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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1998
Commission file number 2-76555
COMMERCE SECURITY BANCORP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0720548
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(State or other jurisdiction of (I.R.S. Employer or
incorporation or organization) Identification No.)
24012 Calle de la Plata,Suite 150, Laguna Hills, California 92653
- ----------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(949) 699-4344
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(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 18,347,397 shares outstanding on May 14, 1998
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COMMERCE SECURITY BANCORP, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 2. Management's Discussion and Analysis or Plan of Operation 3
</TABLE>
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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, 1997 contained in the 1997 Annual Report of CSBI on Form
10-K.
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, Capital Resources and Liquidity and
Interest Sensitivity, and those discussed in CSBI's Form 10-K for the year ended
December 31, 1997, including without limitation those sections entitled
Supervision and Regulation, Capital Resources, Liquidity and Interest Rate
Sensitivity.
SUMMARY
The registrant owns 100% of Eldorado Bank (the "Bank") which is the
registrant's only banking subsidiary. CSBI acquired Eldorado Bancorp and its
subsidiary bank Eldorado Bank (the "Eldorado Acquisition") on June 8, 1997 and
on June 30, 1997 merged its other operating banks into a single bank (the
"Bank") known as Eldorado Bank. The Eldorado Acquisition was accounted for
using the purchase method of accounting for business combinations. Accordingly,
the following discussion related to the operating results of the registrant
during the three months ended March 31, 1997 do not include the results of
operations of Eldorado Bank. In most of the registrant's income and expense
categories and net income, the increases in the amounts reported for the three
months ended compared to the same periods last year resulted from the Eldorado
Acquisition. Other significant factors affecting the registrant's results of
operations and financial condition are described in the applicable sections
below.
FINANCIAL CONDITION
Total assets of CSBI at March 31, 1998 were $1.0 billion compared to total
assets of $902.4 million at December 31, 1997. The increase in total assets
since December 31, 1997 is substantially attributable to the increase in
mortgage loans held for sale that increased $87.5 million to $183.7 million at
March 31, 1998. Total earning assets of CSBI at March 31, 1998 were $767.1
million compared to total earning assets of $725.6 million at December 31, 1997.
Again, earning assets increased primarily due to the increase in mortgage loans
held for sale.
Total gross loans and leases of CSBI at March 31, 1998 were $704.5 million,
including $183.7 million of mortgage loans held for sale, compared to $615.3
million and $96.2 million at December 31, 1997, respectively. At March 31, 1998
the four largest lending categories were: (i) commercial real estate loans; (ii)
residential mortgage loans; (iii) commercial loans and (iv) loans to
individuals. At March 31, 1998, these categories accounted for $272.0
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million, $213.4 million, $109.6 million and $62.8 million, or approximately
38.6%, 30.3%, 15.6% and 8.9% of total loans and leases, respectively. Leases are
made to finance small equipment for businesses and accounted for $46.7 million,
or approximately 6.6% of total loans and leases, at March 31, 1998.
The Bank is an active participant in the lending programs established
through the Small Business Administration ("SBA"). All SBA loans in the Bank's
loan portfolio at March 31, 1998 totaled $105.1 million compared to $105.7
million at December 31, 1997. Included in the Bank's SBA loan portfolio are
loans made by the Bank and guaranteed by the United States Government to the
extent of 75% to 90% of the principal and interest due on such loans ("SBA 7(a)"
loans). The Bank is active in originating this type of loan. Generally, it
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.
The government guaranteed portion of the SBA 7(a) 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 7(a) loan retained by the Bank, is capitalized and
recognized as income over the estimated life of the loan. The total SBA 7(a)
loan portfolio serviced by the Bank at March 31, 1998 was approximately $280.4
million and included in this amount was approximately $87.0 million
representing the guaranteed and unguaranteed portions of the SBA 7(a) loans
retained by the Bank, which compares to $286.8 million and $90.0 million at
December 31, 1997, respectively.
Total investments of CSBI at March 31, 1998 were $62.5 million compared to
$117.3 million at December 31, 1997. Investments decreased largely due to the
funds required by the increased mortgage origination activity. At March 31,
1998, the investment portfolio primarily consisted of U.S. treasury securities
and mortgage backed securities. Both of these categories of investment
securities are classified as available for sale and totaled $19.5 million and
$43.0 million, respectively, or 31.2% and 68.8% of total investments,
respectively.
