<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1997
Commission file number 2-76555
COMMERCE SECURITY BANCORP, INC.
-------------------------------
(Exact name of small business issuer in its charter)
Delaware 33-0720548
-------- ----------
(State or other jurisdiction of (I.R.S. Employer or
incorporation or organization) Identification No.)
24012 Calle de la Plata,Suite 150, Laguna Hills, California 92647-3067
----------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(714) 895-2929
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 18,347,397 shares outstanding on November 14, 1997
<PAGE>
COMMERCE SECURITY BANCORP, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition - 3
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations 5
For the nine months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Operations 6
For the three months ended September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows - 7
For the nine months ended September 30, 1997 and 1996
Notes to the Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis or Plan of Operation 18
Part II - Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition
September 30, 1997 and December 31, 1996
September 30, December 31,
1997 1996
(Unaudited)
------------- ------------
ASSETS
Cash and due from banks $ 98,785,000 $ 32,522,000
Federal funds sold 20,000,000 13,700,000
------------- ------------
Total cash and cash equivalents 118,785,000 46,222,000
Held-to-maturity investment securities at
amortized cost, approximate fair value
September 30, 1997 $21,346,000
December 31, 1996 $19,910,000 21,342,000 20,025,000
Available-for-sale investment securities 81,416,000 15,513,000
Mortgage loans held for sale 9,839,000 10,837,000
Loans and leases 504,753,000 261,197,000
Less allowance for loan loss 9,249,000 5,156,000
------------- ------------
Loans, net 505,343,000 266,878,000
Loan and servicing sale receivable 104,254,000 54,080,000
Premises and equipment, net 11,284,000 3,911,000
Real estate acquired through foreclosure, net 3,433,000 3,635,000
Goodwill and other intangibles 69,308,000 10,736,000
Accrued interest receivable and other assets 22,703,000 16,060,000
------------- ------------
Total assets $ 937,868,000 $437,060,000
------------- ------------
------------- ------------
See notes to condensed consolidated financial statements.
3
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition (Continued)
September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing $ 275,614,000 $ 126,885,000
Interest bearing 94,115,000 38,602,000
Savings:
Regular 140,952,000 42,190,000
Money market 98,032,000 25,662,000
Time:
Under $100,000 132,917,000 123,789,000
$100,000 or more 57,298,000 25,903,000
------------- -------------
Total deposits 798,928,000 383,031,000
Federal funds purchased 2,416,000 -
Due to related parties - 4,500,000
Accrued expenses and other liabilities 11,315,000 8,220,000
Guaranteed preferred beneficial interest in the Company's
junior subordinated debentures 27,657,000 -
Mandatory Convertible Debentures 537,000 537,000
------------- -------------
Total liabilities 840,853,000 396,288,000
Shareholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, 116,593 issued and outstanding at
September 30, 1997 11,659,000 -
Special common stock, $.01 par value, 9,651,600
shares authorized, 4,825,718 issued and outstanding at
September 30, 1997 48,000 -
Common stock, $.01 par value, 50,000,000
shares authorized, 13,945,861 issued and
outstanding at September 30, 1997 139,000 97,000
Additional paid-in capital 85,532,000 42,394,000
Accumulated deficit (516,000) (1,736,000)
Unrealized gain on securities available-for-sale 153,000 17,000
------------- -------------
Total shareholders' equity 97,015,000 40,772,000
------------- -------------
Total liabilities and shareholders' equity $ 937,868,000 $ 437,060,000
------------- -------------
------------- -------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Nine months ended September 30, 1997 and 1996
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1997 1996
-------------- -----------
Interest Income:
Interest and fees on loans $ 28,990,000 $ 8,380,000
Income from lease financing receivables 3,110,000 382,000
Interest on Federal funds sold 1,124,000 556,000
Interest on investment securities 3,620,000 1,338,000
------------ -----------
Total interest income 36,844,000 10,656,000
Interest Expense:
Deposits 13,005,000 4,226,000
Other borrowed funds 1,303,000 56,000
------------ -----------
Total interest expense 14,308,000 4,282,000
------------ -----------
Net interest income 22,536,000 6,374,000
Provision for loan and lease losses 1,087,000 217,000
------------ -----------
Net interest income after
provision for loan losses 21,449,000 6,157,000
Non-interest income 8,440,000 2,506,000
Non-interest expense 26,031,000 7,986,000
------------ -----------
Net income (loss) before taxes 3,858,000 677,000
Income tax 2,230,000 227,000
------------ -----------
Net income $ 1,628,000 $ 450,000
------------ -----------
------------ -----------
Net income available to common $ 1,220,000 $ 450,000
Primary income per common and common
equivalent share $ 0.090 $ 0.118
Fully diluted income per common and common
equivalent share $ 0.085 $ 0.118
See notes to consolidated financial statements.
5
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended September 30, 1997 and 1996
(Unaudited)
Three Months Ended September 30,
--------------------------------
1997 1996
-------------- ---------------
Interest Income:
Interest and fees on loans $ 13,527,000 $ 4,231,000
Income from lease financing receivables 942,000 382,000
Interest on Federal funds sold 410,000 339,000
Interest on investment securities 1,927,000 595,000
------------ -----------
Total interest income 16,806,000 5,547,000
Interest Expense:
Deposits 5,631,000 2,203,000
Other borrowed funds 922,000 25,000
------------ -----------
Total interest expense 6,553,000 2,228,000
------------ -----------
Net interest income 10,253,000 3,319,000
Provision for loan and lease losses 358,000 91,000
------------ -----------
Net interest income after
provision for loan losses 9,895,000 3,228,000
Non-interest income 3,294,000 1,471,000
Non-interest expense 10,798,000 4,383,000
------------ -----------
Net income (loss) before taxes 2,391,000 316,000
Income tax 1,318,000 89,000
------------ -----------
Net income $ 1,073,000 $ 227,000
------------ -----------
------------ -----------
Net income available to common $ 750,000 $ 227,000
Income (loss) per common and common
equivalent share $ 0.040 $ 0.038
Fully diluted income per common and common
equivalent share $ 0.039 $ 0.038
See notes to consolidated financial statements.
