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, 1998
-------------
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
July 1, 1998.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 4,575,944
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, 1998, June 30, 1997
and December 31, 1997 3
Consolidated Statements of Operations -
Three Months Ended June 30, 1998 and
June 30, 1997 and Six Months Ended
June 30, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and
June 30, 1997 5
Consolidated Statements of Comprehensive
Income - Six Months Ended June 30, 1998
and June 30, 1997 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. Other Information 18
SIGNATURES 19
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
1998 1997 1997
-------- -------- --------
ASSETS
- ------
Cash and due from banks ........................ $ 22,600 $ 18,694 $ 16,503
Federal funds sold ............................. 45,075 -- 13,230
-------- -------- --------
Total cash and cash equivalents ............. 67,675 18,694 29,733
Securities available for sale .................. 30,922 30,998 31,097
Securities held to maturity
(market value of $28,423, $34,291
and $27,727, respectively) .................. 28,051 34,119 27,280
Other securities ............................... 2,145 1,901 1,990
Loans:
Commercial ................................... 129,502 114,293 135,140
Real estate-construction ..................... 9,609 12,495 12,929
Real estate-other ............................ 61,140 65,497 64,430
Installment and other ........................ 16,869 21,991 20,478
-------- -------- --------
Total loans .................................. 217,120 214,276 232,977
Less allowance for loan losses ................. 4,337 4,791 4,351
-------- -------- --------
Loans - net .................................. 212,783 209,485 228,626
Interest receivable and other assets ........... 5,407 5,162 5,216
Leasehold improvements and equipment - net ..... 1,314 1,377 1,435
Foreclosed assets .............................. 1,182 60 --
Other assets held for sale ..................... -- 205 43
-------- -------- --------
TOTAL ASSETS ................................... $349,479 $302,001 $325,420
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing .......................... $ 90,567 $ 76,916 $ 89,823
Interest-bearing:
Checking ................................... 7,783 8,914 6,950
Money market ............................... 105,945 92,936 95,770
Time and savings ........................... 101,464 82,382 90,607
-------- -------- --------
Total deposits ............................... 305,759 261,148 283,150
Federal funds purchased ........................ -- 2,300 --
Accrued interest payable and other liabilities . 3,592 2,816 3,583
-------- -------- --------
Total liabilities .............................. 309,351 266,264 286,733
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,
4,575,944, 4,604,345 and 4,619,768 shares ... 34,156 31,220 35,149
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) ..................... 5,737 4,415 3,287
Accumulated other comprehensive income - net ... 235 102 251
-------- -------- --------
Total shareholders' equity ..................... 40,128 35,737 38,687
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..... $349,479 $302,001 $325,420
======== ======== ========
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,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- --------------
INTEREST INCOME:
Loans ........................................ $ 5,782 $ 5,287 $ 11,409 $ 9,994
Securities available for sale, securities held
to maturity and other securities ........... 737 922 1,446 1,916
Tax exempt securities ........................ 168 141 328 279
Federal funds sold ........................... 400 52 737 132
---------- ---------- ---------- ----------
Total interest income ........................ 7,087 6,402 13,920 12,321
INTEREST EXPENSE:
Deposits ..................................... 2,037 1,760 4,052 3,394
Other borrowings ............................. -- 31 -- 32
---------- ---------- ---------- ----------
Total interest expense ....................... 2,037 1,791 4,052 3,426
---------- ---------- ---------- ----------
NET INTEREST INCOME .......................... 5,050 4,611 9,868 8,895
Provision for loan losses .................... 37 25 75 50
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES .................. 5,013 4,586 9,793 8,845
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees ........................ 209 171 418 359
Other ........................................ 24 53 52 82
---------- ---------- ---------- ----------
Total noninterest income ..................... 233 224 470 441
NONINTEREST EXPENSE:
Salaries and employee benefits ............... 1,862 1,751 3,704 3,402
Occupancy .................................... 266 251 537 491
Equipment .................................... 216 235 428 454
Data processing services ..................... 92 85 181 163
Telephone and postage ........................ 88 65 154 144
Legal fees ................................... 59 74 114 143
Goodwill and core deposit amortization ....... 49 58 97 115