Total deposits were $823.5 million at March 31, 1998 compared to $765.2
million at December 31, 1997. An increase in regular savings deposits and
certificates of deposits, partially offset by decreases in demand deposits and
other interest bearing accounts, contributed to the increase in total deposits.
The increase in deposits reflects the Bank's attempt to increase funding sources
required to fund the increase in mortgage lending activity. Total non-interest
bearing demand deposits were $285.1 million, or approximately 34.6% of total
deposits, at March 31, 1998 compared to $289.3 million, or approximately 37.8%
of total deposits, at December 31, 1997. Interest bearing deposits were $538.4
million, or approximately 65.4% of total deposits, at March 31, 1998 compared to
$475.9 million, or approximately 62.2% of total deposits, at December 31, 1997.
Borrowings of the Company increased to $75.0 million at March 31, 1998 from
$30.2 million at December 31, 1997. This increase in borrowings was primarily
due to an increase in Federal funds purchased which increased to $46.8 million
at March 31, 1998 from $2.1 million at December 31, 1997. These additional
borrowings were undertaken primarily to the meet funding requirement presented
by increased mortgage lending volume.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998
For the three months ended March 31, 1997, CSBI had net income of $1.7
million compared to net income of $434,000 for the same period in 1997.
Compared to the prior year results, the improvements stem from a combination of
increased net interest income of approximately $5.6 million and non-interest
income of approximately $1.5 million, partially offset by increased loan loss
provision of $515,000, non-interest expense of approximately $4.3 million and
provision for taxes of $1.0 million. The improvement in 1998 earnings is partly
attributable to the earnings of Eldorado in 1998 that were not included in
earnings for 1997 and partly attributable to an improvement in earnings related
to the Bank's mortgage banking operations.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was approximately $11.0 million for the three months
ended March 31, 1998, an increase of $5.6 million over the $5.4 million for the
same period in 1997. An increase in interest income to $17.4 million for the
three months ended March 31, 1997 from $8.6 million for the same period in 1997,
partially offset by increased interest expense of $6.4 million for the three
months ended March 31, 1997 from $3.2 million for the same period in 1997
contributed to this earnings improvement.
Loans and leases, the largest component of earning assets, increased to an
average balance of $648.2 million for the three months ended March 31, 1998 from
$304.1 million for the three months ended March 31, 1997, with an average yield
of 10.2% and 10.4%, respectively. Investments in securities and Federal funds
sold rose to an average of $71.8 million for the three months ended March 31,
1998 from an average of $52.7 million for the three months ended March 31, 1997,
with an average yield of 6.1% in both periods. The yield on earning assets was
9.8% for both three month periods ended March 31, 1998 and 1997.
Interest-bearing liabilities increased to an average of $558.4 million for
the three months ended March 31, 1998 from $275.3 million for the same period in
1997. The cost of these funds decreased to 4.6% for the three months ended
March 31, 1998 compared to 4.8% for the same period in 1997. The increase in
average balances and the decrease in cost is primarily attributable to deposits
with borrowings also contributing to the increase in average balances but
partially offsetting the decrease in rates paid. Average interest-bearing
deposits increased to $497.0 million for the three months ended March 31, 1998
from $266.5 million for the same period in 1997. The average rate paid on these
deposits decreased to 4.2% during the three months ended March 31, 1998 compared
to 4.8% during the same period in 1997. The decrease in the cost of deposits
is attributable to a decrease in rates paid on certificates of deposit that
decreased to 5.0% for the three months ended March 31, 1998 compared to 5.7% for
the same period in 1997, and a decrease in rates paid on interest bearing
transaction accounts and savings accounts that in the aggregate was 3.5% for the
three months ended March 31, 1998 compared to 3.7% for the same period in 1997.
The average balance for all borrowings increased to $61.4 million for the
three months ended March 31, 1998 from $8.8 million for the same period in 1997.
The average cost of these borrowings was 8.4% for the three months ended March
31, 1998 compared to 3.1% for the same period in 1997. The increase in the
average balance and cost of borrowings is
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attributable to Federal funds purchased and the subordinated debentures issued
to fund the Eldorado Acquisition. Federal funds purchased averaged $33.2
million with an average rate of 5.5% for the three months ended March 31, 1998
compared to $3.7 million with an average rate of 5.7% for the same period in
1997. Other debt, including the subordinated debentures, averaged $28.2 million
at an average rate of 11.9% compared to $5.0 million at 1.2%.
