greater variety of products to their
customers as well as produce significant ongoing pretax savings in future
periods.
FINANCIAL OVERVIEW
Since December 31, 1999, the Company's total assets have increased by
approximately $314.2 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, net loans and leases increased $36.5 million and
total securities increased $16.3 million due primarily to purchases totaling
$32.5 million, offset partially by repayments of mortgage backed securities of
$5.5 million and maturities of securities of $10.4 million. Since December 31,
1999, the Company's total deposits have increased by approximately $279.1
million due primarily to the SCB Acquisition; SCB's deposits totaled $182.3
million at the date of acquisition.
Consolidated net loss for the six months ended June 30, 2000, was $(1.2)
million or $(0.05) per diluted share. This compares with a consolidated net loss
of $(888) thousand or $(0.13) per diluted share for the six months ended
June 30, 1999. Consolidated net income (loss), before goodwill and other
intangibles amortization and after-tax reorganization and merger-related costs,
for the same six month periods in 2000 and 1999 was net income of $2.0 million
and a net loss of $(435) thousand, respectively, or $0.04 and $(0.06) per
diluted share, respectively.
Consolidated net loss for the quarter ended June 30, 2000, was $(654)
thousand or $(0.02) per diluted share. This compares with a consolidated net
loss of $(276) thousand or $(0.04) per diluted share for the quarter ended
June 30, 1999. Consolidated net income (loss), before goodwill and other
intangibles amortization and after-tax reorganization and merger-related costs,
for the same three month periods in 2000 and 1999 was net income (loss) of $1.5
million and $(44) thousand, respectively, or $0.02 and $(0.01) per diluted
share, respectively.
RESULTS OF OPERATIONS
OPERATING INCOME. The Company defines operating income as net income
before: goodwill amortization, after-tax core deposit intangible amortization,
and after-tax reorganization and merger-related costs. Reorganization and
merger-related costs represent charges to operations related to the
16
PSB/SCB Reorganization and the BOC/CalWest Merger which represent mainly
severance costs, system conversion costs, termination penalties to exit data
processing contracts and professional fees to accomplish the merger-related
activities. In addition, the Company may experience further reorganization and
merger-related costs as the Company pursues further operating efficiency
opportunities. The following table summarizes key financial data and ratios at
and for the six and three months ended June 30, 2000 and 1999 for the Company.
AT AND FOR THE AT AND FOR THE AT AND FOR THE AT AND FOR THE
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------------ ------------------ ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating income (loss):
Net loss................................. $ (654) $ (276) $ (1,212) $ (888)
ADJUSTMENTS TO NET LOSS:
Core deposit intangible amortization... 842 147 1,525 296
Tax benefit related to core deposit
intangible........................... (350) (61) (633) (121)
Goodwill amortization.................. 780 146 1,386 278
----------- ---------- ----------- ----------
Operating income (loss), before
after-tax reorganization and
merger-related costs............... 619 (44) 1,066 (435)
After-tax reorganization and
merger-related costs............. 875 -- 914 --
----------- ---------- ----------- ----------
Operating income (loss).............. $ 1,493 $ (44) $ 1,980 $ (435)
=========== ========== =========== ==========
Revenues:
Net interest income, before provision for
loan and lease losses.................. $ 12,315 $ 2,732 $ 22,264 $ 5,315
Noninterest income....................... 1,718 453 3,071 872
----------- ---------- ----------- ----------
Revenues............................. $ 14,033 $ 3,185 $ 25,335 $ 6,187
=========== ========== =========== ==========
Operating noninterest expense:
Noninterest expense...................... $ 14,470 $ 3,296 $ 25,843 $ 6,777
ADJUSTMENTS TO NONINTEREST EXPENSE:
Core deposit intangible amortization... 842 147 1,525 296
Goodwill amortization.................. 780 146 1,386 278
Reorganization and merger-related
costs................................ 1,497 -- 1,563 --
----------- ---------- ----------- ----------
Operating noninterest expense........ $ 11,351 $ 3,003 $ 21,369 $ 6,203
=========== ========== =========== ==========
Per share information:
Number of shares (weighted average)...... 26,312,576 6,875,776 24,648,118 6,875,776
Diluted shares........................... 26,891,121 7,210,506 25,226,662 7,210,506
Basic net loss per share................. $ (0.02) $ (0.04) $ (0.05) $ (0.13)
Diluted net loss per share............... $ (0.02) $ (0.04) $ (0.05) $ (0.13)
Operating basic net income (loss) per
share (Non-GAAP disclosure)............ $ 0.02 $ (0.01) $ 0.04 $ (0.06)
Operating diluted net income (loss) per
share (Non-GAAP disclosure)............ $ 0.02 $ (0.01) $ 0.04 $ (0.06)
Profitability measures:
Return on average assets................. (0.23)% (0.49)% (0.23)% (0.78)%
Return on average equity................. (2.05)% (3.27)% (2.07)% (5.23)%
Return on equity......................... (2.06)% (3.28)% (1.90)% (5.31)%
Efficiency ratio......................... 103.00% 103.49% 102.01% 109.54%
Operating profitability measures (Non-GAAP
disclosure):
Return on average tangible assets........ 0.23% (0.08)% 0.22% (0.41)%
Return on average equity................. 1.94% (0.52)% 1.82% (2.56)%
Return on equity......................... 1.94% (0.52)% 1.68% (2.60)%
Efficiency ratio......................... 80.89% 94.29% 84.35% 100.26%
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.
