SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 0-13287
CIVIC BANCORP
2101 Webster Street, 14th Floor
Oakland, CA 94612
(510) 836-6500
Incorporated in California I.R.S. Employer Identification No.
68-0022322
The number of shares of common stock outstanding as of the close of business on
August 1, 1997.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 4,385,783
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
June 30, 1997, June 30, 1996
and December 31, 1996 3
Consolidated Statements of Operations -
Three Months Ended June 30, 1997 and
June 30, 1996 and Six Months Ended
June 30, 1997 and June 30, 1996 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and
June 30, 1996 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
PART II. Other Information 16
SIGNATURES 17
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands except shares)
June 30 June 30 December 31
1997 1996 1996
----------------- ------------------ ------------------
ASSETS
- ------
Cash and due from banks $ 18,694 $ 17,314 $ 16,929
Federal funds sold - 12,200 29,300
----------------- ------------------ ------------------
Total cash and cash equivalents 18,694 29,514 46,229
Securities available for sale 30,998 6,068 26,871
Securities held to maturity
(market value of $34,291, $44,092
and $41,667, respectively) 34,119 43,838 41,311
Other securities 1,901 1,646 1,761
Loans:
Commercial 114,293 79,765 92,756
Real estate-construction 12,495 2,574 6,608
Real estate-other 65,497 62,852 64,272
Installment and other 21,991 17,434 19,757
----------------- ------------------ ------------------
Total loans 214,276 162,625 183,393
Less allowance for loan losses 4,791 5,050 4,969
----------------- ------------------ ------------------
Loans - net 209,485 157,575 178,424
Interest receivable and other assets 5,162 3,443 4,921
Leasehold improvements and equipment - net 1,377 1,595 1,463
Foreclosed assets 60 422 923
Other assets held for sale 205 275 275
----------------- ------------------ ------------------
TOTAL ASSETS $302,001 $244,376 $302,178
================= ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 76,916 $ 69,992 $ 84,337
Interest-bearing:
Checking 8,914 25,268 26,245
Money market 92,936 72,006 85,035
Time and savings 82,382 44,345 70,830
----------------- ------------------ ------------------
Total deposits 261,148 211,611 266,447
Federal funds purchased 2,300 - -
Accrued interest payable and other liabilities 2,816 1,409 1,584
----------------- ------------------ ------------------
Total liabilities 266,264 213,020 268,031
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,
4,385,090, 4,514,903 and 4,431,895 shares 31,220 36,918 31,739
Retained deficit - (5,501) -
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 4,415 - 2,240
Net unrealized gain (loss) on securities
available for sale 102 (61) 168
----------------- ------------------ ------------------
Total shareholders' equity 35,737 31,356 34,147
----------------- ------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $302,001 $244,376 $302,178
================= ================== ==================
3
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands except shares and per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME:
Loans $5,287 $4,053 $9,994 $8,185
Securities available for sale, securities held
to maturity and other securities 922 1,916 1,858
925
Tax exempt securities 141 31 279 34
Federal funds sold 52 19 132 43
------------- --------------- --------------- -------------
Total interest income 6,402 5,028 12,321 10,120
INTEREST EXPENSE:
Deposits 3,394 2,237
1,760 1,115
Other borrowings 31 17 32 31
------------- --------------- --------------- -------------
Total interest expense 1,791 1,132 3,426 2,268
------------- --------------- --------------- -------------
NET INTEREST INCOME 4,611 3,896 8,895 7,852
Provision for loan losses 25 50 450
225
------------- --------------- --------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,586 3,671 8,845 7,402
------------- --------------- --------------- -------------
NONINTEREST INCOME:
Customer service fees 171 145 359 280
Other 53 33 82 77
------------- --------------- --------------- -------------
Total noninterest income 224 178 441 357
NONINTEREST EXPENSE:
Salaries and employee benefits 1,751 1,491 3,402 3,025
Occupancy 251 253 491 502
Equipment 235 214 454 428
Foreclosed asset expense 39 73 63 153
Goodwill and core deposit amortization 58 65 115 129
Telephone and postage 65 70 144 126
Data processing services 85 61 163 125
Marketing 54 61 101 116
Legal fees 74 45 143 90
