<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 March 31, 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 9,697,430 shares outstanding on May 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 -
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
For the three months ended March 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows -
For the three months ended March 31, 1997 and 1996 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 15
Part II - Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition
March 31, 1997 and December 31, 1996
March 31, December 31,
1997 1996
(Unaudited)
------------- ------------
ASSETS
Cash and due from banks $50,800,000 $ 32,522,000
Federal funds sold 21,400,000 13,700,000
Reverse repurchase agreements 4,000,000 -
------------- -------------
Total cash and cash equivalents 76,200,000 46,222,000
Interest bearing deposits in other
financial institutions 235,000 338,000
Held-to-maturity investment securities at
amortized cost, approximate fair value
March 31, 1997 $29,716,000
December 31, 1996 $19,910,000 29,985,000 20,025,000
Available-for-sale investment securities 18,154,000 15,175,000
Mortgage loans held for sale 3,970,000 10,837,000
Loans and leases 256,072,000 261,197,000
Less allowance for loan loss 5,250,000 5,156,000
------------- ------------
Loans, net 254,792,000 266,878,000
Loan and servicing sale receivable 50,926,000 54,080,000
Premises and equipment, net 3,717,000 3,911,000
Real estate acquired through foreclosure, net 3,249,000 3,635,000
Goodwill and other intangibles 10,529,000 10,736,000
Accrued interest receivable and other assets 16,364,000 16,060,000
--------------- -------------
Total assets $464,151,000 $437,060,000
------------- -------------
------------- -------------
See notes to condensed consolidated financial statements.
3
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition (Continued)
March 31, 1997 and December 31, 1996
March 31, December 31,
1996 1996
(Unaudited)
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing $122,354,000 $126,885,000
Interest bearing 29,431,000 38,602,000
Savings:
Regular 92,563,000 42,190,000
Money market 30,921,000 25,662,000
Time:
Under $100,000 112,098,000 123,789,000
$100,000 or more 23,028,000 25,903,000
------------- -------------
Total deposits 410,395,000 383,031,000
Due to related parties 4,500,000 4,500,000
Accrued expenses and other liabilities 7,521,000 8,220,000
Mandatory Convertible Debentures 537,000 537,000
------------- -------------
Total liabilities 422,953,000 396,288,000
Shareholders' equity:
Common stock, $.01 par value, 12,000,000
shares authorized 9,697,430 issued and
outstanding at March 31, 1997 97,000 97,000
Additional paid-in capital 42,394,000 42,394,000
Accumulated deficit (1,302,000) (1,736,000)
Unrealized gain on securities
available-for-sale 9,000 17,000
------------- -------------
Total shareholders' equity 41,198,000 40,772,000
------------- -------------
Total liabilities and shareholders' equity $464,151,000 $437,060,000
============= =============
See notes to condensed consolidated financial statements.
4
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COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 6,627,000 $ 920,000
Income from lease financing receivables 1,160,000 -
Interest on Federal funds sold 206,000 49,000
Interest on deposits with financial institutions 11,000 11,000
Interest on investment securities 581,000 86,000
------------- -------------
Total interest income 8,585,000 1,066,000
Interest Expense:
Deposits 3,156,000 292,000
Other borrowed funds 68,000 15,000
--------------- --------------
Total interest expense 3,224,000 307,000
--------------- --------------
Net interest income 5,361,000 759,000
Provision for loan losses 407,000 35,000
--------------- --------------
Net interest income after
provision for loan losses 4,954,000 724,000
Non-interest income 3,167,000 162,000
Non-interest expense 6,945,000 863,000
--------------- --------------
Net income (loss) before taxes 1,176,000 23,000
Income tax 742,000 5,000
--------------- --------------
Net income $434,000 $18,000
========= ========
Income (loss) per common and common
equivalent share $0.04 $ 0.02
Average number of common shares and
common stock equivalents 9,697,430 895,467
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
For three months ended March 31,
--------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Operating Activities:
Net income (loss) $434,000 $ 18,000
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for loan losses and real estate
acquired through foreclosure 452,000 35,000
Gain on sale of real estate acquired through
foreclosure (23,000) -
Gain on sale of premises and equipment (22,000) -
Depreciation and amortization 492,000 35,000
Accretion/amortization related to securities, net 50,000 -
Equity in loss of real estate joint venture 153,000 -
Mortgage loans originated for sale (155,924,000) -
Proceeds from sales of loans and servicing 161,344,000 -
Loss on the sale of loans and servicing 1,504,000 -
Decrease in loan servicing sale receivable 547,000 -
