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, 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
November 1, 1998.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 4,666,906
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
--- ---
CIVIC BANCORP
AND
SUBSIDIARY
Index to Form 10-Q Page Number
-----------
PART I. Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1999, September 30, 1998
and December 31, 1998 3
Consolidated Statements of Operations -
Three Months Ended September 30, 1999 and
September 30, 1998 and Nine Months Ended
September 30, 1999 and September 30, 1998 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and
September 30, 1998 5
Consolidated Statements of Comprehensive
Income - Three Months Ended September 30, 1999 and
September 30, 1998 and Nine Months Ended
September 30, 1999 and September 30, 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 17
PART II. Other Information 17
SIGNATURES 18
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
1999 1998 1998
------------ ------------ -----------
ASSETS
Cash and due from banks $ 16,717 $ 15,891 $ 15,276
Federal funds sold 3,800 76,950 73,028
-------- -------- ---------
Total cash and cash equivalents 20,517 92,841 88,304
Securities available for sale 35,919 31,133 30,869
Securities held to maturity
(market value of $42,874, $27,377
and $33,218, respectively) 43,467 26,461 32,503
Other securities 2,437 2,228 2,243
Loans:
Commercial 176,316 133,940 146,216
Real estate - construction 10,219 10,109 7,648
Real estate - other 77,958 59,435 62,328
Installment and other 15,350 16,151 17,019
-------- -------- ---------
Total loans 279,843 219,635 233,211
Less allowance for loan losses 4,568 4,375 4,424
-------- -------- ---------
Loans - net 275,275 215,260 228,787
Interest receivable and other assets 5,484 5,547 5,316
Leasehold improvements and equipment - net 1,553 1,374 1,558
-------- --------- ---------
TOTAL ASSETS 384,652 $ 374,844 $ 389,580
========= ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 62,564 $ 72,366 $ 71,417
Interest-bearing:
Checking 5,345 7,238 6,231
Money market 161,794 139,281 139,851
Time and savings 106,535 109,369 125,450
-------- --------- ---------
Total deposits 336,238 328,254 342,949
Accrued interest payable and other liabilities 3,775 5,071 4,817
-------- --------- ---------
Total liabilities 340,013 333,325 347,766
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,
4,666,906, 4,768,777 and 4,666,202 shares 34,590 33,600 32,723
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 10,176 7,512 8,797
Accumulated other comprehensive income - net (127) 407 294
-------- --------- ---------
Total shareholders' equity 44,639 41,519 41,814
-------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $384,652 $ 374,844 $ 389,580
======== ========= =========
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,
---------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
INTEREST INCOME:
Loans $ 6,410 $ 5,584 $ 17,636 $ 16,993
Securities available for sale, securities held
to maturity and other securities 959 732 2,682 2,178
Tax exempt securities 223 170 623 498
Federal funds sold 47 910 1,246 1,647
---------- ---------- ---------- ----------
Total interest income 7,639 7,396 22,187 21,316
INTEREST EXPENSE:
Deposits 1,948 2,249 6,129 6,301
Other borrowings 12 - 12 -
---------- ---------- ---------- ----------
Total interest expense 1,960 2,249 6,141 6,301
---------- ---------- ---------- ----------
NET INTEREST INCOME 5,679 5,147 16,046 15,015
Provision for loan losses 75 38 165 113
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,604 5,109 15,881 14,902
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees 260 183 687 601
Other 348 900 474 952
---------- ---------- ---------- ----------
Total noninterest income 608 1,083 1,161 1,553
NONINTEREST EXPENSE:
Salaries and employee benefits 2,096 1,902 6,133 5,606
Occupancy 279 275 828 812
Equipment 245 213 754 641
Data processing services 101 89 305 270