Consulting fees 45 60 90 120
FDIC insurance 8 - 15 1
Other 340 276 670 644
------------- --------------- --------------- -------------
Total other expenses 3,005 2,669 5,851 5,459
------------- --------------- --------------- -------------
INCOME BEFORE INCOME TAXES 1,805 1,180 3,435 2,300
Income tax expense 680 195 1,260 390
------------- --------------- --------------- -------------
NET INCOME $ 1,125 $ 985 $ 2,175 $ 1,910
============= =============== =============== =============
NET INCOME PER COMMON SHARE $0.24 $0.21 $0.47 $0.41
============= =============== =============== =============
Weighted average shares outstanding used
to compute net income per common share 4,602,541 4,609,492 4,592,877 4,589,331
============= =============== =============== =============
4
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
Six Months Ended June 30,
------------------------------------
1997 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,175 $ 1,910
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 50 450
Depreciation and amortization 564 536
Loss on sale of foreclosed assets - 43
Write-down of foreclosed assets (12) 73
Increase (decrease) in deferred loan fees 80 (58)
Change in assets and liabilities:
(Increase) decrease in interest receivable and (254) 342
other assets
Increase in accrued interest payable and other 1,273 28
liabilities
-------------- --------------
Net cash provided by operating activities 3,876 3,324
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (227) (193)
Paydown on assets held for sale 70 -
Proceeds from sales of foreclosed assets 950 307
Net increase in loans (31,266) (8,306)
Activities in securities held to maturity:
Proceeds from maturing securities 8,019 11,084
Purchases of securities (957) (3,730)
Activities in securities available for sale:
Proceeds from maturing securities - 10,000
Purchases of securities (4,382) (6,210)
-------------- --------------
Net cash (used in) provided by investing activities (27,793) 2,952
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 82 167
Purchase of common stock (701) -
Federal funds purchased 2,300 -
Net decrease in deposits (5,299) (8,487)
-------------- --------------
Net cash used in financing activities (3,618) (8,320)
-------------- --------------
Net decrease in cash and cash equivalents (27,535) (2,044)
Cash and cash equivalents at beginning of period 46,229 31,558
-------------- --------------
Cash and cash equivalents at end of period $ 18,694 $ 29,514
============== ==============
Cash paid during year for:
Interest $ 3,350 $ 2,370
============== ==============
Income taxes $ 862 $ 955
============== ==============
Supplemental schedule of non-cash investing activity:
Loans transferred to foreclosed assets $ 75 $ 75
============== ==============
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 and with the instructions to Form 10-Q. In
the opinion of management, all necessary adjustments have been made to
fairly present the financial position, results of operations and cash flows
for the interim periods presented. These unaudited consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1996. The results of operations
and cash flows are not necessarily indicative of those expected for the
complete fiscal year. Net income per common share computed on a primary and
fully diluted basis is substantially the same.
2. NEW PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board, ("FASB"), issued
Statement of Financial Accounting Standards No. 128, ("FAS 128"), "Earnings
Per Share". This statement specifies the computation, presentation and
disclosure requirements for earnings per share and is effective for both
interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. The Company does not believe FAS 128 will have
a material effect on its consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, ("FAS 130"), "Reporting Comprehensive Income". This statement
establishes standards for reporting and displaying comprehensive income and
its components in the consolidated financial statements. It does not require
a specific format, but requires the Company to display an amount
representing total comprehensive income for the period in that financial
statement. This statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, ("FAS 131"), "Disclosures About Segments of an Enterprise and
Related Information". This statement establishes standards for the way
public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. This statement is effective for financial
statements for periods beginning after December 31, 1997.
