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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER: 333-87481
------------------------
CALIFORNIA COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3339505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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 November 10, 2000: 26,312,576 shares of common stock, no par
value.
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<PAGE>
TABLE OF CONTENTS
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<CAPTION>
PAGE
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<S> <C> <C>
FORWARD-LOOKING STATEMENTS................................................... 3
PART I--FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (unaudited)............... 4
Unaudited Condensed Consolidated Balance Sheets............. 4
Unaudited Condensed Consolidated Statements of Operations... 5
Unaudited Condensed Consolidated Statements of Comprehensive
Income (Loss)............................................. 6
Unaudited Condensed Consolidated Statements of Cash Flows... 7
Unaudited 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................................. 14
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 34
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 35
ITEM 2. Changes in Securities and use of Proceeds................... 35
ITEM 3. Defaults Upon Senior Securities............................. 35
ITEM 4. Submission of Matters to a Vote of Security Holders......... 35
ITEM 5. Other Information........................................... 35
ITEM 6. Exhibits and Reports on Form 8-K............................ 36
SIGNATURES................................................................... 37
</TABLE>
<PAGE>
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT, INCLUDING, BUT NOT LIMITED TO, "NOTE 4--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
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 60,802 $ 39,569
Federal funds sold and securities purchased under agreements
to resell................................................. 77,786 20,791
---------- --------
Total cash and cash equivalents......................... 138,588 60,360
Interest-bearing deposits with other banks.................. 1,784 2,576
Investment securities available-for-sale, at fair value..... 117,025 57,656
Investment securities held-to-maturity, at amortized cost... 62,527 70,592
Investments in Federal Home Loan Bank and Federal Reserve
Bank stock, at cost....................................... 7,814 4,112
Loans and leases receivable, net of allowance for loan and
lease losses of $10,041 at September 30, 2000 and $6,750
at December 31, 1999...................................... 738,903 551,399
Real estate owned, net...................................... 4,938 5,001
Premises and equipment, net................................. 23,598 20,874
Accrued interest receivable................................. 6,451 4,644
Cash surrender value of life insurance...................... 2,375 1,471
Goodwill and other intangible assets........................ 84,460 61,868
Other assets................................................ 4,668 2,626
---------- --------
TOTAL ASSETS............................................ $1,193,131 $843,179
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits.............................. $ 236,296 $151,121
Interest-bearing deposits................................. 790,348 561,641
---------- --------
Total deposits.......................................... 1,026,644 712,762
Accrued interest payable and other liabilities............ 6,784 5,889
Deferred income tax liabilities, net...................... 8,596 6,694
Trust preferred securities................................ 18,500 18,500
---------- --------
Total liabilities....................................... 1,060,524 743,845
Minority interest in subsidiaries
Placer Capital Co. Preferred Stock issued to Placer
Capital Funding LLC-- $0.01 par value; 25,000,000
authorized; one share issued and outstanding at
September 30, 2000 and December 31, 1999................ 3,500 3,500
Commitments and contingencies
Stockholders' equity:
Common stock--$0.01 par value; 75,000,000 shares
authorized; 26,312,576 shares issued and outstanding at
September 30, 2000, and 21,267,483 shares issued and
outstanding at December 31, 1999........................ 132,847 99,450
Accumulated other comprehensive loss...................... (125) (342)
Accumulated deficit....................................... (3,615) (3,274)
---------- --------
Total stockholders' equity.............................. 129,107 95,834
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $1,193,131 $843,179
========== ========
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
4
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS(a)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans and leases..................... $ 17,592 $ 8,212 $ 47,998 $ 13,378
Interest on investment securities......................... 2,593 1,888 7,383 2,890
Interest on Federal funds sold and securities purchased
under agreements to resell.............................. 1,246 689 2,556 1,469
Dividends on Federal Home Loan Bank and Federal Reserve
Bank stocks............................................. 139 25 326 40
Interest on deposits with other banks..................... 24 59 156 179
--------- --------- --------- --------
Total interest and dividend income...................... 21,594 10,873 58,419 17,956
INTEREST EXPENSE:
Savings, money market and demand deposits................. 2,434 1,165 6,528 1,783
Time certificates of deposit under $100................... 3,297 1,683 8,970 2,183
Time certificates of deposit of $100 and over............. 2,472 961 6,348 1,611
Interest on borrowings.................................... 441 207 1,359 207
--------- --------- --------- --------
Total interest expense.................................. 8,644 4,016 23,205 5,784
--------- --------- --------- --------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN AND
LEASE LOSSES.............................................. 12,950 6,857 35,214 12,172
PROVISION FOR LOAN AND LEASE LOSSES......................... 305 248 750 399
--------- --------- --------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE
LOSSES.................................................... 12,645 6,609 34,464 11,773
NONINTEREST INCOME:
Service charges and fees on deposits...................... 827 480 2,285 845
Loan servicing fees....................................... 191 39 491 54
Loan referral fees........................................ 160 119 312 223
Commissions on investment products........................ 235 151 674 151
Gain on sale of loans, net................................ 35 146 401 357
Gain (loss) on sale of securities......................... -- 12 (7) 12
Other income.............................................. 281 366 644 543
--------- --------- --------- --------
Total noninterest income................................ 1,729 1,313 4,800 2,185
NONINTEREST EXPENSE:
Salaries and employee benefits............................ 5,553 3,212 16,517 6,058
Occupancy, premises and equipment......................... 1,785 1,085 5,007 1,901
Data and item processing.................................. 505 394 1,625 779
Professional fees......................................... 755 352 2,022 1,068
Communications............................................ 504 260 1,432 496
Business development...................................... 477 229 1,263 442
Customer services expense................................. 370 251 794 469
Amortization of intangible assets......................... 1,624 509 4,535 1,083
Other operating expenses.................................. 989 906 5,210 1,679
--------- --------- --------- --------
Total noninterest expense............................... 12,562 7,198 38,405 13,975
--------- --------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS.... 1,812 724 859 (17)
INCOME TAXES................................................ 859 290 944 579
--------- --------- --------- --------
INCOME (LOSS) BEFORE MINORITY INTERESTS..................... 953 434 (85) (596)
--------- --------- --------- --------
MINORITY INTERESTS:
Dividend on preferred stock of minority interest.......... 82 39 256 39
Minority interest in loss of subsidiaries................. -- (58) -- (200)
--------- --------- --------- --------
NET INCOME (LOSS)........................................... $ 871 $ 453 $ (341) $ (435)
========= ========= ========= ========
Net income (loss) per share (Note 5):
Basic................................................... $0.03 $0.03 $(0.01) $(0.05)
Diluted................................................. $0.03 $0.03 $(0.01) $(0.05)
</TABLE>
----------------------------------
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
September 30, 1999 to data for the current periods may not be meaningful.
See Note 3 and Note 4 of "Notes to Unaudited Condensed Consolidated
Financial Statements."
See "Notes to Unaudited Condensed Consolidated Financial Statements."