Telephone and postage 86 85 263 239
Consulting fees 66 85 198 205
Marketing 53 53 166 190
Legal fees 50 75 128 189
Goodwill and core deposit amortization 42 48 126 145
FDIC insurance 11 8 30 25
Foreclosed asset expense - 3 1 9
Other 473 381 1,111 1,024
---------- ---------- ---------- ----------
Total other expenses 3,502 3,217 10,043 9,355
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,710 2,975 6,999 7,100
Income tax expense 1,035 1,200 2,674 2,875
---------- ---------- ---------- ----------
NET INCOME $ 1,675 $ 1,775 $ 4,325 $ 4,225
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.36 $ 0.37 $ 0.91 $ 0.88
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 0.35 $ 0.36 $ 0.89 $ 0.83
========== ========== ========== ==========
Weighted average shares outstanding used to
compute basic earnings per common share 4,709,008 4,777,352 4,727,334 4,824,098
Dilutive effects of stock options 137,715 209,215 138,769 252,267
---------- ---------- ---------- ----------
Weighted average shares outstanding used to
compute diluted earnings per common share 4,846,723 4,986,567 4,866,103 5,076,365
========== ========== ========== ==========
4
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30,
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,325 $ 4,225
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 165 113
Depreciation and amortization 945 745
Gain on sale of foreclosed assets and assets
available for sale (67) (875)
Increase (decrease) in deferred loan fees 146 (45)
Change in assets and liabilities:
(Increase) decrease in interest receivable and other assets (121) 224
Decrease in accrued interest payable and other liabilities (935) 865
------- -------
Net cash provided by operating activities 4,458 5,252
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (461) (312)
Paydown on assets held for sale - 374
Proceeds from sales of foreclosed assets 67 3,484
Net (increase) decrease in loans (46,799) 10,820
Expenditures on foreclosed assets - (62)
Activities in securities held to maturity:
Proceeds from maturing securities 23 11,018
Purchases of securities (11,311) (10,440)
Activities in securities available for sale:
Proceeds from maturing securities 10,000 -
Purchases of securities (15,974) -
------- -------
Net cash (used in) provided by investing activities (64,455) 14,882
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 769 392
Purchase of common stock (1,845) (2,522)
Cash paid in lieu of fractional shares (3) -
Net (decrease) increase in deposits (6,711) 45,104
------- -------
Net cash (used in) provided by financing activities (7,790) 42,974
------- -------
Net (decrease) increase in cash and cash equivalents (67,787) 63,108
Cash and cash equivalents at beginning of period 88,304 29,733
------- -------
Cash and cash equivalents at end of period $20,517 $92,841
======= =======
Cash paid during period for:
Interest $ 6,588 $ 6,154
======= =======
Income taxes $ 2,375 $ 1,500
======= =======
Supplemental schedule of non-cash investing activity:
Loans transferred to foreclosed assets $ - $ 2,478
======= =======
5
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net Income $ 1,675 $ 1,775 $ 4,325 $ 4,225
Other Comprehensive Income:
Unrealized loss on securities available for sale (125) 286 (701) 259
Income tax expense related to unrealized loss
on securities available for sale 50 (114) 280 (103)
-------- -------- -------- --------
Other Comprehensive Income (75) 172 (421) 156
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 1,600 $ 1,947 $ 3,904 $ 4,381
======== ======== ======== ========
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, 1998. The results of operations and cash
flows are not necessarily indicative of those expected for the complete
fiscal year.
The weighted average shares outstanding and per share amounts for all periods
presented have been adjusted to give effect for a 5% stock dividend payable
in May 1999.
2. NEW PRONOUNCEMENTS
In June 1999, the FASB issued Statement of Financial Standards (SFAS) No.
