SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File No. 0-13287
CIVIC BANCORP
2101 Webster Street, 14th Floor
Oakland, CA 94612
(510) 836-6500
Incorporated in California I.R.S. Employer Identification No.
68-0022322
The number of shares of common stock outstanding as of the close of business on
August 06, 2001.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 5,260,721
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
------- -------
CIVIC BANCORP
AND
SUBSIDIARY
Index to Form 10-Q Page Number
-----------
PART I. Item 1. Unaudited Financial Statements
Consolidated Balance Sheets -
June 30, 2001, and
December 31, 2000 3
Consolidated Statements of Income -
Three Months Ended June 30, 2001, and
June 30, 2000, and Six Months Ended
June 30, 2001, and June 30, 2000 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001, and
June 30, 2000 5
Consolidated Statements of Comprehensive
Income - Three Months Ended June 30, 2001,
and June 30, 2000, and Six Months Ended
June 30, 2001, and June 30, 2000 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II. Other Information 20
SIGNATURES 21
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(unaudited)
(dollars in thousands) June 30 December 31
2001 2000
-------- -----------
ASSETS
- ------
Cash and due from banks $ 27,536 $ 25,692
Federal funds sold 25,100 -
-------- --------
Total cash and cash equivalents 52,636 25,692
Securities available for sale 17,946 28,369
Securities held to maturity
(market value of $38,721
and $46,679, respectively) 37,902 46,367
Other securities 2,185 1,722
Loans:
Commercial 225,529 235,532
Real estate-construction 6,355 4,427
Real estate-other 119,355 115,693
Installment and other 20,800 22,467
-------- --------
Total loans 372,039 378,119
Less allowance for loan losses 6,864 6,573
-------- --------
Loans - net 365,175 371,546
Intangible assets - net 11,618 12,092
Interest receivable and other assets 9,080 10,106
Leasehold improvements and equipment - net 2,395 2,401
-------- --------
TOTAL ASSETS $498,937 $498,295
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 77,270 $ 89,090
Interest-bearing:
Checking 9,023 9,090
Money market 213,093 210,178
Time and savings 132,958 120,837
-------- --------
Total deposits 432,344 429,195
Other borrowings - 6,100
Accrued interest payable and other liabilities 9,634 9,218
-------- --------
Total liabilities 441,978 444,513
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock no par value; authorized,
10,000,000 shares; none issued or outstanding
Common stock no par value; authorized,
10,000,000 shares; issued and outstanding,
5,260,721 and 5,203,254 shares, respectively 42,560 38,227
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 14,261 15,395
Accumulated other comprehensive income - net 138 160
-------- --------
Total shareholders' equity 56,959 53,782
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $498,937 $498,295
======== ========
See accompanying notes to unaudited consolidated financial statements
3
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
(dollars in thousands)
2001 2000 2001 2000
----------- ------------- ---------- ----------
INTEREST INCOME:
Loans $ 7,662 $ 9,105 $ 16,194 $ 16,649
Taxable investment securities 697 980 1,583 1,860
Tax exempt securities 254 266 513 513
Federal funds sold 478 48 894 120
---------- ---------- ---------- ----------
Total interest income 9,091 10,399 19,184 19,142
INTEREST EXPENSE:
Deposits 2,724 2,801 5,661 5,089
Other borrowings - 131 3 198
---------- ---------- ---------- ----------
Total interest expense 2,724 2,932 5,664 5,287
---------- ---------- ---------- ----------
NET INTEREST INCOME 6,367 7,467 13,520 13,855
Provision for loan losses 150 225 375 375
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,217 7,242 13,145 13,480
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees 476 373 917 681
Other 168 153 296 197
---------- ---------- ---------- ----------
Total noninterest income 644 526 1,213 878
NONINTEREST EXPENSE:
Salaries and employee benefits 3,003 3,343 6,120 5,975
Occupancy 419 390 833 711
Equipment 399 366 780 655
Goodwill and core deposit amortization 237 180 474 266
Telephone and postage 124 143 261 252
Consulting fees 72 254 144 326
Data processing services 140 106 270 210
Marketing 39 72 85 131
Legal fees 110 53 186 108
Other 498 555 929 977
---------- ---------- ---------- ----------
Total noninterest expenses 5,041 5,462 10,082 9,611
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,820 2,306 4,276 4,747
Income tax expense 695 886 1,626 1,822
---------- ---------- ---------- ----------
NET INCOME $ 1,125 $ 1,420 $ 2,650 $ 2,925
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.21 $ 0.27 $ 0.51 $ 0.56
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 0.21 $ 0.27 $ 0.49 $ 0.55
========== ========== ========== ==========
Weighted average shares outstanding used to
compute basic earnings per common share 5,259,077 5,201,210 5,245,882 5,183,932
Dilutive effects of stock options 149,595 116,367 154,028 115,742
---------- ---------- ---------- ----------
Total weighted average shares outstanding used to
compute diluted earnings per common share 5,408,672 5,317,577 5,399,910 5,299,674
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements
4
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
(dollars in thousands) Six Months Ended June 30,
-------------------------
2001 2000
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,650 $ 2,925
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 375 375
Depreciation and amortization 752 826
Write-down on foreclosed asset - 36
Increase in deferred loan fees 39 215
Change in assets and liabilities:
Decrease (increase) in interest receivable and other assets 1,026 (4,213)
Increase in accrued interest payable and other liabilities 431 395
------- ---------
Net cash provided by operating activities 5,273 559
