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 March 31, 2000
--------------
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
April 1, 2000:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 4,953,533
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 ______
-------
1
CIVIC BANCORP
AND
SUBSIDIARY
Index to Form 10-Q Page Number
-----------
PART I. Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000, March 31, 1999
and December 31, 1999 3
Consolidated Statements of Income -
Three Months Ended March 31, 2000 and
March 31, 1999 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and
March 31, 1999 5
Consolidated Statements of Comprehensive
Income - Three Months Ended March 31, 2000
and March 31, 1999 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 19
PART II. Other Information 20
SIGNATURES 21
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands except shares)
March 31, March 31, December 31,
2000 1999 1999
--------- --------- ------------
ASSETS
- ------
Cash and due from banks $ 29,685 $ 17,339 $ 12,205
Federal funds sold - 81,750 7,500
---------- ---------- ----------
Total cash and cash equivalents 29,685 99,089 19,705
Securities available for sale 36,831 35,727 31,665
Securities held to maturity
(market value of $45,406, $37,027
and $42,468, respectively) 46,397 36,574 43,416
Other securities 2,243 2,257 2,126
Loans:
Commercial 210,310 154,226 173,124
Real estate-construction 13,621 8,643 10,053
Real estate-other 108,203 64,887 85,470
Installment and other 21,449 16,495 16,890
---------- ---------- ----------
Total loans 353,583 244,251 285,537
Less allowance for loan losses 5,962 4,710 4,850
---------- ---------- ----------
Loans - net 347,621 239,541 280,687
Interest receivable and other assets 19,350 6,231 6,151
Leasehold improvements and equipment - net 2,077 1,612 1,621
Foreclosed assets 200 - -
---------- ---------- ----------
TOTAL ASSETS $ 484,404 $ 421,031 $ 385,371
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 86,920 $ 72,941 $ 65,277
Interest-bearing:
Checking 6,721 4,692 11,851
Money market 189,018 173,463 160,432
Time and savings 139,553 120,805 97,154
---------- ---------- ----------
Total deposits 422,212 371,901 334,714
Federal funds purchased 8,875 - -
Accrued interest payable and other liabilities 5,339 5,617 4,453
---------- ---------- ----------
Total liabilities 436,426 377,518 339,167
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,
4,953,533, 4,755,633 and 4,908,132 shares 38,096 33,259 34,751
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 10,140 10,072 11,701
Accumulated other comprehensive income (loss) - net (258) 182 (248)
---------- ---------- ----------
Total shareholders' equity 47,978 43,513 46,204
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 484,404 $ 421,031 $ 385,371
========== ========== ==========
3
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Dollars in thousands except shares and per share amounts)
Three Months Ended March 31,
----------------------------------
2000 1999
------------ ------------
INTEREST INCOME:
Loans $ 7,544 $ 5,475
Securities available for sale, securities held
to maturity and other securities 880 782
Tax exempt securities 247 192
Federal funds sold 72 813
------------ ------------
Total interest income 8,743 7,262
INTEREST EXPENSE:
Deposits 2,288 2,188
Other borrowings 67 -
------------ ------------
Total interest expense 2,355 2,188
------------ ------------
NET INTEREST INCOME 6,388 5,074
Provision for loan losses 150 45
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,238 5,029
------------ ------------
NONINTEREST INCOME:
Customer service fees 308 202
Other 44 40
------------ ------------
Total noninterest income 352 242
NONINTEREST EXPENSE:
Salaries and employee benefits 2,632 2,019
Occupancy 321 277
Equipment 289 245
Data processing services 104 96
Telephone and postage 109 83
Consulting fees 72 66
Marketing 59 42
Legal fees 55 45
Goodwill and core deposit amortization 86 42
Other 422 296
------------ ------------
Total noninterest expense 4,149 3,211
------------ ------------
INCOME BEFORE INCOME TAXES 2,441 2,060
Income tax expense 936 785
------------ ------------
NET INCOME $ 1,505 $ 1,275
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.31 $ 0.27
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.30 $ 0.26
============ ============
Weighted average shares outstanding used
to compute basic earnings per common share 4,920,623 4,724,081