137, "Accounting for Derivative Financial Instruments and Hedging Activities
- Deferral of Effective Date of FASB Statement No. 133." Statement No. 137
defers the effective date of Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" for one year. Statement No. 133 is now
effective for fiscal quarters beginning after June 15, 2000. This statement
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. For instruments existing at the date of adoption,
Statement No. 133 provides an entity with the option of not applying this
provision to hybrid instruments entered into before January 1, 1998 and not
modified substantially thereafter. Consistent with the deferral of the
effective date for one year, Statement No. 137 provides an entity the option
of not applying this provision to hybrid instruments entered into before
January 1, 1998 or 1999 and not modified substantially thereafter. The
Company has not completed its evaluation of the impact on the Company's
consolidated financial statements.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
For the nine months ended September 30, 1999, the Company reported net income of
$4,325,000, or $.89 earnings per diluted share compared to a net income of
$4,225,000 or $.83 earnings per diluted share for the same period of the prior
year. The annualized return on average assets was 1.48% for the nine months
ended September 30, 1999 compared to 1.64% for the same period of the prior
year. The annualized return on average shareholders' equity for the nine months
ended September 30, 1999 and 1998 was 13.12% and 14.06%, 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 year ended December 31, 1998 and the Quarterly Reports on Form
10-Q filed in fiscal 1999. Certain statements in this discussion constitute
"forward looking statements" and actual results could 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, 1999 was $16.0
million, increasing $1.0 million or 6.9% from net interest income of $15.0
million for the same period in 1998. The increase in net interest income was
primarily due to an increase in the volume of average earning assets which was
partially offset by an decline in the average rate earned on those assets.
Total interest income for the first nine months of 1999 equaled $22.2 million,
an increase of $.9 million from interest income earned for the same period in
1998. The increase in total interest income is primarily attributed to the
increase in volume of earning assets. Total average earning assets increased
$46.1 million or 14.4% to $367.1 million for the first nine months of 1999
compared to $321.0 million for the same period in 1998. Offsetting the impact on
total interest income due to the growth in earning assets was a decline in the
average rate earned on those assets of 78 basis points from 8.98% to 8.20% for
the same periods presented.
Total interest expense for the first nine months of 1999 was $6.1 million a
decrease of $.2 million or 2.5% from the $6.3 million for the first nine months
of 1998. The decrease in interest expense was due to decreases in the average
rate paid on interest bearing liabilities which was partially offset by the
increase in the volume of average interest bearing liabilities. The average rate
paid on interest bearing liabilities declined 55 basis points to 3.35% from
3.90% due to the declining interest rate environment. Average interest bearing
liabilities increased $29 million or 13.5% to $245 million from $216 million
for the first nine months of 1999 and 1998, respectively.
Net Interest Margin
The net interest margin declined 40 basis points to 5.96% for the nine months
ended September 30, 1999 from 6.36% for the same period of the prior year. The
decrease in the margin is attributed to a greater decline in the average rate
earned on earning assets of 78 basis points relative to the decrease in the
average rate paid on interest bearing deposits of 55 basis points.
7
The following table presents an analysis of the components of net income for the
first nine months ended September 30, 1999 and 1998.