6
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
For nine months ended September 30,
-----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,628,000 $ 450,000
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for loan losses and real estate
acquired through foreclosure 1,176,000 237,000
Loss (gain) on sale of real estate acquired
through foreclosure 55,000 (70,000)
Equity in loss of real estate joint venture 250,000 -
Loss on sale of premises and equipment 15,000 -
Loss on sale of securities 9,000 -
Depreciation and amortization 2,676,000 306,000
Accretion/amortization related to securities, net 246,000 -
Mortgage loans originated for sale (627,993,000) (68,025,000)
Proceeds from sales of loans and servicing 634,061,000 79,225,000
Gain on the sale of loans and servicing (5,013,000) -
Increase in loan servicing sale receivable (46,009,000) -
Decrease (increase) in other assets (9,830,000) (956,000)
Increase (decrease) in other liabilities (360,000) 1,302,000
------------- ------------
Net cash provided by (used in) operating activities (49,089,000) 12,469,000
INVESTING ACTIVITIES:
Purchases of investment securities (17,016,000) (27,936,000)
Proceeds from sales and maturities of
investment securities 49,724,000 39,303,000
Net increase in loans (10,584,000) (35,948,000)
Purchases of premises and equipment (722,000) (746,000)
Proceeds from the sale of premises and equipment 12,000 48,000
Proceeds from sale of real estate acquired
through foreclosures 2,824,000 1,900,000
Capital expenditures for other real estate owned (3,064,000) (1,322,000)
Purchase of Liberty National Bank, net of cash received - 7,283,000
Purchase of Commerce Security Bank, net of cash received - 52,758,000
Purchase of Eldorado Bancorp, net of cash received (46,477,000) -
------------- ------------
Net cash provided by (used in) investing activities (25,303,000) 35,340,000
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
For the Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
For nine months ended September 30,
-----------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 75,439,000 (18,769,000)
Decrease in other borrowings (6,120,000) -
Repayment of notes payable to related parties (4,500,000) -
Issuance of capital securities 27,657,000 -
Issuance of preferred stock 11,659,000 -
Issuance of common stock 43,228,000 35,133,000
Payment of preferred dividends (408,000) -
------------- ------------
Net cash provided by financing activities 146,955,000 16,364,000
------------- ------------
Net Increase in cash and cash equivalents 72,563,000 64,173,000
Cash and cash equivalents at beginning of period 46,222,000 5,940,000
------------- ------------
Cash and cash equivalents at end of period $ 118,785,000 $ 70,113,000
------------- ------------
------------- ------------
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. The accompanying
financial information for Commerce Security Bancorp, Inc. ("CSBI" or the
"registrant") has been prepared in accordance with the Securities and Exchange
Commission rules and regulations for quarterly reporting and therefore does
not necessarily include all information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles. The interim financial data is unaudited;
however, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. The information
contained in this report should be read in conjunction with the Annual Report
of CSBI on Form 10-KSB for the year ended December 31, 1996.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. Economic risk is
comprised of three components - interest rate risk, credit risk and market
risk. The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature and reprice at different speeds, or on a
different basis, than its interest-bearing assets. Credit risk is the risk
of default on the Company's loan portfolio that results from the borrower's
inability or unwillingness to make contractually required payments. Market
risk results from changes in the value of assets and liabilities which may
impact, favorably or unfavorably, the realizability of those assets and
liabilities.
The Company is subject to the regulations of various governmental
agencies. These regulations can and do change significantly from period to
period. The Company is also subject to periodic examinations by the
regulatory agencies, which may subject it to changes in asset valuations, in
amounts of required loss allowances and in operating restrictions resulting
from the regulators' judgments based on information available to them at the
time of their examination.
9
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" (FAS 125).
This statement provides consistent accounting and reporting standards for the
transfers and servicing of financial assets and the extinguishment of
liabilities. The Company adopted FAS 125 effective January 1, 1997 and does
not expect the adoption to have a material impact on its financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks and federal
funds sold. Generally, federal funds sold are sold for one-day periods.
INVESTMENT SECURITIES
The Company has classified its investment securities as held-to-maturity
and available-for-sale. No trading portfolio is maintained. Investment
securities classified as held-to-maturity are carried at cost, adjusted for
the amortization of premiums and the accretion of discounts. Premiums and
discounts are amortized and accreted to operations using the straight line
method, which management believes approximates the interest method.
Management has the intent and ability to hold these assets as long-term
investments until their expected maturities. Under certain circumstances,
including the significant deterioration of the issuer's credit worthiness or
a significant change in tax-exempt status or statutory or regulatory
requirements, securities classified as held-to-maturity may be sold or
transferred to another classification.
Investment securities classified as available-for-sale may be held for
indefinite periods of time and may be sold to implement the Bank's
asset/liability management strategies and in response to changes in interest
rates and/or prepayment risk and similar factors. These securities are
recorded at estimated fair value. Unrealized gains and losses are reported
as a separate component of shareholders' equity, net of income taxes.
Gains and losses on investment securities are generally determined on the
specific identification method and are included in other income.
LOANS AND LEASES
Loans are stated at principal amounts outstanding, net of unearned
income, including discounts and fees. Net deferred fees and costs are
generally amortized into interest income over the life of the related loans
using a method that approximates the level yield method.
Direct financing leases, which include estimated residual values of leased
equipment, are carried net of unearned income. Income from these leases is
recognized on a basis which produces a level yield on the outstanding net
investment in the lease.
10
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ALLOWANCE FOR ESTIMATED LOAN AND LEASE LOSSES
A provision for estimated loan and lease losses is charged to expense
when, in the opinion of management, such losses are expected to be incurred
or are inherent in the portfolio. Loans and leases are charged-off against
the allowance for loan and lease losses when management believes that the
collectibility of the principal is unlikely. Management's estimates are used
to determine the allowance that is considered adequate to absorb losses
inherent in the existing loan and lease portfolio. These estimates are
inherently uncertain and their accuracy depends on the outcome of future
events. Management's estimates are based on previous loan loss experience,
specific problem loans and leases, current economic conditions that may
impact the borrower's ability to pay, volume, growth and composition of the
loan portfolio, value of the collateral and other relevant factors.
NON-PERFORMING AND PAST DUE LOANS
Included in the non-performing loan category are loans which have been
categorized by management as nonaccrual because collection of interest is
doubtful, and loans which have been restructured to provide a reduction in
the interest rate or a deferral of interest or principal payments.
When payment of principal or interest on a loan is delinquent for 90
days, or earlier in some cases, the loan is placed on nonaccrual status,
unless the loan is in the process of collection and the underlying collateral
fully supports the carrying value of the loan. When a loan is placed on
nonaccrual status, interest accrued during the period prior to the judgment
of uncollectibility is charged to operations. Generally, any payments
received on nonaccrual loans are applied first to outstanding loan amounts
and next to the recovery of charged-off loan amounts. Any excess is treated
as recovery of lost interest.
Restructured loans are those loans on which concessions in terms have
been granted because of a borrower's financial difficulty. Interest is
generally accrued on such loans in accordance with the new terms.
MORTGAGE BANKING ACTIVITIES
The Company originates and sells residential mortgage loans to a variety
of secondary market investors, including the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association (FNMA) and
others. The Company has an arrangement with the Government National Mortgage
Association (GNMA) whereby loans originated by the Company are securitized by
GNMA and sold to others. Gains and losses on the sale of mortgage loans are
recognized upon delivery based on the difference between the selling price
and the carrying value of the related mortgage loans sold. Deferred
origination fees and expenses are recognized at the time of sale in the
determination of the gain or loss. The Company sells the servicing for such
loans to either the purchaser of the loans or to a third party. The Company
recognizes the gain or loss on servicing sold when all risks and rewards of
ownership have transferred.
