<PAGE>
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
-------- ----------
(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
--------------
(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
<PAGE>
COMMERCE SECURITY BANCORP, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition - 3
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations 5
For the three months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows - 6
For the three months ended March 31, 1998 and 1997
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Qualitative and Quantitative Disclosure about Market Risk 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition
March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1998 1997
(Unaudited)
----------------- -----------------
ASSETS
Cash and due from banks $ 147,539,000 $ 81,030,000
Federal funds sold - 40,000,000
----------------- -----------------
Total cash and cash equivalents 147,539,000 121,030,000
Available-for-sale investment securities 62,510,000 67,295,000
Mortgage loans held for sale 183,684,000 96,230,000
Loans and leases, net of unearned income 517,992,000 519,048,000
Less allowance for loan and lease loss (7,893,000) (9,395,000)
----------------- -----------------
Loans, net 693,783,000 605,883,000
Loan and servicing sale receivable 4,168,000 1,247,000
Premises and equipment, net 11,025,000 11,232,000
Real estate acquired through foreclosure, net 1,539,000 2,740,000
Intangibles arising from acquisitions, net 65,984,000 66,769,000
Accrued interest receivable and other assets 23,269,000 26,159,000
----------------- -----------------
Total assets $1,009,817,000 $902,355,000
----------------- -----------------
----------------- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Condition (Continued)
March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
----------------- -----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing $285,142,000 $289,344,000
Interest bearing 95,645,000 97,416,000
Savings:
Regular 131,704,000 98,465,000
Money market 96,141,000 98,189,000
Time:
Under $100,000 122,700,000 99,713,000
$100,000 or more 92,179,000 82,076,000
----------------- -----------------
Total deposits 823,511,000 765,203,000
Federal funds purchased 46,836,000 2,050,000
Due to related parties 540,000 -
Accrued expenses and other liabilities 15,014,000 12,172,000
Mandatory convertible debentures - 537,000
Subordinated debentures 27,657,000 27,657,000
----------------- -----------------
Total liabilities 913,558,000 807,619,000
Shareholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, 116,593 issued and outstanding at
March 31, 1998 11,659,000 11,659,000
Special common stock, $.01 par value, 9,651,600
shares authorized, 4,825,718 issued and
outstanding at March 31, 1998 48,000 48,000
Common stock, $.01 par value, 50,000,000
shares authorized, 13,521,679 issued and
outstanding at a March 31, 1998 135,000 135,000
Additional paid-in capital 83,855,000 83,855,000
Retained earnings 1,895,000 524,000
Unearned compensation (1,383,000) (1,509,000)
Unrealized gain on securities available-for-sale 50,000 24,000
----------------- -----------------
Total shareholders' equity 96,259,000 94,736,000
----------------- -----------------
Total liabilities and shareholders' equity $1,009,817,000 $902,355,000
----------------- -----------------
----------------- -----------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
Interest Income:
Interest and fees on loans $15,212,000 $6,627,000
Income from lease financing receivables 1,153,000 1,160,000
Interest on Federal funds sold 85,000 206,000
Interest on investment securities 987,000 592,000
----------- ----------
Total interest income 17,437,000 8,585,000
Interest Expense:
Deposits 5,113,000 3,156,000
Other borrowed funds 1,278,000 68,000
----------- ----------
Total interest expense 6,391,000 3,224,000
----------- ----------
Net interest income 11,046,000 5,361,000
Provision for loan and lease losses 922,000 407,000
----------- ----------
Net interest income after
provision for loan and lease losses 10,124,000 4,954,000
Non-interest income 4,623,000 3,167,000
Non-interest expense 11,283,000 6,945,000
----------- ----------
Net income before taxes 3,464,000 1,176,000
Income tax 1,777,000 742,000
----------- ----------
Net income $1,687,000 $434,000
----------- ----------
----------- ----------
Preferred dividends $ 316,000 -
Net income available to common $1,371,000 $434,000
Earnings per share (basic) $ 0.075 $ 0.040
Earnings per share (dilutive) $ 0.071 $ 0.040
</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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
For three months ended March 31,
--------------------------------
1998 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,687,000 $ 434,000
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for loan losses and real estate
acquired through foreclosure 922,000 452,000
Loss (gain) on sale of real estate acquired
through foreclosure 325,000 (23,000)
Equity in loss of real estate joint venture - 153,000
Loss on sale of premises and equipment - (22,000)
Depreciation and amortization 462,000 270,000
Amortization of goodwill and other intangibles 763,000 222,000
Amortization of compensation expense 126,000 -
Accretion/amortization related to securities, net (658,000) 50,000
Mortgage loans originated for sale (396,302,000) (155,924,000)
Proceeds from sales of loans and servicing 394,493,000 161,344,000
Loss (gain) on the sale of loans and servicing (2,527,000) 1,504,000
Decrease (increase) in servicing sale receivable (2,921,000) 547,000
Decrease in other assets 1,743,000 2,682,000
Increase (decrease) in other liabilities 2,721,000 (1,011,000)
------------- -------------
Net cash provided by operating activities 834,000 10,678,000
INVESTING ACTIVITIES:
Purchases of investment securities (15,481,000) (15,000,000)
Proceeds from sales and maturities of
investment securities 20,948,000 2,118,000
Net decrease (increase) in loans (1,686,000) 4,799,000
Net increase in loans held for sale (84,673,000)
Purchases of premises and equipment (255,000) (67,000)
Proceeds from the sale of premises and equipment - 12,000
Proceeds from sale of real estate acquired
through foreclosures 1,120,000 980,000
Capital expenditures for other real estate owned - (890,000)
------------- -------------
Net cash used in investing activities (80,027,000) (8,048,000)
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
COMMERCE SECURITY BANCORP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
For three months ended March 31,
--------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits 58,308,000 27,348,000
Increase in other borrowings 44,786,000 -
Issuance of notes payable to related parties 540,000 -
Redemption of mandatory convertible debentures (537,000) -
Payment of preferred dividends (316,000) -
-------------- -------------
Net cash provided by financing activities 102,781,000 27,348,000
-------------- -------------
Net Increase in cash and cash equivalents 26,509,000 29,978,000
Cash and cash equivalents at beginning of period 121,030,000 46,222,000
-------------- -------------
Cash and cash equivalents at end of period $147,539,000 $76,200,000
-------------- -------------
-------------- -------------
</TABLE>
See notes to consolidated financial statements.