Dilutive effects of stock options 111,400 145,256
------------ ------------
Total weighted average shares outstanding used
to compute diluted earnings per common share 5,032,023 4,869,337
============ ============
4
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
Three Months Ended March 31,
----------------------------
2000 1999
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,505 $ 1,275
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 150 45
Depreciation and amortization 353 313
Increase (decrease) in deferred loan fees 357 22
Change in assets and liabilities:
(Increase) decrease in interest receivable and other assets (4,304) (23)
Increase (decrease) in accrued interest payable and other liabilities 892 (59)
--------- --------
Net cash (used) provided by operating activities (1,047) 1,573
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (645) (205)
Net increase in loans (68,749) (10,821)
Acquisition, net of cash acquired (7,872) -
Activities in securities held to maturity:
Proceeds from maturing securities 180 6
Purchases of securities (3,323) (4,130)
Activities in securities available for sale:
Proceeds from maturing securities 8,000 3,000
Purchases of securities (13,216) (8,126)
--------- --------
Net cash used by investing activities (85,625) (20,276)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 279 536
Proceeds from short-term borrowing 8,875 -
Net increase in deposits 87,498 28,952
--------- --------
Net cash provided by financing activities 96,652 29,488
--------- --------
Net increase in cash and cash equivalents 9,980 10,785
Cash and cash equivalents at beginning of period 19,705 88,304
--------- --------
Cash and cash equivalents at end of period $ 29,685 $ 99,089
========= ========
Cash paid during period for:
Interest $ 2,157 $ 2,372
========= ========
Income taxes $ 151 $ 250
========= ========
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 $ -
5
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(In thousands)
Three Months Ended March 31,
----------------------------
2000 1999
------------ ----------
Net Income $ 1,505 $ 1,275
Other Comprehensive Income:
Unrealized loss on securities available for sale (17) (187)
Income tax benefit related to unrealized loss
on securities available for sale 7 75
---------- ----------
Other Comprehensive Loss (10) (112)
---------- ----------
COMPREHENSIVE INCOME $ 1,495 $ 1,163
========== ==========
6
CIVIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Civic BanCorp and its
subsidiary bank, CivicBank of Commerce, (the Company) have been prepared in
accordance with generally accepted accounting principles and 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, cash flows and comprehensive income 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, 1999. The results of operations and cash flows
are not necessarily indicative of those expected for the complete fiscal
year.
2. NEW PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement Number 33." Statement number 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 fiscal
quarters of 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 hybrid instruments entered into before January
1, 1998 and not modified substantially thereafter. Consistent with the
deferral of the effective date for one year, Statement No. 137 provides an
entity with the option of not applying this provision to hybrid instruments
entered into before January 1, 1998 or 1999 and not modified substantially
thereafter. The Company has not completed its evaluation of the impact of
Statement No. 133 as amended on the Company's consolidated financial
statements.
3. ACQUISITION OF EAST COUNTY BANK
On February 29, 2000 CivicBank of Commerce acquired East County Bank for
approximately $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 business and individuals in Contra Costa County.
Unaudited total assets of East County Bank on February 29, 2000 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 March 31 are included in the income statement of Civic BanCorp for
the first three months of the fiscal year 2000.
The following unaudited pro-forma financial information presents the
combined results of operations of the Company and East County Bank as if
the acquisition had occurred at the beginning of the period, after giving
effect to certain adjustments, including the amortization of goodwill. The
pro-forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and East County bank
constituted a single entity during such periods.