11
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Mortgage loans held for sale are stated at the lower of cost or market as
determined by the outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis. Valuation
adjustments are charged against non-interest income.
Forward commitments to sell, and put options on, mortgage-backed
securities are used to reduce interest rate risk on a portion of loans held
for sale and anticipated loan fundings. The resulting gains and losses on
forward commitments are deferred and included in the carrying values of loans
held for sale. Premiums on put options are capitalized and amortized over
the option period. Gains and losses on forward commitments and put options
deferred against loans held for sale approximately offset equivalent amounts
of unrecognized gains and losses on the related loans. Forward commitments
to sell and put options on mortgage-backed securities that hedge anticipated
loan fundings are not reflected in the statement of financial condition.
Gains and losses on these instruments are not recognized until the actual
sale of the loans held for sale. Loans generally fund in 10 to 30 days from
the date of commitment.
In 1996, the Company sold its portfolio of loan servicing and no longer
services mortgage loans for others. Previously, the Company capitalized the
cost of acquiring mortgage servicing rights through either purchase or
origination of mortgage loans if it sold or securitized those loans, and
retained the servicing. The Company allocated the cost of the mortgage loans
to the mortgage servicing rights and the loans (without the servicing rights)
based on observable market prices. Capitalized mortgage servicing rights
were amortized in proportion to, and over the period of, estimated net
servicing income. Capitalized servicing rights were evaluated and measured
for impairment on a quarterly basis. In performing its impairment analysis,
the Company stratified the servicing portfolio based on the relevant risk
characteristics of the underlying loans, loan term and interest rate
structure (fixed/adjustable). Valuation allowances, if any, were established
for each risk stratum to carry the servicing rights at the lower of cost or
market.
Loan servicing income represented fees earned for servicing real estate
and construction loan participations owned by investors, net of amortization
expense. The fees are generally calculated on the outstanding principal
balances of the loans serviced and are recorded as income when collected.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation on furniture, fixtures and equipment is
computed using the straight-line method over the estimated useful lives,
which range from two to fifteen years. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the
improvements or the remaining lease term, whichever is shorter. Expenditures
for betterments or major repairs are capitalized and those for ordinary
repairs and maintenance are charged to operations as incurred.
12
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
The Company records real estate acquired through foreclosure or "deed in
lieu of" as the lesser of the outstanding loan amount or the fair value less
estimated costs to sell, at the time of foreclosure. Any resulting loss on
foreclosure is charged to the valuation allowance for loan losses and a new
basis is established in the property. A valuation allowance is established
to reflect declines in value subsequent to foreclosure, if any, below the new
basis. Required developmental costs associated with foreclosed property
under construction are capitalized and considered in determining the fair
value of the property. Operating expenses of such properties, net of related
income, and gains and losses on their disposition are included in other
non-interest expenses.
INTANGIBLES ARISING FROM ACQUISITIONS
The Company has paid amounts in excess of fair value for Eldorado's,
CSB's and LNB's core deposits and tangible assets. Such amounts are being
amortized by systematic charges to income over a period which is no greater
that the estimated remaining life of the assets acquired or not to exceed the
estimated average remaining life of the existing deposit base assumed. The
Company periodically reviews intangibles to assess recoverability and
impairment is recognized in operations if permanent loss of value occurs.
CUSTOMER ACCOUNTS
Customer accounts comprise primarily the Bank's savings and checking
accounts. Customer accounts vary as to terms, with the major differences
being minimum balance required, maturity, interest rates and the provisions
for payment of interest. Upon the merger of the four banks, all customer
accounts are insured by the FDIC, through the BIF for up to an aggregate
amount of $100,000 per customer. SDNB's, LNB's and Eldorado's customer
accounts were insured by the FDIC, through the BIF and CSB's deposits were
insured through the SAIF.
Interest is accrued and paid either to the customer or added to the
customer's account on a periodic basis. On term accounts, the forfeiture of
interest (because of withdrawal prior to maturity) is offset as of the date
of withdrawal against interest expense.
FEDERAL AND STATE TAXES
The Company provides for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS
109). Under the liability method which is prescribed by FAS 109, a deferred
tax asset and/or liability is computed for both the expected future impact of
differences between the financial statement and tax bases of assets and
liabilities, and for the expected future tax benefit to be derived from tax
loss and tax credit carry forwards. FAS 109 also requires the establishment
of a valuation allowance, if necessary, to reflect the likelihood of
realization of deferred tax assets. The effect of tax rate changes will be
reflected in income in the period such changes are enacted.
13
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Deferred income taxes are provided by applying the statutory tax rates in
effect at the balance sheet date to temporary differences between the book
basis and the tax basis of assets and liabilities. The resulting deferred tax
assets and liabilities are adjusted to reflect changes in tax laws or rates.
EARNINGS PER COMMON SHARE
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period and dilutive
common stock equivalents by using the treasury stock method.
The Company has a total of 4,482,433 warrant shares outstanding at an
exercise price of $4.81 and are deemed anti-dilutive to earnings per share at
that price. Lacking an active market for its shares, the Company assumed a
weighted average per share price of $6.00 in computing the dilutive impact of
the outstanding warrants. There were granted but no exercisable stock options
at September 30, 1997 or December 31, 1996. The mandatory convertible
debentures ("Debentures") are convertible into common stock of CSBI at the
current market value at the time of conversion, and thus are not dilutive to
the earnings per share of CSBI.
The weighted average number of common shares used to compute primary
earnings per share were 13,553,112 and 3,804,268 for the nine months ended
September 30, 1997 and September 30, 1996, respectively and 18,771,579 and
6,054,203 for the three months ended September 30, 1997 and September 30,
1996, respectively. The fully diluted average number of common shares used to
compute fully diluted earnings per share were 14,442,128 and 3,804,268 for
the nine months ended September 30, 1997 and September 30, 1996, respectively
and 19,660,595 and 6,054,203 for the three months ended September 30, 1997
and September 30, 1996, respectively.
NOTE 2 - ACQUISITIONS AND 1996 REORGANIZATION
On March 31, 1996, the SDN completed its acquisition (the "Liberty
Acquisition") of Liberty National Bank ("Liberty") for approximately $15.1
million in cash, as contemplated by the October 26, 1995 Agreement and Plan
of Merger by and among the registrant, Liberty, and Dartmouth Capital Group,
L.P., a Delaware limited partnership (the "Partnership") and the
registrant's controlling shareholder. Liberty is headquartered in Huntington
Beach, California and had total assets of approximately $149 million as of
the Liberty Acquisition.
As of March 27, 1996, the Partnership invested approximately $13.4
million in SDN to fund the Liberty Acquisition. In exchange for that
investment, SDN issued a total of 3,392,405 additional shares of SDN common
stock at a price per share of $3.95, SDN's book value per share as of
December 31, 1995. At the Partnership's direction, SDN issued 1,764,000 of
those shares of common stock, in the aggregate, to certain limited partners
of the Partnership (the "Direct Holders") and the remaining 1,628,405 shares
of common stock directly to the Partnership.
