FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended Commission file number
September 30, 1996 0-13287
- ---------------------- ----------------------
CIVIC BANCORP
------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 68-0022322
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2101 Webster Street, Oakland, California 94612
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (510) 836-6500
---------------------
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
----- -----
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of November 12, 1996: 4,515,883
The total number of pages in this form is 23
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The index of exhibits appears on page 22
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1
CIVIC BANCORP
AND
SUBSIDIARY
Index to Form 10-Q Page Number
-----------
PART I
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1996, September 30, 1995
and December 31, 1995 3
Consolidated Statements of Operations -
Nine Months Ended September 30, 1996 and
and September 30, 1995 and Three Months Ended
September 30, 1996 and September 30, 1995 4-5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and
September 30, 1995 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. Other Information 17
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 23
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands except shares)
September 30, September 30, December 31,
1996 1995 1995
--------------- -------------- ------------
ASSETS
Cash and due from banks $ 12,469 $ 13,453 $ 16,758
Federal funds sold 19,400 6,500 14,800
-------- -------- --------
Total cash and cash equivalents 31,869 19,953 31,558
Securities available for sale 26,751 10,039 10,021
Securities held to maturity
(market value of $45,901, $53,866
and $52,163, respectively) 45,611 53,294 51,199
Other securities 1,717 1,599 1,636
Loans:
Commercial 88,621 68,976 70,417
Real estate-construction 3,160 3,716 4,067
Real estate-other 56,628 58,773 61,752
Installment and other 19,316 17,557 18,460
-------- -------- --------
Total loans 167,725 149,022 154,696
Less allowance for loan losses 5,133 4,843 4,960
-------- -------- --------
Loans - net 162,592 144,179 149,736
Interest receivable and other assets 4,185 3,926 3,914
Leasehold improvements and equipment - net 1,563 1,864 1,730
Foreclosed assets 308 826 770
Other assets held for sale 275 297 275
-------- -------- --------
TOTAL ASSETS $274,871 $235,977 $250,839
========= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 65,358 $ 64,732 $73,149
Interest-bearing:
Checking 31,717 22,093 24,791
Money market 82,091 75,434 68,151
Time and savings 61,088 44,394 54,007
-------- -------- --------
Total deposits 240,254 206,653 220,098
Accrued interest payable and other liabilities 2,035 1,220 1,381
-------- -------- --------
Total liabilities 242,289 207,873 221,479
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,
4,515,883, 4,451,350 and 4,488,485 shares 31,423 36,488 36,751
Retained deficit - (8,396) (7,411)
Retained earnings, (subsequent to July 1,1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 1,050 - -
Net unrealized gain on securities
available for sale 109 12 20
-------- -------- --------
Total shareholders' equity 32,582 28,104 29,360
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $274,871 $235,977 $250,839
======== ======== ========
3
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except shares and per share amounts)
(unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------------- ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans $ 4,209 $ 3,928 $ 12,394 $ 11,925
Securities available for sale,
securities held to maturity,
and other securities 949 1,064 2,807 3,169
Tax exempt securities 68 3 102 10
Federal funds sold 239 147 282 561
------------ ------------ ------------ ------------
Total interest income 5,465 5,142 15,585 15,665
INTEREST EXPENSE:
Deposits 1,417 1,215 3,654 3,823
Other borrowings - - 31 -
------------ ------------ ------------ ------------
Total interest expense 1,417 1,215 3,685 3,823
------------ ------------ ------------ ------------
NET INTEREST INCOME 4,048 3,927 11,900 11,842
Provision for loan losses 75 625 525 2,365
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,973 3,302 11,375 9,477
------------ ------------ ------------ ------------
NONINTEREST INCOME:
Customer service fees 150 152 430 442
Other 18 69 95 386
------------ ------------ ------------ ------------
Total other income 168 221 525 828
NONINTEREST EXPENSES:
Salaries and employee benefits 1,475 1,436 4,500 4,347
Occupancy 251 253 753 747
Equipment 219 226 647 670
Goodwill and core deposit
amortization 64 72 193 215
Data processing services 59 62 184 210
FDIC insurance 1 (12) 2 240
Telephone and postage 62 65 188 195
Consulting fees 30 90 150 206
Legal fees 44 51 134 152
Marketing 52 42 168 161
Foreclosed asset expense 101 - 254 (45)
Other 298 333 942 1,082
------------ ------------ ------------ ------------
Total other expenses 2,656 2,618 8,115 8,180
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,485 905 3,785 2,125
Income tax expense 435 30 825 100
------------ ------------ ------------ ------------
NET INCOME $ 1,050 $ 875 $ 2,960 $ 2,025
============ ============ ============ ============
NET INCOME PER COMMON SHARE $0.23 $0.19 $0.64 $0.45
============ ============ ============ ============
Weighted average shares
outstanding to compute net