Marketing .................................... 68 54 137 101
Consulting fees .............................. 60 45 120 90
Foreclosed asset expense ..................... 3 39 6 63
FDIC insurance ............................... 9 8 17 15
Other ........................................ 319 340 643 670
---------- ---------- ---------- ----------
Total other expenses ......................... 3,091 3,005 6,138 5,851
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ................... 2,155 1,805 4,125 3,435
Income tax expense ........................... 880 680 1,675 1,260
---------- ---------- ---------- ----------
NET INCOME ................................... $ 1,275 $ 1,125 $ 2,450 $ 2,175
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE .............. $ 0.28 $ 0.24 $ 0.53 $ 0.47
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE ............ $ 0.26 $ 0.23 $ 0.50 $ 0.45
========== ========== ========== ==========
Weighted average shares outstanding used to
compute basic earnings per common share ... 4,611,036 4,608,365 4,617,009 4,621,176
Dilutive effects of stock options ............ 257,597 178,695 262,585 178,486
---------- ---------- ---------- ----------
Weighted average shares outstanding used to
compute diluted earnings per common share . 4,868,633 4,787,060 4,879,594 4,799,662
========== ========== ========== ==========
4
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
Six Months Ended June 30,
-------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 2,450 $ 2,175
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses ........................................... 75 50
Depreciation and amortization ....................................... 495 564
Write-down of foreclosed assets ..................................... -- (12)
(Decrease) increase in deferred loan fees ........................... (69) 80
Change in assets and liabilities:
Decrease (increase) in interest receivable and other assets ......... 163 (254)
(Decrease) increase in accrued interest payable and other liabilities (99) 1,273
-------- --------
Net cash provided by operating activities ............................... 3,015 3,876
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................. (136) (227)
Paydown on assets held for sale ....................................... 43 70
Proceeds from sales of foreclosed assets .............................. 1,233 950
Net decrease (increase) in loans ...................................... 13,448 (31,266)
Expenditures on foreclosed assets ..................................... (26) --
Activities in securities held to maturity:
Proceeds from maturing securities ................................... 8,011 8,019
Purchases of securities ............................................. (8,931) (957)
Activities in securities available for sale:
Purchases of securities ............................................. -- (4,382)
-------- --------
Net cash provided by (used in) investing activities ..................... 13,642 (27,793)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options ................................. 255 82
Purchase of common stock ................................................ (1,579) (701)
Federal funds purchased ................................................. -- 2,300
Net increase (decrease) in deposits ..................................... 22,609 (5,299)
-------- --------
Net cash provided by (used in) financing activities ..................... 21,285 (3,618)
-------- --------
Net increase (decrease) in cash and cash equivalents .................... 37,942 (27,535)
Cash and cash equivalents at beginning of period ........................ 29,733 46,229
-------- --------
Cash and cash equivalents at end of period .............................. $ 67,675 $ 18,694
======== ========
Cash paid during year for:
Interest .............................................................. $ 3,761 $ 3,350
======== ========
Income taxes .......................................................... $ 900 $ 862
======== ========
Supplemental schedule of non-cash investing activity:
Loans transferred to foreclosed assets ................................ $ 2,339 $ 75
======== ========
5
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(In thousands except shares and per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
Net Income ..................................... $ 1,275 $ 1,125 $ 2,450 $ 2,175
Other Comprehensive Income:
Unrealized loss on securities available for sale (7) 289 (27) (108)
Income tax expense related to unrealized loss
on securities available for sale .......... 2 (116) 11 42
------- ------- ------- -------
Other Comprehensive Income ..................... (5) 173 (16) (66)
------- ------- ------- -------
COMPREHENSIVE INCOME ........................... $ 1,270 $ 1,298 $ 2,434 $ 2,109
------- ------- ------- -------
6
CIVIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Civic BanCorp and
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, 1997. The results of operations and cash
flows are not necessarily indicative of those expected for the complete
fiscal year.