5
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME (LOSS)........................................... $ 871 $453 $(341) $(435)
Other comprehensive income (loss), net of related taxes:
Unrealized holding gains (losses) arising during the
period.................................................. 273 (22) 223 (115)
Less reclassification of realized gains (losses) included
in income............................................... -- 7 6 30
------ ---- ----- -----
Total................................................... 273 (29) 217 (145)
------ ---- ----- -----
COMPREHENSIVE INCOME (LOSS)................................. $1,144 $424 $(124) $(580)
====== ==== ===== =====
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
6
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2000 1999
----------------- -----------------
<S> <C> <C>
NET LOSS.................................................... $ (341) $ (435)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Provision for loan and lease losses..................... 750 399
Minority interest in loss of subsidiaries............... -- (204)
Depreciation and amortization of premises and
equipment............................................. 2,303 763
Amortization of intangible assets....................... 4,535 1,083
Amortization of premiums (accretion of discounts) on
investment securities, net............................ (605) 155
Amortization of deferred loan and lease fees, net....... (195) (8)
Gain on sale of loans................................... (401) (357)
Loss (gain) on sale of investment securities............ 7 (12)
Gain on sale of other real estate owned................. (6) (58)
Gain on sale of premises and equipment.................. (65) (2)
Dividends received on Federal Home Loan Bank and Federal
Reserve Bank stock.................................... (88) (9)
Net (increase) decrease in accrued interest
receivable............................................ (823) 73
Net decrease in other assets............................ 790 87
Net (decrease) increase in net deferred tax
liabilities........................................... (438) 2,647
Net decrease in accrued interest payable and other
liabilities........................................... (5,542) (3,567)
-------- -------
Net cash (used in) provided by operating activities... (119) 555
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in other
banks................................................. 792 306
Purchases of investment securities:
Available-for-sale.................................... (67,373) (6,015)
Held-to-maturity...................................... -- (10,120)
Proceeds from calls and maturities of investment
securities:
Available-for-sale.................................... 32,582 7,000
Held-to-maturity...................................... 1,160 5,790
Proceeds from sales of investment securities
available-for-sale.................................... 493 13,393
Proceeds from principal repayments on mortgage backed
securities:
Available-for-sale.................................... 974 448
Held-to-maturity...................................... 7,137 2,095
Net disbursement of loans............................... (82,073) (40,753)
Proceeds from sale of loans............................. 35,472 6,906
Purchases of premises and equipment..................... (3,188) (820)
Proceeds from sale of other real estate owned........... 482 1,201
Purchase of Federal Reserve Bank stock, net............. (3,438) (676)
Proceeds from cash surrender value of life insurance.... 3,749 --
Additional cash paid for acquisitions................... (154) (306)
Purchase of Placer Sierra Bank, net of cash acquired.... -- (37,879)
Purchase of Sacramento Commercial Bank, net of cash
acquired.............................................. (13,280) --
-------- -------
Net cash used in investing activities................. (86,665) (59,430)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, interest-bearing and
savings deposits...................................... 131,615 (11,269)
Purchase of dissenting shares........................... (3) --
Issuance of trust preferred securities.................. -- 18,500
Increase in minority interest........................... -- 3,500
Issuance of common stock for acquisition and
cancellation of dissenters' rights.................... 33,400 54,000
-------- -------
Net cash provided by (used in) financing activities... 165,012 64,731
-------- -------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 78,228 5,856
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 60,360 80,880
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $138,588 $86,736
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 17,463 $ 6,411
Income taxes paid......................................... $ 1,645 $ 27
Net change in unrealized gain (loss) on available-for-sale
securities, net of taxes................................ $ 216 $ 145
Acquisitions of other real estate owned through
foreclosure............................................. $ 126 $ 28
Reduction of deferred tax assets against goodwill......... $ 120 --
Property reclassified to real estate held for
investment.............................................. $ 250 --
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
7
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
UNAUDITED SUPPLEMENTAL DISCLOSURE FOR ACQUISITION OF SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2000 1999
--------------- ------------------
SACRAMENTO
COMMERCIAL BANK PLACER SIERRA BANK
--------------- ------------------
<S> <C> <C>
ASSETS ACQUIRED:
Cash...................................................... $ 16,339 $ 18,994
Federal funds sold........................................ 8,500 18,058
Investment securities..................................... 25,317 153,253
Investment in Federal Reserve Bank stock.................. 177 2,936
Loans and leases.......................................... 141,181 372,015
Real estate owned......................................... 38 6,215
Premises and equipment.................................... 2,024 19,385
Accrued interest receivable............................... 983 3,958
Cash surrender value of life insurance.................... 4,519 1,442
Other assets.............................................. 1,962 1,122
Goodwill.................................................. 20,825 32,421
Favorable lease rights.................................... 346 --
Core deposit intangible................................... 5,713 10,816
-------- --------
227,924 640,615
-------- --------
LIABILITIES ASSUMED:
Deposits.................................................. 182,265 554,352
Accrued interest and other liabilities.................... 7,540 11,332
-------- --------
CASH PAID FOR COMMON STOCK.................................. $ 38,119 $ 74,931
======== ========
</TABLE>
See "Notes to Unaudited Condensed Consolidated Financial Statements."
8
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1--DESCRIPTION OF BUSINESS
California Community Bancshares, Inc. (the "Company"), incorporated on
September 3, 1999 as a Delaware corporation, operates three banking
subsidiaries, Placer Sierra Bank ("PSB"), Sacramento Commercial Bank ("SCB") and
Bank of Orange County ("BOC")(collectively, the "Banks"). The Banks are
incorporated under the laws of the State of California and licensed by the
California Department of Financial Institutions ("DFI") and are members of the
Federal Reserve System.
The Company, through the Banks, derives its income primarily from interest
received on real estate-related loans, commercial loans and consumer loans and,
to a lesser extent, fees from the sale of loans originated, interest on
investment securities and fees received in connection with servicing loan and
deposit customers. The Company's major operating expenses are the interest it
pays on deposits and on borrowings and general operating expenses. The Banks
rely on a foundation of locally generated deposits. The Company's operations,
like those of other financial institutions operating in California, are
significantly influenced by economic conditions in California, including the
strength of the real estate market, and the fiscal and regulatory policies of
the federal government and the regulatory authorities that govern financial
institutions.
NOTE 2--BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of the Company
included herein reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods indicated. Certain
reclassifications have been made to the unaudited condensed consolidated
financial statements for 1999 to conform to the 2000 presentation. Certain
information and note disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). The results of operations
for the three and nine months ended September 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 and lease
losses, the carrying value of real estate owned, and the carrying value of the
gross 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 3--ACQUISITIONS AND MERGERS
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
9
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (CONTINUED)
NOTE 3--ACQUISITIONS AND MERGERS (CONTINUED)
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 Company common stock. Upon completion of,
and as a result of, the CCB Merger, the Company became the sole stockholder of
BOC and CalWest Bank ("CalWest") and the majority stockholder 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"). In connection with and as a result of the CCB merger, the
minority shareholders of NBB and SFB became stockholders of CCB. CalWest was
subsequently merged with and into BOC (the "BOC/CalWest Merger") effective
July 14, 2000.
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 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. On December 13,
1999, in a transaction accounted for under the "as-if" pooling-of-interests
method of accounting, PCC became a wholly owned subsidiary of the Company (the
"CCB/PCC Merger") through an exchange of 100% of the outstanding shares of PCC
common stock for shares of Company common stock.
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 (the "SCB Acquisition"). 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.
NOTE 4--UNAUDITED SUMMARY PRO FORMA DATA
The following table shows unaudited summary pro forma statements of
operations information for the nine month periods ended September 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 nine month period ended
September 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
10
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (CONTINUED)
NOTE 4--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
nine months ended September 30, 2000. The pro forma results for the nine months
ended September 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 interests of SFB and NBB.
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.
11
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (CONTINUED)
NOTE 4--UNAUDITED SUMMARY PRO FORMA DATA (CONTINUED)
UNAUDITED SUMMARY PRO FORMA STATEMENTS OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest income............................................. $ 61,103 $ 53,605
Interest expense............................................ 24,077 20,273
--------- ---------
Net interest income....................................... 37,026 33,332
Provision for loan and lease losses......................... 810 1,293
--------- ---------
Net interest income after provision for loan and lease
losses.................................................. 36,216 32,039
Noninterest income.......................................... 4,837 5,566
Noninterest expense, excluding reorganization and
merger-related expenses and amortization of intangibles... 33,761 31,240
Reorganization and merger-related expenses.................. 1,563 --
Amortization of intangibles................................. 4,844 4,087
--------- ---------
Income before income taxes and minority interest.......... 885 2,278
Income tax expense........................................ 1,040 2,043
Dividend on preferred stock of minority interest and
minority interest in
loss of subsidiaries...................................... 256 249
--------- ---------
Net loss................................................ ($ 411) $ (14)
========= =========
Per share information:
Weighted average shares outstanding:
Basic..................................................... 26,308.5 26,126.6
Diluted................................................... 26,308.5 26,126.6
Net loss per share:
Basic..................................................... $ (0.02) --
Diluted................................................... $ (0.02) --
</TABLE>
NOTE 5--NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted net income 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. When an entity has a loss 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 following
is a summary of
12
<PAGE>
CALIFORNIA COMMUNITY BANCSHARES, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (CONTINUED)
NOTE 5--NET INCOME (LOSS) PER SHARE (CONTINUED)
the calculation of basic and diluted net income (loss) per share for the three
and nine month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income (loss).............................. $871 $453 $(341) $(435)
========== ========== ========== =========
Weighted average shares outstanding............ 26,312,576 13,857,140 25,206,987 9,228,470
========== ========== ========== =========
Basic net income (loss) per share.............. $0.03 $0.03 $(0.01) $(0.05)
========== ========== ========== =========
Weighted average shares outstanding............ 26,312,576 13,857,140 25,206,987 9,228,470
Effect of dilutive stock options and
debentures................................... 586,095 465,834 586,095 465,834
========== ========== ========== =========
Diluted shares outstanding..................... 26,898,672 14,322,974 25,793,082 9,694,304
========== ========== ========== =========
Diluted net income (loss) per share............ $0.03 $0.03 $(0.01) $(0.05)
========== ========== ========== =========
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a state-wide multi-bank holding company operating three
banking subsidiaries with total assets of $1.2 billion at September 30, 2000.
The Company serves Placer, Sacramento, Nevada, El Dorado, Plumas and Sierra
Counties, California through PSB (27 branches) and SCB (1 branch) and serves
Orange County and Los Angeles County through BOC (6 branches).