income per common share 4,630,746 4,526,584 4,603,160 4,508,405
============ ============ ============ ============
4
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
Nine Months Ended Sept. 30,
-------------------------------
1996 1995
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,960 $ 2,025
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 525 2,365
Depreciation and amortization 597 1,546
Loss on sale of fixed assets 30 40
Loss (gain) on sale of foreclosed assets 43 (197)
Write-down of foreclosed assets 27 20
Decrease in deferred loan fees (149) (8)
Change in assets and liabilities:
(Increase)decrease in interest receivable and other
assets (464) 805
Increase in accrued interest payable
and other liabilities 654 36
------------- ------------
Net cash provided by operating activities 4,223 6,632
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (355) (275)
Expenditures on foreclosed assets - (23)
Proceeds from sales of foreclosed assets 467 436
Pay-down on other assets held for sale - 9
Net (increase) decrease in loans (13,307) 4,502
Activities in securities held to maturity:
Proceeds from maturing securities 14,098 10,014
Purchases of securities (8,392) (10,107)
Activities in securities available for sale:
Proceeds from maturing securities 10,000 15,307
Purchases of securities (26,752) (11,115)
------------- ------------
Net cash (used in) provided by investing activities (24,241) 8,748
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 173 21
Net increase(decrease) in deposits 20,156 (27,178)
------------- ------------
Net cash provided by(used in) financing activities 20,329 (27,157)
------------- ------------
Net increase(decrease) in cash and cash equivalents 311 (11,777)
Cash and cash equivalents at beginning of period 31,558 31,730
------------- ------------
Cash and cash equivalents at end of period $ 31,869 $ 19,953
============= ============
Cash paid during year for:
Interest $ 3,601 $ 3,726
Income taxes $ 1,322 $ 85
Supplemental schedule of noncash investing activity:
Loans transferred to foreclosed assets $ 75 $ 462
5
CIVIC BANCORP AND SUBSIDIARY
NOTES TO 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 for interim financial
information and with the instructions to Form 10-Q. In the opinion of
management, all adjustments necessary for a fair presentation of the
financial position, results of operations and cash flows for the
interim periods presented have been included. 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, 1995. The results of operations and cash flows are not necessarily
indicative of those expected for the year. Net income per share
computed on a primary and fully diluted basis is substantially the
same.
2. QUASI-REORGANIZATION
The Company's deficit retained earnings at June 30, 1996 were incurred
primarily as a result of substantial writedowns of real estate loans
and foreclosed assets in 1992 and 1993, and the conditions giving rise
to those losses have substantially changed. As a result, the Company
determined that it was appropriate to effect a quasi-reorganization
which was approved by the Company's Board of Directors on April 17,
1996 and by the shareholders on May 30, 1996, and became effective
July 1, 1996.
In a quasi-reorganization, assets and liabilities are restated to fair
values at the effective date. However, no adjustments were made to the
assets and liabilities of the Company since, in the opinion of
management, the book value of the Company's assets and liabilities
approximated fair value at July 1, 1996. As a part of a quasi-
reorganization, the deficit of $5.5 million in retained earnings was
eliminated against common stock (paid-in capital). Retained earnings
at September 30, 1996 and in the future will be dated to reflect only
the results of operations subsequent to the effective date of the
quasi-reorganization. Any future tax effects of the temporary
differences, operating loss and tax credit carryforward items which
arose prior to the effective date of the quasi-reorganization will be
reported as a direct credit/debit to common stock (paid-in capital) as
they are realized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
Certain statements in Management's Discussion and Analysis of
Financial Position and Results of Operations constitute "forward-
looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such "forward-looking" statements are
subject to known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of
the Company to be materially different from any
6
future results, performance, or achievements expressed or implied by such
"forward-looking" statements.
OVERVIEW
For the nine months ended September 30, 1996, the Company reported net
income of $2,960,000, or $.64 per share compared to net income of
$2,025,000 or $.45 per share for the same period in 1995. The annualized
return on average assets was 1.61% for the nine months ended September 30,
1996 compared to 1.09% for the same period in 1995. The annualized return
on average shareholders' equity for the nine months ended September 30,
1996 and 1995 was 12.78% and 9.93%, respectively.
RESULTS OF OPERATIONS
Net interest income was consistent with the prior period at $11.9 million
and $11.8 million for the first nine months of 1996 and 1995, respectively.
Improvements in net interest income from changes in the mix of earning
assets and reduced volumes of paying liabilities were offset by a less
favorable interest rate environment in 1996 relative to 1995.