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (522) (1,168)
Net decrease (increase) in loans 5,957 (93,498)
Acquisition, net of cash acquired - (7,655)
Activities in securities held to maturity:
Proceeds from maturing securities 8,376 1,432
Purchases of securities (464) (4,410)
Activities in securities available for sale:
Proceeds from maturing securities 10,725 12,000
Purchases of securities - (13,216)
------- ---------
Net cash provided (used) by investing activities 24,072 (106,515)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 554 279
Cash paid in lieu of fractional shares (4) (3)
(Repayments) proceeds from short-term borrowing (6,100) 19,300
Net increase in deposits 3,149 100,679
------- ---------
Net cash (used) provided by financing activities (2,401) 120,255
------- ---------
Net increase in cash and cash equivalents 26,944 14,299
Cash and cash equivalents at beginning of period 25,692 19,705
------- ---------
Cash and cash equivalents at end of period $52,636 $ 34,004
======= =========
Cash paid during period for:
Interest $ 5,373 $ 4,969
======= =========
Income taxes $ 1,490 $ 2,231
======= =========
Supplemental schedule of non-cash investing activity:
Fair value of assets acquired $ - $ 87,219
Liabilities assumed $ - $ 72,614
Cash paid for capital stock $ - $ 14,605
See accompanying notes to unaudited consolidated financial statements
5
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(unaudited)
(dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
------------ ----------- --------- ---------
Net Income $1,125 $1,420 $2,650 $2,925
Other Comprehensive Income:
Unrealized gain (loss) on securities available for sale (125) 65 (38) 48
Income tax expense related to unrealized loss
on securities available for sale 50 (26) 16 (19)
------ ------ ------ ------
Other Comprehensive Income (Loss) (75) 39 (22) 29
------ ------ ------ ------
COMPREHENSIVE INCOME $1,050 $1,459 $2,628 $2,954
====== ====== ====== ======
See accompanying notes to unaudited consolidated financial statements
6
CIVIC BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Civic BanCorp and
subsidiary (the Company) have been prepared in accordance with generally
accepted accounting principles and with the instructions to Form 10-Q. In the
opinion of management, all necessary adjustments have been made to fairly
present the financial position, results of operations and cash flows for the
interim periods presented. These unaudited consolidated financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K
for the year ended December 31, 2000. The results of operations and cash
flows are not necessarily indicative of those expected for the complete
fiscal year.
The weighted average shares outstanding and per share amounts for all periods
presented have been adjusted to give effect for a 5% stock dividend paid in
May 2001.
2. NEW PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill,
noting that any purchase price allocable to an assembled workforce may not be
accounted for separately. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that intangible
assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001,
which it expects to account for using the pooling-of-interests method, and
Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are
acquired in a purchase business combination completed after June 30, 2001
will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141
for recognition apart from goodwill. Upon adoption of Statement 142, the
Company will be required to reassess the useful lives and residual values of
all intangible assets acquired in purchase business combinations, and make
any necessary amortization period adjustments by the end of the first interim
period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required
to test the intangible asset for impairment in accordance with the provisions
of Statement 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill [and equity-method goodwill] is impaired as of the
date of adoption. To accomplish this the Company must identify its reporting
units and determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible
assets, to those
7
reporting units as of the date of adoption. The Company will then have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount. To the
extent a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired and the
Company must perform the second step of the transitional impairment test. In
the second step, the Company must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of it assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation in accordance with Statement
141, to its carrying amount, both of which would be measured as of the date
of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of earnings.
And finally, any unamortized negative goodwill [and negative equity-method
goodwill] existing at the date Statement 142 is adopted must be written off
as the cumulative effect of a change in accounting principle.
As of the date of adoption, the Company expects to have unamortized goodwill
in the amount of $11.1 million, unamortized identifiable intangible assets in
the amount of $74,000, and no unamortized negative goodwill, all of which
will be subject to the transition provisions of Statements 141 and 142.
Amortization expense related to goodwill was $689,000 and $474,000 for the
year ended December 31, 2000 and the six months ended June 20, 2001,
respectively. Because of the extensive effort needed to comply with adopting
Statements 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.
In June 1999, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 137, "Accounting for Derivative Financial Instruments and Hedging
Activities - Deferral of Effective Date of FASB Statement No. 133." Statement
No. 137 defers the effective date of Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" for one year. Statement No.