The Banks are full-service community banks offering a broad range of banking
products and services, including accepting time and demand deposits, originating
real estate-related loans, commercial loans, and consumer loans and making other
investments. Special services and products not offered by the Banks can be
arranged through correspondent institutions. The Company is committed to running
the Banks as relationship-based, community banks serving the needs of
individuals and small to medium sized businesses in the local market areas
surrounding their branches. The strategy for serving the Company's target
markets is the delivery of value-added products and services that satisfy the
primary needs of the Company's customers, emphasizing superior service and
relationships rather than transaction volume.
During 1998 and 1999 and the first quarter of 2000, the Company's focus was
on acquiring financial institutions. In December of 1999 the four banking
subsidiaries located in southern California were merged with and into one
another to form two banks in order to achieve operating and strategic
efficiencies. During the second and third quarter of 2000 the Company turned its
focus to 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. As a step in this process, the Company undertook a
reorganization of PSB and SCB and consummated 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 focus better 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
residential and commercial real estate-related lending divisions. 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.
During the second quarter of 2000 the Company also combined certain
administrative functions between PSB and SCB 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 its severance program, the Company accrued a $1.1 million charge in the
second quarter to reflect this cost. This liability was paid during the third
quarter. It is anticipated that the PSB/SCB Reorganization will produce
significant ongoing pretax savings in future periods.
BOC/CALWEST MERGER
During the first part of 2000, the Company significantly reorganized its
southern California banking subsidiaries, 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 profitability. To continue to
achieve further operational efficiencies the Company effected the BOC/CalWest
Merger. The process of merging these two entities resulted in merger-related
charges of approximately $375 thousand in the second quarter. The merger-related
costs relate primarily to
14
<PAGE>
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 BOC to offer a greater variety of products to their customers as well as
produce significant ongoing pretax savings in future periods.
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the Company's condensed
consolidated financial statements included elsewhere in this document. Certain
statements under this caption constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which involve
risk and uncertainties. The Company's actual results may differ significantly
from the results discussed in such forward looking statements. Factors that
might cause such a difference include but are not limited to economic
conditions, competition in the geographic and business areas in which the
Company conducts its operations, fluctuation in interest rates, credit quality
and government regulation. See "FORWARD-LOOKING STATEMENTS" herein.
BALANCE SHEET
Since December 31, 1999, the Company's total assets have increased by
approximately $350.0 million including the impact of the SCB Acquisition; SCB's
assets totaled $227.8 million. Excluding the SCB Acquisition, total assets have
grown $122 million, or 14.5%, including an increase in net loans and leases and
securities of $46.3 million and $30.1 million, respectively. Securities
increased due primarily to purchases totaling $67.4 million, offset partially by
repayments of mortgage backed securities of $8.1 million and maturities of
securities of $33.7 million. Since December 31, 1999, the Company's total
deposits have increased by approximately $313.9 million including the impact of
the SCB Acquisition; SCB's deposits totaled $182.3 million at the date of
acquisition. Excluding the SCB Acquisition, total deposits have grown
$131.6 million, or 18.5%.
RESULTS OF OPERATIONS
Contained within this document are various references to "net operating
income". Net operating income is defined herein as net income before the
amortization of goodwill and core deposit intangibles arising from acquisitions
accounted for under the purchase method of accounting and costs arising from or
associated with merger and reorganization activities, net of their tax
consequences. Net operating income is not defined by generally accepted
accounting principles; however, management believes this presentation to be
beneficial to gaining an understanding of the Company's financial performance.
The following tables summarize net income, net income per share and key
financial ratios using the Company's net operating income and net income for the
three and nine month periods ended September 30, 2000 and 1999.
15
<PAGE>
<TABLE>
<CAPTION>
NET OPERATING INCOME NET INCOME
(BEFORE GOODWILL AND CORE DEPOSIT (AFTER GOODWILL AND CORE DEPOSIT INTANGIBLE
INTANGIBLE AMORTIZATION AND MERGER COSTS, AMORTIZATION AND MERGER COSTS, NET OF THEIR
NET OF THEIR TAX EFFECTS) TAX EFFECTS)
----------------------------------------- -------------------------------------------
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30, ENDED SEPT. 30, ENDED SEPT. 30,
2000 1999 2000 1999
------------------- ------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net operating income/Net
income................ $2,162 $ 856 $ 871 $ 453
Income per share:
Basic................. $ 0.08 $0.06 $0.03 $0.03
Diluted............... $ 0.08 $0.06 $0.03 $0.03
Annualized return on
average assets*....... 0.79% 0.56% 0.30% 0.28%
Annualized return on
average stockholders'
equity*............... 6.69% 5.12% 2.70% 2.71%
</TABLE>
------------------------
* Average tangible assets and average tangible stockholders' equity used in
computing the ratios for net operating income.
THIRD QUARTER ANALYSIS. Consolidated net operating income for the quarter
ended September 30, 2000 and 1999 was $2.2 million and $856 thousand,
respectively, or $0.08 and $0.06 per diluted share, respectively. The annualized
net operating return on average tangible assets improved to 0.79% from 0.56%
while the annualized net operating return on average tangible stockholders'
equity increased to 6.69% from 5.12% for the same time periods.
The growth in net operating income, diluted net operating income per share
and improvement in the other key performance indicators presented is principally
the result of the Company's growth through the acquisitions of PSB and SCB. The
improvement in net operating income for the third quarter of 2000 compared to
the same period of 1999 also reflects significant growth in interest-earning
assets of the Company's southern California operations. Average interest-earning
assets of BOC grew $32.9 million, or 17.5%, for the quarter ended September 30,
2000 as compared to the same period in 1999. Third quarter results for 2000
reflect operating efficiencies achieved through the merger of the southern
California banking subsidiaries in July of 2000 and the consolidation of certain
back office and administrative functions associated with the PSB/SCB
Reorganization that were being completed during the third quarter of 2000.
Consolidated net income for the quarter ended September 30, 2000, was $871
thousand or $0.03 per diluted share. This compares with consolidated net income
of $453 thousand or $0.03 per diluted share for the quarter ended September 30,
1999. The Company's annualized return on average assets and annualized return on
average stockholders' equity remained fairly consistent from 1999 to 2000 due to
the improvement in net operating income off set by the increase in intangible
amortization expense associated with the purchase of PSB and SCB.
16
<PAGE>
<TABLE>
<CAPTION>
NET OPERATING INCOME NET LOSS
(BEFORE GOODWILL AND CORE DEPOSIT (AFTER GOODWILL AND CORE DEPOSIT
INTANGIBLE AMORTIZATION AND MERGER COSTS, INTANGIBLE AMORTIZATION AND MERGER COSTS,
NET OF THEIR TAX EFFECTS) NET OF THEIR TAX EFFECTS)
----------------------------------------- -----------------------------------------
NINE MONTHS NINE MONTHS NINE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30, ENDED SEPT. 30, ENDED SEPT. 30,
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net operating income/Net
income (loss)............ $4,142 $ 421 $ (341) $ (435)
Net income (loss) per
share:
Basic.................... $ 0.16 $0.05 $(0.01) $(0.05)
Diluted.................. $ 0.16 $0.04 $(0.01) $(0.05)
Annualized return on
average assets *......... 0.55% 0.16% (0.04)% (0.05)%
Annualized return on
average stockholders'
equity *................. 4.57% 1.25% (0.38)% (0.45)%
</TABLE>
------------------------
* Average tangible assets and average tangible stockholders' equity used in
computing the ratios for net operating income.
YEAR-TO-DATE ANALYSIS. Consolidated net operating income for the nine
months ended September 30, 2000 and 1999 was $4.1 million and $421 thousand,
respectively, or $0.16 and $0.04 per diluted share, respectively. The annualized
net operating return on average tangible assets improved to 0.55% from 0.16%
while the annualized net operating return on average tangible stockholders'
equity increased to 4.57% from 1.25% for the nine months ended September 30,
2000 and 1999, respectively. Similar to the discussion for the third quarter,
the improvement in net operating income, diluted net operating income per share
and improvement in the other key performance indicators for the first nine
months of 2000 compared to 1999 reflects the positive impact of the merger of
the southern California banking subsidiaries into BOC as well as the operating
efficiencies created through the consolidation of certain back office and
administrative functions associated with the PSB/SCB Reorganization. Management
anticipates that overhead efficiencies will improve during the fourth quarter,
since these restructuring activities were only fully completed near the end of
the third quarter of this year.
Consolidated net loss for the nine months ended September 30, 2000, was $341
thousand or $0.01 per diluted share. This compares with consolidated net loss of
$435 thousand or $0.05 per diluted share for the nine months ended September 30,
1999. The Company's annualized return on average assets and annualized return on
average stockholders' equity improved slightly from 1999 to 2000 due to the
increase in net operating income, offset by reorganization and merger-related
expenses recognized in the first half of the year and the increase in intangible
amortization expense related to the purchase of PSB and SCB.
