SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-13287
CIVIC BANCORP
2101 Webster Street, 14th Floor
Oakland, CA 94612
(510) 836-6500
Incorporated in California I.R.S. Employer Identification No.
68-0022322
The number of shares of common stock outstanding as of the close of business on
April 1, 1999:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 4,529,174
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
1
CIVIC BANCORP
AND
SUBSIDIARY
Index to Form 10-Q Page Number
-----------
PART I. Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1999, March 31, 1998
and December 31, 1998 3
Consolidated Statements of Income -
Three Months Ended March 31, 1999 and
March 31, 1998 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and
March 31, 1998 5
Consolidated Statements of Comprehensive
Income - Three Months Ended March 31, 1999
and March 31, 1998 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 19
SIGNATURES 20
2
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
March 31 March 31 December 31
1999 1998 1998
------------------ ----------------- ------------------
ASSETS
Cash and due from banks $ 17,339 $ 18,178 $ 15,276
Federal funds sold 81,750 25,100 73,028
------------------ ----------------- ------------------
Total cash and cash equivalents 99,089 43,278 88,304
Securities available for sale 35,727 34,982 30,869
Securities held to maturity
(market value of $37,027, $24,437 and $33,218, respectively) 36,574 24,080 32,503
Other securities 2,257 2,055 2,243
Loans:
Commercial 154,226 129,630 146,216
Real estate-construction 8,643 9,674 7,648
Real estate-other 64,887 64,172 62,328
Installment and other 16,495 17,899 17,019
------------------ ----------------- ------------------
Total loans 244,251 221,375 233,211
Less allowance for loan losses 4,710 4,073 4,424
------------------ ----------------- ------------------
Loans - net 239,541 217,302 228,787
Interest receivable and other assets 6,231 5,175 5,316
Leasehold improvements and equipment - net 1,612 1,336 1,558
Foreclosed assets - 554 -
------------------ ----------------- ------------------
TOTAL ASSETS $ 421,031 $ 328,762 $ 389,580
================== ================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 72,941 $ 80,398 $ 71,417
Interest-bearing:
Checking 4,692 9,844 6,231
Money market 173,463 89,998 139,851
Time and savings 120,805 104,883 125,450
------------------ ----------------- ------------------
Total deposits 371,901 285,123 342,949
Accrued interest payable and other liabilities 5,617 3,823 4,817
------------------ ----------------- ------------------
Total liabilities 377,518 288,946 347,766
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,
4,529,174, 4,620,635 and 4,444,002 shares 33,259 35,115 32,723
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 10,072 4,462 8,797
Accumulated other comprehensive income - net 182 239 294
------------------ ----------------- ------------------
Total shareholders' equity 43,513 39,816 41,814
------------------ ----------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 421,031 $ 328,762 $ 389,580
================== ================= ==================
3
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except shares and per share amounts)
Three Months Ended March 31,
---------------------------------------------
1999 1998
------------------ ------------------
INTEREST INCOME:
Loans $ 5,475 $ 5,627
Securities available for sale, securities held
to maturity and other securities 782 709
Tax exempt securities 192 160
Federal funds sold 813 337
------------------ ------------------
Total interest income 7,262 6,833
INTEREST EXPENSE:
Deposits 2,188 2,015
------------------ ------------------
Total interest expense 2,188 2,015
------------------ ------------------
NET INTEREST INCOME 5,074 4,818
Provision for loan losses 45 38
------------------ ------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,029 4,780
------------------ ------------------
NONINTEREST INCOME:
Customer service fees 202 209
Other 40 28
------------------ ------------------
Total noninterest income 242 237
NONINTEREST EXPENSE:
Salaries and employee benefits 2,019 1,842
Occupancy 277 271
Equipment 245 212
Data processing services 96 89
Telephone and postage 83 66
Consulting fees 66 60
Marketing 42 69
Legal fees 45 55
Goodwill and core deposit amortization 42 48
FDIC insurance 10 8
Other 286 327
------------------ ------------------
Total noninterest expense 3,211 3,047
------------------ ------------------
INCOME BEFORE INCOME TAXES 2,060 1,970
Income tax expense 785 795