7
Pro-forma results of operations: Three Months Ended March 31,
dollars in thousands except per share 2000 1999
--------- ----------
Net Interest Income $ 7,137 $ 6,152
Net Income $ 1,449 $ 1,305
Dilued Earnings per Share $ 0.29 $ 0.27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the Three Months Ended March 31, 2000 and 1999
OVERVIEW
For the three months ended March 31, 2000, the Company reported net income of
$1,505,000, or $0.30 earnings per diluted share compared to net income of
$1,275,000 or $0.26 earnings per diluted share for the same period of the prior
year. The annualized return on average assets was 1.43% for the three months
ended March 31, 2000 compared to 1.28% for the same period of the prior year.
The annualized return on average shareholders' equity for the three months ended
March 31, 2000 and 1999 was 12.76% and 11.97%, respectively.
RESULTS OF OPERATIONS
Net interest income for the three months ended March 31, 2000 was $6.4 million,
increasing $1.3 million or 25.9% from net interest income of $5.1 million for
the same period in 1999. The increase in net interest income is primarily
attributed to an increase in the volume of earning assets and an increase in
average rate earned on those earning assets.
8
The following table presents an analysis of the components of net interest
income for the first quarter of 2000 and 1999.
Three months ended March 31,
----------------------------------------------------------------------------------
2000 1999
---------------------------------------- ---------------------------------------
dollars in thousands Interest Rates Interest Rates
Average Income\ Earned\ Average Income\ Earned\
Balance Expense /2/ Paid Balance Expense /2/ Paid
------------ ----------- ------------ ---------- ------------ -----------
ASSETS
Securities available for sale $ 32,851 $ 511 6.25% $ 33,177 $ 520 6.36%
Securities held to maturity:
U.S. Treasury securities 483 8 6.33% - - 0.00%
U.S. Government agencies 24,307 330 5.47% 17,369 230 5.37%
Municipal securities/(1)/ 20,193 375 7.46% 16,147 291 7.32%
Other securities 2,198 31 5.75% 2,254 32 5.81%
Federal funds sold and securities
purchased under agreements to resell 5,155 72 5.58% 70,177 813 4.70%
Loans: /2/,/3/
Commercial 184,388 4,534 9.89% 149,601 3,482 9.44%
Real estate-construction 11,650 343 11.85% 7,874 185 9.52%
Real estate-other 94,734 2,236 9.49% 63,047 1,429 9.19%
Installment and other 18,500 431 9.38% 16,847 379 9.12%
--------- --------- ------ --------- --------- ---------
Total Loans 309,272 7,544 9.81% 237,369 5,475 9.35%
--------- --------- ------ --------- --------- ---------
Total Earning Assets 394,459 8,871 9.04% 376,493 7,361 7.93%
Cash and due from banks 22,215 18,254
Leasehold improvements and equipment - net 1,785 1,605
Interest receivable and other assets 7,323 5,932
Foreclosed assets 68 -
Less allowance for loan loss (5,325) (4,518)
--------- ---------
TOTAL ASSETS $ 420,525 $ 397,766
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 35,205 48 0.55% $ 27,773 40 0.58%
Money market 110,551 941 3.42% 101,736 806 3.21%
Time and savings 115,316 1,299 4.53% 124,369 1,342 4.38%
Other borrowed funds 4,523 67 5.97% - - 0.00%
--------- --------- ------ --------- --------- ---------
Total interest bearing liabilities 265,595 2,355 3.57% 253,878 2,188 3.50%
Demand deposits 103,070 95,638
Other liabilities 4,698 5,628
Shareholders' equity 47,162 42,622
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 420,525 $ 397,766
========= =========
Net Interest Income $ 6,516 $ 5,173
========= =========
Net Interest Margin 6.64% 5.57%
========= =========
Tax Equivalent Adjustment/(1)/ $ 128 $ 99
========= =========
- --------------------------------------------------------------------------------
(1) The tax-equivalent income adjustment on municipal securities is computed
using a Federal income tax rate of 34%. Interest on municipal securities was
$247,000 and $197,000 for March 31, 2000 and 1999, 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
$96,000 and $139,000 for March 31, 2000 and 1999, respectively; fees on real
estate loans of $151,000 and $67,000 for March 31, 2000 and 1999, respectively;
and fees on installment and other loans of $8,000 and $7,000 for March 31, 2000
and 1999, respectively.