Decrease (increase) in other assets 2,682,000 (1,428,000)
Increase (decrease) in other liabilities (1,011,000) 4,000
------------- -----------
Net cash used by operating activities 10,678,000 (1,336,000)
Investing Activities:
Decrease (increase) in interest bearing deposits
with other financial institutions 118,000 (304,000)
Purchases of investment securities (15,000,000) (2,500,000)
Proceeds from sales and maturities of
investment securities 2,000,000 3,657,000
Net decrease in loans 4,799,000 1,773,000
Purchases of premises and equipment (67,000) -
Proceeds from the sale of premises and equipment 12,000
Proceeds from sale of real estate acquired
through foreclosures 980,000 -
Capital expenditures for other real estate owned (890,000) (154,000)
Purchase of Liberty National Bank, net of
cash received - 7,283,000
------------- -----------
Net cash provided by investing activities (8,048,000) 9,755,000
Financing Activities:
Net increase in deposits 27,348,000 16,875,000
Issuance of common stock - 13,400,000
------------- -----------
Net cash provided by financing activities 27,348,000 30,275,000
------------- -----------
Net Increase in cash and cash equivalents 29,978,000 38,694,000
Cash and cash equivalents at beginning of period 46,222,000 5,940,000
------------- -----------
Cash and cash equivalents at end of period $76,200,000 $44,634,000
============= ===========
</TABLE>
See notes to consolidated financial statements.
6
<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.
7
<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.
8
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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.
9
<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.
10
<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.
11
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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
9,697,430 for the three months ended March 31, 1997 and 895,497 for the three
months ended March 31, 1996.
The mandatory convertible debentures ("Debentures") are convertible into
common stock of SDN Bancorp, Inc., a wholly owned subsidiary of CSBI, and are
not dilutive to the earnings per share of CSBI. Additionally, there were no
exercisable stock options at March 31, 1997 or 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.
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.
12
<PAGE>
NOTE 2 - ACQUISITIONS AND 1996 REORGANIZATION (CONTINUED):
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.
Both the Liberty Acquisition and Commerce 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 arising
from the transactions totaled approximately $3.8 million in the Liberty
Acquisition and $7.2 million in the Commerce Acquisition and is 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 three months ended
March 31, 1997 and 1996 and for the twelve months ended December 31, 1996.
The pro forma operating data reflects the effect of the Liberty Acquisition
and the Commerce 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.
13
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NOTE 2 - ACQUISITIONS AND 1996 REORGANIZATION (CONTINUED):
<TABLE>
<CAPTION>
Unaudited Pro Forma Combined for
---------------------------------------------------------
Three Months Ended March 31,
-------------------------------- Twelve Months Ended
1997 1996 December 31, 1996
-------------- ----------- -------------------
<S> <C> <C> <C>
Total interest income $8,585,000 $8,191,000 $32,616,000
Total interest expense 3,224,000 3,439,000 13,707,000
-------------- -------------- -------------
Net interest income 5,361,000 4,752,000 18,909,000
Provision for loan losses 407,000 233,000 1,005,000
-------------- -------------- -------------
Net interest income after provision
for loan and lease losses 4,954,000 4,519,000 17,904,000
Non-interest income 8,121,000 3,357,000 10,584,000
Non-interest expense 6,945,000 7,901,000 34,882,000
-------------- -------------- -------------
Net income before taxes 1,176,000 (25,000) (6,394,000)
Income tax 742,000 35,000 (4,221,000)
-------------- -------------- -------------
Net income $434,000 $ (60,000) $ (2,173,000)
========= ========== ============
</TABLE>
On December 24, 1996, the Company entered into an agreement with
Eldorado Bancorp ("Eldorado") the holding company of Eldorado Bank, to
acquire 100% of the outstanding stock of Eldorado for cash consideration of
$23 per share. The aggregate consideration payable to holders of Eldorado
common stock, including consideration for outstanding options, will be
approximately $89.6 million. In connection with this acquisition, the
Company issued two notes in the amounts of $200,000 and $4,300,000 to a
director and the Partnership, respectively. These funds were placed on
deposit to be utilized for the acquisition of Eldorado. At March 31, 1997,
Eldorado had assets of approximately $406 million (unaudited). The
acquisition will be accounted for using the purchase method. Completion of
the transaction is contingent upon the approval of shareholders and state and
federal regulators.