------------------ ------------------
NET INCOME $ 1,275 $ 1,175
================== ==================
BASIC EARNINGS PER COMMON SHARE $ 0.28 $ 0.25
================== ==================
DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ 0.24
================== ==================
Weighted average shares outstanding used
to compute basic earnings per common share 4,499,125 4,623,047
Dilutive effects of stock options 138,339 267,732
------------------ ------------------
Total weighted average shares outstanding used
to compute diluted earnings per common share 4,637,464 4,890,779
================== ==================
4
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
1999 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,275 $ 1,175
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 45 38
Depreciation and amortization 313 251
Increase (decrease) in deferred loan fees 22 (28)
Change in assets and liabilities:
(Increase) decrease in interest receivable and other assets (23) 193
(Decrease) in accrued interest payable and other liabilities (59) 130
----------------- -----------------
Net cash provided by operating activities 1,573 1,759
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (205) (31)
Paydown on assets held for sale - 43
Net (increase) decrease in loans (10,821) 10,760
Activities in securities held to maturity:
Proceeds from maturing securities 6 4,005
Purchases of securities (4,130) (870)
Activities in securities available for sale:
Proceeds from maturing securities 3,000 -
Purchases of securities (8,126) (3,979)
----------------- -----------------
Net cash (used in) provided by investing activities (20,276) 9,928
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 536 71
Purchase of common stock - (186)
Net increase in deposits 28,952 1,973
----------------- -----------------
Net cash provided by financing activities 29,488 1,858
----------------- -----------------
Net increase in cash and cash equivalents 10,785 13,545
Cash and cash equivalents at beginning of period 88,304 29,733
----------------- -----------------
Cash and cash equivalents at end of period $ 99,089 $ 43,278
================= =================
Cash paid during period for:
Interest $ 2,372 $ 1,664
================= =================
Income taxes $ 250 $ -
================= =================
Supplemental schedule of non-cash investing activity:
Loans transferred to foreclosed assets $ - $ 554
================= =================
5
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended March 31,
---------------------------------------------
1999 1998
------------------ ------------------
Net Income $ 1,275 $ 1,175
Other Comprehensive Income:
Unrealized loss on securities available for sale (187) (21)
Income tax expense related to unrealized loss
on securities available for sale 75 9
----------------- -----------------
Other Comprehensive Income (112) (12)
----------------- -----------------
COMPREHENSIVE INCOME $ 1,163 $ 1,163
----------------- -----------------
6
CIVIC BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Civic BanCorp and its
subsidiary bank CivicBank of Commerce (the Company) have been prepared in
accordance with generally accepted accounting principles and 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, cash flows and comprehensive income for the interim periods
presented. These unaudited consolidated financial statements should be read
in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. The results of operations and cash flows are not
necessarily indicative of those expected for the complete fiscal year.
2. NEW PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board (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. This 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 has not completed its evaluation
of the impact of its adoption, however, management does not believe it will
have a significant impact on the Company's consolidated financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations For the Three Months Ended March 31, 1999 and 1998
OVERVIEW
For the three months ended March 31, 1999, the Company reported net income of
$1,275,000, or $0.27 earnings per diluted share compared to net income of
$1,175,000 or $0.24 earnings per diluted share for the same period of the prior
year. The annualized return on average assets was 1.28% for the three months
ended March 31, 1999 compared to 1.43% for the same period of the prior year.
The annualized return on average shareholders' equity for the three months ended
March 31, 1999 and 1998 was 11.97% and 11.96%, respectively.