Total interest income for the first nine months of 1996 decreased to $15.6
million from $15.7 million for the same period in 1995. Average earning
assets for the first nine months of 1996 declined slightly to $227.1
million from $228.5 million for the same period of the prior year, however
the mix of earning assets improved during 1996 as average loans, as a
percentage of total average earning assets, increased to 72.3% from 64.8%
for the first nine months of 1995. The positive impact on interest income
from a shift in the mix of earning assets to higher yielding loans from Fed
Funds sold and investment securities was offset by the lower interest rate
environment in 1996, relative to 1995. The average rate earned on loans
declined to 10.37% for the first nine months of 1996 from 10.77% for the
same period of the prior year. The reference rate used by the Company to
price loan products decreased .50% to 8.25% at September 30, 1996 from a
reference rate of 8.75% at September 30, 1995.
Total interest expense declined to $3.7 million from $3.8 million for the
nine months ended September 30, 1995. The decline in interest expense is
attributed to the decline in the volume of interest bearing liabilities
offset by a higher average rate paid on those liabilities. Average interest
bearing liabilities declined to $145 million from $153 million for the
first nine months of 1996 and 1995, respectively, while the average rate
paid on interest bearing liabilities increased 5 basis points to 3.39% from
3.34% for the same periods, respectively.
The net interest margin increased to 7.00% for the first nine months of
1996 from 6.93% for the same period of 1995 and is primarily attributed to
the improved mix of earning assets and the decline in the volume of
interest bearing liabilities.
7
The following table presents an analysis of the average balances, income
and expense and the average rates for interest-earning assets and interest-
bearing liabilities for the nine months ended September 30, 1996 and 1995.
Nine months ended September 30,
-------------------------------------------------------------
1996 1995
----------------------------- ------------------------------
Interest Rates Interest Rates
Average Income\ Earned\ Average Income\ Earned\
Balance Expense/2/ Paid Balance Expense/2/ Paid
--------- --------- ------- ---------- ---------- ------
ASSETS
Securities available for sale $ 10,832 $ 497 6.13% $ 10,577 $ 488 6.17%
Securities held for investment:
U.S. Treasury securities 10,799 495 6.12% 13,354 543 5.43%
U.S. Government agencies 33,241 1,711 6.88% 40,912 2,023 6.61%
Municipal securities /1/ 2,983 102 4.57% 202 10 6.35%
Commercial Paper 777 32 5.50% 1,082 51 6.30%
Other securities 1,648 72 5.84% 1,550 64 5.50%
Federal funds sold 7,278 282 5.18% 12,863 561 5.83%
Loans:/2/3/
Commercial 79,478 6,285 10.56% 68,055 5,718 11.23%
Real estate-construction 3,151 237 10.05% 4,892 376 10.28%
Real estate-other 59,506 4,546 10.20% 55,910 4,314 10.32%
Installment and other 17,492 1,326 10.13% 19,133 1,517 10.60%
--------- --------- ------- ---------- ---------- ------
Total Loans 159,627 12,395 10.37% 147,990 11,925 10.77%
--------- --------- ------- ---------- ---------- ------
Total Earning Assets 227,185 15,585 9.16% 228,530 15,665 9.16%
Cash and due from banks 16,832 15,789
Leasehold improvements and equipment-net 1,643 1,991
Interest receivable and other assets 3,531 4,346
Foreclosed assets 613 743
Assets held for sale 275 297
Less Allowance for Loan Loss (5,030) (3,684)
--------- ----------
TOTAL ASSETS $ 245,049 $ 248,012
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-bearing:
Checking $ 24,343 $ 172 0.94% $ 21,588 $ 190 1.18%
Money market 72,969 1,782 3.26% 85,128 2,076 3.26%
Time and savings 47,161 1,700 4.82% 46,321 1,557 4.50%
Other borrowed funds 745 31 5.59% - - -%
--------- --------- ------- ---------- ---------- ------
Total interest-bearing liabilities 145,218 3,685 3.39% 153,037 3,823 3.34%
Demand deposits 67,135 66,226
Other liabilities 1,809 1,559
Shareholders' equity 30,887 27,190
--------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 245,049 $ 248,012
========= ==========
Net Interest Income $ 11,900 $ 11,842
========= ==========
Net Interest Margin $ 245,049 7.00% $ 248,012 6.93%
========= ==== ========== ======
- ------------------------- ------ ---------------- ------- ------------------- ------- ------
(1) Tax-exempt interest income has not been adjusted to a fully taxable
equivalent basis.
(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 $313,000 and
$321,000 for the nine month periods ended 1996 and and 1995, respectively; fees
on real estate loans of $343,000 and $244,000 for the nine month periods of 1996
and 1995, respectfully; and fees on installment and other loans of $25,000 and
$31,000 for the same periods of 1996 and 1995.
The following table sets forth changes in interest income and interest
expense for each major category of interest-earning assets and interest-
bearing
8
liabilities, and the amount of change attributable to volume and rate
changes for the nine month period ended September 30, 1996.