14
<PAGE>
NOTE 2 - ACQUISITIONS AND 1996 REORGANIZATION (CONTINUED):
As of September 1, 1996, CSBI completed the plan of reorganization (the
"1996 Reorganization") contemplated by the Agreement and Plan of
Reorganization dated April 23, 1996 (the "Agreement") between SDN and
Commerce Security Bank, a California-chartered commercial bank ("CSB"). As
part of the 1996 Reorganization, SDN became a subsidiary of CSBI, effective
August 31, 1996, in a transaction in which SDN shareholders received shares
of CSBI common stock in exchange for all of the outstanding shares of SDN
common stock. As of September 1, 1996, CSBI completed the acquisition of CSB
(the "Commerce Acquisition") in which CSBI acquired all of the outstanding
shares of CSB. SDN and CSB remain wholly-owned subsidiaries of CSBI.
Through SDN, CSBI controls Liberty and San Dieguito National Bank ("SDNB"),
SDN's wholly-owned subsidiaries.
Prior to August 31, 1996, the Partnership invested approximately $14.5
million in SDN to fund the Commerce Acquisition. In exchange for that
investment, SDN issued a total of 3,664,776 additional shares of SDN common
stock at a price per share of $3.95 pursuant to a subscription agreement
entered into in March 1996. At the Partnership's direction, SDN issued
1,080,000 of those shares of common stock, in the aggregate, to certain
limited Direct Holders and the remaining 2,584,776 shares of common stock
directly to the Partnership. In addition, at the same time SDN issued a
total of 81,800 shares of common stock to other accredited investors for an
aggregate purchase price of approximately $424,000.
Holders of SDN common stock were issued one share of CSBI common stock
for each share held in SDN. A total of 4,327,606 shares of SDN common stock
were outstanding at the time of the 1996 Reorganization. Holders of CSB
common stock were issued 1,527,540 shares of CSBI common stock and received
cash of approximately $14.1 million. An additional 58,212 shares of the
Company's common stock and cash of approximately $346,000 were placed into
escrow pending resolution of the SAIF recapitalization. As a result of
legislation that recapitalized the SAIF, passed on September 30, 1996, the
stock and cash escrows were distributed, with approximately $96,000 disbursed
in cash and 16,151 common shares distributed. A total of 161,356 shares were
issued to other direct investors who invested in conjunction with the Merger
and investment bankers involved in the Merger.
As of June 6, 1997, the registrant completed its merger (the "Merger") of
Eldorado Bancorp ("Eldorado") as contemplated by the Agreement and Plan of
Reorganization dated December 24, 1996 (the "Agreement"). Shareholders for
Eldorado were paid $23.00 per share on 3,845,388 shares outstanding at June
6, 1997. Total consideration paid to holders of Eldorado stock and stock
options (net of the tax benefit arising out of the stock options) was $90.3
million.
In conjunction with the securities issued to fund the Eldorado Merger,
existing shares of Common Stock were reclassified as Class B common stock.
Additionally, the registrant issued Class A common stock ("Senior Common"
and together with the Class B common stock "Common Stock"), trust originated
preferred stock, $1,000 par value ("Series A Capital Securities") and
non-cumulative preferred stock, $100 par value ("Series B Preferred Stock"
and together with the Senior Common, Series A Capital Securities "Senior
Securities").
As of June 6, 1997 Dartmouth Capital Group, L.P. (the "Partnership")
invested
15
<PAGE>
approximately $21.9 million in the registrant to fund the Eldorado Merger.
Initially, $4.3 million of this investment was provided to the registrant in
the form of a loan to fund an escrow account that would have been forfeited
had the registrant failed to finance the Merger. These funds (including
interest thereon) were to be converted to shares of Class B common stock upon
the consummation of the Merger at $4.40 per share. Additionally, the
Partnership invested $7.9 million to be converted to shares of Class B common
stock at $4.81 per share and $10.0 million to be converted to Senior
Securities, and for which the Partnership received a 1% commitment fee based
upon the total funding commitment made in conjunction with the Merger.
In exchange for the $21.9 million Partnership investment, the registrant
issued a total of 2,715,506 additional shares of Class B common stock,
771,788 shares of Class A common stock, 4,423 shares of Series A Capital
Securities and 18,647 shares of Series B Preferred Stock. At the
Partnership's direction the registrant issued 1,703,242 of the shares of
Class B common stock, in the aggregate, to certain limited partners of the
Partnership (the "Direct Holders") and the remaining 1,012,264 shares of
Class B common stock directly to the Partnership. On July 15, 1997, the
Partnership sold its interest in the $10.0 million of Senior Securities.
Giving effect to the issuance of those shares to fund the Eldorado Merger and
the subsequent sale , the Partnership holds voting control of 32.55% of the
Common Stock and the Direct Holders own, in the aggregate 31.50% of the
Common Stock.
Excess capital of $13.0 million was redeemed from Eldorado as a funding
component of the Merger. Certain institutional investors and individuals
provided the balance of the funding for the Merger of approximately $58.1
million. In exchange for this investment, the registrant issued a total of
1,520,129 additional shares of Class B common stock, 4,053,930 shares of
Class A common stock (of which 422,850 were non-voting shares), 23,234 shares
of Series A Capital Securities and 97,946 shares of Series B Preferred Stock.
There were a total of 18,758,783 shares of Common Stock outstanding after
the Merger.
Each of the Liberty Acquisition, Commerce Acquisition and the Eldorado
Acquisition were accounted for using the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations". Under this method of accounting, the purchase price was
allocated to the assets acquired and deposits and liabilities assumed based
on their fair values as of the acquisition date. The consolidated financial
statements include the operations of Liberty and CSB from the date of
acquisition. Goodwill and other intangibles arising from the transactions
totaled approximately $3.8 million in the Liberty Acquisition, $7.2 million
in the Commerce Acquisition and $50.0 million in the Eldorado Acquisition and
are being amortized over twenty years on a straight line basis.
The table on the following page sets forth selected unaudited pro forma
combined financial information of the Company for the nine months ended
September 30, 1997 and 1996 and for the twelve months ended December 31,
1996. The pro forma operating data reflects the effect of the Liberty
Acquisition, Commerce Acquisition and the Eldorado Acquisition as if each was
consummated at the beginning of each period presented. The pro forma results
are not necessarily indicative of the results that would have occurred had
such acquisitions actually occurred as of such dates, nor are they
necessarily indicative of the results of future operations.