NET OPERATING INCOME. The following table presents net operating income and
operating noninterest expense used in key financial data and ratios for the
three and nine month periods ended September 30, 2000 and 1999. The Company
deducts reorganization and merger-related costs related primarily to the PSB/SCB
Reorganization and the BOC/CalWest Merger (which represent severance costs,
system conversion costs, termination penalties to exit data processing contracts
and professional fees to accomplish the
17
<PAGE>
merger-related activities) in calculating net operating income. The Company
expects further reorganization and merger-related costs as the Company pursues
further operating efficiency opportunities.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net operating income:
Net income (loss)...................................... $ 871 $ 453 $ (341) $ (435)
ADJUSTMENTS TO NET INCOME (LOSS):
After-tax core deposit intangible amortization....... 508 150 1,400 320
Goodwill amortization................................ 783 253 2,169 536
------- ------ ------- -------
Net operating income before after-tax reorganization
and
merger-related costs............................... 2,162 856 3,228 421
After-tax reorganization and merger-related costs.... -- -- 914 --
------- ------ ------- -------
Net operating income................................... $ 2,162 $ 856 $ 4,142 $ 421
======= ====== ======= =======
Operating noninterest expense:
Noninterest expense.................................... $12,562 $7,198 $38,405 $13,975
ADJUSTMENTS TO NONINTEREST EXPENSE:
Core deposit intangible amortization................. 841 256 2,366 547
Goodwill amortization................................ 783 253 2,169 536
Reorganization and merger-related costs.............. -- -- 1,563 --
------- ------ ------- -------
Operating noninterest expense.......................... $10,938 $6,689 $32,307 $12,892
======= ====== ======= =======
Efficiency ratio......................................... 85.6% 88.1% 96.0% 97.3%
Efficiency ratio based on operating noninterest
expense................................................ 74.5% 81.9% 80.7% 89.8%
</TABLE>
THIRD QUARTER ANALYSIS. The efficiency ratio (noninterest expense divided
by revenues) is a measure of the Company's efficiency in generating revenue. A
lower or declining ratio indicates improving efficiency.
The Company's efficiency ratio for the third quarter of 2000 improved to
85.6% from 88.1% in 1999. When reorganization and merger-related expenses are
excluded, along with the amortization expense of goodwill and core deposit
intangibles, the efficiency ratio (operating noninterest expense divided by
revenues) improved to 74.5% in the third quarter of 2000 from 81.9% in the third
quarter of 1999. This improvement is attributed primarily to the operating
efficiencies generated by merging the southern California Banks into a single
entity. Additionally, third quarter 2000 benefited from the PSB/SCB
Reorganization which occurred in the second quarter of 2000, with further
benefits anticipated during the fourth quarter.
YEAR-TO-DATE ANALYSIS. The Company's efficiency ratio improved to 96.0% in
2000 from 97.3% in 1999, despite the recognition of $1.6 million in
reorganization and merger-related costs in 2000 whereas no such costs were
incurred during the same period in 1999. Therefore, the Company's efficiency
ratio based on operating noninterest expense improved to 80.7% in 2000 from
89.8% in 1999. The improvement in the efficiency ratios in 2000 as compared to
1999 is due mainly to the contribution of the SCB and PSB efficiency ratios in
the 2000 year-to-date 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.
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 the
18
<PAGE>
Banks can differentiate themselves through a higher level of personalized
service, particularly when compared to competing financial institutions that
continue to disenfranchise customers through their own consolidation efforts.
The Company also believes that the local community orientation of the Banks
provides a valuable opportunity to attract customers. Growth will also come from
participation in the continued growth in the economies of the communities in
which the 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
three and nine months ended September 30, 2000 and September 30, 1999. Average
earning loans and leases include nonaccrual loans and leases.
19
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
--------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST BALANCE EXPENSE COST
---------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans and leases........................... $ 753,142 $17,592 9.29% $372,263 $8,212 8.75%
Investment securities...................... 164,657 2,593 6.26% 127,218 1,888 5.89%
Federal funds sold......................... 75,600 1,246 5.56% 49,005 689 5.58%
Other earning assets....................... 11,244 163 5.77% 6,614 84 4.98%
---------- ------- -------- ------
Total interest-earning assets.......... 1,004,643 21,594 8.55% 555,100 10,873 7.77%
Noninterest-earning assets:
Cash and demand deposits with banks........ 55,264 29,235
Other assets............................... 105,100 63,623
---------- --------
Total assets........................... $1,165,007 $647,958
========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand.................. $ 108,488 $ 551 2.02% $ 52,583 $ 169 1.28%
Money market............................. 156,102 1,287 3.28% 75,944 593 3.09%
Savings.................................. 106,926 596 2.22% 73,853 403 2.16%
Time..................................... 402,748 5,769 5.70% 218,972 2,644 4.79%
---------- ------- -------- ------
Total interest-bearing deposits........ 774,264 8,203 4.21% 421,352 3,809 3.59%
Borrowing.................................. 18,586 441 9.44% 12,266 207 6.70%
---------- ------- -------- ------
Total interest-bearing liabilities..... 792,850 8,644 4.34% 433,618 4,016 3.67%
Noninterest-bearing liabilities:
Demand deposits.......................... 231,104 126,660
Other liabilities........................ 8,988 15,618
---------- --------
Total liabilities...................... 1,032,942 575,896
Minority interest.......................... 3,500 2,321
Stockholders' equity....................... 128,565 69,741
---------- --------
Total liabilities and stockholders'
equity................................... $1,165,007 $647,958
========== ========
Net interest income........................ $12,950 $6,857
======= ======
Net interest spread........................ 4.21% 4.10%
===== =====
Net interest margin........................ 5.13% 4.91%
===== =====
</TABLE>
THIRD QUARTER ANALYSIS. The net interest spread increased to 4.21% from
4.10% for the third quarter of 2000 compared to the third quarter of 1999, and
the net interest margin increased to 5.13% from 4.91% over the same time
periods.
The yield on interest-earning assets increased 78 basis points to 8.55% in
the third quarter of 2000 from 7.77% in the third quarter of 1999, due primarily
to the proportion of average loans and leases to total interest-earning assets
increasing to 75.1% during the third quarter of 2000 from 67% during the
20
<PAGE>
third quarter of 1999. The increase in the overall yield on interest earning
assets was boosted by the yield on loans and leases to 9.29% for the third
quarter of 2000 from 8.75% for the third quarter of 1999. This increase is
attributed to a greater percentage of higher yielding commercial loans and
commercial real estate loans associated with the SCB Acquisition, the growth in
these loan categories during 2000 and the run off of lower yielding mortgage
loans at PSB.
The Company's cost of funds, excluding noninterest-bearing demand deposits,
increased 67 basis points from 3.67% during the third quarter of 1999 compared
to 4.34% during the third quarter of 2000. The overall increase in the cost of
funds can be attributed to an increase in the cost of time certificates of
deposit by 91 basis points associated with the rising interest rate environment
during the period. The percentage of time certificates of deposit to
interest-bearing deposits remained relatively unchanged in comparing the third
quarter of 1999 to the third quarter of 2000.
21
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
--------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST BALANCE EXPENSE COST
---------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans and leases........................... $ 704,710 $47,998 9.10% $196,539 $13,378 9.10%
Investment securities...................... 157,539 7,383 6.26% 68,775 2,890 5.62%
Federal funds sold......................... 55,210 2,556 6.18% 39,468 1,469 4.98%
Other earning assets....................... 9,746 482 6.61% 5,803 219 5.02%
---------- ------- -------- -------
Total interest-earning assets.......... 927,205 58,419 8.42% 310,585 17,956 7.73%
Noninterest-earning assets:
Cash and demand deposits with banks........ 47,938 20,168
Other assets............................... 109,365 35,580
---------- --------
Total assets........................... $1,084,508 $366,333
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand.................. $ 99,754 $ 1,400 1.87% $ 27,850 $ 260 1.25%
Money market............................. 133,576 3,379 3.38% 47,479 1,024 2.88%
Savings.................................. 105,684 1,749 2.21% 30,624 499 2.18%
Time..................................... 377,600 15,318 5.42% 105,924 3,794 4.79%
---------- ------- -------- -------
Total interest-bearing deposits........ 716,614 21,846 4.07% 211,877 5,577 3.52%
Borrowings................................. 18,529 1,359 9.80% 4,133 207 6.70%
---------- ------- -------- -------
Total interest-bearing liabilities..... 735,143 23,205 4.22% 216,010 5,784 3.58%
Noninterest-bearing liabilities:
Demand deposits.......................... 209,088 95,193
Other liabilities........................ 15,579 8,121
---------- --------
Total liabilities...................... 959,810 319,324
Minority interest.......................... 3,500 782
Stockholders' equity....................... 121,198 46,227
---------- --------
Total liabilities and stockholders'
equity................................... $1,084,508 $366,333
========== ========
Net interest income........................ $35,214 $12,172
======= =======
Net interest spread........................ 4.20% 4.15%
===== =====
Net interest margin........................ 5.07% 5.24%
===== =====
</TABLE>
YEAR-TO-DATE ANALYSIS. The net interest spread increased to 4.20% from
4.15% during the first three quarters of 2000 compared to the first three
quarters of 1999. The net interest margin (annualized net interest income
divided by average interest-earning assets) decreased from 5.24% to 5.07% 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 69% in 1999 to 77% in 2000 such that the
overall cost of deposits (annualized interest expense as a percentage of
interest-bearing and noninterest bearing deposits) increased from 2.43% in 1999
to 3.15% in 2000. The increase in the ratio of interest-bearing deposits
resulted from the PSB and SCB Acquisitions as well as a dedicated effort to
raise deposits to support loan growth.