9
Total interest income for the first three months of 2000 was $8.7 million, an
increase of $1.5 million, or 20.4% over the same period ended 1999. The increase
in total interest income results from an increase in the volume of earning
assets, an increase in the yield on earning assets, and an improvement in the
mix of those earning assets. Average earning assets increased $18.0 million or
4.8% to $394.5 million in the first quarter of 2000 compared to $376.5 million
for the same period ended 1999. The average yield earned on earning assets
increased 111 basis points due to a rising interest rate environment and a more
favorable mix of earning assets. There was a shift in the mix of earning assets
from Federal funds sold, which have the lowest interest rates of earning assets,
to loans, which earn at the highest rates.
Total interest expense for the first three months of 2000 was $2.4 million, an
increase of $0.2 million over the same period ended 1999. The increase in total
interest expense reflects a modest increase in both the volume and rate of
interest bearing deposits. Average interest bearing deposits increased $11.7
million or 4.6% to $265.6 million in the first quarter of 2000 compared to
$253.9 million for the same period ended 1999.
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 three month period ended March 31, 2000.
Analysis of Changes in Interest Income and Expense
Increase (Decrease) Due to Changes in
in thousands
Volume /1/ Rate /2/ Total
-------------- ------------- ---------
Increase (decrease) in interest income:
Securities available for sale - $ (9) $ (9)
Securities held to maturity:
U.S. Treasury securities 8 - 8
U.S. Government agencies 94 6 100
Municipal securities 77 7 84
Other securities (1) - (1)
Federal funds sold (752) 11 (741)
Loans:
Commercial 845 207 1,052
Real estate-construction 90 68 158
Real estate-other 736 71 807
Installment and other 40 12 52
------- ---------- --------
Total Loans 1,711 358 2,069
------- ---------- --------
Total increase $ 1,137 $ 373 $ 1,510
------- ---------- --------
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking $ (10) $ 2 $ (8)
Money market (77) (58) (135)
Savings and time 86 (43) 43
Other borrowed funds (67) -- (67)
------- -------- - --------
Total increase $ (68) $ (99) $ (167)
------- ---------- --------
Total change in net interest income $ 1,069 $ 274 $ 1,343
======= ========== ========
(1) Changes not solely due to volume have been allocated to volume (2) Loan
fees are reflected in rate variances.
10
Net Interest Margin
The net interest margin increased 107 basis points to 6.64% for the first
quarter of 2000 from 5.57% for the same period in 1999 due to a rising interest
rate environment and favorable changes in the mix of earning assets. The average
yield on the loan portfolio increased 46 basis points for the three months ended
March 31, 2000 as compared to the same period in 1999 due to a rising interest
rate environment. There was also a shift in the composition of average earning
assets as Federal funds sold decreased to 1.3% of total earning assets for the
first quarter of 2000 compared to 18.6% for the same period of the prior year.
Concurrently, loans increased to 78.4% from 63.0% of total earning assets for
the same periods, respectively. Loans have the highest yield in the portfolio of
earning assets while Federal funds have the lowest yield and the shift has
increased the weighted average yield on the portfolio of earning assets. The
average yield on interest bearing deposits increased 7 basis points to 3.57% for
the three months ended March 31, 2000 compared to 3.50% for the same period
ended one year ago. The interest rates on deposits have reacted to the rising
interest rate environment more slowly than have the interest rates on the
earning assets.
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, management's
assessment of the overall quality of the portfolio, the value of the collateral
on problem loans, recommendations by regulatory authorities and general economic
conditions among others. The provisions for loan losses for the three months
ended March 31, 2000 and 1999 were $150,000 and $45,000, respectively. The
increase in the provision in the first quarter of the current year was based on
the growth in the loan portfolio and the increase in classified loans.