Analysis of Changes in Interest Income and Expense
Increase (Decrease) Due to Change in
1996 over 1995
Volume/1/ Rate /2/ Total
--------- ------------ --------
(In thousands)
Increase (decrease) in interest income
Securities available for sale $ 12 $ (3) $ 9
Securities held to maturity:
U.S. Treasury securities (104) 56 (48)
U.S. government agency (379) 67 (312)
Municipal security /3/ 131 (39) 92
Commercial paper (14) (5) (19)
Other securities 3 5 8
Federal funds sold (244) (35) (279)
Loans:
Commercial 959 (392) 567
Real estate-construction (147) 8 (139)
Real estate-other 290 (58) 232
Installment and other (130) (61) (191)
--------- ------------ --------
Total loans 972 (503) 469
--------- ------------ --------
Total increase (decrease) $ 377 $ (457) $ (80)
(Increase) decrease in interest expense:
Deposits:
Interest-bearing checking $ 24 $ (42) $ (18)
Money market (296) 2 (294)
Savings and time 28 115 143
Other borrowed funds 31 0 31
--------- ------------ --------
Total (increase) decrease $ (213) $ 75 $ (138)
Total change in net interest income $ 590 $ (532) $ 58
(1) Changes not solely attributed to rate or volume have been allocated
to volume.
(2) Loan fees are reflected in rate variances.
(3) Tax-exempt interest income has not been adjusted to a fully taxable
equivalent basis.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 1996
was $525,000, a decrease of $1.9 million from $2.4 million for the nine
months ended September 30, 1995. In the second quarter, 1995 the Company
made a special provision following the completion of a regular examination
by Federal Reserve Bank of San Francisco. The provision in 1996 reflects a
return to a normalized level.
9
Non-Interest Income
Non-interest income for the nine months ended September 30, 1996 was
$525,000, a decrease of $303,000 or 36.6% from the nine months ended
September 30, 1995. The decrease in other income is attributed to non-
recurring transactions during the first nine months of 1995 which included
a gain on the sales of foreclosed assets of $72,000, the recovery of
$132,000 related to the sale of the mortgage division in September 1994,
and interest income of $58,000 allowed on an income tax refund.
Non-Interest Expense
Non-interest expense totaled $8.1 million and $8.2 million for the nine
months ended September 30, 1996 and 1995, respectively. Salaries and
employee benefits expense for the nine months ended September 30, 1996
increased $153,000 or 3.5% from September 30, 1995. Full time equivalent
personnel numbered 100 on September 30, 1996 compared to 113 on September
30, 1995. Included in salaries and employees benefits are management
incentive accruals which are based on the financial performance of the
Company and have increased $315,000 for the first nine months of 1996 as
compared to the same period of the prior year. For the nine months ended
September 30, 1996 the Company recorded foreclosed asset expenses of
$254,000 compared to expense recoveries of $45,000 for the same period of
the prior year associated with managing, maintaining and liquidating
foreclosed assets. FDIC insurance expense declined $238,000 for the nine
months ended September 30, 1996 from $240,000 for the same period of the
prior year due to a reduction in the assessment rate.
The following table summarizes the significant components of noninterest
expense for the dates indicated:
Noninterest Expense
----------- -------- --------- --------
Sept. 30 Sept. 30 Dollar %
(Dollars in thousands) 1996 1995 Change Change
----------- -------- --------- --------
Salaries and related benefits........... $4,500 $4,347 $153 3.5%
Occupancy............................... 753 747 6 0.8%
Equipment............................... 647 670 (23) -3.4%
Goodwill and core deposit amortization.. 193 215 (22) -10.2%
Data processing services................ 184 210 (26) -12.4%
FDIC insurance.......................... 2 240 (238) -99.2%
Telephone and postage................... 188 195 (7) -3.6%
Consulting fees......................... 150 206 (56) -27.2%
Legal fees.............................. 134 152 (18) -11.8%
Marketing............................... 168 161 7 4.3%
Foreclosed asset expenses............... 254 (45) 299 664.4%
Other................................... 942 1,082 (140) -12.9%
------ ------ ---- -----
TOTAL NONINTEREST EXPENSE............... $8,115 $8,180 ($65) -0.8%
====== ====== ==== =====
10
Provision for Income Taxes
The provision for income taxes for the first nine months of 1996 increased
to $825,000 from $100,000 for the same period of the prior year of which
$435,000 was recorded in the third quarter. Beginning July 1, 1996, the
effective date of the quasi-reorganization, the future tax effects of
temporary differences, operating loss, and tax carryforward items which
arose prior to the effective date of the quasi-reorganization are being
reported as a direct adjustment to common stock.
FINANCIAL CONDITION
Loans
Average loans increased $11.6 million or 7.8% to $159.6 million for the
nine months ended September 30, 1996 from $148.0 million for the same
period in 1995. The increase in average loans is attributed to an improving
economy and an overall increase in loan demand.