16
<PAGE>
NOTE 2 - ACQUISITIONS AND 1996 REORGANIZATION (CONTINUED):
<TABLE>
<CAPTION>
Unaudited Pro Forma Combined for
--------------------------------------------------------
Nine months Ended
September 30,
---------------- Twelve Months ended
1997 1996 December 31, 1996
---------------- ------------- -------------------
<S> <C> <C> <C>
Total interest income $ 49,100,000 $ 46,568,000 $ 61,145,000
Total interest expense 18,876,000 18,385,000 24,483,000
---------------- ------------- ---------------
Net interest income 30,224,000 28,183,000 36,662,000
Provision for loan losses 1,087,000 843,000 1,158,000
---------------- ------------- ---------------
Net interest income after provision
for loan and lease losses 29,137,000 27,340,000 35,504,000
Non-interest income 10,203,000 10,259,000 14,956,000
Non-interest expense 34,753,000 41,916,000 53,784,000
---------------- ------------- ---------------
Net income (loss) before taxes 4,587,000 (4,316,000) (3,324,000)
Income tax (benefit) 2,865,000 (945,000) (1,968,000)
---------------- ------------- ---------------
Net income (loss) $ 1,722,000 $ (3,371,000) $ (1,356,000)
---------------- ------------- ---------------
---------------- ------------- ---------------
Weighted average common shares
outstanding 18,758,763 18,758,763 18,758,763
Net income (loss) per common share $ 0.09 $ (0.18) $ (0.14)
</TABLE>
On June 30, 1997, the Company merged SDNB, Liberty and CSB into Eldorado
Bank and merged Eldorado Bancorp into itself (collectively the "Bank Mergers").
The resultant structure of the Company after the Bank Mergers is a single bank
holding company with Eldorado Bank being the only bank subsidiary of the
Company.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This information should be read in conjunction with the consolidated
financial statements and the notes thereto of Commerce Security Bancorp, Inc.
("CSBI" or the "registrant") included in Item 1 of this Quarterly Report and
the audited consolidated financial statements and notes thereto and
Management Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1996 contained in the 1996 Annual
Report of CSBI on Form 10-KSB.
Except for the historical information contained herein, the following
discussion contains forward looking statements that involve risks and
uncertainties. CSBI's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to, changes in regulatory climate,
shifts in interest rate environment, change in economic conditions of various
markets CSBI serves, as well as the other risks detailed in this section, and
in the sections entitled Results of Operations and Liquidity and Capital
Resources, and those discussed in CSBI's Form 10-KSB for the year ended
December 31, 1996.
SUMMARY
As a result of the 1996 Reorganization, the Liberty, CSB and Eldorado
Acquisitions (the "Acquisitions") and the Bank Mergers described in the
footnotes to the accompanying consolidated condensed financial statements, as
of September 30, 1997, the registrant owns 100% of Eldorado Bank (the
"Bank"). Each of the Acquisitions were accounted for using the purchase
method of accounting for business combinations. Accordingly, the following
discussion related to the operating results of the Bank only include results
of operations subsequent to the date of acquisition. In most of the
Company's income and expense categories and net income, the increases in the
amounts reported for the three and nine months ended compared to the same
periods last year resulted from the Acquisitions. The increases in
substantially all of the categories of the Company's statement of condition
between amounts reported at September 30, 1997 and December 31, 1996 resulted
from the Eldorado Acquisition. Other significant factors affecting the
Company's results of operations and financial condition are described in the
applicable sections below.
FINANCIAL CONDITION
Total assets of CSBI at September 30, 1997 were $937.9 million compared
to total assets of $437.1 million at December 31, 1996. The increase in
total assets since December 31, 1996 is attributable to the assets acquired
in the Eldorado Acquisition. Eldorado had total assets of approximately $400
million at June 6, 1997. Total earning assets of CSBI at September 30, 1997
were $741.6 million compared to total earning assets of $375.0 million at
December 31, 1996. Earning assets increased primarily due to the acquisition
of Eldorado that had total earning assets at June 6, 1997 of approximately $
334 million.
Total loans and leases, net of unearned fees, of CSBI at September 30, 1997
were $514.6 million, including $9.8 million of mortgage loans held for sale,
compared to $272.0 million, including $10.8 million of mortgage loans held for
sale, at December 31, 1996. Loans acquired in the Eldorado Acquisition are
attributable to this increase which were
18
<PAGE>
approximately $233 million at June 6, 1997. Additionally, at September 30,
1997 CSBI had $104.3 million in loan sale receivables attributable to its
mortgage banking activities compared to $54.1 million at December 31, 1996.
The four largest lending categories are: (i) commercial real estate
loans; (ii) other loans secured by real estate; (iii) commercial loans and
(iv) loans to individuals. At September 30, 1997, these categories accounted
for approximately 35.9%, 26.6%, 20.2% and 10.4% of total loans and leases,
respectively. Leases are primarily made to finance small equipment for
businesses and accounted for 6.8% of the total loan and lease portfolio.
Included among the Banks' portfolio of loans are SBA 7a ("SBA") loans
made by the Bank guaranteed by the United States Government to the extent of
75% to 90% of the principal and interest due on such loans. The Bank is
active in originating this type of loan and generally sells the government
guaranteed portion of these loans to participants in the secondary market and
retains servicing responsibilities and the unguaranteed portion of the loans.
Historically, the guaranteed portion of the SBA loans have not always been
sold and the Bank maintains in its portfolio both the guaranteed and
unguaranteed portion of the loans.
When the government guaranteed portion of the SBA loans are sold they are
sold at a premium, a portion of which is immediately recognized as income.
The remaining premium, representing estimated normal servicing fees or a
yield adjustment on the portion of the SBA loan retained by the Banks, is
deferred and recognized as income over the estimated life of the loan. The
total SBA loan portfolio serviced by the Bank at September 30, 1997 was
approximately $285.4 million and included in this amount was approximately
$86.7 million representing the portion of the SBA loans retained by the Bank.
Total investments of CSBI at September 30, 1997 were $122.8 million
compared to $49.2 million at December 31, 1996. Investment securities
increased largely due to securities acquired in the Eldorado Acquisition
which were approximately $101 million at June 6, 1997, partially offset by
securities that have matured with the proceeds being used to fund lending
activity. The investment portfolio primarily consists of U.S. government and
municipal securities, Federal funds sold, reverse repurchase agreements.
U.S. government and municipal securities were $102.8 million, or 83.7% of the
total portfolio, of which $21.3 million are categorized as held to maturity
and $81.4 million are categorized as available for sale. Federal funds sold
and reverse repurchase agreements totaled $20.0 million, or 16.3% of the
total portfolio.
Total deposits were $798.9 million at September 30, 1997 compared to
$383.0 million at December 31, 1996. This increase in deposits is largely
attributable to those deposits acquired in the Eldorado Acquisition which
were approximately $343 million on June 6, 1997. Non-interest bearing demand
accounts were $275.6 million, or 34.5% of total deposits, at September 30,
1997. Interest bearing deposits are comprised of interest bearing demand
accounts, regular savings accounts, money market accounts, time deposits of
under $100,000 and time deposits of $100,000 or more which were $94.1
million, $141.0 million, $98.0 million, $132.9 million and $57.3 million,
respectively, or 11.8%, 17.6%, 12.3%, 16.6% and 7.2% of total deposits,
respectively.
