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 September 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
November 1, 1998.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 4,441,692
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 -
September 30, 1998, September 30, 1997
and December 31, 1997 3
Consolidated Statements of Operations -
Three Months Ended September 30, 1998 and
September 30, 1997 and Nine Months Ended
September 30, 1998 and September 30, 1997 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and
September 30, 1997 5
Consolidated Statements of Comprehensive
Income - Three Months Ended September 30, 1998 and
September 30, 1997 and Nine Months Ended
September 30, 1998 and September 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 18
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)
September 30 September 30 December 31
1998 1997 1997
------------ ------------ -----------
ASSETS
- ------
Cash and due from banks $ 15,891 $ 20,352 $ 16,503
Federal funds sold 76,950 7,400 13,230
-------- -------- --------
Total cash and cash equivalents 92,841 27,752 29,733
Securities available for sale 31,133 31,133 31,097
Securities held to maturity
(market value of $27,377, $30,467
and $27,727, respectively) 26,461 30,107 27,280
Other securities 2,228 1,949 1,990
Loans:
Commercial 133,940 119,556 135,140
Real estate-construction 10,109 15,479 12,929
Real estate-other 59,435 64,954 64,430
Installment and other 16,151 20,280 20,478
-------- -------- --------
Total loans 219,635 220,269 232,977
Less allowance for loan losses 4,375 4,638 4,351
-------- -------- --------
Loans - net 215,260 215,631 228,626
Interest receivable and other assets 5,547 5,229 5,216
Leasehold improvements and equipment - net 1,374 1,324 1,435
Foreclosed assets - 570 -
Other assets held for sale - 205 43
-------- -------- --------
TOTAL ASSETS $374,844 $313,900 $325,420
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 72,366 $ 77,380 $ 89,823
Interest-bearing:
Checking 7,238 5,023 6,950
Money market 139,281 98,367 95,770
Time and savings 109,369 92,607 90,607
-------- -------- --------
Total deposits 328,254 273,377 283,150
Accrued interest payable and other liabilities 5,071 3,352 3,583
-------- -------- --------
Total liabilities 333,325 276,729 286,733
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,
4,541,692, 4,610,679 and 4,619,768 shares 33,600 31,278 35,149
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 7,512 5,665 3,287
Accumulated other comprehensive income - net 407 228 251
-------- -------- --------
Total shareholders' equity 41,519 37,171 38,687
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $374,844 $313,900 $325,420
======== ======== ========
3
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands except shares and per share amounts)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME:
Loans $5,584 $5,618 $16,993 $15,612
Securities available for sale, securities held
to maturity and other securities 732 912 2,178 2,828
Tax exempt securities 170 159 498 438
Federal funds sold 910 90 1,647 222
--------- --------- --------- ---------
Total interest income 7,396 6,779 21,316 19,100
INTEREST EXPENSE:
Deposits 2,249 1,934 6,301 5,328
Other borrowings - 7 - 39
--------- --------- --------- ---------
Total interest expense 2,249 1,941 6,301 5,367
--------- --------- --------- ---------
NET INTEREST INCOME 5,147 4,838 15,015 13,733
Provision for loan losses 38 25 113 75
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,109 4,813 14,902 13,658
--------- --------- --------- ---------
NONINTEREST INCOME:
Customer service fees 183 222 601 581
Other 900 26 952 108
--------- --------- --------- ---------
Total noninterest income 1,083 248 1,553 689
NONINTEREST EXPENSE:
Salaries and employee benefits 1,902 1,744 5,606 5,146
Occupancy 275 269 812 760
Equipment 213 210 641 664
Data processing services 89 83 270 246
Telephone and postage 85 76 239 220
Legal fees 75 74 189 217
Goodwill and core deposit amortization 48 57 145 172
Marketing 53 59 190 160
Consulting fees 85 45 205 135
Foreclosed asset expense 3 9 9 72
FDIC insurance 8 8 25 23
Other 381 367 1,024 1,037
--------- --------- --------- ---------
Total other expenses 3,217 3,001 9,355 8,852
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 2,975 2,060 7,100 5,495
Income tax expense 1,200 810 2,875 2,070
--------- --------- --------- ---------
NET INCOME $1,775 $1,250 $ 4,225 $ 3,425
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE $0.39 $0.27 $0.92 $0.74
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $0.37 $0.26 $0.87 $0.70
========= ========= ========= =========
Weighted average shares outstanding used to
compute basic earnings per common share 4,549,859 4,608,850 4,594,379 4,617,485
Dilutive effects of stock options 199,252 230,265 240,254 262,585
--------- --------- --------- ---------
Weighted average shares outstanding used to
compute diluted earnings per common share 4,749,111 4,839,115 4,834,633 4,880,070