22
<PAGE>
The yield on interest-earning assets increased to 8.42% from 7.73% during
the first nine months of 2000 compared to the same period of 1999. This increase
is principally attributed to the increase in loans as a percentage of average
interest earning assets from 63% during the first nine months of 1999 to 76%
during the same period of 2000. Yields on loans remained approximately the same
for the nine months ended September 30, 1999 to the same period in 2000 due to
the lower yielding portfolios of PSB impacting the year-to-date results for only
approximately two of the nine months ended September 30, 1999.
The Company's cost of funds, excluding noninterest-bearing demand deposits,
increased from 3.58% for the nine months ended September 30, 1999 to 4.22% 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 an effort to maintain a
loan-to-deposit ratio of approximately 80% prior to the BOC/CalWest Merger, used
high cost web-based certificates of deposit to generate short-term liquidity
which also had an impact on the Company's cost of funds. These certificates of
deposit are expected to run off by the end of the first quarter of 2001.
PROVISION FOR LOAN AND LEASE LOSSES. The Company maintains an allowance for
loan and lease losses ("ALLL") at a level determined appropriate for each Bank.
A provision for loan and lease losses is a charge to operations which represents
the current period cost associated with maintaining an adequate ALLL. The
provision is dependent on many factors and the provision for loan and lease
losses may fluctuate due to management's assessment of the adequacy of the ALLL
based on current information available; however, actual loan and lease losses
may vary from estimates.
The provision for the loan and lease losses totaled $305 thousand for the
quarter ended September 30, 2000 compared to $248 thousand for the same quarter
in 1999. For the nine months ended September 30, 2000 and 1999, the Company
recognized a charge for the provision for the loan and lease losses of
$750 thousand and $399 thousand, respectively. See-Balance Sheet
Analysis--CREDIT QUALITY.
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, commissions earned on selling investment
products, gains on sale of loans and other miscellaneous income.
The following tables sets forth the details of noninterest income for the
three and nine months ended September 30, 2000 and September 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. Additionally, as PSB was
acquired on August 11, 1999, the results of PSB are included in the Company's
2000 results, and are included in the 1999 historical results of the Company
from the date of acquisition through September 30, 1999. For purposes of this
analysis, the "Pro Forma Company" column for 2000 combines pre-acquisition
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
23
<PAGE>
period with the historical results of SCB for the three and nine months ended
September 30, 1999 and PSB for the applicable periods ended August 11, 1999.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED JULY 1, TO ENDED
SEPT. 30, SEPT. 30, AUGUST 11, SEPT. 30,
------------ ------------ ---------- --------------------
2000 1999
------------ ------------------------------------------------
PRO FORMA
COMPANY COMPANY PSB SCB COMPANY CHANGE
------------ ------------ ---------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service charges and fees on deposits.... $ 827 $ 480 $189 $ 30 $ 699 $ 128
Loan servicing fees..................... 191 39 11 178 228 (37)
Loan referral fees...................... 160 119 -- -- 119 41
Commissions on investment products...... 235 151 57 -- 208 27
Gain on sale of loans, net.............. 35 146 16 -- 162 (127)
Gain (loss) on sale of securities,
net................................... -- 12 -- -- 12 (12)
Other income............................ 281 366 28 42 436 (155)
------ ------ ---- ---- ------ -----
Total noninterest income................ $1,729 $1,313 $301 $250 $1,864 $(135)
====== ====== ==== ==== ====== =====
</TABLE>
THIRD QUARTER ANALYSIS. On a pro forma basis with SCB and PSB, total
noninterest income decreased $135 thousand to $1.7 million for the quarter ended
September 30, 2000 from $1.9 million for the quarter ended September 30, 1999.
This decrease is attributed mainly to a $127 thousand decrease in gain on sale
of loans and a $155 thousand decrease in other income partially offset by a
$128 thousand increase in service charges and fees on deposits. The decrease in
other income on a pro forma basis is due mainly to a decrease in dividend income
on certain single premium life insurance policies that were redeemed in the
second quarter of 2000, offset partially by gains on sale of fixed assets in
2000 totaling $105 thousand. The decrease in gain on sales of loans is
attributed to cessation of mortgage banking activities at PSB combined with a
movement towards retaining SBA loans in the Company's loan portfolio in 2000
compared to a strategy of funding and selling SBA loans in 1999.
<TABLE>
<CAPTION>
NINE NINE NINE
MONTHS TWO MONTHS MONTHS MONTHS JANUARY 1,
ENDED ENDED ENDED ENDED TO NINE MONTHS
SEPT. 30, FEB. 29, SEPT. 30, SEPT. 30, AUGUST 11, ENDED SEPT. 30,
--------- ---------- --------- --------- ----------- --------------------
2000 1999
---------------------------------- ----------------------------------------------
PRO FORMA PRO FORMA
COMPANY SCB COMPANY COMPANY PSB SCB COMPANY CHANGE
--------- ---------- --------- --------- ----------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges and fees on
deposits....................... $2,285 $ 22 $2,307 $ 845 $1,188 $ 95 $2,128 $ 179
Loan servicing fees.............. 491 103 594 54 85 499 638 (44)
Loan referral fees............... 312 6 318 223 -- 16 239 79
Commissions on investment
products....................... 674 -- 674 151 436 -- 587 87
Gain on sale of loans, net....... 401 -- 401 357 400 -- 757 (356)
Gain (loss) on sale of
securities, net................ (7) (97) (104) 12 38 -- 50 (154)
Other income..................... 644 3 647 543 353 271 1,167 (520)
------ ---- ------ ------ ------ ---- ------ -----
Total noninterest income......... $4,800 $ 37 $4,837 $2,185 $2,500 $881 $5,566 $(729)
====== ==== ====== ====== ====== ==== ====== =====
</TABLE>
YEAR-TO-DATE ANALYSIS. On a pro forma basis with SCB and PSB, total
noninterest income decreased $729 thousand from $5.6 million for the nine months
ended September 30, 1999 to $4.8 million for the nine months ended
September 30, 2000 due primarily to a $356 thousand decrease in gain on sale of
loans, recording a $104 thousand loss on sale of securities versus a
$50 thousand gain in 1999 and a $520 thousand decrease in other income. The loss
on sale of securities in 2000 relates to SCB selling certain securities 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 $116 thousand
24
<PAGE>
and a decrease of $137 thousand in dividend income on single premium life
insurance policies that were redeemed in the second quarter of 2000.
NONINTEREST EXPENSE. The following table sets forth the details of
noninterest expense for the nine and three months ended September 30, 2000 and
September 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, and are included in the 1999
historical results of the Company from the date of acquisition through
September 30, 1999. For purposes of this analysis, the "Pro Forma Company"
column for 2000 combines the historical results of 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 of the
Company for the 1999 period with the actual results of SCB for the nine and
three months ended September 30, 1999 and PSB for the applicable periods ended
August 11, 1999.