17
The Company's efficiency ratio improved from 109.6% in the first half of
1999 to 102.0% in the first half of 2000, despite recognizing $1.6 million in
reorganization and merger-related costs in 2000 whereas no such costs were
incurred during the same period in 1999. Therefore, based on operating
profitability measures, efficiency ratios (operating noninterest expense divided
by revenues) improved from 100.3% in the first half of 1999 to 84.4% in the
first half of 2000. The improvement in the efficiency ratios from 1999 to 2000
is due mainly to the contribution of the SCB and PSB efficiency ratios in the
2000 results as well as the achievement of certain operating efficiencies
through the mergers of the banking subsidiaries located in southern California.
Further efficiencies are expected to be recognized from the benefits of the
PSB/SCB Reorganization and the BOC/CalWest Merger.
The Company's efficiency ratio for the second quarter of 2000 remained
relatively unchanged from the same period in 1999. However, the 2000 results
include the impact of recording $1.5 million in reorganization and
merger-related costs versus zero for the same time period in 1999. When
reorganization and merger-related expenses are excluded, along with the
amortization expense of goodwill and core deposit intangibles as shown in the
operating profitability measures, the efficiency ratios (operating noninterest
expense divided by revenues) improved from 94.3% in the second quarter of 1999
to 80.9% in the second quarter of 2000. This improvement is attributable
primarily to the contribution of the SCB and PSB efficiency ratios in the 2000
results as well as the achievement of certain operating efficiencies through the
mergers of the banking subsidiaries located in southern California.
The Company's return on average assets improved from a loss of (0.78%) in
the first half of 1999 to a loss of (0.23%) for the first half of 2000 while the
operating return on average tangible assets improved from a loss of (0.41%) to
income of 0.22% for the same time periods. The Company's return on average
assets improved from a loss of (0.49%) in the second quarter of 1999 to a loss
of (0.23%) for the second quarter of 2000 while the operating return on average
tangible assets improved from a loss of (0.08%) to income of 0.23% for the same
time periods.
Improved profitability and achievement of targeted returns on stockholders'
equity is dependent upon increased revenues through growth in the deposit and
loan customer base. These new customers will principally be obtained from the
market share of competing organizations. The Company believes that its Banks can
differentiate themselves through a higher level of personalized service,
particularly when compared to competing financial institutions who continue to
disenfranchise customers through their own consolidation efforts. The Company
also believes that the local community-orientation of its Banks provides a
unique opportunity to attract customers. Growth will also come from
participation in the continued growth in the economies of the communities in
which its Banks are located. Management will also continue to look for
opportunities to achieve operating efficiencies through consolidation of
administrative activities, but only where such activities do not interfere with
customer relationships. Finally, Management anticipates that this growth will be
achieved while maintaining strong controls over asset quality in order to avoid
unexpected additions to the allowance for loan and lease losses.
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 regarding average interest-earning
assets and interest-bearing liabilities and yields and rates thereon for the six
and three months ended June 30, 2000 and June 30, 1999. Average earning loans
and leases include nonaccrual loans and leases.