As a result of the foregoing factors, the average net yield on earning
assets increased to 6.2% for the three months ended March 31, 1998 compared to
6.1% for the same period in 1997.
ALLOWANCE AND PROVISION FOR LOAN AND LEASE 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 and lease 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 Bank 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 following table summarizes the loans for which the accrual of interest
has been discontinued and loans more than 90 days past due and still accruing
interest, including those loans that have been restructured:
<TABLE>
<CAPTION>
March 31 December 31,
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1998 1997 1997 1996 1995
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(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual Loans, not restructured $ 5,774 $ 6,488 $10,589 $ 5,483 $ 1,492
Accruing loans past due 90 days or more 1,031 672 4,638 1,314 46
Restructured loans 3,183 1,919 2,779 2,200 82
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Total $ 9,988 $ 9,079 $18,006 $ 8,997 $ 1,620
------- ------- ------- ------- -------
------- ------- ------- ------- -------
As a percent of outstanding loans 1.4% 3.5% 2.9% 2.7% 4.2%
</TABLE>
The allowance for loan and lease losses at CSBI was approximately $5.3
million at March 31, 1998 compared to approximately $9.4 million at December 31,
1997. During the three months ended March 31, 1998, the provision for loan and
lease losses was $922,000, or .71% (annualized) to portfolio loans at March 31,
1998, loan and lease charge-offs were $2.6 million and recoveries were $200,000
which compares to a provision for loan and lease losses of $407,000, or .64%
(annualized) to portfolio loans at March 31, 1997, loan and lease charge-offs of
$345,000 and recoveries of $32,000 during the same period in 1997. Of the loans
charged off during the quarter ended March 31, 1998, approximately $2.1 million
was comprised of two loans that continue to be performing loans but were charged
off based upon the deterioration of the borrowers' financial condition that fell
below the Bank's underwriting standards which are written in conformity with
regulatory guidelines. The allowance for loan and lease losses for CSBI
represented 1.5% of net loans, excluding those loans held for sale, at March 31,
1998 and 1.8% at December 31, 1997.
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The table below summarizes average portfolio loans outstanding, gross
portfolio loans, non-performing loans and changes in the allowance for possible
loan and lease losses arising from loan and lease losses and additions to the
allowance from provisions charged to operating expense:
<TABLE>
<CAPTION>
March 31 December 31,
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1998 1997 1997 1996 1995
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(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average portfolio loans outstanding $524,467 $305,904 $464,788 $146,743 $ 42,272
Gross portfolio loans $517,992 $263,527 $522,054 $263,641 $ 39,022
Non-performing loans $ 9,988 $ 9,079 $ 18,006 $8,997 $1,620
Allowance for loan losses
Balance at beginning of period $ 9,395 $ 5,156 $ 5,156 $ 639 $ 821
Balance acquired - - 4,076 4,382 -
Loans charged off during period
Commercial 2,297 262 467 430 258
Leases 167 - 1,092 - -
Real estate 63 81 610 144 115
Installment 98 2 334 76 329
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Total 2,625 345 2,503 650 702
Recoveries during period
Commercial 20 25 397 103 121
Leases 16 - 33 - -
Real estate 143 3 517 61 2
Installment 21 4 224 106 102
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Total 200 32 1,171 270 225
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Net loans charged off during period 2,425 313 1,331 380 477
Additions charged to operations 922 407 1,495 515 295
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Balance at end of period $ 7,892 $ 5,250 $ 9,395 $ 5,156 $ 639
-------- -------- -------- -------- --------
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Loan loss and quality ratios:
Net charge-offs to average portfolio loans 1.85% .41% .29% 0.26% 1.13%
Provision for loan losses to average
portfolio loans .71% .53% .32% 0.35% 0.70%
Allowance at end of period to gross portfolio
loans outstanding at end of period 1.52% 1.99% 1.80% 1.88% 1.64%
Allowance as % of non-performing loans 79.01% 57.70% 52.18% 57.31% 39.44%
</TABLE>
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The following table indicates management's allocation of the allowance for
each of the following periods indicated:
<TABLE>
<CAPTION>
March 31 December 31,
--------------------- ------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allocated amount:
Commercial, financial and agricultural $ 559 $ 386 $ 799 $ 980 $ 32
Real estate and construction 1,626 700 1,864 1,680 242
Consumer 607 480 602 461 51
Unallocated 5,100 3,684 6,130 2,035 314
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Total $7,892 $5,250 $9,395 $5,156 $ 639
------ ------ ------ ------ ------
------ ------ ------ ------ ------
As a percent of allowance:
Commercial, financial and agricultural 7.1% 7.4% 8.5% 19.0% 5.0%
Real estate and construction 20.6 13.3 19.8 32.6 37.9
Consumer 7.7 9.1 6.4 8.9 8.0
Unallocated 64.6 70.2 65.3 39.5 49.1
------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
In allocating the Company's allowance for possible loan and lease losses,
management has considered the credit risk in the various loan categories in its
portfolio. As such, the allocations of the allowance for possible loan and
lease losses are based upon the average aggregate historical net loan losses
experienced in each of the subsidiary banks. While every effort has been made
to allocate the allowance to specific categories of loans, management believes
that any allocation of the allowance for possible loan and lease losses into
loan categories lends an appearance of exactness which does not exist, in that
the allowance for possible loan and lease losses is utilized a single
unallocated allowance available for losses on all types of loans and leases.