========= ========= ========= =========
4
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
--------------
Nine Months Ended Sept. 30,
------------------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,225 $ 3,425
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 113 75
Depreciation and amortization 745 835
Write-down of foreclosed assets - 15
Gain on sale of foreclosed assets and assets (875) -
available for sale
(Decrease) increase in deferred loan fees (45) 42
Change in assets and liabilities:
Decrease (increase) in interest receivable and other assets 224 (378)
Increase in accrued interest payable and other liabilities 865 1,827
-------- --------
Net cash provided by operating activities 5,252 5,841
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (312) (303)
Paydown on assets held for sale 374 70
Proceeds from sales of foreclosed assets 3,484 1,063
Net decrease (increase) in loans 10,820 (38,084)
Expenditures on foreclosed assets (62) 35
Activities in securities held to maturity:
Proceeds from maturing securities 11,018 12,019
Purchases of securities (10,440) (1,005)
Activities in securities available for sale:
Purchases of securities - (4,382)
-------- --------
Net cash provided by (used in) investing activities 14,882 (30,587)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 392 193
Purchase of common stock (2,522) (854)
Net increase in deposits 45,104 6,930
-------- --------
Net cash provided by financing activities 42,974 6,269
-------- --------
Net increase (decrease) in cash and cash equivalents 63,108 (18,477)
Cash and cash equivalents at beginning of period 29,733 46,229
-------- --------
Cash and cash equivalents at end of period $ 92,841 $ 27,752
======== ========
Cash paid during year for:
Interest $ 6,154 $ 5,138
======== ========
Income taxes $ 1,500 $ 1,483
======== ========
Supplemental schedule of non-cash investing activity:
Loans transferred to foreclosed assets $ 2,478 $ 760
======== ========
5
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(In thousands except shares and per share amounts)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------ -----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net Income $ 1,775 $ 1,250 $ 4,225 $ 3,425
Other Comprehensive Income:
Unrealized loss on securities available for sale 286 210 259 102
Income tax expense related to unrealized loss
on securities available for sale (114) (84) (103) (42)
------- ------- ------- -------
Other Comprehensive Income 172 126 156 60
COMPREHENSIVE INCOME $ 1,947 $ 1,376 $ 4,381 $ 3,485
------- ------- ------- -------
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 Statement of Financial Accounting
Standards (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.
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 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 nine months ended September 30, 1998, the Company reported net income of
$4,225,000, or $.87 earnings per diluted share compared to a net income of
$3,425,000 or $.70 earnings per diluted share for the same period of the prior
year. The annualized return on average assets was 1.64% for the nine months
ended September 30, 1998 compared to 1.53% for the same period of the prior
year. The annualized return on average shareholders' equity for the nine months
ended September 30, 1998 and 1997 was 14.06% and 12.94%, respectively.
The following discussion and analysis is intended to provide additional
information on the results of operations and financial condition of the Company
and should be read in conjunction with the Company's Annual Report on Form 10-K
for the fiscal
7
year ended December 31, 1997 and the Quarterly Reports on Form 10-Q filed in
fiscal 1998. Certain statements in this discussion constitute "forward looking
statements" and could cause the actual results to differ materially from those
expressed or implied in the forward looking statements. Factors which that might
cause such differences include, but are not limited to, interest rate risks,
asset quality, general economic conditions, legislative or regulatory changes,
increases in personnel or commercial customers' bankruptcies, and "Year 2000"
information systems compliance being more difficult or more expensive to
complete than expected. The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward looking
statements. Readers should carefully review the risk factors described in other
documents the Company files with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Net interest income for the nine months ended September 30, 1998 was $15.0
million, increasing $1.3 million or 9.3% from net interest income of $13.7
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 nine months of 1998 equaled $21.3 million,
an increase of $2.2 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
$42.1 million or 15.1% to $321.0 million for the first nine months of 1998
compared to $278.9 million for the same period in 1997.