18
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 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.................. $ 680,228 $30,406 8.99% $107,221 $5,166 9.72%
Investment securities............. 153,941 4,790 6.26% 39,070 1,002 5.17%
Federal funds sold................ 44,903 1,310 5.87% 34,621 780 4.54%
Other earning assets.............. 8,989 319 7.14% 5,391 135 5.05%
---------- ------- -------- ------
Total interest-earning
assets...................... 888,061 36,825 8.34% 186,302 7,083 7.67%
Noninterest-earning assets:
Cash and demand deposits with
banks........................... 44,235 15,559
Other assets...................... 111,521 21,324
---------- --------
Total assets.................. $1,043,817 $223,185
========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand......... $ 95,339 $ 849 1.79% $ 15,279 $ 91 1.20%
Money market.................... 122,189 2,092 3.44% 33,010 431 2.63%
Savings......................... 105,056 1,153 2.21% 8,651 96 2.24%
Time............................ 364,888 9,549 5.26% 48,463 1,150 4.79%
---------- ------- -------- ------
Total interest-bearing
deposits.................... 687,472 13,643 3.99% 105,402 1,768 3.38%
Short-term borrowing.............. -- -- -- -- -- --
Long-term debt.................... 18,500 918 9.98% -- -- --
---------- ------- -------- ------
Total interest-bearing
liabilities................. 705,972 14,561 4.15% 105,402 1,768 3.38%
Noninterest-bearing liabilities:
Demand deposits................. 197,959 79,199
Other liabilities............... 18,912 4,310
---------- --------
Total liabilities............. 922,843 188,910
Minority interest................. 3,500 --
Stockholders' equity.............. 117,474 34,275
---------- --------
Total liabilities and
stockholders' equity............ $1,043,817 $223,185
========== ------- ======== ------
Net interest income............... $22,264 $5,315
======= ======
Net interest spread............... 4.19% 4.29%
==== ====
Net interest margin............... 5.04% 5.74%
==== ====
19
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 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.................. $ 743,038 $16,778 9.08% $112,120 $2,756 9.86%
Investment securities............. 164,385 2,545 6.23% 41,306 478 4.64%
Federal funds sold................ 59,259 885 6.01% 27,392 304 4.45%
Other earning assets.............. 7,134 181 10.20% 5,759 67 4.68%
---------- ------- -------- ------
Total interest-earning
assets...................... 973,816 20,389 8.42% 186,577 3,605 7.75%
Noninterest-earning assets:
Cash and demand deposits with
banks........................... 50,677 12,902
Other assets...................... 119,171 17,161
---------- --------
Total assets.................. 1,143,664 216,640
========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand......... 108,223 537 2.00% 16,504 47 1.15%
Money market.................... 171,421 1,515 3.55% 33,609 218 2.60%
Savings......................... 74,159 273 1.48% 8,552 48 2.25%
Time............................ 397,572 5,321 5.38% 47,660 560 4.71%
---------- ------- -------- ------
Total interest-bearing
deposits.................... 751,375 7,646 4.09% 106,326 873 3.29%
Short-term borrowing.............. -- -- -- -- -- --
Long-term debt.................... 18,500 428 9.30% -- -- --
---------- ------- -------- ------
Total interest-bearing
liabilities................. 769,875 8,074 4.22% 106,326 873 3.29%
Noninterest-bearing liabilities:
Demand deposits................. 217,911 77,033
Other liabilities............... 23,873 3,186
---------- --------
Total liabilities............. 1,011,659 186,545
Minority interest................. 3,500 --
Stockholders' equity.............. 128,505 30,094
---------- --------
Total liabilities and
stockholders' equity............ $1,143,664 $216,639
========== ------- ======== ------
Net interest income............... $12,315 $2,732
======= ======
Net interest spread............... 4.20% 4.46%
===== ====
Net interest margin............... 5.09% 5.88%
===== ====
20
YEAR-TO-DATE ANALYSIS. The net interest spread decreased from 4.29% to
4.19% from the first half of 1999 compared to the first half of 2000, while the
net interest margin (annualized net interest income divided by average
interest-earning assets) decreased from 5.74% to 5.04% over the same time
periods. The decrease in the net interest margin is attributed mainly to an
increase in the ratio of interest-bearing deposits as a percentage of the
Company's total deposits from 57.1% in 1999 to 77.6% in 2000 such that the
overall cost of deposits (annualized interest expense as a percentage of
interest-bearing and noninterest bearing deposits) increased from 1.93% in 1999
to 3.10% in 2000. The increase in the ratio of interest-bearing deposits arises
from the impact of the PSB and SCB Acquisitions as well as a dedicated effort to
raise deposits to support loan growth.
The yield on interest-earning assets increased from 7.67% during the first
half of 1999 to 8.34% during the same period of 2000. This increase is
principally attributed to the increase in loans as a percentage of average
interest earning assets from 57.55% during the first six months of 1999 to
76.60% during the same period of 2000. Yields on loans declined from 9.72% to
8.99% from the six months ended June 30, 1999 to the same period in 2000. This
decline in the yield on loans during a rising rate environment resulted
principally from the impact of the lower yielding single-family mortgage loan
portfolio acquired through the PSB Acquisition.