Nine months ended September 30,
----------------------------------------------------------------------
1999 1998
---------------------------------- --------------------------------
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 $ 37,162 $ 1,723 6.20% $ 31,339 $ 1,481 6.32%
Securities held to maturity:
U.S. Treasury securities - - 0.00% 5,959 266 5.96%
U.S. Government agencies 21,404 862 5.38% 6,675 338 6.76%
Municipal securities (1) 17,522 944 7.21% 13,892 754 7.26%
Other securities 2,355 97 5.52% 2,120 93 5.89%
Federal funds sold and securities
purchased under agreements to resell 35,416 1,246 4.70% 40,236 1,647 5.47%
Loans: 2,3
Commercial 159,401 11,215 9.41% 131,193 10,168 10.36%
Real estate - construction 8,903 631 9.48% 10,563 807 10.22%
Real estate - other 69,637 4,758 9.13% 61,542 4,720 10.25%
Installment and other 15,319 1,032 9.01% 17,519 1,298 9.91%
-------- ---------- ------ -------- ---------- -------
Total Loans 253,260 17,636 9.31% 220,817 16,993 10.29%
-------- ---------- ------ -------- ---------- -------
Total Earning Assets 367,119 22,508 8.20% 321,038 21,572 8.98%
Cash and due from banks 18,167 19,956
Leasehold improvements and equipment - net 1,610 1,340
Interest receivable and other assets 6,109 5,042
Foreclosed assets - 601
Assets held for sale - -
Less allowance for loan loss (4,603) (4,260
--------- --------
TOTAL ASSETS $ 388,402 $ 343,717
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 32,106 128 0.53% $ 27,647 197 0.95%
Money market 101,169 2,456 3.25% 83,643 2,124 3.40%
Time and savings 111,422 3,545 4.25% 104,452 3,980 5.09%
Other borrowed funds 273 12 5.81% - - 0.00%
-------- ---------- ------ -------- ---------- -------
Total interest bearing liabilities 244,970 6,141 3.35% 215,742 6,301 3.90%
Demand deposits 94,206 83,573
Other liabilities 5,260 4,327
Shareholders' equity 43,966 40,075
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 388,402 $ 343,717
========= =========
Net Interest Income $ 16,367 $ 15,271
========= ==========
Net Interest Margin 5.96% 6.36%
====== =======
Tax Equivalent Adjustment (1) $ 321 $ 256
========= =======
- ----------------------
(1) The tax-equivalent income adjustment on municipal securities is computed
using a Federal income tax rate of 34%. Interest on municipal securities was
$623,000 and $498,000 for September 30, 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
$356,000 and $381,000 for September 30, 1999 and 1998, respectively; fees on
real estate loans of $238,000 and $283,000 for September 30, 1999 and 1998,
respectively; and fees on installment and other loans of $21,000 and $22,000 for
September 30, 1999 and 1998, respectively.
8
The following table sets forth changes in interest income and interest expense
for each major category of interest-earning assets and interest-bearing
liabilities, and the amount of change attributable to volume and rate changes
for the nine month periods ended September 30, 1999 and 1998.
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 $ 275 $ (33) $ 242
Securities held to maturity:
U.S. Treasury securities (266) - (266)
U.S. Government agencies 745 (221) 524
Municipal securities 197 (7) 190
Other securities 4 - 4
Federal funds sold (197) (204) (401)
Loans:
Commercial 2,186 (1,139) 1,047
Real estate - construction (127) (49) (176)
Real estate - other 622 (584) 38
Installment and other (163) (103) (266)
------ ------- ------
Total Loans 2,518 (1,875) 643
------ ------- ------
Total increase $3,276 $(2,340) $ 936
------ ------- ------
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking $ (32) $ 101 $ 69
Money market (445) 113 (332)
Savings and time (266) 701 435
Other borrowed funds (12) - (12)
------ ------- ------
Total increase $ (755) $ 915 $ 160
------ ------- ------
Total change in net interest income $2,521 $(1,425) $ 1,096
====== ======= =======
(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 loss is charged to operations and increases the allowance
for future loan losses. The amount of the provision is dependent on many factors
which include the current 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 value of collateral on problem loans, recommendations by
regulatory authorities and general economic conditions among others. The
provision for loan losses for the nine months ended September 30, 1999 was
$165,000 as compared to $113,000 for the same period of the prior year. The
increase in the provision was based principally on the growth in the loan
portfolio. See "Allowance for Loan Losses" for further discussion.
9
Non-Interest Income
Non-interest income was $1,161,000 and $1,553,000 for the nine months ended
September 30, 1999 and 1998, respectively. Included in other non-interest income
in 1999 were gains on the disposition of stock warrants of $290,000. Included in
other non-interest income for the first nine months of 1998 were gains of
$875,000 on the disposal of foreclosed assets and other nonearning assets.
Customer service fees increased $86,000 or 14.3% to $687,000 for the first nine
months of 1999 relative to $601,000 for the same period of the prior year due an
increase in the number of deposit accounts.