The Securities and Exchange Commission, ("SEC"), has approved rule
amendments to clarify and expand existing disclosure requirements for
derivative instruments. The amendments require enhanced disclosure of
accounting policies for derivative financial instruments in the notes to the
financial statements and expand existing disclosure requirements to include
quantitative and qualitative information about market risk inherent in
market risk sensitive instruments. The required quantitative and qualitative
information should be disclosed outside the financial statements and related
notes thereto. The enhanced accounting policy disclosure requirements are
effective for the quarterly period ended June 30, 1997. As the Company does
not engage in derivative instruments, no further interim period disclosure
has been provided. The rule amendments that require expanded disclosure of
quantitative and qualitative information about market risk are effective
with the 1997 Form 10-K.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
For the six months ended June 30, 1997, the Company reported net income of
$2,175,000, or $.47 per share compared to a net income of $1,910,000 or $.41 per
share for the same period of the prior year. The annualized
6
return on average assets was 1.49% for the six months ended June 30, 1997
compared to 1.62% for the same period of the prior year. The annualized return
on average shareholders' equity for the six months ended June 30, 1997 and 1996
was 12.53% and 12.56%, respectively.
RESULTS OF OPERATIONS
Net interest income for the six months ended June 30, 1997 was $8.9 million,
increasing $1.0 million or 12.7% from net interest income of $7.9 million for
the same period in 1996. The increase in net interest income is primarily due to
an increase in the volume of average earning assets the benefits of which were
partially offset by an increase in the volume of interest bearing liabilities.
Total interest income for the first six months of 1997 equaled $12.3 million, an
increase of $2.2 million from interest income earned for the same period in
1996. The increase in total interest income is primarily attributed to the
increase in volume of earning assets. Total average earning assets increased
$53.9 million or 24.7% to $272.4 million for the first six months of 1997
compared to $218.5 million for the same period in 1996.
Total interest expense for the first six months of 1997 was $3.4 million an
increase of $1.2 million or 51.1% from the $2.3 million for the first six months
of 1996. The increase in interest expense was due to increases in both the
average volume and the average rate paid on interest bearing liabilities.
Average interest bearing liabilities were $183.2 million for the first six
months of 1997 as compared to $137.6 million for the same period of the prior
year, an increase of $45.6 million or 33.1%. The average rate paid on these
liabilities increased 44 basis points to 3.77% for the first six months of 1997
from 3.33% for the same period of 1996. The increase in the average rate is
attributed to a higher interest rate environment for deposits and a shift in the
mix of interest bearing liabilities to savings and time deposits. Savings and
time deposits as a percentage of total interest bearing liabilities increased to
40.0% from 31.7% for the first half of 1997 and 1996, respectively.
Net Interest Margin
Net interest margin declined 57 basis points to 6.70% for the six months ended
June 30, 1997 from 7.27% for the same period of the prior year. The decrease in
the margin is attributed to the decline in average rate earned on earning assets
of 15 basis points and the increase in the average rate paid on interest bearing
deposits of 44 basis points. The decline in the yield on earning assets was due
to a lower average reference rate for the first six months of 1997 as compared
to the same period of the prior year. The average reference rate was 8.37% for
the first six months of 1997 as compared to an average rate of 8.42% to the same
period of the prior year. Approximately 90% of the loans in the portfolio have
adjustable interest rates which are based on the Bank's reference rate. The
increase in the average rate paid on interest bearing deposits reflects a higher
interest rate environment for deposits and a shift in the mix of interest
bearing liabilities toward savings and time deposits which have higher interest
rates.
7
The following table presents an analysis of the components of net interest
income for the first six months ended June 30, 1997 and 1996.
