<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 June 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.)
7777 Center Avenue, Huntington Beach, 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 18,758,763 shares outstanding on August 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
March 31, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations 5
For the six months ended June 30, 1997 and 1996
Condensed Consolidated Statements of Operations 6
For the three months ended June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows - 7
For the six months ended June 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 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
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
June 30, 1997 and December 31, 1996
June 30,
1997 December 31,
(Unaudited) 1996
------------- -------------
ASSETS
Cash and due from banks $ 80,144,000 $ 32,522,000
Federal funds sold 17,300,000 13,700,000
Reverse repurchase agreements 20,000,000 -
------------- -------------
Total cash and cash equivalents 117,444,000 46,222,000
Interest bearing deposits in other
financial institutions - 338,000
Held-to-maturity investment securities at
amortized cost, approximate fair value
June 30, 1997 $27,245,000
December 31, 1996 $19,910,000 27,404,000 20,025,000
Available-for-sale investment securities 111,288,000 15,175,000
Mortgage loans held for sale 6,775,000 10,837,000
Loans and leases 498,206,000 261,197,000
Less allowance for loan loss 9,242,000 5,156,000
------------- -------------
Loans, net 495,739,000 266,878,000
Loan and servicing sale receivable 60,851,000 54,080,000
Premises and equipment, net 11,270,000 3,911,000
Real estate acquired through foreclosure, net 2,811,000 3,635,000
Goodwill and other intangibles 67,802,000 10,736,000
Accrued interest receivable and other assets 15,151,000 16,060,000
------------- -------------
Total assets $ 909,760,000 $ 437,060,000
------------- -------------
------------- -------------
See notes to condensed consolidated financial statements.
3
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition (Continued)
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
June 30,
1997 December 31,
(Unaudited) 1996
------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing $ 243,866,000 $ 126,885,000
Interest bearing 87,866,000 38,602,000
Savings:
Regular 128,404,000 42,190,000
Money market 92,529,000 25,662,000
Time:
Under $100,000 148,079,000 123,789,000
$100,000 or more 57,656,000 25,903,000
------------- -------------
Total deposits 758,400,000 383,031,000
Federal funds purchased 16,545,000 -
Due to related parties - 4,500,000
Accrued expenses and other liabilities 10,402,000 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 813,541,000 396,288,000
Shareholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, 116,593 issued and outstanding at
June 30, 1997 11,659,000 -
Special common stock, $.01 par value, 9,651,600
shares authorized, 4,825,718 issued and
outstanding at June 30, 1997 48,000 -
Common stock, $.01 par value, 50,000,000
shares authorized, 13,933,045 issued and
outstanding at June 30, 1997 139,000 97,000
Additional paid-in capital 85,470,000 42,394,000
Accumulated deficit (1,266,000) (1,736,000)
Unrealized gain on securities available-for-sale 169,000 17,000
------------- -------------
Total shareholders' equity 96,219,000 40,772,000
------------- -------------
Total liabilities and shareholders' equity $ 909,760,000 $ 437,060,000
------------- -------------
------------- -------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Six months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
1997 1996
<S> -------------- --------------
Interest Income: <C> <C>
Interest and fees on loans $15,463,000 $ 4,684,000
Income from lease financing receivables 2,168,000 -
Interest on Federal funds sold 673,000 296,000
Interest on investment securities 1,693,000 663,000
-------------- --------------
Total interest income 19,997,000 5,643,000
Interest Expense:
Deposits 7,372,000 2,021,000
Other borrowed funds 340,000 31,000
--------------- --------------
Total interest expense 7,712,000 2,052,000
--------------- --------------
Net interest income 12,285,000 3,591,000
Provision for loan and lease losses 715,000 127,000
--------------- --------------
Net interest income after
provision for loan losses 11,570,000 3,464,000
Non-interest income 5,084,000 499,000
Non-interest expense 15,187,000 3,602,000
--------------- --------------
Net income (loss) before taxes 1,467,000 361,000
Income tax 912,000 138,000
--------------- --------------
Net income $555,000 $223,000
=============== ==============
Net income available to common $470,000 $223,000
Income (loss) per common and common