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS THREE MONTHS
ENDED ENDED JULY 1, TO ENDED
SEPT. 30, SEPT. 30, AUGUST 11, SEPT. 30,
--------- --------- ---------- --------------------
2000 1999
--------- ---------------------------------------------
PRO FORMA
COMPANY COMPANY PSB SCB COMPANY CHANGE
--------- --------- ---------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits............... $ 5,553 $3,212 $ 840 $1,273 $ 5,325 $ 228
Occupancy, premises and equipment............ 1,785 1,085 241 296 1,622 163
Data and item processing..................... 505 394 81 40 515 (10)
Professional fees............................ 755 352 37 (7) 383 372
Communications............................... 504 260 105 44 409 95
Business development......................... 477 229 58 97 384 93
Customer services............................ 370 251 14 25 290 80
Other........................................ 989 906 236 232 1,374 (385)
------- ------ ------ ------ ------- ------
Total noninterest expense, excluding goodwill
and other intangibles amortization......... 10,938 6,689 1,612 2,000 10,301 637
Goodwill amortization........................ 783 258 -- -- 258 525
Core deposit intangible amortization......... 841 251 -- -- 251 590
------- ------ ------ ------ ------- ------
Total noninterest expense.................... $12,562 $7,198 $1,612 $2,000 $10,810 $1,752
======= ====== ====== ====== ======= ======
</TABLE>
THIRD QUARTER ANALYSIS. On a pro forma basis with SCB and PSB, total
noninterest expense, before goodwill and other intangibles amortization,
increased $636 thousand to $10.9 million for the quarter ended September 30,
2000 from $10.3 million for the quarter ended September 30, 1999. This increase
was due principally to increases in salary expense, occupancy, premises and
equipment and professional fees offset partially by a decrease in other
expenses. Salary expense increased $228 thousand 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 opening two new branches during 2000.
Occupancy, premises and equipment expense increased $163 thousand due to
approximately $115 thousand of additional building and leasehold improvement
depreciation and amortization from the write-up in value of certain properties
and leasehold improvements in the PSB and SCB Acquisitions. The Company has also
purchased equipment for PSB's in-house data processing center and made capital
expenditures for the new branches opened during 2000, thus increasing
depreciation expense. The
25
<PAGE>
Company also recognized approximately $30 thousand for additional rent for the
new branches in the third quarter of 2000 compared to 1999.
Professional fees increased $372 thousand for the third quarter of 2000 over
the same quarter in 1999 due mostly to the cost of legal, accounting and
consulting services. The increase in legal fees in 2000 relates primarily to
general corporate matters in relation to the Company being a public registrant
during 2000, resolution of problem credit issues and legal issues related to the
sale of real estate held for investment. Additionally, in 1999 legal fees
include a recovery of legal costs recorded in the third quarter of 1999 at SCB.
The increase in accounting fees relates to preparation of short period tax
returns arising from the acquisition and merger activity and a general increase
reflective of the Company's growth in size and complexity in addition to public
reporting requirements. Further, the Company undertook a number of projects to
analyze operating efficiency opportunities. Many of these costs incurred during
the third quarter of 2000 are expected to benefit future periods.
Other expenses decreased $385 thousand due mostly to cost savings arising
from consolidating the banking subsidiaries in southern California and from
discontinuing the offering of certain services, including insurance products and
merchant bankcards. Total noninterest expense increased $1.8 million to
$12.6 million for the quarter ended September 30, 2000 from $10.8 million for
the same quarter in 1999 due to the increase in goodwill and other intangibles
amortization.
<TABLE>
<CAPTION>
NINE
MONTHS
NINE MONTHS TWO MONTHS NINE MONTHS ENDED JANUARY 1, TO
ENDED SEPT. 30, ENDED FEB. 29, ENDED SEPT. 30, SEPT. 30, AUGUST 11,
--------------- -------------- --------------- --------- -------------
2000 1999
-------------------------------------------------- -------------------------
PRO FORMA
COMPANY SCB COMPANY COMPANY PSB
--------------- -------------- --------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits... $16,517 $ 892 $17,409 $ 6,058 $ 5,976
Occupancy, premises and
equipment...................... 5,007 181 5,188 1,901 1,677
Data and item processing......... 1,625 26 1,651 779 472
Professional fees................ 2,022 72 2,094 1,068 331
Communications................... 1,432 29 1,461 496 804
Business development............. 1,263 66 1,329 442 631
Customer services................ 794 18 812 469 51
Other............................ 3,647 170 3,817 1,679 1,856
------- ------ ------- ------- -------
Total noninterest expense,
excluding goodwill and other
intangibles amortization, and
reorganization and
merger-related costs........... 32,307 1,454 33,761 12,892 11,798
Reorganization and merger-related
costs.......................... 1,563 790 2,353 -- --
Goodwill amortization............ 2,169 -- 2,169 536 --
Core deposit intangible
amortization................... 2,366 -- 2,366 547 --
------- ------ ------- ------- -------
Total noninterest expense........ $38,405 $2,244 $40,649 $13,975 $11,798
======= ====== ======= ======= =======
<CAPTION>
NINE MONTHS
ENDED
SEPT. 30,
--------------------
1999
--------------------
PRO FORMA
SCB COMPANY CHANGE
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits... $3,756 $15,790 $1,619
Occupancy, premises and
equipment...................... 894 4,472 716
Data and item processing......... 119 1,370 281
Professional fees................ 203 1,602 492
Communications................... 130 1,430 31
Business development............. 290 1,363 (34)
Customer services................ 55 575 237
Other............................ 804 4,339 (522)
------ ------- ------
Total noninterest expense,
excluding goodwill and other
intangibles amortization, and
reorganization and
merger-related costs........... 6,251 30,941 2,820
Reorganization and merger-related
costs.......................... -- -- 2,353
Goodwill amortization............ -- 536 1,633
Core deposit intangible
amortization................... -- 547 1,819
------ ------- ------
Total noninterest expense........ $6,251 $32,024 $8,625
====== ======= ======
</TABLE>
YEAR-TO-DATE ANALYSIS 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 $2.8 million to
$32.3 million for the nine months ended September 30, 2000 from $30.9 million
for the nine months ended September 30, 1999. This increase was due primarily to
increases in salary expense, occupancy, premises and equipment expense and
professional fees offset by a decrease in other expense. Salary expense
increased $1.6 million which is attributed mainly to the expansion of certain
lending functions at the Banks as well as expanding the business development and
marketing functions across the organization since the end of the second quarter
of 1999. Salary expense in 2000 also includes approximately $500 thousand
related to positions eliminated in the PSB/SCB Reorganization,
26
<PAGE>
exclusive of reorganization expenses, as well as $325 thousand in nonrecurring
medical self-insurance expense as the Company changed insurance carriers.
Occupancy, premises and equipment expense increased $716 thousand due to
approximately $345 thousand of additional building and leasehold improvement
depreciation and amortization from the write-up in value of certain properties
and leasehold improvements through the PSB and SCB Acquisitions as well as
additional depreciation expense for equipment purchased in relation to PSB's
in-house data processing center and approximately $80 thousand additional rent
for two new branches.
On a pro forma basis, data and item processing ("DP") expense for the nine
months ended September 30, 2000 increased $281 thousand from the same period of
1999. During the nine months ended September 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 June 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).
Professional fees increased $492 thousand for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999. The
majority of the increases occurred during the third quarter of 2000 and were
discussed previously. The Company also incurred additional costs in the first
half of the year in relation to recruiting fees and obtaining assistance in
preparing the Company's 1999 annual report. Other expense decreased
$522 thousand due to overall cost savings arising from consolidating the
southern California subsidiaries as well as consolidating all the Banks into the
Company.
The increase in customer services expenses is due to the growth in the
number of customers and average balances of deposit customers which are home
owner associations, title and escrow companies and bankruptcy trustees for whom
the Banks utilize third party vendors to provide banking-related services. 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.