Six months ended June 30,
------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
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 $ 30,866 $ 984 6.43% $ 8,257 $ 243 5.95%
Securities held to maturity:
U.S. Treasury securities 7,227 214 5.97% 10,783 329 6.17%
U.S. Government agencies 17,982 665 7.45% 36,105 1,220 6.83%
Municipal securities/1/ 11,984 429 7.22% 1,566 53 6.82%
Commercial paper 0 0 0.00% 632 19 5.95%
Other securities 1,820 54 5.98% 1,627 47 5.85%
Federal funds sold and securities
purchased under agreements to resell 4,883 132 5.45% 1,607 43 5.40%
Loans:/2,3/
Commercial 103,521 5,369 10.46% 77,386 4,104 10.72%
Real estate-construction 8,985 462 10.38% 3,130 165 10.64%
Real estate-other 64,940 3,177 9.87% 60,344 3,063 10.26%
Installment and other 20,151 985 9.85% 17,035 853 10.12%
-------------- ----------- ---------- ------------- ----------- -------
Total Loans 197,597 9,994 10.20% 157,895 8,185 10.48%
-------------- ----------- ---------- ------------- ----------- -------
Total Earning Assets 272,359 12,471 9.23% 218,472 10,139 9.38%
Cash and due from banks 17,407 16,119
Leasehold improvements and equipment - net 1,444 1,675
Interest receivable and other assets 4,837 3,511
Foreclosed assets 913 737
Assets held for sale 240 275
Less allowance for loan loss (5,008) (4,999)
-------------- -------------
TOTAL ASSETS $292,192 $235,790
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 19,324 117 1.22% $ 22,876 107 0.95%
Money market 89,556 1,436 3.23% 70,033 1,106 3.19%
Time and savings 73,256 1,841 5.07% 43,601 1,024 4.75%
Other borrowed funds 1,101 32 5.82% 1,121 31 5.62%
-------------- ----------- ---------- ------------- ----------- -------
Total interest bearing liabilities 183,237 3,426 3.77% 137,631 2,268 3.33%
Demand deposits 71,720 65,959
Other liabilities 2,528 1,790
Shareholders' equity 34,707 30,410
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $292,192 $235,790
============== =============
Net Interest Income $9,045 $7,871
=========== ===========
Net Interest Margin 6.70% 7.27%
========== =======
Tax Equivalent Adjustment/1/ $150 $19
=========== ===========
- --------------
(1) Tax-exempt interest income on municipal securities is computed using a
Federal income tax rate of 35%. Interest on municipal securities was $279,000
and $34,000 for June 30, 1997 and 1996, 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 $209,000 and $221,000
for June 30, 1997 and 1996, respectively; fees on real estate loans of $194,000
and $236,000 for June 30, 1997 and 1996, respectively; and fees on installment
and other loans of $17,000 and $16,000 for June 30, 1997 and 1996, respectively.
8
The following table sets forth changes in interest income and interest expense
for each major category of interest-earning assets and interest-bearing
liabilities, and the amount of change attributable to volume and rate changes
for the six month periods ended June 30, 1997 and 1996.
Analysis of Changes in Interest Income and Expense
Increase (Decrease) Due to Changes in
Volume/1/ Rate/2/ Total
in thousands ------------ ----------- -----------
Increase (decrease) in interest income:
Securities available for sale $667 $74 $740
Securities held to maturity:
U.S. Treasury securities (108) (7) (115)
U.S. Government agencies (613) 56 (556)
Municipal securities 352 24 376
Commercial paper (19) 0 (19)
Other securities 6 1 7
Federal funds sold 88 1 89
Loans:
Commercial 1,401 (136) 1,265
Real estate-construction 309 (12) 297
Real estate-other 243 (128) 115
Installment and other 159 (27) 132
------------ ----------- -----------
Total Loans 2,112 (303) 1,809
------------ ----------- -----------
Total increase (decrease) $2,486 $ (154) $2,332
------------ ----------- -----------
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking $ 16 $ (26) $ (10)
Money market (311) (19) (330)
Savings and time (701) (116) (817)
Other borrowed funds 0 (1) (1)
------------ ----------- -----------
Total increase $ (996) $ (162) $ (1,158)
------------ ----------- -----------
Total change in net interest income $1,490 $ (316) $ 1,174
============ =========== ===========
(1) Changes not solely attributed to rate or volume have been allocated to
volume.