133 is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For instruments
existing at the date of adoption, Statement No. 133 provides an entity with
the option of not applying this provision to such hybrid instruments entered
into before January 1, 1998 and not modified thereafter. Consistent with the
deferral of the effective date for one year, Statement No. 137 provides an
entity the option of not applying this provision to hybrid instruments
entered into before January 1, 1998 or 2000 and not modified substantially
thereafter. The Company adopted this statement on January 1, 2001. The
Company does not have any derivatives, therefore there was no impact from the
adoption of the pronouncement and no transition adjustment was necessary.
3. BUSINESS COMBINATION
On February 29, 2000, CivicBank of Commerce acquired East County Bank for
aproximately $14.6 million in cash. East County Bank is a community bank
headquartered in Antioch, California with two branches in Concord and Walnut
Creek serving businesses and individuals in Contra Costa County. Unaudited
total assets of East County Bank were approximately $79 million. The
transaction was treated as a purchase for accounting purposes with goodwill
amortized on a straight-line basis over 15 years. The results of operations
of the acquired enterprise from March 1 through June 30, 2000 are included in
the income statement of Civic BanCorp for the first six months of fiscal
2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is intended to provide greater details of
the results of operations and financial condition of the Company. In addition to
historical information, certain statements in this filing constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements involve certain
8
risks and uncertainties and could cause actual results to differ materially from
those expressed or implied in the forward-looking statements. Factors which
might cause such a difference include, but are not limited to, interest rate
risks, asset quality, general economic conditions, adverse economic conditions
in California resulting from increases in energy costs, legislative or
regulatory changes and increases in personal or commercial customers'
bankruptcies.
OVERVIEW
For the six months ended June 30, 2001, the Company reported net income of
$2,650,000, or $.49 earnings per diluted share compared to a net income of
$2,925,000 or $.55 earnings per diluted share for the same period of the prior
year as adjusted for the impact of the 5% stock dividend paid in May 2001. The
annualized return on average assets was 1.05% for the six months ended June 30,
2001 compared to 1.29% for the same period of the prior year. The annualized
return on average shareholders' equity for the six months ended June 30, 2001
and 2000 was 9.50% and 12.17%, respectively.
RESULTS OF OPERATIONS
Net interest income for the six months ended June 30, 2001, was $13.5 million,
decreasing $.3 million or 2.4% from net interest income of $13.9 million for the
same period in 2000. The decrease in net interest income was primarily due to
the declining interest rate environment.
Total interest income for the first six months of 2001 equaled $19.2 million,
which was consistent with total interest income for the same period in 2000 as
the increase in interest income generated by an increase in average earning
assets was offset by a falling interest rate environment. Total average earning
assets increased $43.7 million or 10.4% to $464.5 million for the first six
months of 2001 compared to $420.7 million for the same period in 2000. The
weighted average yield on those earning assets decreased to 8.44% for the first
half of 2001 relative to 9.28% for the same period of the prior year. The
decrease in the yield was attributed to the declining interest rate environment
of 2001. The average Prime or Reference rate decreased to 7.99% for the first
six months of 2001 from 8.96% for the comparative period of the prior year.
Total interest expense for the first six months of 2001 was $5.7 million, an
increase of $.4 million or 7.1% relative to $5.3 million for the first six
months of 2000. The increase in interest expense reflects an increase in the
volume of interest bearing liabilities that was partially offset by a decrease
in average rate paid on those interest-bearing liabilities. Average interest
bearing liabilities increased to $313.9 million for the first six months of 2001
as compared to $288.5 million for the same period of the prior year, an increase
of $25.4 million or 8.8%. The weighted average rate paid on these liabilities
decreased 5 basis points to 3.64% for the first six months of 2001 from 3.69%
for the same period of 2000. The decrease in the average rate is attributed to a
falling interest rate environment for deposits.
Net Interest Margin
Net interest margin decreased 77 basis points to 5.98% for the six months ended
June 30, 2001, from 6.75% for the same period of the prior year. The decrease
in the margin is attributed to a balance sheet which is asset sensitive
resulting in a greater decrease in the average rate earned on earning assets of
84 basis points relative to the decrease in the average rate paid on interest
bearing deposits of 5 basis points. Following actions by the Federal Reserve,
the Company has reduced its Prime or Reference rate six times during the first
six months of 2001 for a total of 275 basis points. The majority of the Banks'
loans are made with terms which include floating interest rates tied to the
Banks reference rate and accordingly, the rates on these loans have followed
these reductions in a timely fashion. Conversely, most of the interest bearing
deposits have not repriced to the same extent or at the same rate due to
competitive pressures or, in the case of time deposits, interest rates that do
not adjust until the term of the deposit contract expires. This set of
circumstances will result in a declining net interest margin until such time as
the liabilities have repriced to the current interest rate environment.
9
The following table presents an analysis of the components of net interest
income for the first six months ended June 30, 2001 and 2000.