Non-Interest Expense
Non-interest expense totaled $10.0 million for the nine months period ended
September 30, 1999, an increase of $688,000 or 8.5% relative to $9.4 million for
the same period of the prior year. Salaries and employee benefits for the nine
months ended September 30, 1999 increased $527,000 or 9.4% from the same period
in 1998. The increase in salaries and employee benefits is associated with
increases in the number of employees and normal promotion and merit increases.
There were 115 full time equivalent employees as of September 30, 1999 as
compared to 109 at September 30, 1998.
Increased equipment expenses of $113,000 or 17.6% reflect the addition and
testing of computer hardware, software applications and the software maintenance
fees associated with preparation for Year 2000. Increased data processing
expenses are related to increased loan and deposit activity combined with
general cost escalation.
The following table summarizes the significant components of noninterest expense
for the dates indicated.
Noninterest Expense
Sept. 30 Sept. 30 Dollar %
(Dollars in thousands) 1999 1998 Change Change
-------- -------- ------ ------
Salaries and related benefits $ 6,133 $ 5,606 527 9.4%
Occupancy 828 812 16 2.0%
Equipment 754 641 113 17.6%
Data processing services 305 270 35 13.0%
Telephone and postage 263 239 24 10.0%
Consulting fees 198 205 (7) -3.4%
Marketing 166 190 (24) -12.6%
Legal Fees 128 189 (61) -32.3%
Goodwill and core deposit amortization 126 145 (19) -13.1%
FDIC insurance 30 25 5 20.0%
Foreclosed asset expenses 1 9 (8) -88.9%
Other 1,111 1,024 87 8.5%
-------- -------- ------ ------
TOTAL NONINTEREST EXPENSE $ 10,043 $ 9,355 $ 688 7.4%
======== ======== ====== ======
Provision for Income Taxes
The provision for income taxes for the nine months of 1999 decreased to
$2,674,000 from $2,875,000 for the same period of the prior year. These
provisions represent effective tax rates of 38% and 41%, respectively. The
effective rate has decreased for 1999 due to the increase in tax exempt
municipal securities and an increase in interest income earned in loans to
customers located in state designated enterprise zones which have favorable
state income tax benefits.
10
FINANCIAL CONDITION
Loans
Average loans for the first nine months of 1999 have increased $32 million or
14.7% to $253 million from an average of $221 million for the same period of the
prior year. Total loans at September 30, 1999 have increased $47 million or
20.2% from December 31, 1998. The growth in the loan portfolio during the first
nine months of 1999 is attributed to a strong regional economy and an overall
strong demand for commercial loans.
The Bank concentrates its lending activities on commercial and other non-
construction related real estate secured loans primarily with commercial
businesses. Installment and other consumer loans are originated with the owners
and principals of companies with whom the Bank maintains commercial
relationships. 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.
Real estate construction loans as a percentage of total loans outstanding were
3.7% at September 30, 1999 compared to 4.6% at September 30, 1998.
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 $78.0 million at September 30, 1999, an increase of $18.5 million or
31.2% from September 30, 1998.
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
------------------------ ----------------------- -------------------------
1999 1998 1998
------------------------ ----------------------- -------------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
---------- ----------- ---------- ---------- ----------- -----------
(Dollars in thousands)
Commercial $ 176,316 63.0% $ 146,216 62.7% $ 133,940 61.0%
Real estate - construction 10,219 3.7% 7,648 3.3% 10,109 4.6%
Real estate - other 77,958 27.8% 62,328 26.7% 59,435 27.0%
Installment and other 15,350 5.5% 17,019 7.3% 16,151 7.4%
---------- ----------- ---------- ---------- ----------- -----------
TOTAL $ 279,843 100.0% $ 233,211 100.0% $ 219,635 100.0%
========== =========== ========== ========== =========== ===========
Non-Performing Assets
The Company's' policy is to recognize interest income on an accrual basis unless
a loan becomes impaired. A loan is considered to be impaired when it becomes
probable that the Company will not recognize all amounts due under the original
terms of the loan agreement. At the time a loan is judged to be impaired, the
accrual of interest is discontinued and any accrued, but uncollected interest is
reversed. Thereafter, all payments are applied against principal until principal
is fully recovered with subsequent collections recognized as interest income as
they are received.