equivalent share $0.043 $ 0.084
Average number of common shares and
common stock equivalents 10,898,933 2,666,920
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------
1997 1996
<S> --------------- --------------
Interest Income: <C> <C>
Interest and fees on loans $8,768,000 $ 3,765,000
Income from lease financing receivables 988,000 -
Interest on Federal funds sold 425,000 247,000
Interest on investment securities 1,099,000 565,000
-------------- --------------
Total interest income 11,280,000 4,577,000
Interest Expense:
Deposits 4,219,000 1,729,000
Other borrowed funds 228,000 15,000
--------------- --------------
Total interest expense 4,447,000 1,744,000
--------------- --------------
Net interest income 6,833,000 2,833,000
Provision for loan and lease losses 308,000 92,000
--------------- --------------
Net interest income after
provision for loan losses 6,525,000 2,741,000
Non-interest income 1,991,000 337,000
Non-interest expense 8,225,000 2,740,000
--------------- --------------
Net income (loss) before taxes 291,000 338,000
Income tax 170,000 133,000
--------------- --------------
Net income $121,000 $205,000
=============== ==============
Net income available to common $36,000 $205,000
Income (loss) per common and common
equivalent share $0.003 $ 0.048
Average number of common shares and
common stock equivalents 12,087,232 4,289,257
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
For six months ended June 30,
--------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $555,000 $ 223,000
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for loan losses and real estate
acquired through foreclosure 831,000 127,000
Loss (gain) on sale of real estate acquired
through foreclosure 29,000 (76,000)
Loss on sale of premises and equipment 16,000 -
Depreciation and amortization 1,245,000 19,000
Accretion/amortization related to securities, net 2,000 -
Equity in loss of real estate joint venture 306,000 -
Mortgage loans originated for sale (356,117,000) -
Proceeds from sales of loans and servicing 363,476,000 -
Gain on the sale of loans and servicing (3,239,000) -
Decrease in loan servicing sale receivable (2,605,000) -
Decrease (increase) in other assets (3,603,000) (237,000)
Increase (decrease) in other liabilities 200,000 (151,000)
----------------- -----------------
Net cash provided by (used in) operating activities 1,096,000 (95,000)
INVESTING ACTIVITIES:
Decrease (increase) in interest bearing deposits
with other financial institutions 338,000 (20,000)
Purchases of investment securities (17,016,000) (24,027,000)
Proceeds from sales and maturities of
investment securities 15,707,000 17,867,000
Net increase in loans (5,198,000) (682,000)
Purchases of premises and equipment (220,000) (337,000)
Proceeds from the sale of premises and equipment 9,000 48,000
Proceeds from sale of real estate acquired
through foreclosures 2,139,000 1,394,000
Capital expenditures for other real estate owned (1,405,000) (310,000)
Purchase of Liberty National Bank, net of cash received - 7,283,000
Purchase of Eldorado Bancorp, net of cash received (45,856,000) -
----------------- -----------------
Net cash provided by (used in) investing activities (51,502,000) 1,216,000
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
For six months ended June 30,
-----------------------------------
1997 1996
<S> ------------------ --------------
FINANCING ACTIVITIES: <C> <C>
Net increase (decrease) in deposits 34,866,000 (805,000)
Increase in other borrowings 8,009,000 -
Repayment of notes payable to related parties (4,500,000) -
Issuance of common and preferred stock 83,338,000 13,407,000
Payment of preferred dividends (85,000) -
----------------- -----------------
Net cash provided by financing activities 121,628,000 12,602,000
----------------- -----------------
Net Increase in cash and cash equivalents 71,222,000 13,723,000
Cash and cash equivalents at beginning of period 46,222,000 5,940,000
---------------- -----------------
Cash and cash equivalents at end of period $117,444,000 $19,663,000
================ =================
</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 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. SDNB's and LNB's customer accounts are insured by the
FDIC, through the BIF for up to an aggregate amount of $100,000 per customer.
CSB's deposits are 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 year and dilutive common
stock equivalents by using the treasury stock method. The weighted average
number of common shares used to compute earnings per share were 10,898,933 and
2,666,920 for the six months ended June 30, 1997 and June 30, 1996, respectively
and 12,087,232 and 4,289,257 for the three months ended June 30, 1997 and June
30, 1996, respectively.