Six months ended June 30,
---------------------------------------------------------------------
2001 2000
---------------------------------- -------------------------------
dollars in thousands Interest Rate Interest Rates
Average Income\ Earned\ Average Income\ Earned\
Balance Expense/(2)/ Paid Balance Expense/(2)/ Paid
-------- ------------ ------- ------- ------------ -------
ASSETS
Securities available for sale $22,724 $ 957 8.49% $ 34,423 $ 1,105 6.45%
Securities held to maturity:
U.S. Treasury securities 990 32 6.44% 555 18 6.37%
U.S. Government agencies 19,107 533 5.62% 24,282 661 5.47%
Municipal securities /(1)/ 21,064 776 7.43% 20,888 776 7.47%
Other securities 2,103 61 5.84% 1,904 76 8.00%
Federal funds sold and securities
purchased under agreements to resell 37,537 894 4.80% 4,179 120 5.76%
Loans: /(2),(3)/
Commercial 217,489 9,921 9.20% 200,041 10,187 10.24%
Real estate-construction 4,489 195 8.76% 13,772 707 10.32%
Real estate-other 116,937 5,135 8.85% 100,208 4,851 9.73%
Installment and other 22,023 943 8.64% 20,471 904 8.88%
-------- ------- ---- -------- ------- -----
Total Loans 360,938 16,194 9.05% 334,492 16,649 10.01%
-------- ------- ---- -------- ------- -----
Total Earning Assets 464,463 19,447 8.44% 420,723 19,405 9.28%
Cash and due from banks 24,465 24,192
Leasehold improvements and equipment - net 2,467 2,037
Interest receivable and other assets 20,704 12,945
Foreclosed assets 0 144
Less allowance for loan loss (6,762) (5,709)
-------- --------
TOTAL ASSETS $505,337 $454,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 43,151 96 0.45% $ 34,542 101 0.59%
Money market 134,216 2,309 3.47% 119,620 2,053 3.45%
Time and savings 136,414 3,256 4.81% 128,193 2,935 4.59%
Other borrowed funds 111 3 4.93% 6,126 198 6.50%
-------- ------- ---- -------- ------- -----
Total interest bearing liabilities 313,892 5,664 3.64% 288,481 5,287 3.69%
Demand deposits 127,669 112,376
Other liabilities 7,993 5,401
Shareholders' equity 55,783 48,074
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $505,337 $454,332
======== ========
Net Interest Income $13,783 $14,118
======= =======
Net Interest Margin 5.98% 6.75%
==== ====
Tax Equivalent Adjustment /(1)/ $ 263 $ 263
======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Tax-exempt interest income on municipal securities is computed using a
Federal income tax rate of 34%. Interest on municipal securities was $513,000
and $513,000 for June 30, 2001 and 2000, respectively. (2) Non-performing loans
have been included in the average loan balances. Interest income is included on
non-accrual loans only to the extent cash payments have been received. (3)
Interest income includes loan fees on commercial loans of $228,000 and $205,000
for June 30, 2001 and 2000, respectively; fees on real estate loans of $150,000
and $245,000 for June 30, 2001 and 2000, respectively; and fees on installment
and other loans of $20,000 and $17,000 for June 30, 2001 and 2000, respectively.
10
The following table sets forth changes in interest income and interest expense
for each major category of interest earning assets and interest bearing
liabilities, and the amount of change attributable to volume and rate changes
for the six-month periods ended June 30, 2001 and 2000.
Analysis of Changes in Net Interest Income
Increase (Decrease) Due to Changes in
dollars in thousands
Volume/(1)/ Rate/(2)/ Total
----------- -------- -----
Increase (decrease) in interest income:
Securities available for sale $ (378) $ 230 $(148)
Securities held to maturity:
U.S. Treasury securities 14 - 14
U.S. Government agencies (142) 14 (128)
Municipal securities 4 (4) (0)
Other securities 8 (23) (15)
Federal funds sold 952 (178) 774
Loans:
Commercial 858 (1,124) (266)
Real estate-construction (477) (35) (512)
Real estate-other 794 (510) 284
Installment and other 66 (27) 39
------ ------- -----
Total Loans 1,241 (1,696) (455)
------ ------- -----
Total increase $1,699 $(1,657) $ 42
------ ------- -----
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking $ (25) $ 30 $ 5
Money market (244) (12) (256)
Savings and time (171) (150) (321)
Other borrowed funds 195 - 195
------ ------- -----
Total increase (245) (132) (377)
------ ------- -----
Total change in net interest income $1,454 $(1,789) $(335)
====== ======= =====
(1) Changes not solely attributed to rate or volume have been allocated to
volume.
(2) Loan fees are reflected in rate volumes.
Provision for Loan Losses
The provision for loan losses is charged to operations and creates an allowance
for future loan losses. The amount of the provision is dependent on many factors
which include the amount of the allowance for loan losses, growth in the loan
portfolio, net charges against the allowance, changes in the composition of the
portfolio, the number and dollar amount of delinquent loans, assessment of the
overall quality of the portfolio, value of the collateral on problem loans,
recommendations by regulatory authorities and general economic conditions among
others. The provision for loan losses for the six months ended June 30, 2001
and 2000 was $375,000. See "Allowance for Loan Losses" for further discussion.