2. NEW PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 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 for the statements, but
requires the Company to display an amount representing total comprehensive
income for the period in the financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual reports and in
interim financial reports issued to shareholders. The statement is effective
for fiscal years beginning after December 15, 1997. The Company has adopted
SFAS No. 131 but does not have multiple industry segments as defined in SFAS
No. 131.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Post Retirement Benefits." SFAS No. 132 changes disclosure
only on applicable defined benefit pension or post retirement plans. The
statement is effective for fiscal years beginning after December 15, 1997. At
this time, the Company does not have a defined benefit pension or post
retirement plan.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The statement is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
expects to adopt this statement January 1, 2000. The Company will begin
evaluating the impact of its adoption on the Company's consolidated financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
For the six months ended June 30, 1998, the Company reported net income of
$2,450,000, or $.50 earnings per diluted share compared to a net income of
$2,175,000 or $.45 earnings per diluted share for the same period of the prior
year. The annualized return on average assets was 1.48% for the six months ended
June 30, 1998 compared to 1.49% for the same period of the prior year. The
annualized return on average shareholders' equity for the six months ended June
30, 1998 and 1997 was 12.30% and 12.53%, respectively.
7
RESULTS OF OPERATIONS
Net interest income for the six months ended June 30, 1998 was $9.9 million,
increasing $1.0 million or 10.9% from net interest income of $8.9 million for
the same period in 1997. The increase in net interest income was 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 1998 equaled $13.9 million, an
increase of $1.6 million from interest income earned for the same period in
1997. The increase in total interest income is primarily attributed to the
increase in volume of earning assets. Total average earning assets increased
$37.1 million or 13.6% to $309.5 million for the first six months of 1998
compared to $272.4 million for the same period in 1997.
Total interest expense for the first six months of 1998 was $4.1 million an
increase of $.6 million or 18.3% from the $3.4 million for the first six
months of 1997. 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 $206.5 million for the first six
months of 1998 as compared to $183.2 million for the same period of the prior
year, an increase of $23.3 million or 12.7%. The average rate paid on these
liabilities increased 19 basis points to 3.96% for the first six months of 1998
from 3.77% for the same period of 1997. 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
49.6% from 40.0% for the first half of 1998 and 1997, respectively.
Net Interest Margin
Net interest margin declined 18 basis points to 6.54% for the six months ended
June 30, 1997 from 6.72% 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 5 basis points and the increase in the average rate paid on interest bearing
deposits of 19 basis points. The decline in the yield on earning assets was due
to a shift in the mix of earning assets to sales of Federal funds. Federal funds
as a percentage of total earning assets increased to 8.8% for the first half
of 1998 compared to 1.8% for the same period of the prior year. 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.
8
The following table presents an analysis of the components of net income for the
first six months ended June 30, 1998 and 1997.