The Company's cost of funds, excluding noninterest-bearing demand deposits,
increased from 3.38% for the six months ended June 30, 1999 to 4.15% for the
same period of 2000. This increase in cost of funds reflects the rising interest
rate environment during 1999 and 2000. Also, a portion of this increase is due
to the Company's use of $18.5 million of trust preferred securities to finance
the PSB Acquisition. Additionally, CalWest, in effort to maintain a
loan-to-deposit ratio of approximately 80% prior to its merger with and into
BOC, used high cost web-based certificates of deposits to generate short-term
liquidity which also had an impact on the Company's cost of funds.
SECOND QUARTER ANALYSIS. The net interest spread decreased from 4.46% to
4.20% from the second quarter of 1999 compared to the second quarter of 2000,
while the net interest margin decreased from 5.88% to 5.09% over the same time
periods. The decrease in the net interest margin is attributed mainly to an
increase in the ratio of average interest-bearing deposits as a percentage of
the Company's total deposits from 58.0% in 1999 to 77.5% in 2000 such that the
overall cost of deposits increased from 1.91% in 1999 to 3.17% in 2000. The
increase in the ratio of interest-bearing deposits arises from the impact of the
PSB and SCB Acquisitions as well as a dedicated effort to raise deposits to
support loan growth.
The yield on interest-earning assets increased 67 basis points from 7.75% in
the second quarter of 1999 to 8.42% in the second quarter of 2000 due primarily
to the proportion of average loans and leases to total interest-earning assets
increasing from 60.1% during the second quarter of 1999 compared to 76.3% during
the second quarter of 2000. The increase in the overall yield on interest
earning assets was tempered by a decrease in the yield on loans and leases from
9.86% for the second quarter of 1999 to 9.08% for the second 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.
The Company's cost of funds, excluding noninterest-bearing demand deposits,
increased 93 basis points from 3.29% during the second quarter of 1999 compared
to 4.22% during the second quarter 2000. In addition to the impact of the PSB
Acquisition and the BOC/CalWest Merger discussed above, the overall increase in
the cost of funds also increased due to an increase in the percentage of time
certificates of deposit to interest-bearing deposits from 44.8% for the second
quarter of 1999 to 52.9% for the second quarter of 2000.
NONINTEREST INCOME. The Company derives noninterest income primarily from
service fees and charges on deposit products, loan servicing fees related to the
sold portion of SBA and mortgage loans, other loan related fees (including loan
referral fees), commissions earned on selling investment products, gains on sale
of loans and other miscellaneous income.
21
The following table sets forth the details of noninterest income for the six
and three months ended June 30, 2000 and June 30, 1999. As SCB was acquired on
February 29, 2000, the Company's results for 2000 include noninterest income
from SCB since the acquisition date 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 the Company's 2000 results,
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 six and three
months ended June 30, 1999.
SIX MONTHS
SIX MONTHS TWO MONTHS ENDED
ENDED ENDED JUNE 30,
JUNE 30, FEBRUARY 29, 2000 SIX MONTHS ENDED JUNE 30, 1999
2000 2000 ---------- ------------------------------------------
---------- ------------ PRO FORMA PRO FORMA
COMPANY SCB COMPANY COMPANY PSB SCB COMPANY CHANGE
---------- ------------ ---------- -------- -------- -------- --------- --------
(IN THOUSANDS)
Service charges and fees on
deposits.................. $1,458 $ 22 $1,480 $365 $ 999 $ 65 $1,429 $ 51
Loan servicing fees......... 300 103 403 15 74 321 410 (7)
Loan referral fees.......... 152 6 158 104 -- 16 120 38
Commissions on investment
products.................. 439 -- 439 -- 379 -- 379 60
Gain on sale of loans,
net....................... 366 -- 366 211 384 -- 595 (229)
Gain (loss) on sale of
securities, net........... (7) (97) (104) -- 38 -- 38 (142)
Other income................ 363 3 366 177 325 229 731 (365)
------ ---- ------ ---- ------ ---- ------ -----
Total noninterest income.... $3,071 $ 37 $3,108 $872 $2,199 $631 $3,702 $(594)
====== ==== ====== ==== ====== ==== ====== =====
THREE MONTHS
ENDED
JUNE 30, THREE MONTHS ENDED JUNE 30, 1999
2000 ------------------------------------------
------------ PRO FORMA
COMPANY COMPANY PSB SCB COMPANY CHANGE
------------ -------- -------- -------- --------- --------
(IN THOUSANDS)
Service charges and fees on
deposits............................ $ 779 $168 $ 521 $ 34 $ 723 $ 56
Loan servicing fees................... 199 9 36 184 229 (30)
Loan referral fees.................... 28 57 -- 16 73 (45)
Commissions on investment products.... 252 -- 244 -- 244 8
Gain on sale of loans, net............ 222 104 209 -- 313 (91)
Gain (loss) on sale of securities,
net................................. -- -- (21) -- (21) 21
Other income.......................... 238 115 126 131 372 (134)
------ ---- ------ ---- ------ -----
Total noninterest income.............. $1,718 $453 $1,115 $365 $1,933 $(215)
====== ==== ====== ==== ====== =====
22
On a pro forma basis with SCB and PSB, total noninterest income decreased
$594 thousand from $3.7 million for the six months ended June 30, 1999 to $3.1
million for the six months ended June 30, 2000 due primarily to a $229 thousand
decrease in gain on sale of loans, recording $104 thousand in loss on sale of
securities versus a gain in 1999 and a $365 thousand decrease in other income.