11
Non-Interest Income
Non-interest income for the six months ended June 30, 2001, was $1,213,000, an
increase of $335,000 or 38.2% from the six months ended June 30, 2000. Customer
service fees, the largest component of non-interest income, increased $236,000
due to the increase in deposit volume and an increase in fee income associated
with increased customer international transaction activity. The increase in
Other noninterest income is related to an increase in SBA servicing income.
Non-Interest Expense
Non-interest expense totaled $10.1 million and $9.6 million for the six months
period ended June 30, 2001 and 2000, respectively. Salaries and employee
benefits for the six months ended June 30, 2001, increased $145,000 or 2.4% from
the same period in 2000. The increase in salaries and employee benefits is
related to normal merit increases that were offset by reduced accruals for
incentive compensation. Full time equivalent personnel numbered 154 on June 30,
2001 and 157 on June 30, 2000.
Occupancy expense increased with the addition of three East County Bank offices.
Increases in data processing and equipment are related to the merger with East
County Bank on February 29, 2000, as is the increase in goodwill. Conversely,
the decrease in consulting relates to data processing conversion efforts in the
second quarter of 2000. The increase in legal fees is related to litigation in
the ordinary course of business.
The following table summarizes the significant components of noninterest expense
for the dates indicated.
Noninterest Expense for the
Six Months Ended,
June 30 June 30 Dollar %
(dollars in thousands) 2001 2000 Change Change
------- ------ ------ ------
<s>
Salaries and employee benefits $ 6,120 $5,975 $ 145 2.4%
Occupancy 833 711 122 17.2%
Equipment 780 655 125 19.1%
Goodwill and core deposit amortization 474 266 208 78.2%
Telephone and postage 261 252 9 3.6%
Consulting fees 144 326 (182) -55.8%
Data processing services 270 210 60 28.6%
Marketing 85 131 (46) -35.1%
Legal fees 186 108 78 72.2%
Other 929 977 (48) -4.9%
------- ------ ----- ----
TOTAL NONINTEREST EXPENSE $10,082 $9,611 $ 471 4.9%
======= ====== ===== ====
Provision for Income Taxes
The provisions for income taxes for the first half of 2001 and 2000 were
$1,626,000 and $1,822,000, respectively. These provisions represent effective
tax rates of 38.0% and 38.4%, respectively.
FINANCIAL CONDITION
Loans
Total loans at June 30, 2001decreased $6.1 million or 1.6% from December 31,
2000 due to the loss of one of the Bank's larger loan customers with
approximately $8.7 million in outstanding loan balances by virtue of a merger.
12
The Bank concentrates its lending activities on commercial, real estate
construction and other forms of real estate loans made primarily to businesses.
Installment and other consumer loans are generally made to the owners and
principals of companies with whom the Bank maintains commercial relationships.
Real estate construction loans as a percentage of total loans were 1.7% at June
30, 2001 and 1.2% at December 31, 2000. The Bank maintains a limited portfolio
of real estate construction loans as the risks associated with real estate
construction lending are generally considered to be higher relative to other
forms of commercial lending. However, the Bank continues to fund real estate
construction commitments on a limited basis with stringent underwriting
criteria. Other real estate loans consist of mini-perm loans and land
acquisition loans that are primarily owner-occupied and are generally granted
based on the rental or lease income stream generated by the property.
The following table sets forth the amount of loans outstanding in each category
and the percentage of total loans outstanding for each category at the dates
indicated.
June 30, 2001 Dec. 31, 2000 June 30, 2000
-------------------- -------------------- --------------------
(dollars in thousands) Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- --------
Commercial $225,529 60.6% $235,532 62.3% $228,289 60.3%
Real estate - construction 6,355 1.7% 4,427 1.2% 17,716 4.7%
Real estate - other 119,354 32.1% 115,693 30.6% 109,919 29.0%
Installment and other 20,801 5.6% 22,467 5.9% 22,580 6.0%
-------- ----- -------- ------ -------- -----
TOTAL $372,039 100.0% $378,119 100.0% $378,504 100.0%
======== ===== ======== ====== ======== =====
Non-Performing Assets
The Company's policy is to recognize interest income on an accrual basis unless
a loan becomes impaired. A loan is considered to be impaired when it becomes
probable that the Company will not recognize all amounts due under the original
terms of the loan agreement. At the time a loan is judged to be impaired, the
accrual of interest is discontinued and any accrued, but uncollected interest is
reversed. Thereafter, all payments are applied against principal until principal
is fully recovered with subsequent collections recognized as interest income as
they are received
The following table provides information with respect to the Company's past due
loans and components of non-performing assets at the dates indicated.