11
The following table provides information with respect to the Company's past due
loans and components of non-performing assets at the dates indicated.
Sept. 30 Dec. 31 Sept. 30
1999 1998 1998
-------- ------- --------
(Dollars in thousands)
Loans 90 days or more past due and still accruing $ 622 $ 112 $ 719
Non-accrual loans 596 208 494
-------- ------- -------
Total non-performing assets $ 1,218 $ 320 $ 1,213
======== ======= =======
Non-performing assets to period end loans
plus foreclosed assets 0.44% 0.14% 0.55%
======== ======= =======
At September 30,1999, the recorded investment in loans considered to be impaired
was $596,000 which approximates the fair value of the supporting collateral of
those loans and accordingly they do not have an associated allowance for loan
loss. For the nine months ended September 30, 1999, the average recorded
investment in impaired loans was $.3 million. Impaired loans are placed on non-
accrual status, however, if interest on these loans had been recognized, such
income would have approximated $35,000 for the first nine months of 1999.
The Company has an active credit administration function, which includes the
regular use of an external loan review firm, that periodically reviews all loans
to identify potential problem credits using quality standards and criteria
similar to those of regulatory agencies. Loans receiving lesser grades are
considered to be classified and fall into "substandard," "doubtful," or "loss"
categories. Substandard loans are characterized as having one or more defined
weaknesses which could result in a loss to the Company if the deficiencies are
not corrected. Doubtful loans have the weakness of substandard loans with the
added complication that those weaknesses are less likely to be remedied and are
of a character that increase the probability of a principal loss. A loan
classified as a loss is considered uncollectable and is discharged against the
allowance.
The following table sets forth the classified assets as of the dates indicated.
(Dollars in thousands)
Sept. 30 Dec. 31 Sept. 30
1999 1998 1998
-------- ------- --------
Substandard $ 10,778 $ 4,307 $ 2,453
Doubtful 865 110 249
Loss - - -
-------- ------- --------
Total Classified $ 11,643 $ 4,417 $ 2,702
Classified Loans to Total Loans 4.16% 1.89% 1.23%
Classified Loans to Reserve for Loan Loss 254.88% 99.84% 61.76%
The increase in total classified loans at September 30, 1999 relative to
December 31, 1998 consists primarily of four credits totaling $5.7 million. One
credit, which has an outstanding balance of $950,000, was placed on a non-
accrual status subsequent to September 30, 1999 and the Bank is presently in
negotiations with the borrower. The remaining three loans are supported by
assets and personal or other third-party guarantees and the is Bank working to
remedy the loans' respective credit weaknesses. Management has reviewed the
reserves specific for these loans and believes they are adequate as of September
30, 1999.
12
As of September 30, 1999, with the exception of the aforementioned classified
loans and nonperforming assets, management was not aware of any loans about
which is has material reservations regarding the borrower's ability to comply
with existing loan repayment terms or which might result in such loans becoming
impaired or classified at some future date. Management cannot, however predict
the impact of future economic events or conditions not the impact such an
environment may have on the Company's loan portfolio. Accordingly, there can be
no assurances that other loans will not become impaired or classified in the
future.
Allowance for Loan Losses
The allowance for loan loss is established through a provision for loan loss,
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
uncollectable. Recoveries of amounts previously charged off are recorded only
when cash is received.
The policy of the Company is to review loans in the portfolio to identify
potential problem credits and to assess the credit quality of the loan
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.