Noninterest Income
Noninterest income for the three months ended March 31, 2000 was $352,000, an
increase of $110,000 or 41.3% from the three months ended March 31, 1999. The
increase in noninterest income is primarily attributable to an increase in the
number of deposit accounts and in the volume of services provided.
Noninterest Expense
Noninterest expense totaled $4.1 million for the three months ended March 31,
2000, an increase of $938,000 or 29.2% from $3.2 million for the same period of
the prior year. Salaries and employee benefits, the largest component of
noninterest expense increased $613,000 or 30.4% due to additional staff, normal
merit increases and an increase in the incentive accruals, which are based on
the growth in profitability. Full time equivalent personnel numbered 156 on
March 31, 2000 compared to 112 on March 31, 1999.
The following table summarizes the significant components of noninterest expense
for the dates indicated.
11
Quarter Ended March 31, Dollar %
(Dollars in thousands) 2000 1999 Change Change
---------- -------- ------ ------
Salaries and employee benefits $ 2,632 $ 2,019 $ 613 30.4%
Occupancy 321 277 44 15.9%
Equipment 289 245 44 18.0%
Data processing services 104 96 8 8.3%
Telephone and postage 109 83 26 31.3%
Consulting fees 72 66 6 9.1%
Marketing 59 42 17 40.5%
Legal fees 55 45 10 22.2%
Goodwill and core deposit amortization 86 42 44 104.8%
Other 422 296 126 42.6%
---------- ------- ----- -----
TOTAL NONINTEREST EXPENSE $ 4,149 $ 3,211 $ 938 29.2%
========== ======= ===== =====
Provision for Income Taxes
The provision for income taxes for the first quarter of 2000 increased to
$936,000 from $785,000 for the same quarter of the prior year. These provisions
represent effective tax rates of 38%.
FINANCIAL CONDITION
Loans
Average loans for the first quarter of 2000 increased $71.9 million or 30.3% to
$309.3 million compared to $237.4 million for the same quarter of 1999. Loans
outstanding at March 31, 2000 increased $68.0 million to $353.6 million from
$285.5 million at December 31, 1999. The increase in loans outstanding during
the first quarter was primarily due to a strong regional economy and the
acquisition of East County Bank, which contributed approximately $49 million in
loan volume.
Real estate construction loans as a percentage of total loans outstanding were
3.9% at March 31, 2000 compared to 3.5% at March 31, 1999. 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 than
risks associated with other forms of 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,
which are primarily owner-occupied and are generally granted based on the rental
or lease income stream generated by the property. Other real estate loans
totaled $108.2 million at March 31, 2000, an increase of $43.3 million or 66.8%
from March 31, 1999.
12
The following table sets forth the amount of loans outstanding in each category
and the percentage of total loans outstanding for each category as of the date
indicated.
March 31, 2000 December 31, 1999 March 31, 1999
--------------------------- -------------------------- --------------------------
Amount Percent Amount Percent Amount Percent
------------- ----------- ------------- ---------- ----------- ------------
(Dollars in thousands)
Commercial $ 210,310 59.5% $ 173,124 60.6% $ 154,226 63.1%
Real estate - construction 13,621 3.9% 10,053 3.5% 8,643 3.5%
Real estate - other 108,203 30.6% 85,470 29.9% 64,887 26.6%
Installment and other 21,449 6.1% 16,890 5.9% 16,495 6.8%
--------- ------ --------- ------ --------- ------
TOTAL $ 353,583 100.0% $ 285,537 100.0% $ 244,251 100.0%
========= ====== ========= ====== ========= ======
Non-Performing Assets
The following table provides information with respect to the Company's past due
loans and components of non-performing assets at the dates indicated.