(2) Loan fees are reflected in rate variances.
Provision for Loan Losses
The provision for loan losses for the six months ended June 30, 1997 was
$50,000, a decrease of $400,000 or 88.9% from the six months ended June 30,
1996. The amount of the provision was reduced because management believed the
allowance for loan losses is adequate.
Non-Interest Income
Non-interest income for the six months ended June 30, 1997 was $441,000, an
increase of $84,000 or 23.5% from the six months ended June 30, 1996. Customer
service fees have increased $79,000 or $28.2% to $359,000 from $280,000 due to
the increase in deposits and an increase in foreign trade transaction volume.
9
Non-Interest Expense
Non-interest expense totaled $5.9 million and $5.5 million for the six months
period ended June 30, 1997 and 1996, respectively. Salaries and employee
benefits for the six months ended June 30, 1997 increased $377,000 or 12.5% from
the same period in 1996 The increase in salaries and employee benefits is
related to increases in the management incentive accrual, employer contributions
to the 401K plan and staffing levels. Full time equivalent personnel numbered
107 on June 30, 1997 compared to 102 on June 30, 1996.
Foreclosed asset expenses have decreased as foreclosed properties have been sold
and increased data processing expenses are related to increased loan and deposit
activity combined with general cost escalation. Legal expenses have increased
due to increased legal activity to recover prior period loan charge-offs and the
Company has reduced the level of external marketing consulting in 1997 from 1996
which has reduced consulting expenses. FDIC assessments increased by $14,000 for
the first half of 1997 as compared to the prior year due to the addition of a
regulatory FICO assessment.
The following table summarizes the significant components of noninterest expense
for the dates indicated.
Noninterest Expense
June 30 June 30 Dollar %
(Dollars in thousands) 1997 1996 Change Change
------------------- -------------- ---------------- ---------------
Salaries and related benefits $3,402 $3,025 $377 12.5%
Occupancy 491 502 (11) -2.2%
Equipment 454 428 26 6.1%
Foreclosed asset expenses 63 153 (90) -58.8%
Goodwill and core deposit amortization 115 129 (14) -10.9%
Telephone and postage 144 126 18 14.3%
Data processing services 163 125 38 30.4%
Marketing 101 116 (15) -12.9%
Legal fees 143 90 53 58.9%
Consulting fees 90 120 (30) -25.0%
FDIC insurance 15 1 14 1400.0%
Other 670 644 26 4.0%
------------------- -------------- ---------------- ---------------
TOTAL NONINTEREST EXPENSE $5,851 $5,459 $392 7.2%
=================== ============== ================ ===============
Provision for Income Taxes
The provision for income taxes for the first half of 1997 increased to
$1,260,000 from $390,000 for the same period of the prior year. These provisions
represent effective tax rates of 36% and 17%, respectively. The 1997 provision
represents a more normalized effective tax rate as compared to the 1996
provision which included the tax benefits of prior period operating losses and
tax carryforward items. Beginning July 1, 1996, the effective date of the
quasi-reorganization, certain tax benefits which arose prior to the date of the
quasi-reorganization, are being reported as a direct adjustment to common stock.
FINANCIAL CONDITION
Loans
Average loans increased $39.7 million or 25.1% to $197.6 million for the six
months ended June 30, 1997 from $157.9 million for the same period in 1996. The
increase in average loans is attributed to an improving economic environment and
an overall increase in loan demand.
10
Real estate construction loans as a percentage of total loans outstanding were
5.8% at June 30, 1997 compared to 1.6% at June 30, 1996. Risks associated with
real estate construction lending are generally considered to be higher than
risks associated with other forms of lending and accordingly, the Bank continues
to fund real estate construction commitments on a limited basis with more
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 $65.5 million at June 30, 1997, an increase of $2.6 million or 4.2% from
June 30, 1996.