INCOME TAXES. The Company's normal effective income tax rate would be
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 income (loss). The Company's actual effective income
tax rates were a charge of over 100% for the nine months ended September 30,
2000 and 1999, and a charge of 47.4% and 40.1% for the quarters ended
September 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
27
<PAGE>
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:
<TABLE>
<CAPTION>
QTR ENDED QTR ENDED QTR ENDED YEAR ENDED QTR ENDED QTR ENDED
SEPTEMBER 30, JUNE 30, MARCH 31, DEC 31, SEPTEMBER 30, JUNE 30,
2000 2000 2000 1999 1999 1999
------------- --------- --------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average loans and leases outstanding............ $753,142 $743,038 $617,418 $ 267,896 $ 372,263 $ 112,120
Gross loans and leases, excluding net deferred
fees.......................................... 751,858 742,021 719,857 559,784 510,985 116,365
Nonaccrual loans, not restructured.............. 4,423 3,286 3,465 413 535 116
Accruing loans past due 90 days or more......... -- -- -- -- -- 20
Restructured loans.............................. -- -- -- -- -- --
-------- -------- -------- ---------- ---------- ----------
Total nonperforming loans and leases (NPLs)... 4,423 3,286 3,465 413 535 136
Other real estate owned (OREO).................. 164 118 38 -- 465 269
-------- -------- -------- ---------- ---------- ----------
Total nonperforming assets (NPAs)........... 4,587 3,404 3,503 413 1,000 405
-------- -------- -------- ---------- ---------- ----------
Allowance for loan and lease losses:
Balance at beginning of period............ 9,774 9,461 6,750 1,986 2,068 2,001
Balance acquired during period............ -- -- 2,547 4,087 4,087 --
-------- -------- -------- ---------- ---------- ----------
Loans and leases charged off during
period................................ (76) (12) (41) (283) (87) (40)
Recoveries during period................ 38 40 45 141 44 16
-------- -------- -------- ---------- ---------- ----------
Net recoveries (charge-offs) during
period.............................. (38) 28 4 (142) (43) (24)
Provision for loan and lease losses....... 305 285 160 819 248 91
-------- -------- -------- ---------- ---------- ----------
Balance at end of period................ $ 10,041 $ 9,774 $ 9,461 $ 6,750 $ 6,360 $ 2,068
======== ======== ======== ========== ========== ==========
Selected ratios:
Annualized net recoveries (charge-offs) to
average loans and leases.................... (0.02)% 0.01% 0.00% (0.05)% (0.04)% (0.04)%
Annualized provision for loan and lease losses
to average loans and leases................. 0.16% 0.08% 0.10% 0.31% 0.26% 0.16%
Allowance at end of period to gross loans and
leases outstanding at end of period........... 1.34% 1.32% 1.31% 1.21% 1.24% 1.78%
Allowance as percentage of nonperforming loans
and leases.................................... 227.02% 297.44% 273.04% 1,634.38% 1,188.79% 1,521.32%
NPLs to gross loans and leases................ 0.59% 0.44% 0.48% 0.07% 0.10% 0.12%
NPAs to gross loans and leases and OREO....... 0.61% 0.46% 0.49% 0.07% 0.20% 0.35%
NPAs to total assets.......................... 0.38% 0.28% 0.31% 0.05% 0.12% 0.18%
</TABLE>
Gross loans and leases increased $192.1 million since December 31, 1999,
including $143.7 million acquired in the SCB Acquisition and loan growth of
$48.4 million, or an annualized growth rate of 8.7%. Nonaccrual loans and leases
were $4.4 million at September 30, 2000, representing a $4.0 million increase
since year-end. This increase is due to management placing several credits
secured by real estate on nonaccrual totaling $2.6 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 was 0.59% at September 30, 2000
compared to 0.07% at December 31, 1999. The ratio of nonperforming assets to
total assets increased from 0.05% at December 31, 1999 to 0.38% as of
September 30, 2000. 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 September 30, 2000.
However, this concentration is spread across several sectors
28
<PAGE>
of the real estate market including single family mortgages, commercial real
estate projects (including SBA guaranteed loans) and construction loans 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), 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:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential real estate loans............ $193,605 26% $207,118 37%
Commercial real estate loans............. 244,657 32% 185,750 33%
Construction loans....................... 72,775 10% 63,154 11%
Equity lines............................. 28,482 4% 19,760 4%
-------- --- -------- ---
Subtotal real estate related loans..... 539,519 72% 475,782 85%
Commercial loans......................... 104,474 14% 59,810 11%
Consumer loans........................... 17,945 2% 17,393 3%
SBA loans................................ 82,730 11% 6,482 1%
Other loans.............................. 7,190 1% 317 --
-------- --- -------- ---
Gross loans.............................. $751,858 100% $559,784 100%
======== === ======== ===
</TABLE>
ALLOWANCE FOR LOAN AND LEASE LOSSES. The Company has established a
monitoring system for its loans and leases in order to identify impaired loans,
and potential problem loans and leases and to permit periodic evaluation of
impairment and the adequacy of the allowance for loan and lease losses ("ALLL")
in a timely manner. The monitoring system and ALLL methodology have evolved over
a period of years, and loan classifications have been incorporated into the
determination of the ALLL. This monitoring system and allowance methodology
include a loan-by-loan analysis for all classified loans and leases as well as
loss factors for the balance of the portfolio that are based on an analysis
relative to the Company's unclassified portfolio. This analysis includes such
factors as historical loss experience, current portfolio delinquency and trends,
and other inherent risk factors such as economic conditions, concentrations in
the portfolio, risk levels of particular loan categories, and internal loan
review.
The ALLL increased by $3.3 million during the nine months ended
September 30, 2000 due primarily to the SCB Acquisition, and increased
$305 thousand during the third quarter of 2000 due mostly to additional
provisions for loan and lease losses. The Company's annualized ratio of net
charge-offs to average loans and leases was 0.02% for the nine months ended
September 30, 2000. 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 $10.0 million at September 30, 2000, is
adequate based on the Company's evaluation of the loan portfolio, improved
economic conditions and continued adherence to established credit policies.
CAPITAL RESOURCES
Stockholders' equity at September 30, 2000 increased to $129.1 million from
$95.8 million at December 31, 1999.
29
<PAGE>
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
stockholders' equity, qualifying perpetual preferred stock, trust preferred
securities and minority interests, less goodwill and other qualifying
intangibles. Supplementary capital includes the allowance for loan losses
(subject to certain limitations), other perpetual preferred stock, trust
preferred securities, certain other capital instruments and term subordinated
debt. The Company's major capital components are stockholders' equity, trust
preferred securities and preferred stock in core capital, and the allowance for
loan losses in supplementary capital.
At September 30, 2000, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted), subject to certain deductions, for the
preceding quarter.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting
forth a five-tier system for measuring the capital adequacy of the financial
institutions they supervise. The capital levels of the Company, PCC and each of
the Banks at September 30, 2000 and the two highest levels recognized under
these regulations are as follows. These ratios all exceeded the well-capitalized
guidelines shown below.
<TABLE>
<CAPTION>
ADEQUATELY WELL CONSOLIDATED
CAPITALIZED CAPITALIZED SCB BOC PSB PCC COMPANY
------------ ------------ -------- -------- -------- -------- ------------
(GREATER THAN OR EQUAL TO)
<S> <C> <C> <C> <C> <C> <C> <C>
Total risk-based
capital............... 8.00% 10.00% 11.40% 11.20% 11.56% 11.46% 11.47%
Tier 1 risk-based
capital ratio......... 4.00% 6.00% 10.14% 9.95% 10.35% 10.24% 10.22%
Tier 1 leverage capital
ratio................. 4.00% 5.00% 6.77% 7.42% 6.27% 6.18% 6.73%
</TABLE>
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 23% and 39%, respectively, on
September 30, 2000 and December 31, 1999, while its loan to deposit ratio stood
at 73% and 78% on those same dates. The decrease in the liquidity ratio from
year end is due to the volume of pledged securities at SCB in relation to
approximately $25 million of bankruptcy related deposits which are expected to
run off due to SCB eliminating servicing this product type. At September 30,
2000, management believes liquidity of the Company is adequate.
The Company is a corporation separate and apart from the Banks. It must
provide for its own liquidity. Substantially all of the Company's revenues are
obtained from dividends declared and paid by the Banks. There are statutory and
regulatory provisions that could limit the ability of the Banks to pay dividends
to the Company. At September 30, 2000, the Banks had approximately $1.6 million
in the aggregate available to be paid as dividends to the Company. Management of
the Company believes that such restrictions will not have an impact on the
ability of the Company to meet its ongoing cash
30
<PAGE>
obligations. Additionally, the Company has a revolving line of credit as a
secondary source of liquidity. At September 30, 2000 the Company had utilized
$200 thousand of the $3 million available on this revolving line of credit. As
of September 30, 2000, the Company did not have any material commitments for
capital expenditures.
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 and its potential impact on both earnings, liquidity, and market
risk. If potential changes to these key risk elements resulting from
hypothetical interest rate swings are not within the limits established by the
Board of Directors of the Company, the Board may direct management to adjust its
asset and liability mix to bring interest rate risk within Board-approved
limits.