The investment in real estate construction loans, as a percentage of total
loans, was 1.9% at September 30, 1996 compared to 2.5% the prior year. The
relatively low level of real estate construction loans reflects
management's decision to curtail real estate construction lending because
the risks associated with construction loans are generally higher than
those of other forms of lending.
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.
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.
September 30, December 31, September 30,
----------------------- -------------------------- ----------------------
1996 1995 1995
----------------------- -------------------------- ----------------------
Amount Percent Amount Percent Amount Percent
----------- ---------- ----------- ------------ ---------- ----------
(Dollars in thousands)
Commercial............................ $88,621 52.8% $70,417 45.5% $68,976 46.3%
Real estate - construction............ 3,160 1.9% 4,067 2.6% 3,716 2.5%
Real estate - other................... 56,628 33.8% 61,752 39.9% 58,773 39.4%
Installment and other................. 19,316 11.5% 18,460 11.9% 17,557 11.8%
----------- ---------- ----------- ------------ ---------- ----------
TOTAL............................... $167,725 100.0% $154,696 100.0% $149,022 100.0%
=========== ========== =========== ============ ========== =========
Non-Performing Assets
11
The following table provides information with respect to the Company's non-
performing assets at the dates indicated.
Sept. 30 Dec. 31 Sept. 30
1996 1995 1995
-------- -------- --------
(Dollars in thousands)
Loans 90 days or more past due and still accruing $ 151 $ 325 $ 627
Non-accrual loans................................ 3,200 2,859 2,956
Other assets held for sale....................... 275 275 297
Foreclosed assets................................ 308 770 826
------ ------ ------
Total non-performing assets.................... $3,934 $4,229 $4,706
====== ====== ======
Non-performing assets to period end loans,
other assets held for sale plus foreclosed asse 2.34% 2.70% 3.13%
======= ======= =======
At September 30, 1996, the recorded investment in loans considered to be
impaired under SFAS No. 114 was $3,200,000, all of which were on a non-
accrual status. Included in this amount are $233,000 of impaired loans for
which the related allowance for loans losses is $218,000, and $2,967,000 of
impaired loans which approximate the fair value of the supporting
collateral and accordingly do not have an associated allowance for loan
losses. For the nine months ended September 30, 1996, the average recorded
investment in impaired loans was $2.9 million and no income was recognized
on impaired loans. If interest income on those loans had been recognized,
such income would have approximated $261,000.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management of
the Company considers to be adequate for losses that can be reasonably
anticipated and for the risk of future losses inherent in the loan
portfolio. In assessing the adequacy of the allowance for loan losses,
management relies on its ongoing review of the loan portfolio to identify
potential problem loans in a timely manner, ascertain whether there are
probable losses which must be charged off and assess the aggregate risk
characteristics of the portfolio. Factors which influence management's
judgment include the impact of forecasted economic conditions, historical
loan loss experience, the evaluation of risks which vary with the type of
loan, creditworthiness of the borrower and the value of the underlying
collateral.
Analysis of the Allowance for Loan Losses
The following table summarizes changes in the allowance for loan losses for
the periods indicated:
12
Nine Months Year Nine Months
Ended Ended Ended
9-30-96 12-31-95 9-30-95
-------- -------- --------
(Dollars in thousands)
Balance, at beginning of period......... $4,960 $3,216 $3,216
Charge-offs:
Commercial............................ 95 188 98
Real estate - construction............ 270 884 884
Real estate - other................... 175 33 -
Installment and other................. 126 310 228
------- ------- ------
Total charge-offs................... 666 1,415 1,210
Recoveries:
Commercial............................ 125 336 278
Real estate - construction............ 54 144 114
Real estate - other................... 122 34 7
Installment and other................. 13 80 73
------ ------- -------
Total recoveries.................... 314 594 472
------- ------- ------
Net charge-offs......................... 352 821 738
Provision charged to operations......... 525 2,565 2,365
------- ------- ------
Balance, at end of period............... $5,133 $4,960 $4,843
======= ====== ======
Ratio of net charge-offs to average
loans (annualized).................... 0.29% 0.55% 0.66%
====== ======= =======
The balance in the allowance for loan losses at September 30, 1996 was $5.1
million or 3.06% of total loans compared to $4.8 million or 3.25% at
September 30, 1995. Management believes the coverage of the allowance for
loan losses to non-performing loans and the overall portfolio was adequate
at September 30, 1996 based upon the detailed review of the loan portfolio.
Potential Problem Loans
At September 30, 1996 there were no loans classified for regulatory
purposes 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.
Investment Portfolio
The Company's investment portfolio is used primarily for liquidity purposes
and secondarily for investment income. The portfolio is primarily composed
of U.S. Treasury and U.S. government agency instruments and investment
grade municipal obligations. The Company has increased its investment in
municipal securities to
13
benefit from the higher after-tax yields available on bank-qualified
municipal securities.
The table below summarizes the book value and estimated market values of
investment securities at the dates indicated.