The following table sets forth the amount of loans outstanding in each category
and the percentage of total loans outstanding for each category at the dates
indicated.
June 30 Dec. 31 June 30
------------------------------- ------------------------------- -------------------------------
1997 1996 1996
------------------------------- ------------------------------- -------------------------------
Amount Percent Amount Percent Amount Percent
--------------- ------------- -------------- ------------- ---------------- ------------
in thousands (Dollars in thousands)
Commercial $114,293 53.3% $92,756 50.6% $79,765 49.0%
Real estate - construction 12,495 5.8% 6,608 3.6% 2,574 1.6%
Real estate - other 65,497 30.6% 64,272 35.0% 62,852 38.6%
Installment and other 21,991 10.3% 19,757 10.8% 17,434 10.7%
--------------- ------------- --------------- ------------- ---------------- ------------
TOTAL $214,276 100.0% $183,393 100.0% $162,625 100.0%
=============== ============= =============== ============= ================ ============
Foreclosed Assets
Foreclosed assets totaled $60,000 at June 30, 1997, as compared to $923,000 at
December 31, 1996. During the first six months of 1997, the Company was
successful in selling two properties with sales proceeds of $950,000, but
foreclosed on one finished lot which has a book value of $60,000 at June 30,
1997.
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.
June 30 Dec. 31 June 30
(Dollars in thousands) 1997 1996 1996
-------------- --------------- --------------
Loans 90 days or more past due and still accruing $ 467 $ 322 $ 518
Non-accrual loans 4,378 2,811 2,620
Other assets held for sale 205 275 275
Foreclosed assets 60 923 422
-------------- --------------- --------------
Total non-performing assets $5,110 $4,331 $3,835
============== =============== ==============
Non-performing assets to period end loans,
other assets held for sale plus foreclosed assets 2.38% 2.35% 2.35%
============== =============== ==============
The increase in non-performing assets at June 30, 1997 is due to a matured real
estate loan in the amount of $1.9 million which was placed on non-accrual as the
renewal is being negotiated. At June 30, 1997, the recorded investment in loans
considered to be
11
impaired under Statement of Financial Accounting Standards No. 114 "Accounting
by Creditors for Impairment of a Loan" as amended by Statement of Financial
Accounting Standards No. 118 was $4,378,000 all of which were placed on a
non-accrual basis. The related allowance for loan loss for impaired loans was
$400,000. For the six months ended June 30, 1997, the average recorded
investment in impaired loans was $3,508,000 and no interest income has been
recognized on impaired loans. If interest income on those loans had been
recognized, such income would have approximated $77,000.
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
in relation to the risk of future losses inherent in the loan portfolio. The
allowance is increased by charges to operating expenses and reduced by net
charge-offs.
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, ascertains whether there are probable losses which must be
charged off and assesses 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. Management believes the allowance for loan losses
was adequate at June 30, 1997.
The following table summarizes the changes in the allowance for loan losses for
the periods indicated:
Six Months Year Six Months
Ended Ended Ended
(Dollars in thousands) 6-30-97 12-31-96 6-30-96
-------------- --------------- --------------
Balance, at beginning of period $4,969 $4,960 $4,960
Charge-offs:
Commercial 16 95 95
Real estate - construction 300 370 230
Real estate - other 0 477 175
Installment and other 16 127 126
-------------- --------------- --------------
Total charge-offs 332 1,069 626
Recoveries:
Commercial 9 242 111
Real estate - construction 37 56 45
Real estate - other 48 140 105
Installment and other 10 40 5
-------------- --------------- --------------
Total recoveries 104 478 266
-------------- --------------- --------------
Net charge-offs 228 591 360
Provision charged to operations 50 600 450
-------------- --------------- --------------
Balance, at end of period $4,791 $4,969 $5,050
============== =============== ==============
Ratio of net charge-offs to average loans (annualized) 0.23% 0.36% 0.46%
============== =============== ==============
Allowance at period end to total loans outstanding 2.24% 2.71% 3.11%
============== =============== ==============
12
Potential Problem Loans
At June 30, 1997 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
benefit from 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.