RESULTS OF OPERATIONS
Net interest income for the three months ended March 31, 1999 was $5.1 million,
increasing $256,000 or 5.3% from net interest income of $4.8 million for the
same period in 1998. The increase in net interest income is primarily attributed
to an increase in the volume of earning assets which was partially offset by an
increase in the volume of interest bearing liabilities and a decline in the net
interest margin.
Total interest income for the first three months of 1999 was $7.3 million, an
increase of $429,000 over the same period ended 1998. The increase in total
interest income reflects an increase in volume of earning assets which was
partially offset by a decline in the yield on earning assets. Average earning
assets increased $69.1 million or 22.5% to $376.5 million in the first quarter
of 1999 compared to $307.4 million for the same period ended 1998. However, the
yield on earning assets declined 119 basis points due to an overall lower
interest rate environment and a less favorable mix of earning assets. Total
interest expense for the first three months of 1999 was $2.2 million, an
increase of $0.2 million over the same period ended 1998. The increase in total
interest expense reflects an increase in volume of interest bearing deposits.
Average
7
interest bearing deposits increased $48.4 million or 23.5% to $253.9 million in
the first quarter of 1999 compared to $205.5 million for the same period ended
1998.
8
The following table presents an analysis of the components of net interest
income for the first quarter of 1999 and 1998.
Three months ended March 31,
------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
-------------------------------------------- ------------------------------------------
Interest Rates Interest Rates
Average Income\ Earned\ Average Income\ Earned\
Balance Expense /2/ Paid Balance Expense /2/ Paid
-------------- ------------ ---------- ------------ ----------- ----------
ASSETS
Securities available for sale $ 33,177 $ 520 6.36% $ 31,331 $ 496 6.42%
Securities held to maturity:
U.S. Treasury securities - - 0.00% 5,955 88 5.99%
U.S. Government agencies 17,369 230 5.37% 4,756 95 8.09%
Municipal securities/(1)/ 16,147 291 7.32% 13,366 242 7.33%
Other securities 2,254 32 5.81% 2,032 30 6.04%
Federal funds sold and securities
purchased under agreements to resell 70,177 813 4.70% 24,948 337 5.47%
Loans:/2,3/
Commercial 149,601 3,482 9.44% 130,022 3,338 10.41%
Real estate-construction 7,874 185 9.52% 11,771 299 10.30%
Real estate-other 63,047 1,429 9.19% 64,118 1,523 9.63%
Installment and other 16,847 379 9.12% 19,141 467 9.90%
-------------- ------------ ---------- ------------ ----------- ----------
Total Loans 237,369 5,475 9.35% 225,052 5,627 10.14%
-------------- ------------ ---------- ------------ ----------- ----------
Total Earning Assets 376,493 7,361 7.93% 307,440 6,915 9.12%
Cash and due from banks 18,254 19,040
Leasehold improvements and equipment - net 1,605 1,392
Interest receivable and other assets 5,932 4,896
Foreclosed assets - 239
Assets held for sale - 20
Less allowance for loan loss (4,518) (4,245)
-------------- ------------
TOTAL ASSETS $ 397,766 $ 328,782
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 27,773 $ 40 0.58% $ 27,807 $ 65 0.95%
Money market 101,736 806 3.21% 74,099 621 3.40%
Time and savings 124,369 1,342 4.38% 103,619 1,329 5.20%
-------------- ------------ ---------- ------------ ----------- ----------
Total interest bearing liabilities 253,878 2,188 3.50% 205,525 2,015 3.98%
Demand deposits 95,638 80,134
Other liabilities 5,628 3,816
Shareholders' equity 42,622 39,307
-------------- ------------
TOTAL LIABILITIES AND $ 397,766 $ 328,782
============== ============
SHAREHOLDERS' EQUITY
Net Interest Income 5,173 4,900
============ ===========
Net Interest Margin 5.57% 6.46%
========== ==========
Tax Equivalent Adjustment/(1)/ 99 82
============ ===========
- --------------------------------------------------------------------------------
/(1)/ Tax-exempt interest income on municipal securities is computed using a
Federal income tax rate of 34%. Interest on municipal securities was $192
and $160 for March 31, 1999 and 1998, 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 $139,000 and
$124,000 for March 31, 1999 and 1998, respectively; fees on real estate
loans of $67,000 and $88,000 for March 31, 1999 and 1998, respectively;
and fees on installment and other loans of $7,000 and $9,000 for March 31,
1999 and 1998, 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 three month period ended March 31, 1999.