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) Sept. 30, 1999 Dec. 31, 1998 Sept. 30, 1998
-------------- ------------- --------------
Balance, at beginning of period $ 4,424 $ 4,351 $ 4,351
Charge-offs:
Commercial 500 200 171
Real estate - construction - 150 150
Real estate - other - 390 390
Installment and other - 95 33
-------------- ------------- --------------
Total charge-offs 500 835 744
Recoveries:
Commercial 124 48 18
Real estate - construction - 164 164
Real estate - other 280 487 421
Installment and other 75 59 52
-------------- ------------- --------------
Total recoveries 479 758 655
-------------- ------------- --------------
Net charge-offs 21 77 89
Provision charged to operations 165 150 113
-------------- ------------- --------------
Balance at end of period $ 4,568 $ 4,424 $ 4,375
============== ============= ==============
Ratio of net charge-offs to average loans (annualized) 0.01% 0.03% 0.05%
============== ============= ==============
Allowance at period end to total loans outstanding 1.63% 1.90% 1.99%
============== ============= ==============
Investment Portfolio
The investment 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 Federal agency securities to benefit
from above
13
the incremental yields over Treasury securities and in municipal securities to
benefit from higher after-tax yields available on bank-qualified municipal
securities.
The table below summarizes the book value and estimated market values of
investment securities at the dates indicated.
September 30,
-----------------------------------------
1999 1998
------------------- -------------------
Book Market Book Market
(Dollars in thousands) Value Value Value Value
-------- -------- -------- --------
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ - $ - $ 2,994 $ 3,005
U.S. government agencies and
corporation 24,311 23,951 7,976 8,180
Municipal securities 19,117 18,882 15,419 16,117
Collateralized mortgage obligations 39 41 72 75
-------- -------- -------- --------
TOTAL $ 43,467 $ 42,874 $ 26,461 $ 27,377
======== ======== ======== ========
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 8,004 $ 8,049 $ 12,017 $ 12,302
U.S. government agencies and
corporation 28,126 27,870 18,438 18,831
-------- -------- -------- --------
TOTAL $ 36,130 $ 35,919 $ 30,455 $ 31,133
======== ======== ======== ========
Deposits
For the nine months ended September 30, 1999, average deposits totaled $339
million, an increase of $40 million or 13.3% from $299 million for the same
period in 1998. The Company emphasizes developing total client relationships
with its customers as a means to increase its core deposit base and generally
expects average loans to increase as average loan volume increases. 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, 1999 and
1998.
Average Deposits
--------------------------------------------
Nine Months Ended September 30,
--------------------------------------------
1999 1998
--------------------- --------------------
Dollars in thousands Amount Percentage Amount Percentage
-------- ---------- -------- ----------
Demand accounts $ 94,206 27.7% $ 83,573 28.0%
Interest-bearing checking 32,106 9.5% 27,647 9.2%
Money market 101,169 29.9% 83,643 27.9%
Savings and time 111,422 32.9% 104,452 34.9%
-------- ---------- -------- ----------
Total $338,903 100.0% $299,315 100.0%
======== ========== ======== ==========
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, 1999 had the following
schedule of maturities:
(Dollars in thousands) Total Maturing
--------------
Three months or less $ 39,345
After three months through six months 23,763
After six months through twelve months 15,697
After twelve months 3,456
--------------
Total $ 82,261
==============
14
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity risk refers to the Banks' ability to acquire funds to meet loan
demand, to fund deposit withdrawals and to service other liabilities as they
become due. The Banks' exposure to liquidity risk is monitored monthly by the
Risk Management Committee which includes members of the Board of Directors and
Executive Management. The committee monitors such liquidity factors as maturing
loans and time deposits, unadvanced loan commitments, regional economic
conditions and historical seasonality to minimize the exposure to liquidity
risk.
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, 1999 the Bank had no outstanding
borrowings against these arrangements. Additionally, at September 30, 1999,
unpledged government securities that are available to secure additional
borrowing in the form of reverse repurchase agreements totaled approximately
$50.8 million. At September 30, 1998 the Bank had no reverse repurchase
agreements.