Total interest expense for the first nine months of 1998 was $6.3 million an
increase of $.9 million or 17.4% from the $5.4 million for the first nine
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 $215.7 million for the first nine
months of 1998 as compared to $187.4 million for the same period of the prior
year, an increase of $28.4 million or 15.1%. The average rate paid on these
liabilities increased 7 basis points to 3.90% for the first nine months of 1998
from 3.83% for the same period of 1997. The increase in the average rate is
attributed to a shift in the mix of interest bearing liabilities to savings and
time deposits which have higher interest rates. Savings and time deposits as a
percentage of total interest bearing liabilities increased to 48.4% from 41.9%
for the first nine months of 1998 and 1997, respectively.
Net Interest Margin
Net interest margin declined 36 basis points to 6.36% for the nine months ended
September 30, 1998 from 6.72% for the same period of the prior year. The
decrease in the margin is attributed to the decline in the average rate earned
on earning assets of 31 basis points and the increase in the average rate paid
on interest bearing deposits of 9 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 12.5% for the first nine months of 1998 compared to 2.0% for the same period
of the prior year. The increase in the average rate paid on interest bearing
deposits reflects 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 interest
income for the nine month periods ended September 30, 1998 and 1997.
Nine months ended September 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 $ 31,339 $ 1,481 6.32% $ 30,901 $ 1,478 6.40%
Securities held to maturity:
U.S. Treasury securities 5,959 266 5.96% 6,788 303 5.97%
U.S. Government agencies 6,675 338 6.76% 17,325 964 7.44%
Municipal securities (1) 13,892 754 7.26% 12,013 664 8.13%
Other securities 2,120 93 5.89% 1,860 83 5.95%
Federal funds sold and securities
purchased under agreements to resell 40,236 1,647 5.47% 5,466 222 5.43%
Loans:(2),(3)
Commercial 131,193 10,168 10.36% 108,487 8,458 10.42%
Real estate-construction 10,563 807 10.22% 10,879 829 10.19%
Real estate-other 61,542 4,720 10.25% 64,867 4,823 9.94%
Installment and other 17,519 1,298 9.91% 20,362 1,502 9.86%
--------- -------- -------- --------- -------- --------
Total Loans 220,817 16,993 10.29% 204,595 15,612 10.20%
--------- -------- -------- --------- -------- --------
Total Earning Assets 321,038 21,572 8.98% 278,948 19,326 9.29%
Cash and due from banks 19,956 17,271
Leasehold improvements and equipment - net 1,340 1,418
Interest receivable and other assets 5,042 4,891
Foreclosed assets 601 608
Assets held for sale - 205
Less allowance for loan loss (4,260) (4,882)
--------- ---------
TOTAL ASSETS $ 343,717 $ 298,459
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 27,647 197 0.95% $ 14,734 175 1.59%
Money market 83,643 2,124 3.40% 93,247 2,149 3.08%
Time and savings 104,452 3,980 5.09% 78,489 3,004 5.12%
Other borrowed funds - - 0.00% 896 39 5.85%
--------- -------- -------- --------- -------- --------
Total interest bearing liabilities 215,742 6,301 3.90% 187,366 5,367 3.83%
Demand deposits 83,573 73,051
Other liabilities 4,327 2,742
Shareholders' equity 40,075 35,300
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 343,717 $ 298,459
========= =========
Net Interest Income $ 15,271 $ 13,959
======== ========
Net Interest Margin 6.36% 6.72%
======= ========
Tax Equivalent Adjustment (1) $256 $ 226
======== ========
- ----------------------------------------------------------------------------
(1) The tax-equivalent income adjustment on municipal securities is computed
using a Federal income tax rate of 34%. Interest on municipal securities was
$498,000 and $438,000 for September 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
$381,000 and $330,000 for September 30, 1998 and 1997, respectively; fees on
real estate loans of $283,000 and $298,000 for September 30, 1998 and 1997,
respectively; and fees on installment and other loans of $22,000 and $25,000 for
September 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 nine month periods ended September 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 $ 22 $ (19) $ 3
Securities held to maturity:
U.S. Treasury securities (36) (1) (37)
U.S. Government agencies (592) (34) (626)
Municipal securities 180 (90) 90
Other securities 10 - 10
Federal funds sold 1,412 13 1,425
Loans:
Commercial 1,767 (57) 1,710
Real estate-construction (24) 2 (22)
Real estate-other (248) 145 (103)
Installment and other (210) 6 (204)
-------- ------ --------
Total Loans 1,285 96 1,381
-------- ------ --------
Total increase $ 2,281 $ (35) $ 2,246
-------- ------ --------
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking $ (154) $ 132 $ (22)
Money market 222 (197) 25
Savings and time (996) 20 (976)
Other borrowed funds 39 - 39
-------- ------ --------
Total increase $ (889) $ (45) $ (934)
-------- ------ --------
Total change in net interest income $ 1,392 $ (80) $ 1,312
======== ====== ========
(1) Changes not solely attributed to rate or volume have been allocated to
volume.