The loss on sale of securities in 2000 relates to SCB selling certain securities
that 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 fees of $114 thousand and a decrease of
$119 thousand in dividend income on certain life insurance policies.
On a pro forma basis with SCB and PSB, total noninterest income decreased
$215 thousand from $1.9 million to $1.7 million from the quarter ended June 30,
1999 to the quarter ended June 30, 2000. This decrease is attributed mainly to a
$91 thousand decrease in gain on sale of loans and a $134 thousand decrease in
other income. The decrease in other income on a pro forma basis is due mainly to
a decrease of $49 thousand in merchant bank card fees and a $57 thousand
decrease in dividend income on certain life insurance policies.
NONINTEREST EXPENSE. The following table sets forth the details of
noninterest expense for the six and three months ended June 30, 2000 and June
30, 1999. As SCB was acquired on February 29, 2000, the Company's results for
2000 only include noninterest expense from SCB since the acquisition date 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 the Company's 2000 results, 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
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
six and three months ended June 30, 1999.
SIX MONTHS
SIX MONTHS TWO MONTHS ENDED
ENDED ENDED JUNE 30,
JUNE 30, FEBRUARY 29, 2000 SIX MONTHS ENDED JUNE 30, 1999
2000 2000 ---------- ------------------------------------------
---------- ------------ PRO FORMA PRO FORMA
COMPANY SCB COMPANY COMPANY PSB SCB COMPANY CHANGE
---------- ------------ ---------- -------- -------- -------- --------- --------
(IN THOUSANDS)
Salaries and employee
benefits............... $10,964 $ 892 $11,856 $2,846 $ 5,136 $2,483 $10,465 $1,391
Occupancy, premises and
equipment.............. 3,222 181 3,403 816 1,436 598 2,850 553
Data and item
processing............. 1,120 26 1,146 385 391 79 855 291
Professional fees........ 1,267 72 1,339 716 294 209 1,219 120
Communications........... 928 29 957 236 699 86 1,021 (64)
Business development..... 786 35 821 213 573 90 876 (55)
Customer services........ 424 18 442 218 37 30 285 157
Other.................... 2,658 201 2,859 773 1,620 675 3,068 (209)
------- ------ ------- ------ ------- ------ ------- ------
Total noninterest
expense, excluding
goodwill and other
intangibles
amortization, and
reorganization and
merger-related costs... 21,369 1,454 22,823 6,203 10,186 4,250 20,639 2,184
Reorganization and
merger-related costs... 1,563 790 2,353 -- -- -- -- 2,353
Goodwill amortization.... 1,386 -- 1,386 278 -- -- 278 1,108
Core deposit intangible
amortization........... 1,525 -- 1,525 296 -- -- 296 1,229
------- ------ ------- ------ ------- ------ ------- ------
Total noninterest
expense................ $25,843 $2,244 $28,087 $6,777 $10,186 $4,250 $21,213 $6,874
======= ====== ======= ====== ======= ====== ======= ======
23
THREE MONTHS
ENDED THREE MONTHS ENDED JUNE 30, 1999
JUNE 30, 2000 ------------------------------------------
-------------- PRO FORMA
COMPANY COMPANY PSB SCB COMPANY CHANGE
-------------- -------- -------- -------- --------- --------
(IN THOUSANDS)
Salaries and employee benefits....... $ 5,803 $1,453 $2,452 $1,209 $ 5,114 $ 689
Occupancy, premises and equipment.... 1,695 406 719 288 1,413 282
Data and item processing............. 671 173 198 37 408 263
Professional fees.................... 595 241 138 105 484 111
Communications....................... 471 129 360 51 540 (69)
Business Development................. 415 104 294 54 452 (37)
Customer services.................... 236 107 18 14 139 97
Other................................ 1,465 390 770 268 1,428 37
------- ------ ------ ------ ------- ------
Total noninterest expense, excluding
goodwill and other intangibles
amortization, and reorganization