14
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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, described in the footnotes to
the accompanying consolidated condensed financial statements, since September
1, 1996, the registrant has owned 100% of CSB and SDN. SDN owns 100% of San
Dieguito National Bank ("SDNB") and, as of March 31, 1996, SDN completed the
Liberty Acquisition as described in the footnotes to the accompanying
consolidated condensed financial statements. The Liberty Acquisition and
Commerce Acquisition were accounted for using the purchase method of
accounting for business combinations. Accordingly, the following discussion
relates to the operating results of SDNB for the three months ended March 31,
1997 and 1996, the operating results of Liberty and CSB for the three months
ended March 31, 1997 and the combined financial condition of SDNB, Liberty
and CSB (collectively the "Banks").
FINANCIAL CONDITION
Total assets of CSBI at March 31, 1997 were $463.8 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 an increase in cash and
cash equivalents partially offset by a decrease in loans and leases and other
assets. Total cash and cash equivalents increased due to an increase in
total deposits and due to a sale of lease financing receivables that offset
an increase in total loans and leases. Total earning assets of CSBI at March
31, 1997 were $333.8 million compared to total earning assets of $321.3
million at December 31, 1996. Earning assets decreased primarily due to the
sale of leases during the quarter.
Total loans and leases of CSBI at March 31, 1997 were $260.0 million,
including $4.0 million of mortgage loans held for sale, compared to $282.9
million at December 31, 1996. CSB sold approximately $16.0 million in lease
finance receivables that primarily accounts for this decrease. Additionally,
at March 31, 1997 CSBI had $50.9 million in loan sale receivables
attributable to the mortgage banking activities at CSB compared to $54.1
million at December 31, 1996.
15
<PAGE>
The Banks hold loans and leases in their portfolio that at March 31,
1997 represented 87.1% and 12.9% of total loans and leases, respectively.
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 March 31, 1997, these categories accounted for
approximately 39.7%, 27.3%, 21.6% and 11.4% of total loans, respectively.
Leases are made to finance small equipment for businesses.
Included among the Banks' portfolio of loans are SBA loans made by the
Banks guaranteed by the United States Government to the extent of 75% to 90%
of the principal and interest due on such loans. Liberty and SDNB are active
in originating this type of loan. Liberty 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
while SDNB generally retains the entire loan for its own portfolio.
The government guaranteed portion of the SBA loans 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. Deferred SBA
servicing fees for Liberty were approximately $1.5 million at March 31, 1997.
The total SBA loan portfolio serviced by Liberty at March 31, 1997 was
approximately $162.2 million and included in this amount was approximately
$45.5 million representing the portion of the SBA loans retained by Liberty.
The total SBA loan portfolio serviced by SDNB at March 31, 1997 was
approximately $5.0 million and included in this amount was approximately
$3.9 million representing the portion of the SBA loans retained by SDNB.
Total investments of CSBI at March 31, 1997 were $73.8 million compared
to $49.2 million at December 31, 1996. Investment securities increased
largely due to increased deposits and proceeds from the sale of leases. The
investment portfolio primarily consists of U.S. government and municipal
securities, Federal funds sold, reverse repurchase agreements and
certificates of deposits held at other depository institutions. U.S.
government and municipal securities were $48.1 million, or 65.2% of the total
portfolio, of which $18.1 million are categorized as held to maturity and
$30.0 million are categorized as available for sale. Federal funds sold,
reverse repurchase agreements and certificates of deposit were $21.4 million,
$4.0 million and $235,000, respectively, or 29.0%, 5.4% and .4% of the total
portfolio, respectively.