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 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. Additionally,
there were no exercisable stock options at June 30, 1997 or December 31, 1996.
Therefore, primary income per share and income per share assuming full dilution
are the same for both periods.
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.
15
<PAGE>
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. Giving effect to the
issuance of those shares to fund the Eldorado Merger, the Partnership holds
voting control of 35.05% of the Common Stock and the Direct Holders own, in
the aggregate 27.33% 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 six months ended June 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
-----------------------------------------------------
Six Months Ended June 30,
------------------------------- Twelve Months Ended
1997 1996 December 31, 1996
----------- ----------- -------------------
<S> <C> <C> <C>
Total interest income $32,253,000 $31,336,000 $ 61,145,000
Total interest expense 11,439,000 11,926,000 24,483,000
----------- ----------- -------------
Net interest income 20,814,000 19,410,000 36,662,000
Provision for loan losses 715,000 611,000 1,158,000
----------- ----------- -------------
Net interest income after provision
for loan and lease losses 20,099,000 18,799,000 35,504,000
Non-interest income 6,847,000 7,743,000 14,956,000
Non-interest expense 23,909,000 24,319,000 53,784,000
----------- ----------- -------------
Net income(loss) before taxes 3,037,000 2,223,000 (3,324,000)
Income tax (benefit) 1,900,000 1,477,000 (1,968,000)
----------- ----------- -------------
Net income (loss) $ 1,137,000 $ 746,000 $ (1,356,000)
----------- ----------- -------------
----------- ----------- -------------
Weighted average common shares
outstanding 18,758,763 18,758,763 18,758,763
Net income (loss) per common share $0.06 $0.04 $(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
June 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 six
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 June 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 June 30, 1997 were $909.8 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 June 30, 1997 were $741.8 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 June 30, 1997 were
$505.0 million, including $6.8 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 approximately
18
<PAGE>
$233 million at June 6, 1997. Additionally, at June 30, 1997 CSBI had $60.8
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 June 30, 1997, these categories accounted for approximately
40.9%, 23.1%, 20.6% and 8.6% 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 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 June 30, 1997 was approximately $300.1 million
and included in this amount was approximately $102.2 million representing the
portion of the SBA loans retained by the Bank.
Total investments of CSBI at June 30, 1997 were $176.0 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. 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 $138.7 million, or
78.8% of the total portfolio, of which $27.4 million are categorized as held to
maturity and $111.3 million are categorized as available for sale. Federal
funds sold and reverse repurchase agreements totaled $37.3 million, or 21.2% of
the total portfolio.
Total deposits were $758.4 million at June 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 $243.9 million, or 32.2% of total deposits, at June 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 $87.9 million, $128.4 million,
$92.5 million, $148.1 million and $57.7 million, respectively, or 11.6%, 16.9%,
12.2%, 19.5% and 7.6% of total deposits, respectively.
19
<PAGE>
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997
For the six months ended June 30, 1997, CSBI had net income of $555,000
compared to net income of $223,000 for the same period in 1996. The
improvement in 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 $8.7 million and
non-interest income of approximately $4.6 million, partially offset by
increased loan and lease loss provision of $588,000, non-interest expense of
approximately $11.6 million and provision for taxes of $774,000.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was approximately $12.3 million for the six months
ended June 30, 1997, an increase of $8.7 million over the same period in 1996.
An increase in interest and fee income to $20.0 million for the six months ended
June 30, 1997 from $5.6 million for the same period in 1996, partially offset by
increased interest expense of $7.7 million for the six months ended June 30,
1997 from $2.1 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 $350.0 million for the six months ended June 30, 1997 from
$80.2 million for the six months ended June 30, 1996, with an average yield of
10.1% and 11.7%, 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 $80.5 million for the six months ended June 30, 1997
from an average of $35.9 million for the six months ended June 30, 1996, with
an average yield of 5.9% and 5.3%, respectively. The yield on earning assets
decreased to 9.3% for the six months ended June 30, 1997 from 9.7% 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 $315.8 million for the six
months ended June 30, 1997 from $94.6 million for the same period in 1996.
Additionally, the average rate paid on these deposits increased to 4.7% during
the six months ended June 30, 1997 compared to 4.3% during the same period in
1996. The average rate paid on interest-bearing liabilities was 4.8% for the
six months ended June 30, 1997 compared to 4.3% for the same period in 1996.