Six months ended June 30,
----------------------------------------------------------------------------
1998 1997
---------------------------------------- -----------------------------------
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 ............ $ 31,566 $ 988 6.31%$ 30,866 $ 983 6.43%
Securities held to maturity:
U.S. Treasury securities ............... 5,963 177 5.98% 7,227 214 5.97%
U.S. Government agencies ............... 5,976 220 7.41% 17,982 665 7.45%
Municipal securities (1)................ 13,698 497 7.31% 11,984 436 7.36%
Other securities ......................... 2,076 61 5.94% 1,820 54 5.98%
Federal funds sold and securities
purchased under agreements to resell ... 27,177 737 5.47% 4,883 132 5.45%
Loans:
Commercial ............................. 130,544 6,741 10.41% 103,521 5,370 10.46%
Real estate-construction ............... 10,833 550 10.24% 8,985 462 10.38%
Real estate-other ...................... 63,415 3,219 10.24% 64,940 3,177 9.87%
Installment and other .................. 18,275 899 9.93% 20,151 985 9.85%
--------- --------- --------- --------- ------- -------
Total Loans ............................ 223,067 11,409 10.31% 197,597 9,994 10.20%
--------- --------- --------- --------- ------- -------
Total Earning Assets ................. 309,523 14,089 9.18% 272,359 12,478 9.23%
Cash and due from banks .................. 19,326 17,407
Leasehold improvements and equipment - net 1,364 1,444
Interest receivable and other assets ..... 4,992 4,837
Foreclosed assets ........................ 578 913
Assets held for sale ..................... -- 240
Less allowance for loan loss ............. (4,237) (5,008)
--------- ---------
TOTAL ASSETS ............................. $ 331,546 $ 292,192
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking ............................. $ 26,996 127 0.95%$ 19,324 117 1.22%
Money market ......................... 77,033 1,296 3.39% 89,556 1,436 3.23%
Time and savings ..................... 102,504 2,629 5.17% 73,256 1,841 5.07%
Other borrowed funds ................. -- -- 0.00% 1,101 32 5.82%
--------- --------- --------- --------- ------- -------
Total interest bearing liabilities ....... 206,533 4,052 3.96% 183,237 3,426 3.77%
Demand deposits .......................... 80,965 71,720
Other liabilities ........................ 4,219 2,528
Shareholders' equity ..................... 39,829 34,707
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 331,546 $ 292,192
========= =========
Net Interest Income ...................... $ 10,037 $ 9,052
========= =========
Net Interest Margin ...................... 6.54% 6.72%
======= =======
Tax Equivalent Adjustment (1)............. $ 169 $ 157
========= =========
- --------------------------------------------------------------------------------
(1) Tax-exempt interest income on municipal securities is computed using a
Federal income tax rate of 34%. Interest on municipal securities was $328,000
and $279,000 for June 30, 1998 and 1997, 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 $252,000 and $209,000
for June 30, 1998 and 1997, respectively; fees on real estate loans of $197,000
and $194,000 for June 30, 1998 and 1997, respectively; and fees on installment
and other loans of $16,000 and $17,000 for June 30, 1998 and 1997, respectively.
9
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, 1998 and 1997.
Analysis of Changes in Interest Income and Expense
Increase (Decrease) Due to Changes in
in thousands
Volume/1/ Rate/2/ Total
-------- ------- -------
Increase (decrease) in interest income:
Securities available for sale .......... $ 23 $ (18) $ 5
Securities held to maturity:
U.S. Treasury securities ............. (37) -- (37)
U.S. Government agencies ............. (444) (1) (445)
Municipal securities ................. 64 (3) 61
Other securities ....................... 7 -- 7
Federal funds sold ..................... 603 2 605
Loans:
Commercial ........................... 1,401 (30) 1,371
Real estate-construction ............. 95 (7) 88
Real estate-other .................... (75) 117 42
Installment and other ................ (92) 6 (86)
------- ------- -------
Total Loans ........................... 1,329 86 1,415
------- ------- -------
Total increase ......................... $ 1,545 $ 66 $ 1,611
------- ------- -------
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking ............ $ (46) $ 36 $ (10)
Money market ......................... 201 (61) 140
Savings and time ..................... (736) (52) (788)
Other borrowed funds ................... 32 -- 32
------- ------- -------
Total increase ......................... $ (549) $ (77) $ (626)
------- ------- -------
Total change in net interest income .... $ 996 $ (11) $ 985
======= ======= =======
(1) Changes not solely attributed rate or volume have been allocated to volume.
(2) Loan fees are reflected in rate volumes.