The following table sets forth the distribution of repricing opportunities
of the Company's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap (i.e., interest rate sensitive assets less
interest rate sensitive liabilities), cumulative interest-earning assets and
interest bearing liabilities, the cumulative interest rate sensitivity gap, the
ratio of cumulative interest-earning assets to cumulative interest-bearing
liabilities and the cumulative gap as a percentage of total assets and total
interest-earning assets as of September 30, 2000. The table also sets forth the
time periods during which interest earning assets and interest-bearing
liabilities will mature or may reprice in accordance with their contractual
terms. The interest rate relationships between the repriceable assets and
repriceable liabilities are not necessarily constant and may be affected by many
factors, including the behavior of customers in response
31
<PAGE>
to changes in interest rates. This table should, therefore, be used only as a
guide as to the possible effect that changes in interest rates might have on the
net interest margin of the Company.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000
-------------------------------------------------------------------------------
AMOUNTS MATURING OR REPRICING IN
-------------------------------------------------------------------------------
OVER 3
MONTHS OVER 1
3 MONTHS TO 12 YEAR TO OVER NON-
OR LESS MONTHS 5 YEARS 5 YEARS SENSITIVE(1) TOTAL
----------- ----------- ---------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.............. $ 198 $ 1,486 $ 100 $ -- $ 60,802 $ 62,586
Federal funds sold................... 77,786 -- -- -- -- 77,786
Investment securities................ 20,990 35,913 78,184 52,279 -- 187,366
Loans and leases..................... 288,142 122,765 103,634 237,150 -- 751,691
Loans held for sale.................. -- -- -- -- -- --
Other assets......................... -- -- -- -- 113,702 113,702
--------- --------- -------- ---------- --------- ----------
Total assets....................... 387,116 160,164 181,918 289,429 174,504 1,193,131
========= ========= ======== ========== ========= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Noninterest-bearing demand
deposits........................... $ -- $ -- $ -- $ -- $ 236,296 $ 236,296
Interest-bearing demand, money market
and savings........................ 388,940 -- -- -- -- 388,940
Time certificates of deposit......... 151,478 200,434 49,005 491 -- 401,408
Short term debt...................... 305 -- -- -- -- 305
Long term debt....................... 18,500 -- -- -- -- 18,500
Other liabilities.................... -- -- -- -- 15,075 15,075
Minority Interests................... 3,500 -- -- -- -- 3,500
Stockholders' equity................. -- -- -- -- 129,107 129,107
--------- --------- -------- ---------- --------- ----------
Total liabilities & stockholders'
equity........................... $ 562,723 $ 200,434 $ 49,005 $ 491 $ 380,478 $1,193,131
========= ========= ======== ========== ========= ==========
Period gap............................. $(175,607) $ (40,270) $132,913 $ 288,938 $(205,974)
Cumulative interest-earning assets..... $ 387,116 $ 547,280 $729,198 $1,018,627
Cumulative interest-bearing
liabilities.......................... $ 562,723 $ 763,157 $812,162 $ 812,653
Cumulative gap......................... $(175,607) $(215,877) $(82,964) $ 205,974
Cumulative interest-earning assets to
cumulative interest-bearing
liabilities.......................... 0.69 0.72 0.90 1.25
Cumulative gap as a percent of:
Total assets......................... (14.72)% (18.09)% (6.95)% 17.26%
Interest-earning assets.............. (17.27)% (21.23)% (8.16)% 20.26%
</TABLE>
------------------------------
(1) Assets or liabilities which are not interest rate-sensitive.
The foregoing table indicates that the Company had a negative one year gap
of $215.9 million, or 18.1% of total assets, at September 30, 2000. In theory,
this would indicate that at September 30, 2000, the Company had $215.9 million
more in liabilities that would reprice if there was a change in interest rates
over the next year than assets. Thus, if interest rates were to increase, this
gap would tend to result in a lower net interest margin. Conversely, if interest
rates were to decrease, this gap would tend to result in a higher net interest
margin. However, changes in the mix of earning assets or funding liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In addition, the interest rate spread between an asset and its
funding liability can vary significantly while the timing of repricing of both
the asset and its funding liability can remain the same, thus impacting net
interest income. This characteristic is referred to as basis risk and,
generally, relates to the repricing characteristics of short-term funding
sources such as certificates of deposit.
The impact of fluctuations in interest rates on the Company's projected next
twelve month net interest income and net income has been evaluated through an
interest rate shock simulation model that included various assumptions regarding
the repricing relationships of assets and liabilities, as well as anticipated
changes in loan and deposit volumes over differing rate environments. As of
September 30, 2000, the analysis indicates that the Company's net interest
income would increase a maximum of 3.85% if rates rose
32
<PAGE>
200 basis points immediately and would decrease by approximately 3.88% if rates
declined 200 basis points immediately.
In addition, while this analysis indicates the probable impact of interest
rate movements on the Company's net interest income, it does not take into
consideration other factors that would impact this analysis. These factors would
include management's actions to mitigate the impact to the Company's credit risk
profile during periods of significant interest rate movements. Varying interest
rate environments create unexpected changes in prepayment levels of assets and
liabilities that are not reflected in the interest sensitivity analysis table.
These prepayments may have significant effects on the Company's net interest
margin. Because of these factors and others, an interest sensitivity gap
analysis may not provide a complete assessment of the Company's exposure to
changes in interest rates.
Interest rate risk is the risk of loss in value due to changes in interest
rates. Interest rate risk exposure is measured using interest rate sensitivity
analysis to determine the Company's change in net portfolio value in the event
of hypothetical changes in interest rates and interest liabilities. Interest
rate sensitivity analysis is used to measure the Company's interest rate risk by
computing estimated changes in net portfolio value of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. Net portfolio value represents the
market value of portfolio equity and is equal to the market value of assets
minus the market value of liabilities, with adjustments made for off-balance
sheet items. This analysis assesses the risk of loss in market rate sensitive
instruments in the event of sudden and sustained increases and decreases in
market interest rates of 100 basis points.
The following table presents the Company's projected change in net portfolio
value for these rate shock levels as of September 30, 2000. All market rate
sensitive instruments presented in this table are classified as either held to
maturity or available for sale. The Company has no trading securities.
<TABLE>
<CAPTION>
CHANGE
---------------------
CHANGE IN INTEREST RATES NET PORTFOLIO VALUE DOLLARS PERCENTAGE
------------------------ ------------------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
100 basis point rise...................... $206,325 $(5,379) (2.54)%
Base scenario............................. $211,705 -- --
100 basis point decline................... $217,204 $ 5,499 2.60%
</TABLE>
The preceding table indicates that at September 30, 2000, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
net portfolio value would be expected to increase. However, the foregoing
analysis does not attribute additional value to the Company's
noninterest-bearing deposit balances, which have a significantly higher market
value during periods of increasing interest rates.
Net portfolio value is calculated based on the net present value of
estimated cash flows utilizing market prepayment assumptions and market rates of
interest provided by independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes is based
on numerous assumptions, including relative levels of market interest rates,
loan prepayments and deposit decay, and should not be relied upon as indicative
of actual future results.
Certain shortcomings are inherent in the method of analysis presented in the
computation of net portfolio value. Actual values may differ from those
projections presented should market conditions vary from assumptions used in the
calculation of the net portfolio value. Certain assets, such as adjustable-rate
loans, which represent one of the Company's loan products, have features that
restrict changes in interest rate on a short-term basis and over the life of the
assets. In addition, the proportion of adjustable-rate loans in the Company's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinancing activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the net
33
<PAGE>
portfolio value. Finally, the ability of many borrowers to repay their
adjustable-rate loans may decrease in the event of significant interest rate
increases.
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.
In September 2000, the FASB issued SFAS No. 140 "ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES" ("SFAS
No. 140"). This statement replaces FASB Statement No. 125, "ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES".
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral. It also provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001 and is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. Management believes that the adoption of SFAS No. 140
will not have a material impact on the Company's result of operations or
financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See the section titled "Liquidity, Interest Rate Sensitivity and Market
Risk" in Management's Discussion and Analysis of Financial Condition and Results
of Operations.
34
<PAGE>
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
(a) The Company held its annual meeting of stockholders on October 24, 2000.
(b) The following directors were elected at the annual meeting to serve for
a three-year term:
J. Thomas Byrom
Clifford R. Ronnenberg
The following directors continued in office after the annual meeting:
Ronald W. Bachli
Richard W. Decker, Jr.
Joseph P. Heitzler
Robert J. Kushner
Larry D. Mitchell
Jaynie Miller Studenmund
(c) At the annual meeting, shareholders voted on (1) the election of the
Company's Class a director; (2) The approval of the Company's 1999 Stock
Option Plan, as described in the Proxy Statement; (3) The ratification of
the selection of KPMG LLP as the Company's independent public accountants
for the fiscal year ending December 31, 2000 The results of the voting
were as follows:
<TABLE>
<CAPTION>
BROKER
MATTER VOTES FOR VOTES AGAINST WITHHELD ABSTENTIONS NON-VOTES
------ ---------- ------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors
J. Thomas Byrom......................... 25,810,722 -- 26,220 -- --
Clifford R. Ronnenberg.................. 25,810,101 -- 26,841 -- --
Option Plan Approval.................... 25,693,422 35,042 -- 31,250 77,228
Ratify Independent Public Accountants... 25,815,285 -- -- 21,657 --
</TABLE>
ITEM 5. OTHER INFORMATION
None.
35
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
2.1 Employment Agreement dated as of September 1, 2000 by and
between Mr. Harvey Ferguson and California Community
Bancshares. *
2.2 Employment Agreement dated as of November 1, 2000 by and
between Mr. David E. Hooston and California Community
Bancshares. *
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
</TABLE>
------------------------
* Management contracts
REPORTS ON FORM 8-K
None.
36
<PAGE>
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: November 14, 2000
/s/ RONALD W. BACHLI
-----------------------------------------
Ronald W. Bachli
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: November 14, 2000 /s/ DAVID E. HOOSTON
-----------------------------------------
David E. Hooston
CHIEF FINANCIAL OFFICER
37