June 30,
---------------------------------------------------------------------
1997 1996
-------------------------------- ----------------------------------
Book Market Book Market
(Dollars in thousands) Value Value Value Value
-------------- ---------------- ---------------- ----------------
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $16,017 $16,154 $10,818 $10,805
U.S. government agencies and
corporation 5,920 5,922 29,081 29,434
Municipal securities 12,073 12,102 3,790 3,699
Collateralized mortgage obligations 109 113 149 154
-------------- ---------------- ---------------- ----------------
TOTAL $34,119 $34,291 $43,838 $44,092
============== ================ ================ ================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $12,035 $12,146 $ - $ -
U.S. government agencies and
corporation 18,793 18,852 6,129 6,068
-------------- ---------------- ---------------- ----------------
TOTAL $30,828 $30,998 $6,129 $6,068
============== ================ ================ ================
Deposits
For the six months ended June 30, 1997 average deposits totaled $253.9 million,
an increase of $51.4 million or 25.4% from $202.5 million for the same period in
1996. Management attributes the increase in deposits 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 servicing both the loan and the
deposit needs. Accordingly, a correlation is expected between loan and deposit
volumes such that deposit volumes will increase as loan activity increases.
Average demand deposits totaled $71.7 million, an increase of $5.8 million or
8.7% from the same period in 1996, however as a percentage of total deposits,
demand deposits decreased to 28.2% for the six months ended June 30, 1997 from
32.6% for the same period of the prior year. Average interest-bearing deposits
increased $45.6 million or 33.4% for the six months ended June 30, 1997 from the
same period in 1996. Average interest-bearing deposits comprised 71.8% of
average total deposits for the six months ended June 30, 1997 and 67.4% of
average total deposits for the six months ended June 30, 1996. The increase in
savings and time deposits, which had the greatest level of growth of all deposit
types, is attributed to the interest rate environment wherein
13
time deposit rates are comparable to interest rates on investment securities and
do not include broker commissions or other transaction costs when purchased.
The table below sets forth information regarding the Bank's average deposits by
amount and percentage of total deposits for the six months ended June 30, 1997
and 1996.
Average Deposits
----------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------
1997 1996
----------------------------------- ----------------------------------
in thousands Amount Percentage Amount Percentage
------------- ---------------- ------------ ---------------
Demand accounts $ 71,720 28.2% $ 65,959 32.6%
Interest-bearing checking 19,324 7.6% 22,876 11.3%
Money market 89,556 35.3% 70,033 34.6%
Savings and time 73,256 28.9% 43,601 21.5%
------------- ----------- ------------ -----------
Total $253,856 100.0% $202,469 100.0%
============= =========== ============ ===========
Certificates of deposit over $100,000 are generally considered a higher cost and
less stable form of funding than lower denomination deposits and may represent a
greater risk of interest rate and volume volatility than small retail deposits.
Time certificates of $100,000 or more at June 30, 1997 had the following
schedule of maturities:
(In thousands)
--------------
Three months or less $27,629
After three months through six months 20,580
After six months through twelve months 5,395
After twelve months 3,577
-------------
Total $57,181
=============
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity management refers to the Bank's ability to acquire funds to meet loan
demand, to fund deposit withdrawals and to service other liabilities.
To augment liquidity, the Bank has informal federal funds borrowing arrangements
with correspondent banks totaling $24.0 million. The Bank 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 June 30, 1997 the Bank had no outstanding
borrowings against these arrangements. Additionally, at June 30, 1997, unpledged
government securities that are available to secure additional borrowing in the
form of reverse repurchase agreements totaled approximately $43.6 million. At
June 30, 1997 the Bank had no reverse repurchase agreements.