March 31 Dec. 31 March 31
2000 1999 1999
------- ------- --------
(Dollars in thousands)
Loans 90 days or more past due and still accruing $ 227 $ 193 $ --
Non-accrual loans 664 632 79
Non-accrual SBA guaranteed loans 707 -- --
Foreclosed assets 200 -- --
------ ------ -----
Total non-performing assets $1,798 $ 825 $ 79
====== ====== =====
Non-performing assets to period end loans,
other assets held for sale plus foreclosed assets 0.51% 0.29% 0.03%
====== ====== =====
The increase in non-performing assets is attributable to the increase in
foreclosed assets and non-performing SBA loans, which were acquired in the
merger with East County Bank. At March 31, 2000, the recorded investment in SBA
loans considered impaired and placed on a non-accrual basis totaled $707,000 and
consisted of $672,000 of loans with SBA guarantees and an associated allowance
of $35,000 for the retained portion, which is not SBA, guaranteed. Included in
non-accrual loans totaling $664,000 are $36,000 of loans with an associated
allowance of $29,000, and $628,000 of loans with adequate supporting collateral
and accordingly they do not have an associated allowance. For the quarter ended
March 31, 2000, the average recorded investment in impaired loans was $700,000.
No interest income was recognized on impaired loans. If interest income on those
loans had been recognized, such income would have approximated $23,000.
The Company has an active credit administration function 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"
and "loss" categories. Substandard loans are characterized as having one or more
deficiencies, which 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
13
increases the probability of a principal loss. A loan classified as a loss is
considered uncollectable and is discharged against the allowance.
The following table sets forth the classified assets as of the dates indicated.
(Dollars in thousands) March 31, December 31, March 31,
2000 1999 2000
---------- ---------- -----------
Substandard $11,084 $ 8,415 $ 3,464
Doubtful 936 45 353
Loss - - -
---------- ---------- -----------
Total Classified $12,020 $ 8,460 $ 3,817
Classified Loans to Total Loans 3.40% 2.96% 1.56%
Classified Loans to Allowance for Loan Loss 201.61% 174.43% 81.04%
Potential Problem Loans
At March 31, 2000 there were no loans classified as loss, doubtful, substandard
or special mention that have not been disclosed in the discussion above that (i)
represented or resulted from trends or uncertainties which management
anticipated would have a material impact on future operating results, liquidity,
capital resources or (ii) represented material credits about which management
was aware of information that would cause serious doubt as to the ability of the
borrower to comply with the loan repayment terms.
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 provisions charged against earnings and
reduced by net loan charge-offs. Loans are charged off when, based on current
information and circumstances, it becomes probable that the Company will be
unable to collect all amounts due according to the original terms and conditions
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 each loan in the portfolio to identify
potential problem credits and to assess the credit quality of each loan in the
portfolio. Specific allocations are made for loans where the probability of a
loss can be defined and reasonably estimated and general allocations are based
on the number and size of classified loans in the portfolio, delinquency trends,
historical data, industry averages and general economic conditions in the
Company's market area.
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.
14
The following table summarizes the changes in the allowance for loan losses for
the periods indicated:
Three Months Year Three Months
Ended Ended Ended
March 31, 2000 December 31, 1999 March 31, 1999
-------------- ----------------- --------------
(Dollars in thousands)
Balance, at beginning of period $ 4,850 $ 4,424 $ 4,424
Charge-offs:
Commercial 145 - -
Real estate - construction - 800 -
Real estate - other - - -
Installment and other 65 4 -
--------- --------- ---------
Total charge-offs 210 804 0
Recoveries:
Commercial 3 480 82
Real estate - construction - - -
Real estate - other 52 351 101
Installment and other 9 84 58
--------- --------- ---------
Total recoveries 64 915 241
--------- --------- ---------
Net (recoveries) charge-offs 146 (111) (241)
Reserve acquired through merger 1,108 - -
Provision charged to operations 150 315 45
--------- --------- ---------
Balance, at end of period $ 5,962 $ 4,850 $ 4,710
========= ========= =========
Ratio of net (recoveries) charge-offs to
average loans (annualized) 0.19% (0.04%) (0.41%)
========= ========= =========
Allowance at period end to total loans
outstanding 1.69% 1.70% 1.93%
========= ========= =========
Investment Portfolio
The Company's investment portfolio is used primarily for liquidity purposes and
secondarily for investment income. The portfolio is composed of U.S. Treasury,
U.S. government agency instruments and investment grade municipal obligations.