Provision for Income Taxes
The provision for loan losses for the six months ended June 30, 1998 was $75,000
as compared to $50,000 for the six months ended June 30, 1997. The increase in
the provision was based on the growth in the loan portfolio. See Allowance for
Loan Losses for further discussion.
10
Non-Interest Income
Non-interest income for the six months ended June 30, 1998 was $470,000, an
increase of $29,000 or 6.6% from the six months ended June 30, 1997. Customer
service fees, the largest component of non-interest income, have increased
$59,000 or $16.4% to $418,000 from $359,000 due to the increase in deposit
volume.
Non-Interest Expense
Non-interest expense totaled $6.1 million and $5.9 million for the six months
period ended June 30, 1998 and 1997, respectively. Salaries and employee
benefits for the six months ended June 30, 1998 increased $302,000 or 8.9%
from the same period in 1997. The increase in salaries and employee benefits
is related to increases in the management incentive accrual and in the
contribution percentages of the 401K and profit sharing benefits. Full time
equivalent personnel numbered 108 on June 30, 1998 compared to 107 on June 30,
1997. Occupancy expenses increased due to normal rent escalations and the
addition of the Palo Alto office in June 1997.
Foreclosed asset expenses have decreased as foreclosed properties have been
sold. 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. Included in consulting fees are third party professional fees related to
compliance auditing services which increased during the first six months of
1998 relative to 1997 as more auditing projects were performed. Marketing
expenses include the cost of an advertising campaign to promote the bank in
new markets in 1998.
The following table summarizes the significant components of noninterest
expense for the dates indicated.
Noninterest Expense
June 30 June 30 Dollar %
(Dollars in thousands) 1998 1997 Change Change
------ ------ ------ ----
Salaries and related benefits ........ $3,704 $3,402 $ 302 8.9%
Occupancy ............................ 537 491 46 9.4%
Equipment ............................ 428 454 (26) (5.7)%
Data processing services ............. 181 163 18 11.0%
Telephone and postage ................ 154 144 10 6.9%
Legal fees ........................... 114 143 (29) (20.3)%
Goodwill and core deposit amortization 97 115 (18) (15.7)%
Marketing ............................ 137 101 36 35.6%
Consulting fees ...................... 120 90 30 33.3%
Foreclosed asset expenses ............ 6 63 (57) (90.5)%
FDIC insurance ....................... 17 15 2 13.3%
Other ................................ 643 670 (27) (4.0)%
------ ------ ------ -------
TOTAL NONINTEREST EXPENSE ............ $6,138 $5,851 $ 287 4.9%
====== ====== ====== =======
Provision for Income Taxes
The provision for income taxes for the first half of 1998 increased to
$1,675,000 from $1,260,000 for the same period of the prior year. These
provisions represent effective tax rates of 41% and 37%, respectively. The
effective rate has been increased for 1998 due to the reduced impact of tax
exempt municipal securities on the larger net income.
11
FINANCIAL CONDITION
Loans
Total loans have decreased $15.9 million or 6.8% at June 30, 1998 from December
31, 1997 by reason of several factors. The Bank has elected to discontinue
funding certain loans due to underwriting concerns and the risk exposure of the
customer in the event of an economic downturn. Additionally, several of the
Bank's notable clients were acquisition targets during the first half of 1998
and their borrowings were repaid after the acquisition was consummated. The real
estate construction loan category has been impacted as existing construction
loans were paid off as anticipated; however, advances on new projects were
delayed due to an extended rainy season. Moreover, the strong regional economy
has generated significant corporate liquidity among many of the Bank's customers
and has reduced the demand for commercial loans.
Real estate construction loans as a percentage of total loans outstanding were
4.4% at June 30, 1998 compared to 5.8% at June 30, 1997. The Bank maintains a
limited portfolio of real estate construction loans as the risks associated with
real estate construction lending are generally considered to be higher than
risks associated with other forms of lending. However, the Bank continues to
fund real estate construction commitments on a limited basis with 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 $61.1 million at June 30, 1998, a decrease of $4.4 million or 6.7% from
June 30, 1997.