September 30,
---------------------------------------------
1996 1995
-------------------- ---------------------
Book Market Book Market
Value Value Value Value
-------- --------- --------- ---------
(Dollars in thousands)
SECURITIES HELD TO MATURITY:
U.S. Treasury securities........... $10,850 $10,847 $10,724 $10,760
U.S. government agencies and
corporation...................... 26,042 26,361 42,391 42,919
Municipal securities............... 8,585 8,558 - -
Collateralized mortgage obligations 134 135 179 187
------- ------- ------- -------
TOTAL............................ $45,611 $45,901 $53,294 $53,866
======= ======= ======= =======
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities........... $12,046 $12,130 $ 4,994 $ 4,989
U.S. government agencies and
corporation...................... 14,596 14,621 5,033 5,050
------- ------- ------- -------
TOTAL............................ $26,642 $26,751 $10,027 $10,039
======= ======= ======= =======
Deposits
For the nine months ended September 30, 1996, average deposits totaled
$211.6 million, a decrease of $7.7 million or 3.6% from $219.3 million for
the same period in 1995. Management attributes the decline in deposits,
particularly money market deposits, to increased competition and
availability of nondeposit products such as mutual funds.
The table below sets forth information regarding trends in the Bank's
average deposits by amount and percentage of deposits for the nine months
ended September 30, 1996 and 1995.
Average Deposits
------------------------------------------
Nine Months Ended September 30,
------------------------------------------
1996 1995
-------- ---------- -------- ----------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
Demand accounts............. $ 67,135 31.7% $66,226 30.2%
Interest-bearing checking... 24,343 11.5% 21,588 9.8%
Money market................ 72,969 34.5% 85,128 38.8%
Savings and time............ 47,161 22.3% 46,321 21.1%
-------- ------ -------- ------
Total.................. $211,608 100.0% $219,263 100.0%
======== ===== ======== =====
14
Certificates of deposit over $100,000 or more 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 deposit over $100,000 or more at September 30, 1996
had the following schedule of maturities:
(In thousands) September 30, 1996
-------------------
Three months or less $17,993
After three months through six months 5,404
After six months through twelve months 12,332
After twelve months 665
-------
Total $36,394
=======
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 as
they come due. To augment liquidity, the Bank has informal Federal Funds
borrowing arrangements with correspondent banks totaling $24.0 million,
maintains a credit arrangement with the Federal Reserve Bank of San
Francisco for open window borrowing and is a member of the Federal Home
Loan Bank of San Francisco and through such membership has the ability to
pledge qualifying collateral for short term (up to six months) and long
term (up to five years) borrowing. At September 30, 1996 there were no
outstanding advances.
Additionally, at September 30, 1996, unpledged U.S. government securities
that are available to secure additional borrowing in the form of reverse
repurchase agreements totaled approximately $54.6 million. At September 30,
1996 and 1995, the Bank had no outstanding borrowings against these
arrangements.
The liquidity position of the Company was consistent with the beginning of
the year as cash flows required for investing activities were satisfied by
financing and operating activities. Cash and cash equivalents of $24.2
million were required to accommodate the growth in loans and investment
securities. Deposit growth provided $20.3 million of cash and cash
equivalents and operating activities provided an additional $4.2 million of
cash and cash equivalents.
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, (b) divided
by total assets less pledged securities. Using this definition at September
30, 1996, the Company had a liquidity ratio of 36.5% as compared to 35.3%
at December 31,
15
1995. The increase in liquidity position reflects the increase in unpledged
securities.
Capital Resources
Total shareholders' equity increased to $32.6 million at September 30, 1996
from $29.4 million at December 31, 1995 reflecting the addition to capital
of $173,000 from the exercise of employee stock options, retained income of
$2,960,000 and by the change in the unrealized gain on securities available
for sale.
The Company and the Bank are subject to capital adequacy guidelines issued
by the Federal Reserve Board which require a minimum risk-based capital
ratio of 8%. At least 4% must be in the form of "Tier 1" capital and
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, (no more than 1.25% of risk-weighted assets) the allowance for
loan losses.
At September 30, 1996, the Company's risk-based capital ratio was 16.90%.
The following table presents the Company's risk-based capital and leverage
ratios as of September 30, 1996 and December 31, 1995.