19
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997
For the nine months ended September 30, 1997, CSBI had net income of
$1,628,000 compared to net income of $450,000 for the same period in 1996.
The improvement over 1996 earnings is attributable to the earnings from
acquired operations during the period that were not included for the same
period in 1996. Compared to the prior period results, the improvements stem
from a combination of increased net interest income of approximately $16.2
million and non-interest income of approximately $5.9 million, partially
offset by increased loan and lease loss provision of $870,000, non-interest
expense of approximately $18.0 million and provision for taxes of $2.0
million.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was approximately $22.5 million for the nine months
ended September 30, 1997, an increase of $16.2 million over the same period
in 1996. An increase in interest and fee income to $36.8 million for the
nine months ended September 30, 1997 from $10.7 million for the same period
in 1996, partially offset by increased interest expense of $14.3 million for
the nine months ended September 30, 1997 from $4.3 million from the same
period in 1996 contributed to this earnings improvement.
Loans and leases, the largest component of earning assets, increased to
an average balance of $421.9 million for the nine months ended September 30,
1997 from $138.8 million for the nine months ended September 30, 1996, with
an average yield of 10.1% and 8.4%, respectively. The yield on loans and
lease increased primarily due to a shift period to period in the mix of loans
with a larger portion of the portfolio concentrated commercial and real
estate loans that earn a higher rate of interest than single family
residential mortgage loans. Investments in securities and Federal funds sold
rose to an average of $108.3 million for the nine months ended September 30,
1997 from an average of $60.4 million for the nine months ended September 30,
1996, with an average yield of 5.8% and 4.2%, respectively. The yield on
earning assets increased to 9.3% for the nine months ended September 30, 1997
from 7.1% for the same period in 1996. The increase in yield on earning
assets can largely be attributed to the higher yield earned on loans and
leases described above.
Average interest-bearing deposits increased to $387.9 million for the
nine months ended September 30, 1997 from $161.1 million for the same period
in 1996. Additionally, the average rate paid on these deposits increased to
4.5% during the nine months ended September 30, 1997 compared to 3.5% during
the same period in 1996. The average rate paid on all interest-bearing
liabilities was 4.7% for the nine months ended September 30, 1997 compared to
3.5% for the same period in 1996. This increase in interest cost represents
an overall increase in rates paid but is largely attributable to a change in
the mix of interest bearing liabilities with a greater emphasis on savings
accounts that incorporate tiered interest rates that pay higher rates for
accounts maintaining higher average balances. These savings accounts
increased to an average of $107.3 million for the nine months ended September
30, 1997 from $27.0 million for the nine months ended September 30, 1996 and
paid interest rates of 4.7% and 2.9%, respectively.
20
<PAGE>
As a result of these forgoing factors, the average yield on earning
assets increased to 5.7% for the nine months ended September 30, 1997
compared to 4.3% for the same period in 1996.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan and lease losses represents the amounts which have
been set aside for the specific purpose of absorbing losses which may occur
in the Bank's loan portfolio. The provision for loan and lease losses is an
expense charged against operating income and added to the allowance for loan
and lease losses. Bank management continues to carefully monitor the
allowance for loan and lease losses in relation to the size of the Bank's
loan and lease portfolio and known risks or problem loans and leases.
The allowance for loan and lease losses at CSBI was approximately $9.2
million at September 30, 1997 compared to approximately $5.2 million at
December 31, 1996. During the nine months ended September 30, 1997, the
provision for loan and lease losses was $1.1 million, loan and lease
charge-offs were $1.3 million and recoveries were $255,000 which compares to
a provision of $217,000, loan and lease charge-offs of $383,000 and
recoveries of $161,000 during the same period in 1996. The allowance for
loan and lease losses for CSBI represented 1.8% of gross loans and leases,
excluding those loans held for sale, at September 30, 1997 and 2.0% at
December 31, 1996.
NON-INTEREST INCOME AND EXPENSES
Non-interest expense net of non-interest income ("Net Non-interest
Expense") increased to $17.6 million for the nine months ended September 30,
1997 from $5.5 million for the same period in 1996. Non-interest income and
expenses have increased over the same period in the prior year primarily due
to the generation of revenues from off-balance sheet activities such as SBA
servicing, mortgage banking, leasing operations and the sales of loans and
leases. As a percentage of average assets, Net Non-interest Expense
(annualized) has increased to 3.7% for the nine months ended September 30,
1997 from 3.2% for the same period in 1996.
Non-interest income for the nine months ended September 30, 1997
increased to $8.4 million, or 1.8% of average assets, from $2.5 million or
1.5% of average assets, for the same period in 1996. Non-interest income
sources of revenue that were in place during 1997 that were not a part of
non-interest income for the same period in 1996, as described above, are
primarily responsible for this improvement in non-interest income.
Non-interest expense for the nine months ended September 30, 1997 increased
to approximately $26.0 million, or 5.4% of average assets, from $8.0 million, or
4.7% of average assets, for the same period in 1996. Salaries and employee
benefits increased to $11.1 million for the nine months ended September 30, 1997
from $3.6 million for the same period in 1996. Occupancy and equipment
increased to $4.4 million for the nine months ended September 30, 1997 from $1.5
million for the same period in 1996. Other non-interest expenses increased to
$10.5 million for nine months ended September 30, 1997 from $2.9 million for the
same period in 1996.
21
<PAGE>
PROVISION FOR INCOME TAXES
As a result of the earnings for the nine months ended September 30, 1997,
the Company mad a $2.2 million provision for income taxes compared to a
provision of $227,000 made for the same period in 1996.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997
For the three months ended September 30, 1997, CSBI had net income of
$1.1 million compared to net income of $227,000 for the same period in 1996.
The increase in net income is a result of increased net interest income by
approximately $6.9 million and increased non-interest income by approximately
$1.8 million partially offset by increased non-interest expense by
approximately $6.4 million and increased provisions for loan and lease losses
and taxes of $267,000 and $1.2 million, respectively,
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income increased to $6.8 million for the three months ended
September 30, 1997, an increase of $4.0 million from $2.8 million for the
same period in 1996. An increase in interest and fee income to $11.3 million
for the three months ended September 30, 1997 from $4.6 million for the same
period in 1996, partially offset by increased interest expense of $4.4
million for the three months ended September 30, 1997 from $1.7 million for
the same period in 1996 contributed to this earnings improvement.
Loans, the largest component of earning assets, increased to an average
balance of $580.4 million for the three months ended September 30, 1997 from
$170.9 million for the three months ended September 30, 1996, with an
average yield of 9.9% and 10.7%, respectively. The yield on loans and lease
decreased primarily due to a shift in the mix of loans with a larger portion
of the portfolio concentrated in single family residential mortgage loans
that earn a lower rate of interest than commercial loans. Investments in
securities and Federal funds sold rose to an average of $158.4 million for
the three months ended September 30, 1997 from an average of $66.7 million
for the three months ended September 30, 1996, with an average yield of 6.0%
and 5.6%, respectively. The yield on earning assets decreased to 9.1% for the
three months ended September 30, 1997 from 9.3% for the same period in 1996.