(2) Loan fees are reflected in rate volumes.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 1998 was
$113,000 as compared to $75,000 for the nine months ended September 30, 1997.
See "Financial Condition-Allowance for Loan Losses" for further discussion.
10
Non-Interest Income
Non-interest income for the nine months ended September 30, 1998 was $1,553,000,
an increase of $864,000 from the nine months ended September 30, 1997. The
increase reflects gains of $875,000 on the disposal of foreclosed assets and
other non-performing assets. Customer service fees have increased $20,000 or
$3.4% to $601,000 from $581,000 due to the increase in deposit volume.
Non-Interest Expense
Non-interest expense totaled $9.4 million and $8.9 million for the nine months
period ended September 30, 1998 and 1997, respectively. Salaries and employee
benefits for the nine months ended September 30, 1998 increased $460,000 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 109 on September 30, 1998 compared to 108 on September 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
decreased due to decreased legal activity to recover prior period loan charge-
offs. Increases in consulting fees include a cost reduction/containment review
which was completed in the third quarter and professional fees related to
compliance auditing services which increased during the nine 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
Sept. 30 Sept. 30 Dollar %
(Dollars in thousands) 1998 1997 Change Change
-------- -------- ------ ------
Salaries and related benefits $5,606 $5,146 $460 8.9%
Occupancy 812 760 52 6.8%
Equipment 641 664 (23) -3.5%
Data processing services 270 246 24 9.8%
Telephone and postage 239 220 19 8.6%
Legal fees 189 217 (28) -12.9%
Goodwill and core deposit amortization 145 172 (27) -15.7%
Marketing 190 160 30 18.8%
Consulting fees 205 135 70 51.9%
Foreclosed asset expenses 9 72 (63) -87.5%
FDIC insurance 25 23 2 8.7%
Other 1,024 1,037 (13) -1.3%
------ ------ ---- -----
TOTAL NONINTEREST EXPENSE $9,355 $8,852 $503 5.7%
====== ====== ==== =====
Provision for Income Taxes
The provision for income taxes for the nine months of 1998 increased to
$2,875,000 from $2,070,000 for the same period of the prior year. These
provisions represent effective tax rates of 41% and 38%, respectively. The
effective rate has been increased for 1998 due to the reduced impact of tax
exempt municipal securities on the larger pre-tax income.
11
FINANCIAL CONDITION
Loans
Total loans have decreased $13.3 million or 5.7% at September 30, 1998 from
December 31, 1997 for several reasons. 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 nine months 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
4.6% at September 30, 1998 compared to 7.0% at September 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
relatively 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 $59.4 million at September 30, 1998, a decrease of $5.5 million or
8.5% from September 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.
September 30, December 31, September 30,
-------------------- -------------------- --------------------
1998 1997 1997
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Commercial $133,940 61.0% $135,140 58.0% $119,556 54.3%
Real estate - construction 10,109 4.6% 12,929 5.5% 15,479 7.0%
Real estate - other 59,435 27.1% 64,430 27.7% 64,954 29.5%
Installment and other 16,151 7.4% 20,478 8.8% 20,280 9.2%
-------- --------- -------- --------- -------- ---------
TOTAL $219,635 100.0% $232,977 100.0% $220,269 100.0%
======== ========= ======== ========= ======== =========
Non-Performing Assets
The following table provides information with respect to the Company's past due
loans and components of non-performing assets at the dates indicated.