RISK-BASED CAPITAL RATIOS
------------------------------------
(Dollars in thousands)
September 30, 1996 December 31, 1995
------------------ -----------------
Amount Ratio Amount Ratio
------------------ -----------------
Company Capital Ratios:
Tier 1 Capital $ 31,364 16.90% $ 28,102 16.04%
Tier 1 minimum requirement 7,424 4.00% 7,008 4.00%
-------- ----- -------- -----
Excess $ 23,940 12.90% $ 21,094 12.04%
======== ===== ======== =====
Total Capital $ 33,719 18.17% $ 30,292 17.29%
Total Capital minimum
requirement 14,849 8.00% 14,016 8.00%
-------- ----- -------- -----
Excess $ 18,870 10.17% $ 16,276 9.29%
======== ===== ======== =====
Risk-adjusted assets $185,611 $175,194
======== ========
Leverage ratio 11.20% 10.99%
Leverage ratio minimum 4.00% 4.00%
----- -----
Leverage ratio excess 7.20% 6.99%
===== =====
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities
On October 16, 1996, the Board of Directors of the Company
amended the Company's bylaws to (i) require shareholders to give,
and establish procedures for giving, advance notice of the
nomination of candidates for the Board of Directors, other than
persons nominated by the Company's nominating committee, and (ii)
impose certain qualification requirements (primarily lack of
affiliation with another financial institution operating or
intending to operate in the Company's general service area). The
changes are set forth in new sections 3.19 and 3.20 of the
Company's bylaws.
On October 16, 1996, the Board of Directors of Civic BanCorp
(the "Company") declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of common
stock, no par value (the "Common Shares"), of the Company. The
dividend is payable on November 22, 1996 (the "Record Date") to
shareholders of record on that date. Each Right entitles the
registered holder to purchase from the Company one one-hundredth
of a share of Series A Junior Participating Preferred Stock, no
par value (the "Preferred Shares"), of the Company at a price of
$35.00 per one one-hundredth of a Preferred Share (the "Purchase
Price"), subject to adjustment. The description and the terms of
the Rights are set forth in a Rights Agreement dated as of
November 8, 1996 (the "Rights Agreement") between the Company and
ChaseMellon Shareholder Services L.L.C., as rights agent (the
"Rights Agent").
Initially, the Rights will be attached to all certificates
representing Common Shares then outstanding, regardless of
whether any such certificate has a copy of this Summary of Rights
attached thereto, and no separate Rights Certificate will be
distributed. The Rights will separate from the Common Shares and
a Distribution Date will occur upon the earlier of (i) 10 days
following a public announcement that a person or group of
affiliated or associated persons (other than a person or such a
group that beneficially owned 10% or more of the outstanding
Common Shares and made all filings under Federal securities and
banking laws with respect to such beneficial ownership by
November 8, 1996) (an "Acquiring Person") have acquired
beneficial ownership of 10% or more of the outstanding Common
Shares, or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior
17
to such time as any Person becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would
result in the beneficial ownership by a person or group of 10% or
more of such outstanding Common Shares (unless the Company's
Board of Directors has approved the offer).
The Rights Agreement provides that, until the Distribution
Date, the Rights will be transferred with and only with the
Common Shares. Until the Distribution Date (or earlier redemption
or expiration of the Rights), new Common Share certificates
issued after the Record Date, upon transfer or new issuance of
Common Shares, will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier
redemption or expiration of the Rights), the surrender for
transfer of any certificates for Common Shares outstanding as of
the Record Date, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute
the transfer of Rights associated with the Common Shares
represented by such certificate. As soon as practicable following
the Distribution Date, separate certificates evidencing the
Rights ("Rights Certificates") will be mailed to holders of
record of the Common Shares as of the close of business on the
Distribution Date and such separate Rights Certificates alone
will evidence the Rights.
The Rights are not exercisable until the Distribution Date.
The Rights will expire on October 31, 2006 (the "Final Expiration
Date"), unless the Rights are earlier redeemed or exchanged by
the Company, in each case as described below.
The Purchase Price payable, and the number of Preferred
Shares or other securities or property issuable, upon exercise of
the Rights are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of
certain rights or warrants to subscribe for or purchase Preferred
Shares at a price, or securities convertible into Preferred
Shares with a conversion price, less than the then current market
price of the Preferred Shares or (iii) upon the distribution to
the holders of the Preferred Shares of evidences of indebtedness
or assets (excluding regular periodic cash dividends paid out of
earnings or retained earnings or dividends payable in Preferred
Shares) or of subscription rights or warrants (other than those
referred to above).
18
The number of outstanding Rights and the number of one one-
hundredths of a Preferred Share issuable upon exercise of each
Right are also subject to adjustment in the event of a stock
split of the Common Shares of a stock dividend payable in Common
Shares or a subdivision, consolidation or combination of the
Common Shares occurring, in any such case, prior to the
Distribution Date.
Preferred Shares purchasable upon the exercise of the Rights
will not be redeemable. Each Preferred Share will be entitled to
a minimum preferential dividend payment of 100 times the dividend
declared per Common Share. In the event of liquidation, the
holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $100.00 per share but will be
entitled to an aggregate payment of 100 times the payment made
per Common Share. Each Preferred Share will have 100 votes,
voting together with the Common Shares. Finally, in the event of
any merger, consolidation or other transaction in which Common
Shares are exchanged, each Preferred Share will be entitled to
receive 100 times the amount received per Common Share. These
rights are protected by customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend,
liquidation and voting rights, the value of the one one-hundredth
interest in a Preferred Share purchasable upon exercise of each
Right should approximate the value of one Common Share.