The decrease in yield on earning assets can largely be attributed to the
lower yield earned on loans and leases described above.
Average interest-bearing deposits increased to $529.7 million for the
three months ended September 30, 1997 from $187.7 million for the same period
in 1996. Additionally, the average rate paid on these deposits was 4.2%
during the three months ended September 30, 1997 and compared to 4.7% during
the same period in 1996. The average rate paid on all interest-bearing
liabilities was 4.6% for the three months ended September 30, 1997 compared
to 4.7% for the same period in 1996. This decrease in interest cost reflects
a change in the mix of deposit liabilities with an increase in lower cost
deposits partially offset by an overall increase in rates paid on deposits.
22
<PAGE>
As a result of these forgoing factors, the average yield on earning assets
decreased to 5.6% for the three months ended September 30, 1997 compared to 6.2%
for the same period in 1996.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan and lease losses represents the amounts which have
been set aside for the specific purpose of absorbing losses which may occur
in the Bank's loan portfolio. The provision for loan and lease losses is an
expense charged against operating income and added to the allowance for loan
and lease losses. Bank management continues to carefully monitor the
allowance for loan and lease losses in relation to the size of the Bank's
loan and lease portfolio and known risks or problem loans and leases.
The allowance for loan and lease losses at CSBI was approximately $9.2
million at September 30, 1997 compared to approximately $5.2 million at
December 31, 1996. During the three months ended September 30, 1997, the
provision for loan and lease losses was $358,000, loan and lease charge-offs
were $495,000 and recoveries were $144,000 which compares to a provision of
$91,000, loan and lease charge-offs of $314,000 and recoveries of $70,000
during the same period in 1996. The allowance for loan and lease losses for
CSBI represented 1.8% of gross loans and leases, excluding those loans held
for sale, at September 30, 1997 and 2.0% at December 31, 1996.
NON-INTEREST INCOME AND EXPENSES
Non-interest expense net of non-interest income ("Net Non-interest
Expense") increased to $7.5 million for the three months ended September 30,
1997 from $2.9 million for the same period in 1996. Non-interest income and
expense have increased over the same period in the prior year primarly due to
the generation of revenues and associated expenses from off-balance sheet
activities such as SBA servicing, mortgage banking, leasing operations and
the sales of loans and leases. As a percentage of average assets, Net
Non-interest Expense (annualized) has decreased to 3.3% for the three months
ended September 30, 1997 from 4.3% for the same period in 1996.
Non-interest income for the three months ended September 30, 1997
increased to $3.3 million, or 1.5% of average assets, from $1.4 million or
2.1% of average assets, for the same period in 1996. Non-interest income
sources of revenue that were in place during 1997 that were not a part of
non-interest income for the same period in 1996, as described above, are
primarily responsible for this increase in non-interest income while lower
spreads on mortgage banking activity during the current period primarily
contributed to a decrease in non-interest income as a percent of average
assets.
Non-interest expense for the three months ended September 30, 1997
increased to approximately $10.8 million, or 4.8% of average assets, from $4.4
million, or 6.4% of average assets, for the same period in 1996. Salaries and
employee benefits increased to $4.5 million for the three months ended September
30, 1997 from $1.9 million for the same period in 1996. Occupancy and equipment
increased to $1.9 million for the three months ended September 30, 1997 from
$764,000 for the same period in 1996. Other non-interest expenses increased to
$4.4 million for three months ended September 30, 1997 from $1.4 million for
23
<PAGE>
the same period in 1996.
PROVISION FOR INCOME TAXES
As a result of the earnings for the three months ended September 30,
1997, the Company made a $1.3 million provision for income taxes compared to
a provision of $89,000 made for the same period in 1996.
CAPITAL RESOURCES
As of June 6, 1997, the registrant completed its merger (the "Merger") of
Eldorado Bancorp ("Eldorado") as contemplated by the Agreement and Plan of
Reorganization dated December 24, 1996 (the "Agreement"). Shareholders for
Eldorado were paid $23.00 per share on 3,845,388 shares outstanding at June
6, 1997. Total consideration paid to holders of Eldorado stock and stock
options (net of the tax benefit arising out of the stock options) was $90.3
million.
In conjunction with the securities issued to fund the Eldorado Merger,
existing shares of Common Stock were reclassified as Class B common stock.
Additionally, the registrant issued Class A common stock ("Senior Common"
and together with the Class B common stock "Common Stock"), trust originated
preferred stock, $1,000 par value ("Series A Capital Securities") and
non-cumulative preferred stock, $100 par value ("Series B Preferred Stock"
and together with the Senior Common, Series A Capital Securities "Senior
Securities").
As of June 6, 1997 Dartmouth Capital Group, L.P. (the "Partnership")
invested approximately $21.9 million in the registrant to fund the Eldorado
Merger. Initially, $4.3 million of this investment was provided to the
registrant in the form of a loan to fund an escrow account that would have
been forfeited had the registrant failed to finance the Merger. These funds
(including interest thereon) were to be converted to shares of Class B common
stock upon the consummation of the Merger at $4.40 per share. Additionally,
the Partnership invested $7.9 million to be converted to shares of Class B
common stock at $4.81 per share and $10.0 million to be converted to Senior
Securities, and for which the Partnership received a 1% commitment fee based
upon the total funding commitment made in conjunction with the Merger.
In exchange for the $21.9 million Partnership investment, the registrant
issued a total of 2,715,506 additional shares of Class B common stock,
771,788 shares of Class A common stock, 4,423 shares of Series A Capital
Securities and 18,647 shares of Series B Preferred Stock. At the
Partnership's direction the registrant issued 1,703,242 of the shares of
Class B common stock, in the aggregate, to certain limited partners of the
Partnership (the "Direct Holders") and the remaining 1,012,264 shares of
Class B common stock directly to the Partnership. On July 15, 1997, the
Partnership sold its interest in the $10.0 million of Senior Securities.
Giving effect to the issuance of those shares to fund the Eldorado Merger and
the subsequent sale , the Partnership holds voting control of 32.55% of the
Common Stock and the Direct Holders own, in the aggregate 31.50% of the
Common Stock.
Excess capital of $13.0 million was redeemed from Eldorado as a funding
component of the Merger. Certain institutional investors and individuals
provided the balance of the
24
<PAGE>
funding for the Merger of approximately $58.1 million. In exchange for this
investment, the registrant issued a total of 1,520,129 additional shares of
Class B common stock, 4,053,930 shares of Class A common stock (of which
422,850 were non-voting shares), 23,234 shares of Series A Capital Securities
and 97,946 shares of Series B Preferred Stock. There were a total of
18,759,381 shares of Common Stock outstanding after the Merger. An
additional 12,198 shares were issued subsequent to the merger bringing the
total shares outstanding to 18,771,579 at September 30, 1997.