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
--------------------- -------------------- ----------------------
1998 1997 1997
--------------------- -------------------- ----------------------
Amount Percent Amount Percent Amount Percent
--------- -------- -------- -------- -------- ---------
(Dollars in thousands)
in thousands
Commercial ............... $129,502 59.6% $135,140 58.0% $114,293 53.3%
Real estate - construction 9,609 4.4% 12,929 5.5% 12,495 5.8%
Real estate - other ...... 61,140 28.2% 64,430 27.7% 65,497 30.6%
Installment and other .... 16,869 7.8% 20,478 8.8% 21,991 10.3%
-------- ------- -------- ------- -------- -------
TOTAL .................. $217,120 100.0% $232,977 100.0% $214,276 100.0%
======== ======= ======== ======= ======== =======
Foreclosed Assets
Foreclosed assets totaled $1.2 million at June 30, 1998 and consists primarily
of a 5.6 acre of real property incorporating six sub-divided parcels. Two of the
parcels have commercial buildings which are 80% leased. The remaining four lots
are undeveloped although onsite improvements have been completed and the lots
are buildable.
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.
12
June 30 Dec. 31 June 30
1998 1997 1997
-------- -------- --------
(Dollars in thousands)
Loans 90 days or more past due and still accruing . $ 548 $ 496 $ 467
Non-accrual loans ................................. 1,710 3,465 4,378
Other assets held for sale ........................ -- 43 205
Foreclosed assets ................................. 1,182 -- 60
------ ------ ------
Total non-performing assets ..................... $3,440 $4,004 $5,110
====== ====== ======
Non-performing assets to period end loans,
other assets held for sale plus foreclosed assets 1.58% 1.72% 2.38%
====== ====== ======
At June 30, 1998, the recorded investment in loans considered to be impaired was
$1.7 million all of which were on a non-accrual basis. Included in this amount
was $37,500 of impaired loans with an associated allowance of $5,000 and
$1,675,000 of impaired loans which approximate the fair value of the supporting
collateral and accordingly do not have an associated allowance for loan loss.
For the six months ended June 30, 1998, the average recorded investment in
impaired loans was $3.0 million and no interest income was recognized on
impaired loans. If interest income on those loans had been recognized, such
income would have approximated $113,000.
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, 1998.
13
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) 6-30-98 12-31-97 6-30-97
-------- -------- --------
Balance, at beginning of period ...................... $ 4,351 $ 4,969 $ 4,969
Charge-offs:
Commercial ......................................... 171 16 16
Real estate - construction ......................... 150 564 300
Real estate - other ................................ 207 650 --
Installment and other .............................. -- 16 16
-------- -------- --------
Total charge-offs ................................ 528 1,246 332
Recoveries:
Commercial ......................................... 10 43 9
Real estate - construction ......................... 16 139 37
Real estate - other ................................ 372 280 48
Installment and other .............................. 41 66 10
-------- -------- --------
Total recoveries ................................. 439 528 104
-------- -------- --------
Net charge-offs ...................................... 89 718 228
Provision charged to operations ...................... 75 100 50
-------- -------- --------
Balance, at end of period ............................ $ 4,337 $ 4,351 $ 4,791
======== ======== ========
Ratio of net charge-offs to average loans (annualized) 0.08% 0.34% 0.23%
======== ======== ========
Allowance at period end to total loans outstanding ... 2.00% 1.87% 2.24%
======== ======== ========
Potential Problem Loans
At June 30, 1998 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.
14
The table below summarizes the book value and estimated market values of
investment securities at the dates indicated.