Volume/1/ Rate/2/ Total
---------- ----------- -----------
(In thousands)
Increase (decrease) in interest income:
Securities available for sale $ 29 $ (5) $ 24
Securities held to maturity:
U.S. Treasury securities (88) - (88)
U.S. government agency 253 (118) 135
Municipal securities 50 (1) 49
Other securities 3 (1) 2
Federal funds sold 611 (135) 476
Loans:
Commercial 506 (362) 144
Real estate-construction (99) (15) (114)
Real estate-other (25) (69) (94)
Installment and other (55) (33) (88)
---------- ----------- -----------
Total Loans 327 (479) (152)
---------- ----------- -----------
Total increase (decrease) $1,185 $ (739) $ 446
---------- ----------- -----------
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking $ (0) $ 25 $ 25
Money market (231) 46 (185)
Savings and time (269) 256 (13)
---------- ----------- -----------
Total (increase) decrease $ (500) $ 327 $ (173)
---------- ----------- -----------
Total change in net interest income $ 685 $ (412) $ 273
========== =========== ===========
/(1)/ Changes not solely attributed to rate or volume have been allocated to
volume.
/(2)/ Loan fees are reflected in rate variances.
Net Interest Margin
The net interest margin declined 89 basis points to 5.57% for the first quarter
of 1999 from 6.46% for the same period in 1998 due to a declining interest rate
environment and unfavorable changes in the mix of earning assets. The average
yield on the securities portfolio, Federal funds sold and the loan porfolio
declined 39, 77 and 79 basis points respectively, for the three months ended
March 31, 1999 as compared to the same period in 1998. There was a shift in the
composition of average earning assets as Federal funds sold increased to 18.6%
of total earning assets for the first quarter of 1999 compared to 8.1% for the
same period of the prior year while loans declined to 63.0% from 73.2% for the
same periods respectively. Loans have the
10
highest yield while Federal funds have the lowest yield and the shift reduced
the weighted average yield on the group of earning assets. The average yield on
interest bearing deposits decreased 48 basis points to 3.50% for the three
months ended March 31, 1999 compared to 3.98% for the same period ended one year
ago.
Provision for Loan Losses
The provision for loan losses is charged to operations and creates an allowance
for future loan losses. The amount of the provision is dependent on many factors
which include the amount of the allowance for loan losses, growth in the loan
portfolio, net charges against the allowance, changes in the composition of the
portfolio, the number and dollar amount of delinquent loans, assessment of the
overall quality of the portfolio, value of the collateral on problem loans,
recommendations by regulatory authorities and general economic conditions among
others. The provision for loan losses for the three months ended March 31, 1999
was $45,000, an increase of $7,000 or 18.4% from the three months ended March
31, 1998. The increase in the provision was based on the growth in the loan
portfolio.
Noninterest Income
Noninterest income for the three months ended March 31, 1999 was $242,000, an
increase of $5,000 or 2.1% from the three months ended March 31, 1998. The
increase is primarily attributable to a $12,000 increase in merchant discount
fees which was partially offset by a $9,000 decrease in international fees.
Noninterest Expense
Noninterest expense totaled $3.2 million for the three months ended March 31,
1999, an increase of $164,000 or 5.4% from $3.0 million for the same period of
the prior year. Salaries and employee benefits, the largest component of
noninterest expense increased $177,000 or 9.6% due to additional staff, normal
merit increases and an increase in the use of temporary help. Full time
equivalent personnel numbered 112 on March 31, 1999 compared to 107 on March 31,
1998.