and merger-related costs........... 11,351 3,003 4,949 2,026 9,978 1,373
Reorganization and merger-related
costs.............................. 1,497 -- -- -- -- 1,497
Goodwill amortization................ 780 146 -- -- 146 634
Core deposit intangible
amortization....................... 842 147 -- -- 147 695
------- ------ ------ ------ ------- ------
Total noninterest expense............ $14,470 $3,296 $4,949 $2,026 $10,271 $4,199
======= ====== ====== ====== ======= ======
On a pro forma basis with SCB and PSB, total noninterest expense, before
reorganization and merger-related costs and goodwill and other intangibles
amortization, increased approximately $2.2 million from $20.6 million for the
six months ended June 30, 1999 to $22.8 million for the six months ended June
30, 2000 due primarily to increases in salary expense and occupancy, premises
and equipment expense. Salary expense increased $1.4 million which is attributed
mainly to the expansion of certain lending functions at the Banks including
commercial and SBA lending at SCB, 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 second quarter of 1999. Further,
the Company recognized approximately $300 thousand in nonrecurring
self-insurance expense as the Company changed insurance carriers. Occupancy,
premises and equipment expense increased $553 thousand due to approximately $230
thousand of additional building and leasehold improvement depreciation and
amortization from the write-up in value of certain properties in the PSB
Acquisition and certain leasehold improvements in the SCB Acquisition as well as
additional depreciation expense for equipment purchased in relation to PSB's
in-house data processing center and approximately $50 thousand additional rent
for two new branches. The increase in customer services expenses is due to the
growth in the number of customers and deposit balances as well as the increase
in market deposit rates.
On a pro forma basis, data and item processing ("DP") expense for the six
months ended June 30, 2000 increased $291 thousand from the same period of 1999.
During the six months ended June 30, 2000 primary banking applications and item
processing for PSB and SCB were in-house, while BOC utilized an outside vendor
for both activities. Prior to January 2000 PSB used an outside vendor to assist
in a portion of the processing of its primary banking applications but performed
its item processing in-house. Personnel costs and depreciation expense related
to in-house DP activities are reported as salary and employee benefits and
occupancy, premises and equipment, respectively. In 2000 PSB purchased and
installed hardware to run its primary banking applications and in June 2000,
PSB's arrangement with the outside vendor was cancelled. The net increase in DP
expense is attributed mainly to external consultants used to assist with the
installation and implementation of this new system as well as payment of an
early contract termination fee. The increased DP expense also includes the cost
of consulting fees paid for upgrades made to PSB's desk-top banking and general
business applications systems (both hardware and software).
24
The Company recognized $1.6 million in reorganization and merger-related
costs associated mainly with personnel severance, system conversions, contract
terminations for data processing services, and professional services to
accomplish the PSB/SCB Reorganization and to effect the BOC/CalWest Merger.
On a pro forma basis with SCB and PSB, total noninterest expense increased
$1.4 million from $10.0 million for the quarter ended June 30, 1999 compared to
$11.4 million for the same quarter in 2000. This increase is also spread across
most expense categories, consistent with the six month analysis. The Company
recorded the $1.5 million in reorganization and merger-related charges described
above in the second quarter of 2000.