U.S. government agency and municipal securities totaling approximately $15
million were acquired in the merger with East County Bank.
15
The table below summarizes the amortized cost and estimated market values of
investment securities at the dates indicated.
March 31, 2000 December 31, 1999
-------------------------------- -------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ------------- ----------- -------------
(Dollars in thousands)
SECURITIES HELD TO MATURITY:
U.S. government agencies and corporation $ 24,243 $ 23,670 $ 24,277 $ 23,773
Municipal securities 21,625 21,207 19,105 18,660
U.S. Treasury 499 497 - -
Mortgage Backed Securities 30 32 34 35
----------- ------------- ----------- -------------
TOTAL $ 46,397 $ 45,406 $ 43,416 $ 42,468
=========== ============= =========== =============
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ - $ - $ 8,003 $ 8,015
U.S. government agencies and corporation 37,261 36,831 24,075 23,650
----------- ------------- ----------- -------------
TOTAL $ 37,261 $ 36,831 $ 32,078 $ 31,665
=========== ============= =========== =============
Deposits
As of March 31, 2000 total deposits were $422.2 million, an increase of $87.5
million or 26.1% relative to total deposits of $334.7 million at December 31,
1999. Included in this increase are approximately $72 million in deposits
acquired in the merger with East County Bank which became effective on February
29, 2000. Management attributes the increase in deposits beyond the merger to an
improving economic environment and an increase in loan demand. It is the
Company's objective to become the primary bank for its customers by servicing
both the loan and deposit needs. Accordingly, a correlation is expected between
the loan and the deposit volumes such that deposit volumes are expected to
increase as the loan volume increases.
For the three months ended March 31, 2000, average demand deposits totaled
$103.1 million, an increase of $7.4 million or 7.8% from the same period in
1999. Average demand deposits as a percentage of total deposits increased to
28.3% for the first quarter of 2000 from 27.4% for the same period of the prior
year. Average interest-bearing deposits increased $7.2 million or 2.8% for the
three months ended March 31, 2000 from the same period in 1999. Included in the
average interest deposits for first quarter 1999 were two large time deposits
totaling $18 million that matured and were withdrawn in April 1999. Average
interest-bearing deposits comprised 71.7% of average total deposits for the
three months ended March 31, 2000 and 72.6% of average total deposits for the
three months ended March 31, 1999.
The following table sets forth information regarding the Bank's average deposits
by amount and percentage of total deposits for the three months ended March 31,
2000 and 1999.
16
Average Deposits
--------------------------------------------------------------------
(Dollars in thousands) Three Months Ended March 31,
--------------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
Amount Percentage Amount Percentage
------------ ---------- ------------ ----------
Demand accounts $ 103,070 28.3% $ 95,638 27.4%
Interest-bearing checking 35,205 9.7% 27,773 7.9%
Money market 110,551 30.4% 101,736 29.1%
Savings and time 115,316 31.7% 124,369 35.6%
------------ ---------- ------------ ----------
Total $ 364,142 100.0% $ 349,516 100.0%
============ ========== ============ ==========
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 March 31, 2000 had the following
schedule of maturities:
(In thousands)
----------------
Three months or less $ 44,158
After three months through six months 31,318
After six months through twelve months 10,840
After twelve months 2,863
---------
Total $ 89,179
=========
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity management refers to the Bank's ability to acquire funds to meet loan
demand, fund deposit withdrawals and to service other liabilities.