12
Non-Performing Assets
Sept. 30 Dec. 31 Sept. 30
1998 1997 1997
-------- ------- --------
(Dollars in thousands)
Loans 90 days or more past due and still accruing $ 719 $ 496 $ 192
Non-accrual loans 494 3,465 3,465
Other assets held for sale - 43 205
Foreclosed assets - - 570
------ ------ ------
Total non-performing assets $1,213 $4,004 $4,432
====== ====== ======
Non-performing assets to period end loans,
other assets held for sale plus foreclosed assets 0.55% 1.72% 2.00%
====== ====== ======
During the first nine months of 1998, the Bank foreclosed on three properties
securing loans totaling $2 million which were classified as non-accrual at
December 31, 1997. Sales on these three properties were consummated during the
third quarter with gains on sales of $868,000. Additionally, non-accrual loans
totaling approximately $1 million were liquidated during the first nine months
of 1998 with associated loan charge-offs of $350,000.
At September 30, 1998, the recorded investment in loans considered to be
impaired was $494,000 which approximates the fair value of the supporting
collateral of the loans and accordingly they do not have an associated allowance
for loan loss. For the nine months ended September 30, 1998, the average
recorded investment in impaired loans was $2.2 million. Impaired loans are
placed on non-accrual status. However, if interest on these loans had been
recognized, such income would have approximated $34,000 for the first nine
months of 1998.
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 September 30, 1998.
13
The following table summarizes the changes in the allowance for loan losses for
the periods indicated:
Nine Months Year Nine Months
Ended Ended Ended
(Dollars in thousands) 9-30-98 12-31-97 9-30-97
----------- -------- --------
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 390 650 400
Installment and other 33 16 16
------ ------ ------
Total charge-offs 744 1,246 732
Recoveries:
Commercial 18 43 11
Real estate - construction 164 139 37
Real estate - other 421 280 253
Installment and other 52 66 25
------ ------ ------
Total recoveries 655 528 326
------ ------ ------
Net charge-offs 89 718 406
Provision charged to operations 113 100 75
------ ------ ------
Balance, at end of period $4,375 $4,351 $4,638
====== ====== ======
Ratio of net charge-offs to average loans (annualized) 0.05% 0.34% 0.26%
====== ====== ======
Allowance at period end to total loans outstanding 1.99% 1.87% 2.11%
====== ====== ======
Potential Problem Loans
At September 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.
September 30,
--------------------------------------
1998 1997
-------- --------- --------- ---------
Book Market Book Market
(Dollars in thousands) Value Value Value Value
-------- --------- --------- ---------
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 2,994 $ 3,005 $ 5,934 $ 5,952
U.S. government agencies and
corporation 7,976 8,180 12,013 12,095
Municipal securities 15,419 16,117 12,062 12,317
Collateralized mortgage obligations 72 75 98 103
------- -------- -------- --------
TOTAL $26,461 $27,377 $30,107 $30,467
======= ======== ======== ========
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $12,017 $12,302 $12,031 $12,215
U.S. government agencies and
corporation 18,438 18,831 18,722 18,918
------- -------- -------- --------
TOTAL $30,455 $31,133 $30,753 $31,133
======= ======== ======== ========
Deposits
The Company emphasizes developing total client relationships with its customers
in order to increase its core deposit base. Total deposits increased $45
million or 15.9% to $328 million as of September 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 September 30, 1998.
For the nine months ended September 30, 1998, average deposits totaled $299.3
million, an increase of $39.8 million or 15.3% from $259.5 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 nine months
ended September 30, 1998 and 1997.