June 30,
-------------------------------------------
1998 1997
-------------------- -------------------
Book Market Book Market
(Dollars in thousands) Value Value Value Value
------- ------- ------- -------
SECURITIES HELD TO MATURITY:
U.S. Treasury securities .......... $ 5,979 $ 5,993 $16,017 $16,154
U.S. government agencies and
corporation ..................... 7,974 7,999 5,920 5,922
Municipal securities .............. 14,019 14,348 12,073 12,102
Collateralized mortgage obligations 79 83 109 113
------- ------- ------- -------
TOTAL ........................... $28,051 $28,423 $34,119 $34,291
======= ======= ======= =======
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities .......... $12,021 $12,196 $12,035 $12,146
U.S. government agencies and
corporation ..................... 18,509 18,726 18,793 18,852
------- ------- ------- -------
TOTAL ........................... $30,530 $30,922 $30,828 $30,998
======= ======= ======= =======
Deposits
The Company emphasizes developing total client relationships with its customers
in order to increase its core deposit base. Total deposits increased $23 million
or 8% to $306 million as of June 30, 1998 from $283 million as of December 31,
1997. Management believes the strong regional economy has generated significant
corporate liquidity among many of the Bank's customers culminating in increased
deposit levels at June 30, 1998.
For the six months ended June 30, 1998, average deposits totaled $287.5 million,
an increase of $33.6 million or 13.3% from $253.9 million for the same period in
1997. The table below sets forth information regarding the Bank's average
deposits by amount and percentage of total deposits for the first six months of
1998 and 1997.
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, 1998
and 1997.
Average Deposits
--------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------
1998 1997
---------------------- ----------------------
in thousands Amount Percentage Amount Percentage
-------- ---------- -------- ----------
Demand accounts ......... $ 80,965 28.1% $ 71,720 28.2%
Interest-bearing checking 26,996 9.4% 19,324 7.6%
Money market ............ 77,033 26.8% 89,556 35.3%
Savings and time ........ 102,504 35.7% 73,256 28.9%
-------- ---------- -------- ----------
Total .............. $287,498 100.0% $253,856 100.0%
======== ========== ======== ==========
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, 1998 had the following
schedule of maturities:
15
(In thousands)
-------
Three months or less ...................................... $34,440
After three months through six months ..................... 30,923
After six months through twelve months .................... 2,225
After twelve months ....................................... 7,363
-------
Total ................................................. $74,951
=======
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 $35.0 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, 1998 the Bank had no outstanding
borrowings against these arrangements. Additionally, at June 30, 1998, unpledged
government securities that are available to secure additional borrowing in the
form of reverse repurchase agreements totaled approximately $35.7 million. At
June 30, 1998 the Bank had no reverse repurchase agreements.
The liquidity position of the Company increased during the first half of 1998
from December 31, 1997 as cash and cash equivalents of $3.0 million, $13.6
million and $21.3 million were provided by operating, investing and financing
activities, respectively.
The liquidity position of the Company may be expressed as a ratio defined as (a)
cash, Federal funds sold, other unpledged short term investments and marketable
securities, including those maturing after one year, divided by (b) total assets
less pledged securities. Using this definition at June 30, 1998, the Company had
a liquidity ratio of 35.1% as compared to 25.6% at December 31, 1997. The
increase in liquidity position reflects the increase in over-night Federal Funds
sold. Federal Funds sold at June 30, 1998 were $45 million as compared to $13
million at December 31, 1997.
Capital Resources
Total shareholders' equity increased to $40.1 million at June 30, 1998 from
$38.7 million at December 31, 1997 reflecting retained income of $2,450,000 for
the first half of 1998 and $331,000 of deferred income tax benefits from tax
carryforward items which arose prior to the date of the quasi-reorganization.
These benefits were partially offset by a net reduction of $1.3 million in
common stock due to stock repurchases and changes in the market adjustment of
securities available for sale.
Since the fourth quarter of 1996, the Board of Directors of the Company has
authorized the repurchase of up to 472,500 shares of common stock from time to
time, subject to appropriate regulatory and other accounting requirements.