This increase represents a slight 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 $90.1 million for the six months
ended June 30, 1997 from $14.0 million for the six months ended June 30, 1996
and paid interest rates of 4.7% and 3.3%, respectively.
As a result of these forgoing factors, the average yield on earning assets
decreased to 5.7% for the six months ended June 30, 1997 compared to 6.2% for
the same period in 1996.
20
<PAGE>
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 June 30, 1997 compared to approximately $5.2 million at December 31,
1996. During the six months ended June 30, 1997, the provision for loan and
lease losses was $715,000, loan and lease charge-offs were $815,000 and
recoveries were $111,000 which compares to a provision of $127,000, loan and
lease charge-offs of $69,000 and recoveries of $91,000 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 June 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 $10.1 million for the six months ended June 30, 1997 from
$3.1 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 decreased to 4.0%
for the six months ended June 30, 1997 from 4.7% for the same period in 1996.
Non-interest income for the six months ended June 30, 1997 increased to
$5.1 million, or 2.0% of average assets, from $499,000, or .8% 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 six months ended June 30, 1997 increased to
approximately $15.2 million, or 6.0% of average assets, from $3.6 million, or
5.5% of average assets, for the same period in 1996. Salaries and employee
benefits increased to $6.7 million for the six months ended June 30, 1997 from
$1.7 million for the same period in 1996. Occupancy and equipment increased to
$2.5 million for the six months ended June 30, 1997 from $763,000 for the same
period in 1996. Other non-interest expenses increased to $6.0 million for six
months ended June 30, 1997 from $1.2 million for the same period in 1996.
PROVISION FOR INCOME TAXES
As a result of the earnings for the six months ended June 30, 1997, a
$912,000 provision for income taxes was made compared to a provision of $138,000
made for the same period in 1996.
21
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997
For the three months ended June 30, 1997, CSBI had net income of $121,000
compared to net income of $205,000 for the same period in 1996. The decrease
in net income is a result of increased non-interest expense by approximately
$5.5 million and increased provisions for loan and lease losses and taxes of
$230,000 and $37,000, respectively, partially offset by increased net interest
income by approximately $4.0 million.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income increased to $6.8 million for the three months ended
June 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 June 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 June 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 $382.2 million for the three months ended June 30, 1997 from $122.8
million for the three months ended June 30, 1996, with an average yield of
10.2% and 12.3%, 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 $103.8 million for the three months ended June 30,
1997 from an average of $61.4 million for the three months ended June 30, 1996,
with an average yield of 5.9% and 5.3%, respectively. The yield on earning
assets decreased to 9.3% for the three months ended June 30, 1997 from 9.9% 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 $364.5 million for the three
months ended June 30, 1997 from $150.1 million for the same period in 1996.
Additionally, the average rate paid on these deposits was 4.6% during the three
months ended June 30, 1997 and during the same period in 1996. The average
rate paid on interest-bearing liabilities was 4.8% for the three months ended
June 30, 1997 compared to 4.6% for the same period in 1996. This increase in
interest expense reflect the interest incurred by the company on the debentures
issued during the quarter.
As a result of these forgoing factors, the average yield on earning assets
decreased to 5.6% for the three months ended June 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
22
<PAGE>
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 June 30, 1997 compared to approximately $5.2 million at December 31,
1996. During the three months ended June 30, 1997, the provision for loan and
lease losses was $308,000, loan and lease charge-offs were $504,000 and
recoveries were $113,000 which compares to a provision of $92,000, loan and
lease charge-offs of $33,000 and recoveries of $79,000 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 June 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 $6.2 million for the three months ended June 30, 1997
from $2.4 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 4.3% for the three months
ended June 30, 1997 from 4.6% for the same period in 1996.
Non-interest income for the three months ended June 30, 1997 increased to
$2.0 million, or 1.4% of average assets, from $337,000, or .6% 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 three months ended June 30, 1997 increased to
approximately $8.2 million, or 5.8% of average assets, from $2.7 million, or
5.3% of average assets, for the same period in 1996. Salaries and employee
benefits increased to $3.6 million for the three months ended June 30, 1997 from
$1.2 million for the same period in 1996. Occupancy and equipment increased to
$1.3 million for the three months ended June 30, 1997 from $559,000 for the same
period in 1996. Other non-interest expenses increased to $3.3 million for three
months ended June 30, 1997 from $927,000 for the same period in 1996.