Average Deposits
--------------------------------------------
Nine Months Ended September 30,
--------------------------------------------
1998 1997
--------------------------------------------
Dollars in thousands Amount Percentage Amount Percentage
------- ---------- -------- ----------
Demand accounts $ 83,573 27.8% $ 73,051 28.0%
Interest-bearing checking 27,647 9.2% 14,734 5.7%
Money market 83,643 27.9% 93,247 35.9%
Savings and time 104,452 34.9% 78,489 30.2%
-------- ------ -------- ------
Total $299,315 100.0% $259,521 100.0%
======== ====== ======== ======
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 September 30, 1998 had the following
schedule of maturities:
15
(In thousands)
--------------
Three months or less $43,288
After three months through six months 22,011
After six months through twelve months 13,826
After twelve months 3,338
-------
Total $82,463
=======
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 September 30, 1998 the Bank had no outstanding
borrowings against these arrangements. Additionally, at September 30, 1998,
unpledged government securities that are available to secure additional
borrowing in the form of reverse repurchase agreements totaled approximately
$33.0 million. At September 30, 1998 the Bank had no reverse repurchase
agreements.
The liquidity position of the Company increased during the nine months of 1998
from December 31, 1997 as cash and cash equivalents of $5.3 million, $14.9
million and $43.0 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 September 30, 1998, the
Company had a liquidity ratio of 39.2% 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 September 30, 1998 were $76.9 million
as compared to $13.2 million at December 31, 1997.
Capital Resources
Total shareholders' equity increased to $41.5 million at September 30, 1998 from
$38.7 million at December 31, 1997. The increase in equity reflects retained
income of $4.2 million, recognition of $700,000 in deferred tax benefits from
tax carryforward items which arose prior to the date of the quasi-reorganization
and an increase of $156,000, net of deferred income taxes, in the market
adjustment of securities available for sale. These benefits were offset by a
reduction of $2.1 million in common stock due to stock repurchases net of
incentive stock option exercises.
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 on 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 nine 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
16
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 September 30, 1998 the Company's total risk-based capital ratio was 15.99%.
The following table presents the Company's risk-based capital and leverage
ratios as of September 30, 1998 and December 31, 1997.
Minimum Capital
Requirements To Be
Considered Well Capitalized
Minimum Under Prompt Corrective
Actual Capital Requirement Action Provisions
----------------------- ----------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ---------- --------- ----------- ---------
As of September 30, 1998:
Total Capital
(to Risk Weighted Assets) $43,754 15.99% $21,885 8.00% $27,356 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 40,322 14.74% 10,942 4.00% 16,414 6.00%
Tier 1 Capital
(to Average Assets) 40,322 11.04% 14,609 4.00% 18,261 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 is working to resolve the potential impact of Year 2000 on it's
computer system and the associated software applications. If the Company and
it's third party software venders are unable to address this issue in a timely
manner, there could substantial financial risk to the Company. Contingency plans
include the conversion to alternative Y2K compliant applications, outsourcing of
critical functions to third-party providers or interim manual processing. In the
worst case scenario, the Company would retain sufficient additional staffing to
convert to manual processing. The added expense in this scenario would be a
function of the number of applications requiring such manual processing and the
duration of time until a Y2K compliant application could be acquired, tested and
installed.
To insure this does not occur, the Company has conducted a comprehensive review
of its computer systems and has developed an action plan to address the issue.
The Company relies on third party software venders for substantially all of its
applications, and accordingly, the focus of the Company is to monitor the
progress of its primary venders toward Year 2000 compliance and to test the
processing of data using Y2K compliant applications on future simulated dates.
To date, certifications have been received from the Company's primary venders
detailing the Year 2000 compliance of their systems. Testing and validation of
Y2K compliant applications is currently underway in a separate computer
environment with
17
mission critical applications testing estimated to be 75% completed and non-
mission critical applications estimated to be 50% completed. Based on the
progress to date, the Company anticipates it will not be required to pursue
contingency plans.
The Company has also investigated "environmental systems providers" which
include such services as building elevators, telephone and alarm systems for
year 2000 compliance and has received certifications that they will be Year 2000
compliant. However, due to the nature of many of the environmental applications,
such as the utility companies, the Company will be unable to test and validate
compliance.
The primary cost associated with the Company's efforts to review, test and
validate its computer applications for Year 2000 compliance has been and will
continue to be the reallocation of internal resources. The Company has budgeted
anticipated expenditures of $50,000 to $75,000 in 1998 and 1999 to insure its
systems are ready for processing information in the Year 2000. The Company has
expensed approximately $38,000 relating to its Year 2000 compliance efforts
during the first nine months 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 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 September 30, 1998 was asset sensitive
due to the significant amount of variable rate loans and Federal funds sold.
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 - None
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: November 5, 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