The following table summarizes the significant components of noninterest expense
for the dates indicated.
Quarter Ended March 31, Dollar %
1999 1998 Change Change
(Dollars in thousands) --------- -------- ---------- ----------
Salaries and employee benefits $ 2,019 $ 1,842 $ 177 9.6%
Occupancy 277 271 6 2.2%
Equipment 245 212 33 15.6%
Data processing services 96 89 7 7.9%
Telephone and postage 83 66 17 25.8%
Consulting fees 66 60 6 10.0%
Marketing 42 69 (27) (39.1%)
Legal fees 45 55 (10) (18.2%)
Goodwill and core deposit amortization 42 48 (6) (12.5%)
FDIC insurance 10 8 2 25.0%)
Other 286 327 (41) (12.5%)
-------- -------- ------ -------
TOTAL NONINTEREST EXPENSE $ 3,211 $ 3,047 $ 164 5.4%
======== ======== ====== =======
11
Provision for Income Taxes
The provision for income taxes for the first quarter of 1999 decreased to
$785,000 from $795,000 for the same quarter of the prior year. These provisions
represent effective tax rates of 38% and 40%, respectively.
FINANCIAL CONDITION
Loans
Average loans for the first quarter of 1999 increased $12.3 million or 5.5% to
$237.4 million compared to $225.1 million for the same quarter of 1998. Loans
outstanding at March 31, 1999 increased $11.1 million to $244.3 million from
$233.2 million at December 31, 1998. The increase in loans outstanding during
the first quarter was due to a strong regional economy and an overall increase
in loan demand.
Real estate construction loans as a percentage of total loans outstanding were
3.5% at March 31, 1999 compared to 4.4% at March 31, 1998. The Bank maintains a
limited portfolio of real estate constructions loans as the risks associated
with real estate construction lending are generally considered to be higher than
risks associated with other forms of lending. However, the Bank continues to
fund real estate construction commitments on a limited basis with stringent
underwriting criteria.
Other real estate loans consist of mini-perm loans and land acquisition loans
which are primarily owner-occupied and are generally granted based on the rental
or lease income stream generated by the property. Other real estate loans
totaled $64.9 million at March 31, 1999, an increase of $715,000 or 1.1% from
March 31, 1998.
The following table sets forth the amount of loans outstanding in each category
and the percentage of total loans outstanding for each category as of the date
indicated.
March 31, 1999 December 31, 1998 March 31, 1998
------------------------------ --------------------------------- --------------------------------
Amount Percent Amount Percent Amount Percent
--------------- ------------ ----------------- ------------- ----------------- ------------
(Dollars in thousands)
Commercial $ 154,226 63.1% $ 146,216 62.7% $ 129,630 58.6%
Real estate - construction 8,643 3.5% 7,648 3.3% 9,674 4.4%
Real estate - other 64,887 26.6% 62,328 26.7% 64,172 29.0%
Installment and other 16,495 6.8% 17,019 7.3% 17,899 8.0%
--------------- ------------ ----------------- ------------- ----------------- ------------
TOTAL $ 244,251 100.0% $ 233,211 100.0% $ 221,375 100.0%
=============== ============ ================= ============= ================= ============
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
March 31 Dec. 31 March 31
1999 1998 1998
--------------- -------------- -------------
(Dollars in thousands)
Loans 90 days or more past due and still accruing $ - $ 112 $ 182
Non-accrual loans 79 208 3,238
Foreclosed assets - - 554
--------------- -------------- -------------
Total non-performing assets $ 79 $ 320 $ 3,974
=============== ============== =============
Non-performing assets to period end loans,
other assets held for sale plus foreclosed assets 0.03% 0.14% 1.80%
=============== ============== =============
At March 31, 1999, the recorded investment in loans considered to be impaired
consisted of one loan totaling $79,000 which was on a non-accrual basis. For the
quarter ended March 31, 1999, the average recorded investment in impaired loans
was $86,000. No interest income was recognized on impaired loans. If interest
income on those loans had been recognized, such income would have approximated
$2,000.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses, the amount of which is based on many factors. See "Provision for Loan
Losses". The allowance is increased by provisions charged against earnings and
reduced by net loan charge-offs. Loans are charged off when they are judged to
be impaired. A loan is considered impaired when, based on current information
and circumstances, it becomes probable that the Company will be unable to
collect all amounts due according to the original terms and conditions of the
loan agreement. Recoveries of amounts previously charged off are recorded only
when cash is received.