June 30 Dec. 31 June 30
2001 2000 2000
------- ------- --------
(Dollars in thousands)
Loans 90 days or more past due and still accruing $ - $ 389 $ 145
Non-accrual loans 1,548 355 737
Non-accrual SBA guaranteed loans 950 868 836
Foreclosed assets - - 164
------ ------ ------
Total non-performing assets $2,498 $1,612 $1,882
====== ====== ======
Non-performing assets to period end loans,
other assets held for sale plus foreclosed assets 0.67% 0.43% 0.50%
------ ------ ------
The increase in non-performing assets from December 31, 2000 to June 30, 2001 is
primarily due to one commercial loan, acquired in the merger with East County
Bank, being placed on non-accrual. Management does not anticipate a principal
loss on this loan at the present time, however collection may be protracted.
13
At June 30, 2001, the recorded investment in loans considered to be impaired was
$2,498,000, all of which were on a non-accrual basis. Of this total, $2,176,000
of non-performing loans has supporting collateral or government guarantees that
equal or exceed the book value and accordingly do not have an associated
allowance for loan loss. Loans totaling $322,000 have an associated allowance
for loan loss of $45,000. For the six months ended June 30, 2001, the average
recorded investment in impaired loans was $1,695,000 and no interest income was
recognized on impaired loans. If interest income on those loans had been
recognized, such income would have approximated $89,000.
The Company has an active credit administrative function, which includes the
regular use of an external loan review firm, that periodically reviews all loans
to identify potential problem credits using quality standards and criteria
similar to those of regulatory agencies. Loans receiving lesser grades are
considered to be classified and fall into "substandard," "doubtful," or "loss"
categories. Substandard loans are characterized as having one or more defined
weaknesses that could result in a loss to the Company if the deficiencies are
not corrected. Doubtful loans have the weakness of substandard loans with the
added complication that those weaknesses are less likely to be remedied and are
of a character that increases the probability of a principal loss. A loan
classified as a loss is considered uncollectable and will be discharged against
the allowance.
The following table sets forth the classified assets as of the dates indicated.
(dollars in thousands)
June 30, 2001 Dec. 31, 2000 June 30, 2000
------------- ------------- -------------
Substandard $10,428 $8,530 $ 9,656
Doubtful 194 205 715
Loss - - -
------- ------ -------
Total Classified $10,622 $8,735 $10,371
======= ====== =======
Classified Loans to Total
Loans 2.86% 2.31% 2.74%
As of June 30, 2001, with the exception of the aforementioned classified loans
and non-performing assets, management was not aware of any loan about which it
has material reservations regarding the borrower's ability to comply with
existing loan repayment terms or which might result in such loans becoming
impaired or classified at some future date. Management cannot, however, predict
the impact of future economic events or conditions, or the impact such an
environment may have on the Company's loan portfolio. Accordingly, there can be
no assurances that other loans will not become impaired or classified in the
future.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses, the amount of which is based on many factors. See "Provision for Loan
Losses". The allowance is increased by recoveries of loans previously charged-
off and by provisions charged against earnings and is reduced by loan charge-
offs. Loans are charged off when they are judged to be impaired. A loan is
considered to be impaired when it becomes probable that the Company will not
recognize all amounts due under the original terms of the loan agreement.
Recoveries of amounts previously charged off are recorded only when cash is
received.
The policy of the Company is to review loans in the portfolio to identify
potential problem credits and to assess the credit quality of the loan
portfolio. Specific allocations are made for loans where the probability of a
loss can be defined and reasonably estimated while the balance of the
allocations are based on the size of the portfolio, delinquency trends,
historical data, industry averages and general economic conditions in the
Company's market area. The following table presents the
14
allocations for loan loss as of the dates indicated by loan category and the
percentage of loans in each category relative to total loans.
Allocation of the Allowance for Loan Losses
June 30, 2001 December 31, 2000
------------------------ ------------------------
(Dollars in thousands) Percent of Percent of
loans in each loans in each
category to category to
Amount total loans Amount total loans
------------------------ ------------------------
Commercial $4,236 60.6% $3,752 62.3%
Real estate - construction 22 1.7% 26 1.2%
Real estate - other 983 32.1% 1,071 30.6%
Installment and other 204 5.6% 251 5.9%
Unallocated 1,419 N/A 1,473 N/A
------------------------ ------------------------
Total $6,864 100.0% $6,573 100.0%
======================== ========================
Although management believes that the allowance for loan losses is adequate for
both potential losses of identified credits and estimated inherent losses in the
portfolio, future provisions will be subject to continuing evaluations of the
portfolio, and if the economy declines or the quality of the loan portfolio
deteriorates, additional provisions may be required.