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 1998 was $4.6
million compared to $3.2 million for the same period in 1997. Non-interest
income related to operations acquired in the Eldorado Acquisition that was not
included in income for the same period in 1997 and increased earnings from the
Bank's mortgage operations are primarily responsible for this improvement in
non-interest income. Income from service charges on deposit accounts increased
to $893,000 for the three months ended March 31, 1998 compared to $272,000 for
the same period in 1997 which is primarily attributable to the Eldorado
Acquisition. Other non-interest income increased to $3.7 million for the three
months ended March 31, 1998 compared to $2.9 million for the same period in 1997
which is primarily attributable to the Bank's mortgage operations.
NON-INTEREST EXPENSES
Non-interest expense for the three months ended March 31, 1998 was
approximately $11.3 million, an increase of $4.4 million from for the same
period in 1997. Salaries and employee benefits increased to $4.8 million for
the three months ended March 31, 1998 from $3.0 million for the same period in
1997, which increase is attributable to the added personnel from the Eldorado
Acquisition and an increase in mortgage related commissions. Occupancy and
equipment expense increased to $1.7 million for the three months ended March 31,
1998
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from $1.1 million for the three months ended March 31, 1997 and represents the
additional cost for facilities and equipment for branches and related operations
attributable to the Eldorado Acquisition. Other non-interest expenses increased
to $4.8 million for the three months ended March 31, 1998 from $2.8 million for
three months ended March 31, 1997 which is primarily attributable to the
Eldorado Acquisition. Also included in non-interest expense for the three
months ended March 31, 1998 is amortization of goodwill of $627,000 that is
attributable to the Eldorado Acquisition.
PROVISION FOR INCOME TAXES
As a result of the earnings for the three months ended March 31, 1998, a
provision for income taxes of $1.8 million was made compared to a $742,000
provision made for the same period in 1997.
CAPITAL RESOURCES
CSBI and the Bank were well capitalized March 31, 1998 for federal
regulatory purposes. As of March 31, 1998, both the Bank and CSBI had leverage
ratios of 6.9%, Tier 1 risk-weighted capital ratios of 8.8% and total
risk-weighted capital ratios of 10.0%. For further discussion regarding capital
requirements for the registrant and its operating bank subsidiary, refer to
sections in CSBI's Form 10-K for the year ended December 31, 1997 entitled
Regulation and Supervision, Capital Resources and the footnotes to the audited
financial statements contained therein.
LIQUIDITY
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 March 31, 1998, liquid assets totaled
approximately $210.3 million, or 20.8% of total assets, which compares to $188.3
million, or 20.8% of total assets, at December 31, 1997.
INFLATION
The majority of the Company's assets and liabilities are monetary items
held by the Banks, and 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
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material misstatement of asset values and depreciation expenses which may result
from fluctuating market values due to inflation. A higher inflation rate,
however, may increase operating expenses or have other adverse effects on
borrowers of the Bank, making collection more difficult for the Bank. Rates of
interest paid or charged generally rise if the marketplace believes inflation
rates will increase.
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COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
U.S. SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
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: July 27, 1998 Robert P. Keller /s/
------------------------------------------
Robert P. Keller
President and Chief Executive Officer
DATE: July 27, 1998 Curt A. Christianssen /s/
-----------------------------------------
Curt A. Christianssen
Senior Vice President and Chief Financial Officer
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