The policy of the Company is to review each loan in the portfolio to identify
potential problem credits and to assess the credit quality of each loan in the
portfolio. Specific allocations are made for loans where the probability of a
loss can be defined and reasonably estimated while the balance of the
allocations are based on the size of the portfolio, delinquency trends,
historical data, industry averages and general economic conditions in the
Company's market area.
Although management believes that the allowance for loan losses is adequate for
both potential losses of identified credits and estimated inherent losses in the
portfolio, future provisions will be subject to continuing evaluations of the
portfolio, and if the economy declines or the quality of the loan portfolio
deteriorates, additional provisions may be required.
13
The following table summarizes the changes in the allowance for loan losses for
the periods indicated:
Three Months Year Three Months
Ended Ended Ended
3-31-99 12-31-98 3-31-98
------------ -------------- ---------------
(Dollars in thousands)
Balance, at beginning of period $ 4,424 $ 4,351 $ 4,351
Charge-offs:
Commercial - 200 171
Real estate - construction - 150 150
Real estate - other - 390 58
Installment and other - 95 -
------------ -------------- ---------------
Total charge-offs - 835 379
Recoveries:
Commercial 82 48 6
Real estate - construction - 164 9
Real estate - other 101 487 15
Installment and other 58 59 33
------------ -------------- ---------------
Total recoveries 241 758 63
------------ -------------- ---------------
Net (recoveries) charge-offs (241) 77 316
Provision charged to operations 45 150 38
------------ -------------- ---------------
Balance, at end of period $ 4,710 $ 4,424 $ 4,073
============ ============== ===============
Ratio of net (recoveries) charge-offs to average
loans (annualized) (0.41%) 0.03% 0.56%
============ ============== ===============
Allowance at period end to total loans
outstanding 1.93% 1.90% 1.84%
============ ============== ===============
Average Loans 237,369 221,758 225,072
EOP Loans 244,251 233,211 221,375
Potential Problem Loans
At March 31, 1999 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, 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 amortized cost and estimated market values of
investment securities at the dates indicated.
March 31, 1999 December 31, 1998
------------------------------------- --------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------------- ---------------- ---------------- ---------------
(Dollars in thousands)
SECURITIES HELD TO MATURITY:
U.S. government agencies and
corporation $ 20,378 $ 20,358 $ 16,290 $ 16,400
Municipal securities 16,140 16,611 61 64
Mortgage Backed Securities 56 58 16,152 16,754
--------------- ---------------- ---------------- ---------------
TOTAL $ 36,574 $ 37,027 $ 32,503 $ 33,218
=============== ================ ================ ===============
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 23,414 $ 23,572 $ 12,013 $ 12,228
U.S. government agencies and
corporation 12,010 12,155 18,366 18,641
--------------- ---------------- ---------------- ---------------
TOTAL $ 35,424 $ 35,727 $ 30,379 $ 30,869
=============== ================ ================ ===============
Deposits
For the three months ended March 31, 1999 average deposits totaled $349.5
million, an increase of $63.8 million or 22.3% from $285.7 million for the same
period in 1998. Management attributes the increase in deposits to an improving
economic environment and an increase in loan demand. It is the Company's
objective to become the primary bank for its customers by servicing both the
loan and deposit needs. Accordingly, a correlation is expected between the loan
and the deposit volumes such that deposit volumes are expected to increase as
the loan volume increases.