INCOME TAXES. The Company's normal effective income tax rate would be a
benefit of approximately 41.5%, representing a blend of the statutory Federal
income tax rate of 34.0% and the effective California franchise tax rate of
7.15% against the Company's recorded net loss. The Company's actual effective
income tax rates were a charge of 8.9% and a charge of 39.0% for the six months
ended June 30, 2000 and 1999, respectively, and a 20.6% benefit and a charge of
57.4% for the quarters ended June 30, 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
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 original 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 original contractual terms of the
loan or (ii) the loan is a consumer loan or other homogeneous 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:
25
CREDIT QUALITY MEASURES
(DOLLARS IN THOUSANDS)
QTR ENDED QTR ENDED YEAR ENDED QTR ENDED QTR ENDED
JUNE 30, MARCH 31, DEC 31, JUNE 30, MARCH 31,
2000 2000 1999 1999 1999
---------- ---------- ----------- ---------- ----------
Average loans and leases outstanding................ $743,038 $617,418 $267,896 $112,120 $102,267
Gross loans and leases.............................. 742,021 719,857 559,784 116,365 110,271
Nonaccrual loans, not restructured.................. 3,286 3,465 413 116 554
Accruing loans past due 90 days or more............. -- -- -- 20 --
Restructured loans.................................. -- -- -- -- --
-------- -------- -------- -------- --------
Total nonperforming loans and leases (NPLs)....... 3,286 3,465 413 136 554
Other real estate owned (OREO)...................... 118 38 -- 269 393
-------- -------- -------- -------- --------
Total nonperforming assets (NPAs)............... 3,404 3,503 413 405 947
======== ======== ======== ======== ========
Allowance for loan and lease losses:
Balance at beginning of period................ 9,461 6,750 1,986 2,001 1,986
Balance acquired during period................ -- 2,547 4,087 -- --
-------- -------- -------- -------- --------
Loans and leases charged off during
period.................................... (12) (41) (283) (40) (59)
Recoveries during period.................... 40 45 141 16 14
-------- -------- -------- -------- --------
Net recoveries (charge-offs) during
period.................................. 28 4 (142) (24) (45)
Provision for loan and lease losses........... 285 160 819 91 60
-------- -------- -------- -------- --------
Balance at end of period.................. $ 9,774 $ 9,461 $ 6,750 $ 2,068 $ 2,001
======== ======== ======== ======== ========
Selected ratios:
Net recoveries (charge-offs) to average loans and
leases.......................................... (0.01)% 0.00% (0.05)% 0.04% 0.18%
Provision for loan and lease losses to average
loans and leases................................ 0.08% 0.10% 0.31% 0.16% 0.23%
Allowance at end of period to gross loans and leases
outstanding at end of period...................... 1.32% 1.31% 1.21% 1.78% 1.81%
Allowance as percentage of nonperforming loans and
leases............................................ 297.44% 273.04% 1,634.38% 1,521.32% 361.19%
NPLs to gross loans and leases.................... 0.44% 0.48% 0.07% 0.12% 0.50%
NPAs to gross loans and leases and OREO........... 0.46% 0.49% 0.07% 0.35% 0.86%
NPAs to total assets.............................. 0.28% 0.31% 0.05% 0.18% 0.42%
26
Gross loans and leases increased $182.2 million since December 31, 1999,
including $143.8 million which is attributed to the loan portfolio acquired in
the SCB Acquisition and net loan growth of $38.4 million, or an annualized
growth rate of 6.9%. Nonaccrual loans and leases were $3.3 million at June 30,
2000, representing a $2.9 million increase since year-end. This increase is due
to management placing a few credits secured by real-estate on nonaccrual
totaling $1.3 million and the addition of $1.4 million in nonaccrual loans as
result of the SCB Acquisition. The loans on nonaccrual status are, in the
opinion of management, adequately secured. The ratio of nonaccrual loans to
total gross loans increased to 0.44% at June 30, 2000 compared with 0.12% at
June 30, 1999 with a decrease in this ratio to 0.07% at December 31, 1999. The
ratio of nonperforming assets to total assets decreased from 0.18% at June 30,
1999 to 0.05% at December 31, 1999 and has increased to 0.28% as of June 30,
2000. The increase in both of these ratios during the first half of 2000 is
attributed mainly to the impact of the SCB Acquisition. The Company does not
have any loans and leases past due 90 days and still accruing.
CREDIT CONCENTRATIONS. In management's opinion, the Company has a
concentration of real estate-related loans with 72% at June 30, 2000 as shown in
the table below. However, this concentration is spread across several sectors of
the real estate market including single family mortgages, commercial real estate
projects (including SBA guaranteed loans) and construction in various geographic
regions in California. Nonetheless, management is focusing on reducing the
Company's exposure to real estate-related products and has undertaken
significant steps to accomplish this goal, including the reorganization of SCB
and PSB's real estate lending functions and dedicating additional resources to
expanding the SBA and commercial lending departments throughout the
organization. The Banks have increased their emphasis on commercial lending with
staff additions since the end of 1999. Further, management will continue to
monitor the risk within the real estate-related portfolio by continuing to track
key factors including, but not limited to, the percentage of real estate-related
loans with government guarantees (i.e. SBA loans), the project mix in the
portfolios, weighted average loan-to-value ratios, as well as geographic and
industry concentrations.