The following table summarizes the changes in the allowance for loan losses for
the periods indicated:
Six Months Year Six Months
Ended Ended Ended
(dollars in thousands) June 30, 2001 Dec. 31, 2000 June 30, 2000
------------- ------------- -------------
Balance, at beginning of period $6,573 $4,850 $4,850
Charge-offs:
Commercial 140 245 169
Real estate - construction - - -
Real estate - other - 116 -
Installment and other - 91 87
------ ------ ------
Total charge-offs 140 452 256
Recoveries:
Commercial 45 70 14
Real estate - construction - - -
Real estate - other - 88 87
Installment and other 11 84 39
------ ------ ------
Total recoveries 56 242 140
------ ------ ------
Net charge-offs 84 210 116
Provision acquired through merger - 1,108 1,108
Provision charged to operations 375 825 375
------ ------ ------
Balance, at end of period $6,864 $6,573 $6,217
====== ====== ======
Ratio of net charge-offs to average loans (annualized) 0.05% 0.06% 0.07%
====== ====== ======
Allowance at period end to total loans outstanding 1.84% 1.74% 1.64%
====== ====== ======
Investment Portfolio
The Company's Available for Sale portion of the investment portfolio is used
primarily for liquidity purposes and the Held to Maturity portion of the
portfolio is principally for investment income. The portfolio is primarily
composed of US Treasury securities, US government agency instruments and bank
qualified municipal obligations. Approximately $10.7 million of
15
Federal agency securities classified as available for sale were called by the
issuing agencies during the first six months of 2001. Approximately $1.7 million
of callable securities remain in the portfolio.
The table below summarizes the book value and estimated market values of
investment securities at the dates indicated.
June 30, 2001 December 31, 2000
------------------ -----------------
(dollars in thousands) Book Market Book Market
Value Value Value Value
-------- --------- ------- -------
SECURITIES HELD TO MATURITY:
U.S. government agencies $16,070 $16,233 $24,141 $24,087
Municipal securities 20,828 21,457 21,218 21,564
U.S Treasury securities 991 1,018 989 1,008
Mortgage Backed securities 13 13 19 20
------- ------- ------- -------
TOTAL $37,902 $38,721 $46,367 $46,679
======= ======= ======= =======
SECURITIES AVAILABLE FOR SALE:
U.S. government agencies $17,717 $17,946 $28,102 $28,369
------- ------- ------- -------
TOTAL $17,717 $17,946 $28,102 $28,369
======= ======= ======= =======
Deposits
Total deposits increased $3.15 million or .7% to $432.3 million as of June 30,
2001, from $429.2 million as of December 31, 2000. For the six months ended June
30, 2001, average deposits totaled $441.5 million, an increase of $46.7 million
or 11.8% from $394.7 million for the same period in 2000. Management attributes
the increase in deposits to acquisition of East County Bank on February 29,
2000, which added approximately $70 million in deposits for four months in 2000.
The table below sets forth information regarding the Bank's average deposits by
amount and percentage of total deposits for the six months ended June 30, 2001
and 2000.
Average Deposits
----------------------------------------
Six Months Ended June 30,
----------------------------------------
(dollars in thousands) 2001 2000
------------------- -------------------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
Demand accounts $127,669 28.8% $112,376 28.5%
Interest-bearing checking 43,151 9.8% 34,542 8.8%
Money market 134,216 30.4% 119,620 30.3%
Savings and time 136,414 30.9% 128,193 32.5%
-------- ----- -------- -----
Total $441,450 100.0% $394,731 100.0%
======== ===== ======== =====
Certificates of deposit over $100,000 are generally considered a higher cost and
less stable form of funding than lower denomination deposits and may represent a
greater risk of interest rate and volume volatility than small retail deposits.
Time certificates of $100,000 or more at June 30, 2001, had the following
schedule of maturities:
16
(In thousands)
--------------
Three months or less $64,137
After three months through six months 12,865
After six months through twelve months 18,668
After twelve months 1,698
-------
Total $97,368
=======
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity risk refers to the Bank's ability to acquire funds to meet loan
demand, to fund deposit withdrawals and to service other liabilities as they
become due. The Risk Management Committee is responsible for monitoring the
Bank's exposure to liquidity risk. The Committee meets on a monthly basis and
includes members of the Board of Directors and senior management. The Committee
monitors such liquidity factors as maturing loans and time deposits, unadvanced
loan commitments, regional economic conditions and historical seasonality to
minimize the exposure to liquidity risk.
To augment liquidity, the Bank has informal federal funds borrowing arrangements
with correspondent banks totaling $40 million. At June 30, 2001, the Bank had
no outstanding borrowings against these arrangements. Additionally, at June 30,
2001, unpledged government securities that are available to secure additional
borrowing in the form of reverse repurchase agreements totaled approximately $26
million. At June 30, 2001, the Bank had no reverse repurchase agreements.
The liquidity position, as measured by the level of cash equivalents, increased
by $26.9 million at June 30, 2001 from December 31, 2000. Cash equivalents,
which include cash, amounts in the process of collection and Federal funds sold,
of $25.1 million were provided by investing activities, principally by the
maturity of securities. Operating activities provided cash equivalents of $5.3
million, however financing activities, principally the repayment of the
borrowing at year-end 2000, used cash equivalents of $2.4 million.