The liquidity position of the Company decreased during the first nine months of
1999 as cash and cash equivalents of $64.5 million and $7.8 million were used by
investing and financing activities, respectively, owning to the growth in the
loan and investment securities portfolio and the decline in total deposits
relative to December 31, 1998. Net cash and cash equivalents of $4.5 million
were provided by operating activities.
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, 1999, the
Company had a liquidity ratio of 24.82% as compared to 38.9% at December 31,
1998. The decrease in liquidity position reflects the shift in earning assets
from overnight sales of Federal funds to the loan portfolio. Federal Funds sold
at September 30, 1999 were $3.8 million as compared to $73.0 million at December
31, 1998.
Capital Resources
Total shareholders' equity increased to $44.6 million at September 30, 1999 from
$41.8 million at December 31, 1998. The increase in equity reflects retained
income earned during the first nine months of 1999 of $4.3 million which was
partially offset by the repurchase of common stock, net of incentive stock
option exercises, of $1.1 million and an adjustment to capital of $.4 million
for the net unrealized loss on the securities classified as available for sale,
net of deferred income taxes.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board of Governors which require a minimum risk-based
capital ratio of 8%. At least 4% must be in the form of "Tier 1" capital which
consists of common equity, non-cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries. "Tier 2" capital
consists of cumulative and limited-life preferred stock, mandatory convertible
securities, subordinated debt and, subject to certain limitations, the allowance
for loan losses. General loan loss reserves included in Tier 2 capital cannot
exceed 1.25% of risk-weighted assets.
15
At September 30, 1999 the Company's total risk-based capital ratio was 14.14%.
The following table presents the Company's risk-based capital and leverage
ratios as of September 30, 1999 and December 31, 1998.
Minimum Capital
Requirements To Be
Considered Well Capitalized
Minimum Under Prompt Corrective
Actual Capital Requirements Action Provisions
--------------- -------------------- ---------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
As of September 30, 1999:
Total Capital
(to Risk Weighted Assets) $ 48,406 14.14% $ 27,389 8.00% $ 34,236 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 44,122 12.89% 13,694 4.00% 20,542 6.00%
Tier 1 Capital
(to Average Assets) 44,122 11.67% 15,128 4.00% 18,910 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 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 formed a committee of representatives
from all operational areas within the Bank. This committee convenes on a monthly
basis and reports quarterly to the Audit Committee of the Board of 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 in December 1997. The Renovation Phases
included implementing the changes in hardware and software necessary to bring
the computer system compliant with Year 2000 processing. The Validation and
Implementation Phases include testing and installation of Year 2000 compliant
hardware and software applications. The Renovation, Validation and
Implementation Phases for Mission Critical Systems was completed in December
1998 and for non-mission critical systems in September 1999.
The Company has also examined "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.
16
Additionally, the Company has identified customers who have a material loan or
deposit relationship with the Bank and is monitoring the Year 2000 readiness of
those customers and assessing the overall risk to the Company resulting from the
status of such customers' 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 $150,000 through September 30, 1999, relating to its Year 2000
compliance efforts and anticipates expenses of $20,000 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 September 30, 1999 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, 1998.
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 - On October 18, 1999, the Company entered into
an Agreement and Plan of Merger with East County Bank of Antioch,
California. Under the Agreement, East County Bank would be merged
with and into CivicBank of Commerce for $14.6 million payable in
cash. The transaction is subject to regulatory approval. approval
of the shareholders of East County Bank and other customary
conditions.
Item 6. Exhibits and Reports on Form 8-K:
Exhibit 2.1 Agreement and Plan of Merger dated as of October 18, 1999 among
Civic BanCorp, CivicBank of Commerce and East County Bank.
Exhibit 27 Financial Data Schedule
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
CIVIC BANCORP
-------------
(Registrant)
Date: November 12, 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
18