For the three months ended March 31, 1999, average demand deposits totaled $95.6
million, an increase of $15.5 million or 19.3% from the same period in 1998.
Average demand deposits as a percentage of total deposits decreased to 27.4% for
the first quarter of 1999 from 28.1% for the same period of the prior year.
Average interest-bearing deposits increased $48.3 million or 23.5% for the three
months ended March 31, 1999 from the same period in 1998. Average interest-
bearing deposits comprised 72.6% of average total deposits for the three months
ended March 31, 1999 and 71.9% of average total deposits for the three months
ended March 31, 1998.
The table below sets forth information regarding the Bank's average deposits by
amount and percentage of total deposits for the three months ended March 31,
1999 and 1998.
Average Deposits
----------------------------------------------------------------------
(Dollars in thousands) Three Months Ended March 31,
----------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------
Amount Percentage Amount Percentage
------------- ---------------- ------------- ------------
Demand accounts $ 95,638 27.4% $ 80,134 28.1%
Interest-bearing checking 27,773 7.9% 27,807 9.7%
Money market 101,736 29.1% 74,099 25.9%
Savings and time 124,369 35.6% 103,619 36.3%
------------- ----------- ------------- ------------
Total $ 349,516 100.0% $ 285,659 100.0%
============= =========== ============= ============
15
Certificates of deposit over $100,000 are generally considered a higher cost and
less stable form of funding than lower denomination deposits and may represent a
greater risk of interest rate and volume volatility than small retail deposits.
Time certificates of $100,000 or more at March 31, 1999 had the following
schedule of maturities:
(In thousands)
-------------
Three months or less $ 60,286
After three months through six months 26,417
After six months through twelve months 5,581
After twelve months 3,339
-------------
Total $ 95,623
=============
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity management refers to the Bank's ability to acquire funds to meet loan
demand, fund deposit withdrawals and to service other liabilities.
To augment liquidity, the Bank has informal federal funds borrowing arrangements
with correspondent banks totaling $35.0 million and is a member of the Federal
Home Loan Bank of San Francisco and through membership has the ability to pledge
qualifying collateral for short term (up to six months) and long term (up to
five years) borrowing. At March 31, 1999 the Bank had no outstanding borrowings
against these arrangements. Additionally, at March 31, 1999, unpledged
government securities that are available to secure additional borrowing in the
form of reverse repurchase agreements totaled approximately $48.1 million. At
March 31, 1999 the Bank had no reverse repurchase agreements.
The liquidity position of the Company improved during the first quarter of 1999.
Deposit growth provided $29.0 million of cash in addition to the $1.6 million
provided by operating activities. Cash and cash equivalents of $20.3 million
were used in the Company's investing activities to purchase securities and to
fund the growth of the loan portfolio. The net increase in cash and cash
equivalents for the quarters ended March 31, 1999 and 1998 was $10.8 million and
$13.5 million, respectively.
The liquidity position of the Company may be expressed as a ratio defined as (a)
cash, Federal funds sold, other unpledged short term investments and marketable
securities, including those maturing after one year, divided by (b) total assets
less pledged securities. Using this definition at March 31, 1999, the Company
had a liquidity ratio of 40.1% as compared to 38.2% at December 31, 1998. The
increase in over-night Federal funds sold reflects the increase in liquidity.
Federal Funds sold at March 31, 1999 were $81.8 million compared to $73.0
million at December 31, 1998.
Capital Resources
Total shareholders' equity increased to $43.5 million at March 31, 1999 from
$41.8 million at December 31, 1998 reflecting retained income of $1,275,000 and
common stock option exercises of $536,000. These benefits were partially offset
by the market adjustment of securities available for sale.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board of Governors which requires a minimum risk-based
capital ratio of 8%. At least 4% must be in the form of "Tier 1" capital, which
consists of common equity, non-cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries. "Tier 2" capital
consists of cumulative and limited-life preferred stock, mandatory convertible
securities, subordinated debt and, subject to
16
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 March 31, 1999 the Company's risk-based capital ratio was 15.35%. The
following table presents the Company's risk-based capital and leverage ratios as
of March 31, 1999 and December 31, 1998.