The liquidity position of the Company may be expressed as a ratio defined as (a)
cash, Federal funds sold, other unpledged short term investments and marketable
securities, including those maturing after one year, divided by (b) total assets
less pledged securities. Using this definition, the liquidity position at June
30, 2001 was 20.8%, consistent with the ratio at December 31, 2000 of 19.1%.
Part of the Bank's normal lending activity involves making commitments to extend
credit. One risk associated with loan commitments is the demand on the Bank's
liquidity that would result if a significant portion of the commitments were
unexpectedly funded at one time. The Bank assesses the likelihood of projected
funding requirements by reviewing historical patterns, current and forecasted
economic conditions and individual funding needs.
On a stand-alone basis, the Company's primary source of liquidity is dividends
from the Bank. The ability of the Bank to pay dividends is subject to regulatory
approval.
Capital Resources
Total shareholders' equity increased to $57.0 million at June 30, 2001, from
$53.8 million at December 31, 2000, reflecting retained income of $2,650,000 for
the first half of 2001 and proceeds from the exercise of stock options of
$554,000.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board of Governors that require a minimum risk-based capital
ratio of 8%. At least 4% must be in the form of "Tier 1" capital that consists
of common equity, non-cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries. "Tier 2" capital
consists of cumulative and limited-life preferred stock, mandatory convertible
securities,
17
subordinated debt and, subject to certain limitations, the allowance for loan
losses. General loan loss reserves included in Tier 2 capital cannot exceed
1.25% of risk-weighted assets.
At June 30, 2001, the Company's total risk-based capital ratio was 11.13%. The
following table presents the Company's risk-based capital and leverage ratios as
of June 30, 2001, and December 31, 2000.
Minimum
Actual Actual Minimum Capital
Ratio Amount Ratio Requirement
------ ------- ------- -----------
(In thousands)
As of June 30, 2001:
Total risk-based capital ratio
Company 11.13% $50,938 8.00% $36,701
Bank 10.95% $50,105 8.00% $36,701
Tier 1 risk-based capital ratio
Company 9.88% $45,203 4.00% $18,350
Bank 9.70% $44,370 4.00% $18,350
Tier 1 leverage
Company 9.15% $45,203 4.00% $18,350
Bank 8.98% $44,370 4.00% $18,350
As of December 31, 2000:
Total risk-based capital ratio
Company 10.34% $47,252 8.00% $36,551
Bank 10.27% $46,914 8.00% $36,551
Tier 1 risk-based capital ratio
Company 9.09% $41,530 4.00% $18,275
Bank 9.02% $41,192 4.00% $18,275
Tier 1 leverage ratio
Company 8.59% $41,530 4.00% $19,339
Bank 8.52% $41,192 4.00% $19,339
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. The Company's primary market
risk is interest rate risk. Interest rate risk occurs as a result of interest
sensitive assets and liabilities not repricing at the same time or by the same
amount and is quantified by estimating the potential gain or loss in the market
value of assets and net interest income that can result from changes in interest
rates. The Company's exposure to interest rate risk is monitored monthly by the
Risk Management Committee which includes members of the Board of Directors and
Senior Management. The Company attempts to manage its exposure to changes in
interest rates; however, due to its size and the direct competition from major
banks, the Company must offer products which are competitive in the market
place, even if less than optimum with respect to interest rate exposure.
18
The Company's balance sheet was asset sensitive at June 30, 2001, due to the
amount of floating rate assets. Generally, if more assets than liabilities
reprice at a given time in a falling rate environment, net interest income will
deteriorate, and in a rising rate environment, net interest income would
increase. Management believes there has been no significant change in the
Bank's market risk exposure disclosed in the Company's Annual Report on Form 10-
K for the year December 31, 2000.
19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders of Civic BanCorp was held on May
3, 2001.
(b) With respect to the election of directors at the annual meeting of
shareholders on May 3, 2001, (i) proxies were solicited pursuant to
Regulation 14 under the Securities and Exchange Act of 1934, (ii) there
was no solicitation in opposition to management's nominees as listed in
the proxy statement, and (iii) all such nominees were elected.
(c) At the meeting, shareholders ratified the selection of KPMG LLP as
independent accountants as described in the proxy statement. The
selection was approved by 4,260,353 votes in favor, 9,793 votes against
4,259 votes abstaining and 726,173 shares not voted.
The total number of shares of the Company's common stock outstanding as
of March 6, 2001, the record date of the annual meeting was 5,000,578.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - There were no reports on Form 8-K
during the period.
20
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
CIVIC BANCORP
-------------
(Registrant)
Date: August 06, 2001 By: /s/ Herbert C. Foster
----------------------
Herbert C. Foster
President
Chief Executive Officer
By: /s/ Gerald J. Brown
--------------------
Gerald J. Brown
Chief Financial Officer
Principal Accounting Officer
21