The following table summarizes the Company's loan portfolio by loan category
at the dates presented (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
--------- -------------
Residential real estate loans......................... $197,010 $207,118
Commercial real estate loans.......................... 241,546 185,750
Construction loans.................................... 68,143 63,154
Equity lines.......................................... 26,595 19,760
-------- --------
Subtotal real estate related loans.................. 533,294 475,782
Commercial loans...................................... 99,402 59,810
Consumer loans........................................ 19,014 17,393
SBA loans............................................. 82,520 6,482
Other loans........................................... 7,791 317
-------- --------
Gross loans........................................... $742,021 $559,784
======== ========
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
27
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, and internal loan
review.
The ALLL increased by $3.0 million during the six months ended June 30, 2000
mostly due to the acquisition of SCB and increased $313 thousand during the
second quarter of 2000 mostly due to additional provisions for loan and lease
losses. The Company's annualized ratio of net charge-offs to average loans and
leases is less than 1% at June 30, 2000 and has been less than 1% for the past
year. Management is not aware of any additional significant loss potential that
has not already been included in the estimation of the ALLL. Management believes
that the ALLL of $9.8 million at June 30, 2000, is adequate based on the
Company's evaluation of the 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, PCC, PSB, SCB and the Company on a consolidated basis as
of June 30, 2000 follow:
ADEQUATELY WELL CONSOLIDATED
CAPITALIZED CAPITALIZED SCB BOC PSB PCC COMPANY
----------- ----------- -------- -------- -------- -------- ------------
(GREATER THAN OR EQUAL TO)
Total risk-based capital............. 8.00% 10.00% 11.27% 11.59% 11.35% 10.87% 11.59%
Tier 1 risk-based capital ratio...... 4.00% 6.00% 10.01% 10.33% 10.15% 9.72% 10.34%
Tier 1 leverage capital ratio........ 4.00% 5.00% 7.12% 7.67% 6.14% 6.06% 6.80%
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK.
LIQUIDITY MANAGEMENT. The Company relies upon deposits as its 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 22.9% and 16.9%, respectively, on
June 30, 2000 and December 31, 1999, while its loan to deposit ratio stood at
74.8% and 78.5% on those same dates. At June 30, 2000, management believes
liquidity of the Company 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 currency exchange 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 June 30, 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
28
would be a net positive impact on the 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 an 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 liabilities.
At June 30, 2000, the Company had $226.9 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 change the Company's gap position
towards being less liability-sensitive by focusing on adjusting maturity and
repricing characteristics of 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. Specifically, management is interested in
shortening the maturities in its investment portfolio and originating more
variable rate assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the FASB issued Interpretation No. 44 "ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION" an interpretation of Accounting
Principles Board ("APB" ) Opinion No. 25. FASB Interpretation No. 44 clarifies
certain issues related to the application of APB Opinion 25 and is effective
July 1, 2000 with certain conclusions covering specific events that occurred
either after December 15, 1998 or January 12, 2000. FASB Interpretation No. 44
is not expected to have a material effect on the Company's financial position or
results of operations.
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. 138, 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. 138"), is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS No. 133 and SFAS No. 138 will not have a
material impact on the Company's results of operations or financial position.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See the section titled "Liquidity, Interest Rate Sensitivity and Market
Risk" in 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
2.1 Employment Agreement dated February 29, 2000 by and between
Mr. Daryl B. Foreman and Sacramento Commercial Bank. *
2.2 Employment Agreement dated February 29, 2000 by and between
Mr. Robert H. Muttera and Sacramento Commercial Bank. *
2.3 Employment Agreement dated February 29, 2000 by and between
Mr. James A. Sundquist and Sacramento Commercial Bank. *
2.4 Employment Agreement dated February 1, 2000 by and between
Mr. David E. Hooston and California Community
Bancshares, Inc. *
2.5 Employment Agreement dated February 14, 2000 by and between
Ms. Lynn M. Hopkins and California Community
Bancshares, Inc. *
11 Statement re: computation of per share earnings is included
in Note 4 to the unaudited condensed consolidated financial
statements of Registrant.
27 Financial Data Schedule
- ------------------------
* Management contracts
REPORTS ON FORM 8-K
None.
31
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: August 11, 2000 /s/ RONALD W. BACHLI
-----------------------------------------
Ronald W. Bachli
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: August 11, 2000 /s/ DAVID E. HOOSTON
-----------------------------------------
David E. Hooston
CHIEF FINANCIAL OFFICER
32