Purchases have been made to the open market with the intention to lessen the
dilutive impact of stock options and to maximize shareholder value. Pursuant to
this program, 140,000 shares have been purchased in the first six months of
1998, and 100,000 and 79,100 shares were purchased in 1996 and 1997,
respectively.
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,
16
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, 1998 the Company's total risk-based capital ratio was 16.20%. The
following table presents the Company's risk-based capital and leverage ratios as
of June 30, 1998 and December 31, 1997.
Minimum Capital
Requirements To Be
Considered Well Capitalized
Minimum Under Prompt Corrective
Actual Capital Requirements Action Provisions
----------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- ------- -------
As of June 30, 1998:
Total Capital
(to Risk Weighted Assets) $42,347 16.20% $20,917 8.00% $26,147 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 39,065 14.94% 10,459 4.00% 15,688 6.00%
Tier 1 Capital
(to Average Assets) ..... 39,065 11.78% 13,267 4.00% 16,584 5.00%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $40,965 14.97% $21,894 8.00% $27,367 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 37,533 13.71% 10,947 4.00% 16,420 6.00%
Tier 1 Capital
(to Average Assets) ..... 37,533 12.01% 12,499 4.00% 15,624 5.00%
Year 2000
The Company has conducted a comprehensive review of its computer systems which
could be affected by the Year 2000 issue and has developed an action Plan to
address the issue. The Company relies upon third-party software vendors for
substantially all of its applications, and accordingly, the focus of the Company
is to monitor the progress of its primary software providers toward compliance
with the Year 2000 issues and to test actual data of the Company in simulated
processing of future sensitive dates. To date, certifications have been received
from the Company's primary vendors detailing the Year 2000 compliance of their
applications. Testing and validation of Year 2000 compliance of mission critical
applications is currently underway with completion anticipated by the end of
1998.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. The Company's primary market
risk is interest rate risk. Interest rate risk occurs as a result of interest
sensitive assets and liabilities not repricing at the same time or by the same
amount and is quantified by estimating the potential gain or loss in the market
value of assets and net interest income that can result from changes in interest
rates. The Company's exposure to interest rate risk is monitored monthly by
17
the Risk Management Committee which includes members of the Board of Directors
and Senior Management. The Company attempts to manage its exposure to changes in
interest rates; however, due to its size and the direct competition from major
banks, the Company must offer products which are competitive in the market
place, even if less than optimum with respect to interest rate exposure.
The Company's balance sheet position at June 30, 1998 was asset sensitive due to
the significant amount of variable rate loans. Generally, if more assets than
liabilities reprice at a given time in a rising rate environment, net interest
income will increase, and in a declining rate environment, net interest income
would deteriorate. Management believes there has been no significant change in
the Bank's market risk exposure disclosed in the Company's Annual Report of Form
10-K for the year December 31, 1997.
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 7, 1998.
(b) With respect to the election of directors at the annual meeting
of shareholders on May 7, 1998 (i) proxies were solicited pursuant
to Regulation 14 under the Securities and Exchange Act of 1934,
(ii) there was no solicitation in opposition to management's
nominees as listed in the proxy statement, and (iii) all such
nominees were elected.
(c) At the meeting, shareholders approved the Civic BanCorp to
increase the number of shares available for grants of stock options
as described in the proxy statement. The plan was approved by
2,417,310 votes in favor, 489,309 votes against and 11,106 votes
abstaining.
(d) At the meeting, shareholders ratified the selection of KPMG
Peat Market LLP as independent accountants as described in the
proxy statement. The plan was approved by 3,966,774 votes in favor,
12,499 votes against and 5,108 votes abstaining.
The total number of shares of the Company's common stock
outstanding as of March 10, 1998, the record date of the annual
meeting was 4,624,320.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
18
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 10, 1998 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
19