In the event that (i) any person or group of affiliated or
associated persons (other than a person or such a group that, as
of November 8, 1996, beneficially owned 10% or more of the
outstanding Common Shares and made all filings under the Federal
securities and banking laws with respect to such beneficial
ownership) becomes the beneficial owner of 10% or more of the
outstanding Common Shares (unless such person first acquires 10%
or more of the outstanding Common Shares by a purchase pursuant
to a tender offer for all the Common Shares which the independent
directors determine to be fair to and otherwise in the best
interests of the Company and its shareholders, employees,
customers and communities in which the Company does business or
through other purchases that have been approved by the
directors), or (ii) during such time as there is an Acquiring
Person, there shall be a reclassification of securities or a
recapitalization or reorganization of the Company or other
transaction or series of transactions involving the Company which
has the effect of increasing by more than 1% the proportionate
share of the outstanding shares of any class of equity securities
of the Company or any of its subsidiaries beneficially owned by
the Acquiring Person (each a "flip-in" event), proper provision
shall be made so that each holder of a Right, other than the
Rights
19
beneficially owned by the Acquiring Person (which will thereafter
be void), will thereafter have the right to receive upon exercise
that number of Common Shares (or, in the event that there are
insufficient authorized Common Shares, substitute consideration
such as cash, property, or other securities of the Company, such
as Preferred Stock) having a market value of two times the
exercise price of the Right. In the event the Company is acquired
in a merger or other business combination transaction or 50% or
more of its consolidated assets or earning power are sold (a
"flip-over event"), proper provision will be made so that each
holder of a Right will thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock of the acquiring
company which at the time of such transaction will have a market
value of two times the exercise price of the Right.
At any time after the acquisition by a person or group of
affiliated or associated persons of beneficial ownership of 10%
or more of the outstanding Common Shares, and prior to the
acquisition by such person or group of 50% or more of the
outstanding Common Shares, the Board of Directors of the Company
may exchange the Rights (other than Rights owned by such person
or group which have become void), in whole or in part, at an
exchange ratio of one Common Share, or one one-hundredth of a
Preferred Share (or of a share of a class or series of the
Company's preferred stock having equivalent rights, preferences
and privileges), per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an
adjustment of at least 1% in such Purchase Price. No fractional
Preferred Shares will be issued (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share,
which may, at the election of the Company, be evidenced by
depository receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Preferred Shares on
the last trading day prior to the date of exercise.
At any time before a person becomes an Acquiring Person, the
Board of Directors of the Company may redeem the Rights in whole,
but not in part, at a price of $0.001 per Right (the "Redemption
Price"). After the redemption period has expired, the Company's
rights of redemption may be reinstated if, prior to competition
of certain recapitalizations, mergers and other business
combinations, an Acquiring Person reduces its beneficial
ownership to less than 10% of the outstanding Common Shares in a
transaction or series of transactions not involving the Company.
The redemption of the
20
rights may be made effective at such time, on such basis and with
such conditions as the Board of Directors in its sole discretion
may establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of
Directors of the Company without the consent of the holders of
the Rights, including an amendment to lower certain thresholds
described above to not less than the greater of (i) any
percentage greater than the largest percentage of the outstanding
Common Shares then known to the Company to be beneficially owned
by any person or group of affiliated or associated persons
(unless such person or group is excluded from the effect of such
reduction) and (ii) 10% except that from and after such time as
any person becomes an Acquiring Person no such amendment may
adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder of a Right will not,
by reason of being such a holder, have rights as a shareholder of
the Company, including, without limitation, the right to vote or
receive dividends.
A copy of the Rights Agreement has been filed with the
Securities and Exchange Commission as an Exhibit to the Company's
Registration Statement on Form 8-A. A copy of the Rights
Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Rights
Agreement.
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
21
Exhibit
Number Exhibit
- ---------- -------
3.2 Certificate of Determination for Series A Junior Participating
Preferred Shares, incorporated by reference from exhibits to the
Company's registration statement on Form 8-A filed on or about
November 12, 1996
3.3 New sections 3.19 and 3.20 of the company's Bylaws
3.4 Bylaws of the Company as amended to October 16, 1996
4 Rights Agreement between the Company and ChaseMellon Shareholder
Services LLC dated November 8, 1996, including Rights Certificate
attached thereto as an exhibit, incorporated by reference from
exhibits to the Company's registration statement on Form 8-A
filed on or about November 12, 1996
27 Financial Data Schedule
22
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: November 12, 1996 By: /s/ Herbert C. Foster
-----------------------------------
Herbert C. Foster
President
Chief Executive Officer
23