PROVISION FOR INCOME TAXES
As a result of the earnings for the three months ended June 30, 1997, a
$170,000 provision for income taxes was made compared to a provision of $133,000
made for the same period in 1996.
CAPITAL RESOURCES
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
23
<PAGE>
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 June 30, 1997 for federal
regulatory purposes. As of June 30, 1997, CSBI had a leverage ratio of 6.7%,
a Tier 1 risk-weighted capital ratio of 9.5% and a total risk-weighted
capital ratio of 10.9%. As of June 30, 1997, the Bank had a leverage ratio
of 6.0%, a Tier 1 risk-weighted capital ratio of 9.1% and a total
risk-weighted capital ratio of 10.4%.
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 June 30, 1997, liquid
assets totaled approximately $235.7 million, or 25.9% of total assets, which
compares to $61.7 million, or 14.1% of total assets, at December 31, 1996.
At June 30, 1997 the Company had net repriceable liabilities (a "
negative gap") as measured at one year of approximately $26.2 million or 2.9%
of total assets. The Company had negative gap as measured at a 90-day time
horizon of approximately $18.8 million, or 2.1% 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 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
24
<PAGE>
paid or charged generally rise if the marketplace believes inflation rates
will increase.
25
<PAGE>
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 in the Court of San Joaquin County in California
(the "Court"), the Court found in favor of the plaintiff awarding economic
damages of $1.4 million, pain and suffering damagaes 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 has set a date of September 25, 1997 to hear these
motions. In the event of an adverse outcome, the damages paid by the Bank
will be recorded as a purchase accounting adjustment related to the Commerce
Acquisition.
ITEM 2. CHANGES IN SECURITIES
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 orginated
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"). The foregoing description of securities is qualified in its
entirety by Exhibits 10.3 and 10.4 of the Company's report on form 8-K dated
June 6, 1997 as amended July 11, 1997.
The Class A common stock is divided between voting and non-voting shares.
The voting Class A common stock voting rights are pari-passu with those of the
Class B common stock with certain rights with respect to the modification of the
certificate of incorporation and the issuance of securities senior to the Class
A common stock. The non-voting Class A common stock has the ability to convert
into Class B common stock provided that the holder of the securities in the
aggregate hold voting shares with less than 9.9% voting control. The Senior
Securities have liquidation and dividend preferences over the Class B common
stock.
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
26
<PAGE>
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)
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: August 14, 1997 /s/ Robert P. Keller
-----------------------------------------
Robert P. Keller
President and Chief Executive Officer
DATE: August 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 80,144
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 37,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 111,288
<INVESTMENTS-CARRYING> 27,404
<INVESTMENTS-MARKET> 27,245
<LOANS> 504,981
<ALLOWANCE> 9,242
<TOTAL-ASSETS> 909,760
<DEPOSITS> 758,400
<SHORT-TERM> 16,545
<LIABILITIES-OTHER> 10,402
<LONG-TERM> 28,194
0
11,659
<COMMON> 85,657
<OTHER-SE> (1,097)
<TOTAL-LIABILITIES-AND-EQUITY> 909,760
<INTEREST-LOAN> 17,631
<INTEREST-INVEST> 2,366
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19,997
<INTEREST-DEPOSIT> 7,372
<INTEREST-EXPENSE> 7,712
<INTEREST-INCOME-NET> 12,285
<LOAN-LOSSES> 715
<SECURITIES-GAINS> (16)
<EXPENSE-OTHER> 15,187
<INCOME-PRETAX> 1,467
<INCOME-PRE-EXTRAORDINARY> 1,467
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<YIELD-ACTUAL> 5.7
<LOANS-NON> 11,600
<LOANS-PAST> 262
<LOANS-TROUBLED> 6,079
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,156
<CHARGE-OFFS> 815
<RECOVERIES> 111
<ALLOWANCE-CLOSE> 9,242
<ALLOWANCE-DOMESTIC> 9,242
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