Total deposits were $410.4 million at March 31, 1997 compared to $383.0
million at December 31, 1996. Increased savings deposits partially offset
by decreased time deposits under $100,000 and interest bearing demand
accounts accounted for this increase in total deposits. This shift in
deposits is concentrated largely at CSB where money desk deposits are being
run off and being replaced by local core deposits. Non-interest bearing
demand accounts were $122.4 million, or 29.8% of total deposits, at March 31,
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 $29.4
million, $92.6 million, $30.9 million, $112.1 million and $23.0 million,
respectively, or 7.2%, 22.6%, 7.5%, 27.3% and 5.6% of total deposits,
respectively.
16
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997
For the three months ended March 31, 1997, CSBI had net income of
$434,000 compared to net income of $18,000 for the same period in 1996. The
improvement in 1996 earnings is partly attributable to the earnings of
Liberty partially offset by a loss incurred by CSB whose results of
operations are included in the CSBI results of operations for the three
months ended March 31, 1997 but were not included for the same period in
1996. Compared to the prior year results, the improvements stem from a
combination of increased net interest income of approximately $4.6 million
and non-interest income of approximately $8.0 million, partially offset by
increased loan loss provision of $372,000, non-interest expense of
approximately $6.1 million and provision for taxes of $737,000.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was approximately $5.4 million for the three months
ended March 31, 1997, an increase of $4.6 million over the same period in
1996. An increase in interest and fee income to $8.6 million for the three
months ended March 31, 1997 from $1.1 million for the same period in 1996 was
partially offset by increased interest expense of $3.2 million for the three
months ended March 31, 1997 from $307,000 from the same period in 1996
contributed to this earnings improvement.
Loans, the largest component of earning assets, increased to an average
balance of $305.9 million for the three months ended March 31, 1997 from
$38.3 million for the three months ended March 31, 1996, with an average
yield of 10.2% and 9.7%, respectively. Investments in securities and Federal
funds sold rose to an average of $52.7 million for the three months ended
March 31, 1997 from an average of $10.3 million for the three months ended
March 31, 1996, with an average yield of 6.1% and 5.7%, respectively. The
yield on earning assets increased to 9.6% for the three months ended March
31, 1997 from 8.8% for the same period in 1996. The increase in yield on
earning assets can largely be attributed to a shift in the mix of loans as a
percent of earning assets where the percent of average loans to average
earning assets during the three months ended March 31, 1997 increased to
85.3% from 78.7% for the same period in 1996.
Average interest-bearing deposits increased to $266.5 million for the
three months ended March 31, 1997 from $38.3 million for the same period in
1996. Additionally, the average rate paid on these deposits increased to 4.7%
during the three months ended March 31, 1997 compared to 3.1% during the same
period in 1996. The average rate paid on interest-bearing liabilities was
4.8% for the three months ended March 31, 1997 compared to 3.2% for the same
period in 1996. This increase represents an overall increase in rates paid
largely attributable to a change in the mix of interest bearing liabilities
with a greater emphasis on time certificates of deposits that generally pay a
higher rate of interest than savings accounts or other interest-bearing
deposits.
As a result of these forgoing factors, the average yield on earning
assets decreased to 6.0% for the three months ended March 31, 1997 compared
to 6.3% for the same period in 1996.
17
<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 Banks' 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. Management of the Banks continue to carefully monitor
the allowance for loan and lease losses in relation to the size of the Banks'
loan portfolio and known risks or problem loans and leases.
The allowance for loan and lease losses at CSBI was approximately $5.3
million at March 31, 1997 compared to approximately $5.2 million at December
31, 1996. During the three months ended March 31, 1997, the provision for
loan and lease losses was $407,000, loan and lease charge-offs were $345,000
and recoveries were $32,000 which compares to a provision of $35,000, loan
and lease charge-offs of $12,000 and recoveries of $35,000 during the same
period in 1996. The allowance for loan and lease losses for CSBI represented
2.1% of net loans, excluding those loans held for sale, at March 31, 1997 and
1.9% at December 31, 1996.