Minimum Capital
Requirements To Be
Considered Well Capitalized
Minimum Under Prompt Corrective
Actual Capital Requirements Action Provisions
----------------------------- ---------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ------------ ------------- ------------
As of March 31, 1999
Total Capital
(to Risk Weighted Assets) $ 46,407 15.35% $ 24,193 8.00% $ 30,241 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 42,615 14.09% 12,096 4.00% 18,145 6.00%
Tier 1 Capital
(to Average Assets) 42,615 10.73% 15,889 4.00% 19,861 5.00%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $ 44,381 15.39% $ 23,070 8.00% $ 28,837 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 40,766 14.14% 11,535 4.00% 17,302 6.00%
Tier 1 Capital
(to Average Assets) 40,766 10.20% 15,987 4.00% 19,984 5.00%
Year 2000
The Company is working to resolve the potential impact of Year 2000 on its
computer system and the associated software applications. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's time-sensitive programs
could interpret a date using "00" as 1900 rather than the year 2000. This could
result in major miscalculations or system failure. If the Company and its third
party software vendors are unable to address this issue in a timely manner,
there could be substantial financial risk to the Company. Contingency plans
include the conversion to alternative Year 2000 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 Year 2000 compliant application
could be acquired, tested and installed.
To insure this does not occur, the Company has formed a committee of
representatives of all operational areas within the Bank. This committee
convenes on a monthly basis and reports quarterly to the Audit Committee of the
Board of
17
Directors. The Committee has developed an action plan which includes five
phases. The Awareness and Assessment Phases included forming a committee of
appropriate members, preparing an inventory of all hardware and software
applications, identifying mission-critical systems and developing an overall
plan to address the issue. These phases were completed by June 1998. The
Renovation Phase included implementing the changes in hardware and software
necessary to bring the computer systems compliant with Year 2000 processing.
This phase was 98% completed in March of 1999. The Validation and Implementation
Phases include testing and installation of Year 2000 compliant hardware and
applications. The Bank has completed 90% of this phase with completion expected
by June of 1999.
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 assurances that those systems have been
tested and are Year 2000 compliant. However, due to the nature of certain of the
environmental applications, such as the utility companies, the Company will be
unable to test and validate compliance in these areas.
Additionally, the Company has identified customers who have a material loan or
deposit relationship with the Bank and is in the process of surveying those
customers to inform them of the Year 2000 issues, insure they are taking
appropriate steps to meet Year 2000 processing requirements and to assess the
overall risk to the Company resulting from the status of such customer's Year
2000 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 expensed
approximately $120,000 through March 31, 1999 relating to its Year 2000
compliance efforts, and anticipates an additional $30,000 of expenses for the
remainder of 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. The Company's primary market
risk is interest rate risk. Interest rate risk occurs as a result of interest
sensitive assets and liabilities not repricing at the same time or by the same
amount and is quantified by estimating the potential gain or loss in the market
value of assets and net interest income that can result from changes in interest
rates. The Company's exposure to interest rate risk is monitored monthly by the
Risk Management Committee which includes members of the Board of Directors and
Senior Management. The Company attempts to manage its exposure to changes in
interest rates; however, due to its size and the direct competition from major
banks, the Company must offer products which are competitive in the market
place, even if less than optimum with respect to interest rate exposure.
The Company's balance sheet position at Market 31, 1999 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 as disclosed
in the Company's Annual Report on Form 10-K for the year December 31, 1998.
18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
19
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
CIVIC BANCORP
(Registrant)
Date: May 7, 1999 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
20