To augment liquidity, the Bank has informal Federal funds borrowing arrangements
with correspondent banks totaling $35.0 million and is a member of the Federal
Home Loan Bank of San Francisco and through membership has the ability to pledge
qualifying collateral for short term (up to six months) and long term (up to
five years) borrowing. At March 31, 2000 the Bank had no outstanding borrowings
against these arrangements. Additionally, at March 31, 2000, unpledged
government securities that are available to secure additional borrowing in the
form of reverse repurchase agreements totaled approximately $59.4 million. At
March 31, 2000 the Bank had no reverse repurchase agreements.
The liquidity position of the Company improved during the first quarter of 2000.
Deposit growth and short-term borrowing provided $95.5 million of cash and cash
equivalents during the quarter. Cash and cash equivalents of $77.8 million were
used in the Company's investing activities to purchase securities and to fund
the growth of the loan portfolio and operating activities required $7.8 million
of cash and cash equivalents. The net increase in cash and cash equivalents for
the quarters ended March 31, 2000 and 1999 was $10.0 million and $10.8 million,
respectively.
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 at March 31, 2000, the Company
had a liquidity ratio of 20.2% as compared to 23.6% at December 31, 1999.
17
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 $48.0 million at March 31, 2000 from
$46.2 million at December 31, 1999 reflecting retained income of $1,505,000 and
common stock option exercises of $279,000. These benefits were partially offset
by the market adjustment of securities available for sale.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board of Governors which requires a minimum risk-based
capital ratio of 8%. At least 4% must be in the form of "Tier 1" capital, which
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, 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 and goodwill is treated as a deduction from
capital.
At March 31, 2000 the Company's total capital ratio was 10.32% as compared to
the total capital ratio at December 31, 1999 of 14.48%. The decline in the total
capital ratio is due to the deduction of the goodwill from total capital
associated with the merger of East County Bank recorded as a purchase for
accounting purposes. The following table presents the Company's risk-based
capital and leverage ratios as of March 31, 2000 and December 31, 1999.
Minimum Capital
Requirements To Be
Considered Well Capitalized
Minimum Under Prompt Corrective
Actual Capital Requirements Action Provisions
---------------------- ---------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
As of March 31, 2000:
Total Capital
(to Risk Weighted Assets) $ 44,084 10.32% $ 34,183 8.00% $ 42,728 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 38,735 9.07% 17,091 4.00% 25,637 6.00%
Tier 1 Capital
(to Average Assets) 38,735 9.21% 16,821 4.00% 21,026 5.00%
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $ 50,070 14.48% $ 23,070 8.00% $ 28,837 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 45,741 13.23% 11,535 4.00% 17,302 6.00%
Tier 1 Capital
(to Average Assets) 45,741 11.80% 15,987 4.00% 19,984 5.00%
Year 2000
18
For the past several years the Company has taken steps to resolve the potential
impact of Year 2000 on its computer system and the associated software
applications. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's time-sensitive programs could interpret a date using "00" as 1900
rather than the year 2000 and such interpretation could result in major
miscalculation or system failure. The Company also identified customers who have
a material loan or deposit relationship with the Bank to insure they were
prepared to meet Year 2000 processing requirements. Further, the Company took
steps to avoid disruptions on February 29, the first leap year in the new
millennium.
The Company did not experience any failures of its computerized systems
resulting from Year 2000 issues, nor does it have any information that indicates
any of its customers or service providers were negatively impacted by Year 2000
issues.
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.
The Company's balance sheet position at Market 31, 2000 was liability sensitive
due to the proportion of fixed rate loans and securities. Generally, if more
liabilities reprice than assets at a given time in a rising rate environment,
net interest income will deteriorate, and in a declining rate environment, net
interest income would increase. Management believes there has been no
significant change in the Bank's market risk exposure as disclosed in the
Company's Annual Report on Form 10-K for the year December 31, 1999.
19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
On March 24, 2000 the Company filed Form 8-K/A regarding the merger
of East County Bank with and into CivicBank of Commerce.
Exhibits
Number Exhibit
10.17 2000 Employee Stock Option Plan
27 Financial Data Exhibit
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: May 7, 2000 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