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 1997 was $3.2
million compared to $162,000 for the same period in 1996. Non-interest
income from Liberty and CSB for the quarter of approximately $988,000 and
$1,863,000, respectively, is primarily responsible for this improvement in
non-interest income that was not included in income for the same period in
1996. The majority of the non-interest income at Liberty is derived from its
SBA loan sale and servicing activity while CSB's non-interest income is
largely derived from its mortgage banking activity and gain recognized on the
sale of leases. Additionally, non-interest income at SDNB was $276,000 for
the first three months ended March 31, 1997 compared to the $162,000 for the
same period in 1996. The increase at SDNB is largely attributable to gains
recognized on the sale of SBA loans and gains on the sale of a note
receivable.
NON-INTEREST EXPENSES
Non-interest expense for the three months ended March 31, 1997 was
approximately $6.9 million, an increase from $863,000 for the same period in
1996. Non-interest expense at Liberty and CSB for the three months ended
March 31, 1997 was approximately $1.6 million and $4.5 million, respectively,
that was not included in income for the same period in 1996, and was
partially offset by improvements in non-interest expense at SDNB. Salaries
and employee benefits increased to $3.0 million for the three months ended
March 31, 1997 from $418,000 for the same period in 1996 of which $630,000 is
attributable to Liberty and $1.9 million is attributable to CSB. Occupancy
and equipment increased to $1.1 million for the three months ended March 31,
1997 from $204,000 for the same period in 1996 of which $295,000 is
attributable to Liberty and $605,000 is attributable to CSB. Other
non-interest expenses increased to $2.8 million for three months ended March
31, 1997 from $241,000 for the same period in 1996 of which $645,000 is
attributable to Liberty and $2.0 million is attributable to CSB.
18
<PAGE>
PROVISION FOR INCOME TAXES
As a result of the earnings for the three months ended March 31, 1997, a
$742,000 provision for income taxes was made compared to a provision of
$5,000 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
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, Liberty and SDNB were well capitalized and CSB was adequately
capitalized as of March 31, 1997 for federal regulatory purposes. As of
March 31, 1997, CSBI had a combined leverage ratio of 7.3%, a Tier 1
risk-weighted capital ratio of 9.2% and a total risk-weighted capital ratio
of 10.7%. The individual banks' leverage ratio, Tier 1 risk-weighted capital
ratio, and total risk-weighted capital ratios are set forth in the following
table:
LIBERTY CSB SDNB
------- ---- ------
Leverage ratio 7.1% 4.9% 9.0%
Tier 1 risk-weighted capital ratio 8.9% 7.1% 11.4%
Total risk-weighted capital ratio 10.1% 8.4% 12.7%
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 Banks, and to reduce the Banks' exposure to
changing interest rates.
The Banks manage liquidity from both sides of the balance sheet through
the coordination of the relative maturities of its assets and liabilities.
The Banks enhance their 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 Banks maintain 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 March 31, 1997,
liquid assets totaled approximately $94.6 million, or 20.4% of total assets,
which compares to $61.7 million, or 14.1% of total assets, at December 31,
1996.
19
<PAGE>
At March 31, 1997 the Banks had net repriceable assets (a "positive
gap") as measured at one year of approximately $11.0 million or 2.4% of total
assets. The Banks had net repriceable assets (a "positive gap") as measured
at a 90-day time horizon of approximately $41.8 million, or 9.0% 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 Banks
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 Banks, making
collection more difficult for the Banks. Rates of interest paid or charged
generally rise if the marketplace believes inflation rates will increase.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
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:
None
21
<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: May 15, 1997 /s/ ROBERT P. KELLER
------------------------------------------
Robert P. Keller
President and Chief Executive Officer
DATE: May 15, 1997 /s/ CURT A. CHRISTIANSSEN
------------------------------------------
Curt A. Christianssen
Senior Vice President and Chief Financial Officer
22
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<FISCAL-YEAR-END> DEC-31-1997
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