The liquidity position of the Company declined during the first half of 1997
from December 31, 1996 as cash flows required for financing and investing
activities exceeded the funds provided by operating activities by $27.5 million.
Cash and cash equivalents of $3.6 million were required to accommodate deposit
withdrawals and cash and cash equivalents of $27.8 million were required to fund
investing activities which were partially funded by operating activities, which
provided $4.0 million of cash and cash equivalents.
14
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 June 30, 1997, the Company had
a liquidity ratio of 26.2% as compared to 36.5% at December 31, 1996. There were
no over-night Federal Funds sold at June 30, 1997; however, at December 31, 1996
the liquidity ratio included $29.3 million of over-night Federal Funds sold
which is an unusually high level and was attributed to client year-end activity.
Capital Resources
Total shareholders' equity increased to $35.7 million at June 30, 1997 from
$34.1 million at December 31, 1996 reflecting retained income of $2,175,000 for
the first half of 1997 offset by changes in the market adjustment of securities
available for sale and a net reduction of $619,000 in common stock due to stock
repurchases.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board of Governors which require 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.
At June 30, 1997 the Company's total risk-based capital ratio was 15.69%. The
following table presents the Company's risk-based capital and leverage ratios as
of June 30, 1997 and December 31, 1996.
Minimum Capital
Requirements To Be
Minimum Considered Well Capitalized
Capital Under Prompt Corrective
Actual Requirements Action Provisions
----------------------------- ---------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ------------ ------------ ------------
As of June 30, 1997:
Total Capital
(to Risk Weighted Assets) 37,674 15.69% 19,213 > 8.00% 24,016 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 34,650 14.43% 9,606 > 4.00% 14,409 6.00%
Tier 1 Capital
(to Average Assets) 34,650 11.73% 11,816 > 4.00% 14,770 5.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) 35,412 16.10% 17,594 > 8.00% 21,993 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 32,635 14.84% 8,797 > 4.00% 13,196 6.00%
Tier 1 Capital
(to Average Assets) 32,635 11.27% 11,580 > 4.00% 14,475 5.00%
15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders of Civic BanCorp was held on
May 8, 1997 and was adjourned until June 9 and adjourned again
until June 23, in order to give more shareholders an opportunity to
vote.
(b) With respect to the election of directors at the annual meeting
of shareholders (i) proxies were solicited pursuant to Regulation
14 under the Securities and Exchange Act of 1934, (ii) there was no
solicitation in opposition to management's nominees as listed in
the proxy statement, and (iii), all such nominees were elected.
(c) At the meeting, there were insufficient affirmative votes to
approve the Classified Board Amendment which would have amended the
Company's bylaws to divide the Board of Directors into three
classes with directors in each class serving a staggered three-year
term. An affirmative vote of holders of a majority of the
outstanding shares of Civic BanCorp common stock entitled to vote
in person or by proxy at the Annual Meeting was required to amend
the Company's bylaws. There were 2,135,943 votes for the proposal,
389,136 against the proposal and 6,563 votes abstaining.
(d) At the meeting, there were insufficient affirmative votes to
approve the Consent Amendment which would have amended the
Company's Articles of Incorporation to add a new provision
requiring that all shareholder actions be taken at an annual or
special meeting of shareholders and prohibiting shareholder action
by written consent in lieu of a meeting. An affirmative vote of
holders of a majority of the outstanding shares of Civic BanCorp
common stock entitled to vote in person or by proxy at the Annual
Meeting was required to amend the Company's Articles of
Incorporation. There were 2,105,692 votes for the proposal, 412,603
against the proposal, and 13,347 abstaining.
The total number of shares of the Company's common stock
outstanding as of March 10, 1997, the record date of the annual
meeting, was 4,398,808.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
CIVIC BANCORP
(Registrant)
Date: August 7, 1997 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
17