Current risk-based regulatory capital standards generally require banks
and holding companies to maintain a ratio of "core" or "Tier 1" capital
(consisting principally of common equity) to risk-weighted assets of at least
4%, a ratio of Tier 1 capital to adjusted total assets (leverage ratio) of at
least 3% and a ratio of total capital (which includes Tier 1 capital plus
certain forms of subordinated debt, a portion of the allowance for loan
losses and preferred stock) to risk-weighted assets of at least 8%.
Risk-weighted assets are calculated by multiplying the balance in each
category of assets according to a risk factor which ranges from zero for cash
assets and certain government obligations to 100% for some types of loans,
and adding the products together.
CSBI and the Bank were well capitalized September 30, 1997 for federal
regulatory purposes. As of September 30, 1997, CSBI had a leverage ratio of
6.6% a Tier 1 risk-weighted capital ratio of 9.0% and a total risk-weighted
capital ratio of 10.4%. As of September 30, 1997, the Bank had a leverage
ratio of 6.0% a Tier 1 risk-weighted capital ratio of 8.8% and a total
risk-weighted capital ratio of 10.0%.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The asset-liability management process determines the size and
composition of the balance sheet and focuses on the management of liquidity
and interest rate risk. The purpose of liquidity and balance sheet
management is to ensure that funds are available to meet customer needs, meet
the financial commitments of the Bank, and to reduce the Bank's exposure to
changing interest rates.
The Bank manages liquidity from both sides of the balance sheet through
the coordination of the relative maturities of its assets and liabilities.
The Bank enhances its liquidity through the ability to raise additional funds
in money markets through Federal funds lines, repurchase agreements and
selling of a specified portion of its securities (securities available for
sale). The Bank maintains a level of liquidity that is considered adequate
to meet current needs. Liquid assets include cash and due from banks,
Federal funds sold, and securities available for sale. At September 30,
1997, liquid assets totaled approximately $200.2 million, or 21.4% of total
assets, which compares to $61.7 million, or 14.1% of total assets, at
December 31, 1996.
At September 30, 1997 the Company had net repriceable liabilities (a "
negative gap") as measured at one year of approximately $57.7 million or 6.2%
of total assets. The Company had negative gap as measured at a 90-day time
horizon of approximately $35.2 million, or 3.8% of total assets. With a
positive gap, a bank would anticipate higher net yields over the near term in
a rising rate environment and lower net yields in a declining rate
environment. Conversely, with a negative gap, a bank would anticipate lower
net yields over
25
<PAGE>
the near term in a rising rate environment and higher net yields in a
declining rate environment.
INFLATION
The majority of the Company's assets and liabilities are monetary items
held by the Banks, the dollar value of which is not affected by inflation.
Only a small portion of total assets is in premises and equipment. The lower
inflation rate of recent years did not have the positive impact on the Bank
that was felt in many other industries. The small fixed asset investment of
the Company minimizes any material misstatement of asset values and
depreciation expenses which may result from fluctuating market values due to
inflation. A higher inflation rate, however, may increase operating
expenses or have other adverse effects on borrowers of the Bank, making
collection more difficult for the Bank. Rates of interest paid or charged
generally rise if the marketplace believes inflation rates will increase.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 25, 1997, in the plaintiff action of Thomas Ruemmler vs Commerce
Security Bank, being tried by jury in the Court of San Joaquin County in
California (the "Court"), the jury found in favor of the plaintiff awarding
economic damages of $1.4 million, pain and suffering damages of $500,000 and
punitive damages of $2.0 million. The attorneys defending the Bank have
filed motions with the Court for i) a new trial and ii) a new judgement
notwithstanding the verdict. The Court heard these motions on October 1,
1997 and as a result issued a remittitur that orders a new trial unless the
plaintiff will accept a reduced judgement of approximatley $2.1 million,
being pain and suffering reduced to $150,000, punitive damages reduced to
$500,000 with no change to the economic damages but awarding interest on that
portion at 7% simple interest. The plaintiff has accepted the remittitur but
has also appealed to the 3rd District Court regarding the Court's action in
issuing the remittitur. In lieu of a final outcome on this case, the reduced
damages in the remittitur were accrued and recorded as a purchase accounting
adjustment related to the Commerce Acquisition.
On September 15, 1997, the Company filed a complaint against certain
officers and directors of Commerce Security Bank in Superior Court of the
State of California for the County of Orange. In its complaint the Company
alleged a variety of claims in connection with the Commerce Acquisition.
These claims were settled out of court on October 24, 1997, in which one
party to the action tendered 424,182 shares of CSBI Class B Common Stock for
cancellation. The cancellation of these shares will be recorded as a
purchase accounting adjustment related to the Commerce Acquisition.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
26
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
June 6, 1997 - Announcement of acquisition of Eldorado Bancorp
(amended on July 11, 1997 and August 6, 1997)
July 11, 1997 - Sale of Capital Securities By Certain Principal
Shareholders
27
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
U.S. SECURITIES AND EXCHANGE COMMISSION FORM 10-QSB
SIGNATURES
Pursuant to the requirements of the U.S. Securities Exchange Act of 1934, CSBI
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COMMERCE SECURITY BANCORP, INC.
DATE: November 14, 1997 /s/ Robert P. Keller
------------------------------------------
Robert P. Keller
President and Chief Executive Officer
DATE: November 14, 1997 /s/ Curt A. Christianssen
-----------------------------------------
Curt A. Christianssen
Senior Vice President and Chief Financial Officer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 98785
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81416
<INVESTMENTS-CARRYING> 21342
<INVESTMENTS-MARKET> 21346
<LOANS> 514592
<ALLOWANCE> 9249
<TOTAL-ASSETS> 937868
<DEPOSITS> 798928
<SHORT-TERM> 2953
<LIABILITIES-OTHER> 11315
<LONG-TERM> 27657
0
11659
<COMMON> 85671
<OTHER-SE> (363)
<TOTAL-LIABILITIES-AND-EQUITY> 937868
<INTEREST-LOAN> 32100
<INTEREST-INVEST> 4744
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 36844
<INTEREST-DEPOSIT> 13005
<INTEREST-EXPENSE> 14308
<INTEREST-INCOME-NET> 22536
<LOAN-LOSSES> 1087
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 26031
<INCOME-PRETAX> 3858
<INCOME-PRE-EXTRAORDINARY> 3858
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1628
<EPS-PRIMARY> .090
<EPS-DILUTED> .085
<YIELD-ACTUAL> 5.7
<LOANS-NON> 8836
<LOANS-PAST> 486
<LOANS-TROUBLED> 5662
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5156
<CHARGE-OFFS> 1325
<RECOVERIES> 255
<ALLOWANCE-CLOSE> 9249
<ALLOWANCE-DOMESTIC> 9249
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