7
<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. Certain
reclassifications have been made in the 1997 financial information to conform
to the presentation used in 1998. Results for the period ending March 31,
1998 are not necessarily indicative of results which may be expected for any
other interim period or for the year as a whole. The information contained in
this report should be read in conjunction with the Annual Report of CSBI on
Form 10-K for the year ended December 31, 1997 and in particular the
footnotes to the audited financial statements included therewith.
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.
8
<PAGE>
EARNINGS PER COMMON SHARE
The actual number of common shares outstanding at March 31, 1998 was
18,347,397. Basic earnings per share is computed by dividing net income less
dividends paid to preferred shareholders by the weighted average number of
common shares outstanding during the period. Dilutive earnings per share is
computed by dividing net income less dividends paid to preferred shareholders
plus the income impact of dilutive securities by the common shares
outstanding plus dilutive common stock equivalents by using the treasury
stock method.
At March 31, 1998, the Company had outstanding common stock purchase
warrants entitling the holders to purchase a total of 4,482,433 shares of
common stock and stock options entitling the holder to purchase a total of
988,600 shares if common stock. Lacking an active market for its shares, the
Company assumed a weighted average per share price of $6.00 in computing the
dilutive impact of the outstanding warrants and options. There were no
warrants or options outstanding at March 31, 1997.
The weighted average number of common shares used to compute basic
earnings per share were 18,347,397 and 9,697,430 for the three months ended
March 31, 1998 and March 31, 1997, respectively. The fully diluted average
number of common shares used to compute dilutive earnings per share were
19,349,959 and 9,697,430 for the three months ended March 31, 1998 and March
31, 1997, respectively. Net income was not adjusted in the calculation of
dilutive earnings per share.
COMPREHENSIVE INCOME
Effective January 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement requires that all items recognized under accounting standards
as components of comprehensive income be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive income by their nature in an annual financial
statement. For example, other comprehensive income may include foreign
currency translation adjustments, minimum pension liability adjustments,
and unrealized gains and losses on marketable securities classified as
available-for-sale. Annual financial statements for prior periods will be
reclassified, as required. The Company's total comprehensive income were as
follows:
<TABLE>
<CAPTION>
Three months
ended March 31,
---------------
1997 1996
---- ----
<S> <C> <C>
(In thousands)
Net income $1,687 $434
Other comprehensive income (loss) 26 (8)
------ -----
Total comprehensive income $1,713 $426
------ -----
------ -----
</TABLE>
9
<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, 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
10
<PAGE>
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.
11
<PAGE>
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
12
<PAGE>
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,
--------------------- --------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
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
------ ------ ------- ------ ------
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. 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.
13
<PAGE>
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,
----------------------- ---------------------------------------
1998 1997 1997 1996 1995
--------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
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
-------- -------- -------- -------- -------
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
-------- -------- -------- -------- -------
Total 200 32 1,171 270 225
-------- -------- -------- -------- -------
Net loans charged off during period 2,425 313 1,331 380 477
Additions charged to operations 922 407 1,495 515 295
-------- -------- -------- -------- -------
Balance at end of period $7,892 $5,250 $ 9,395 $ 5,156 $ 639
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
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>
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.
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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 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,
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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 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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
In Management's opinion there has not been a material change in the
Company's market risk profile during the three months ended March 31, 1998.
At March 31, 1998 the Company had net repriceable assets (a "positive gap")
as measured at one year of approximately $21.9 million or 2.2% of total
assets that compared to $63.9 million or 7.1% of total assets at December 31,
1997. The Company had a positive gap as measured at a 90-day time horizon of
approximately $76.2 million, or 7.6% of total assets that compared to $104.2
million, or 11.6% of total assets at December 31, 1997. The ratio of
interest earning assets to interest bearing liabilities maturing or repricing
within one year at March 31, 1998 was 1.04 which compares to 1.14 at December
31, 1997 and management tries to maintain this ratio as close to zero as
possible while remaining in a range between .80 and 1.20. Interest income is
likely to be affected to a greater extent than interest expense for any
changes in interest rates within one year from March 31, 1998. 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.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot
be used to evaluate the Company's interest rate sensitivity position. To
supplement traditional gap analysis, the Company performs simulation modeling
to estimate the potential effects of changing interest rates. The process
allows the Company to explore the complex relationships within the gap over
time and various interest rate environments. In performing this type of
analysis, certain assumptions are made which include the nature and timing of
interest rate levels including yield curve shape, prepayments on loans and
securities, changes in deposit levels, pricing decisions on loans and
deposits, reinvestment/replacement of asset and liability cashflows, and
others. While assumptions are developed based upon current economic and
local market conditions, the Bank cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change. Furthermore, the sensitivity
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analysis does not reflect actions that the Bank might take in responding to
or anticipating changes in interest rates.
17
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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 2, 1998 Robert P. Keller /s/
------------------------------------------
Robert P. Keller
President and Chief Executive Officer
DATE: July 2, 1998 Curt A. Christianssen /s/
-----------------------------------------
Curt A. Christianssen
Senior Vice President and Chief Financial Officer
18
