FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended Commission file number
September 30, 1995 0-13287
- - --------------------- ----------------------
CIVIC BANCORP
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 68-0022322
- - --------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2101 Webster Street, Oakland, California 94612
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (510) 836-6500
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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_____
-----
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of November 3, 1995: 4,451,350
--
The total number of pages in this form is 21
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The index of exhibits appears on page 20
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1
CIVIC BANCORP
AND
SUBSIDIARY
Index to Form 10-Q Page Number
-----------
PART I
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1995, September 30, 1994
and December 31, 1994 3
Consolidated Statements of Operations -
Nine Months Ended September 30, 1995 and
and September 30, 1994 and Three Months Ended
September 30, 1995 and September 30, 1994 4-5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and
September 30, 1994 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. Other Information 20
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands except shares)
ASSETS
------
September 30, September 30, December 31,
1995 1994 1994
------------- ------------- ------------
ASSETS
Cash and due from banks $ 13,453 $ 21,928 $ 13,730
Interest bearing deposits in banks - 437 -
Federal funds sold 6,500 13,800 18,000
-------- -------- --------
Total cash and cash equivalents 19,953 36,165 31,730
Securities available for sale 10,039 9,968 9,965
Securities held to maturity (market value of
$53,866, $43,624, and $56,914,
respectively) 53,294 44,063 58,010
Other securities 1,599 1,520 1,551
Loans held for investment:
Commercial 68,976 73,806 74,164
Real estate - construction 3,716 8,179 5,977
Real estate - other 58,773 51,750 53,715
Installment and other 17,557 21,451 20,860
-------- -------- --------
Total loans held for investment 149,022 155,186 154,716
Less allowance for loan losses 4,843 3,372 3,216
-------- -------- --------
Loans held for investment - net 144,179 151,814 151,500
Interest receivable and other assets 3,926 7,520 5,293
Leasehold improvements and equipment, net 1,864 2,286 2,105
Foreclosed assets 826 1,153 600
Other assets held for sale 297 306 306
Net assets of discontinued operations - 3,015 -
-------- -------- --------
TOTAL ASSETS $235,977 $257,810 $261,060
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 64,732 $ 72,122 $ 78,024
Interest-bearing:
Checking 22,093 22,256 23,388
Money market 75,434 86,619 87,216
Time and savings 44,394 50,023 45,203
-------- -------- --------
Total deposits 206,653 231,020 233,831
Accrued interest payable and other liabilities 1,220 1,433 1,184
-------- -------- --------
Total liabilities 207,873 232,453 235,015
SHAREHOLDERS' EQUITY:
Preferred stock no par value; authorized,
10,000,000 shares; issued and outstanding, none
Common stock no par value; authorized,
10,000,000 shares; issued and outstanding,
4,451,350, 4,447,945 and 4,447,945 shares 36,488 36,467 36,467
Retained deficit (8,396) (11,104) (10,421)
Net unrealized gain (loss) on securities
available for sale 12 (6) (1)
-------- -------- --------
Total shareholders' equity 28,104 25,357 26,045
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $235,977 $257,810 $261,060
======== ======== ========
3
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands except share and per share amounts)
(unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1995 1994 1995 1994
-------- -------- -------- --------
INTEREST INCOME:
Loans (including fees) $3,928 $3,947 $11,925 $11,376
Securities available for sale,
securities held to maturity, and
other securities 1,064 706 3,169 1,701
Tax exempt securities 3 5 10 25
Federal funds sold 147 100 561 269
Interest-bearing deposits
with banks - 3 - 9
------ ------ ------- -------
Total interest income 5,142 4,761 15,665 13,380
INTEREST EXPENSE:
Deposits 1,215 1,204 3,823 3,596
Other borrowing - - - 18
------ ------ ------- -------
Total interest expense 1,215 1,204 3,823 3,614
------ ------ ------- -------
NET INTEREST INCOME 3,927 3,557 11,842 9,766
PROVISION FOR LOAN LOSSES 625 75 2,365 225
------ ------ ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,302 3,482 9,477 9,541
------ ------ ------- -------
OTHER INCOME:
Customer service fees 152 161 442 484
Other 69 45 386 815
------ ------ ------- -------
Total other income 221 206 828 1,299
OTHER EXPENSES:
Salaries and related benefits 1,436 1,417 4,347 4,262
Occupancy expense 253 157 747 807
Equipment 226 231 670 681
FDIC insurance (12) 142 240 483
Foreclosed asset expense - 28 (45) 564
Goodwill and core deposit
amortization 72 105 215 299
Consulting fees 90 103 206 255
Telephone and postage 65 68 195 196
Data processing services 62 90 210 216
Marketing 42 45 161 134
Legal fees 51 54 152 126
Write-down other assets
held for sale - - - 39
Other 333 350 1,082 1,003
------ ------ ------- -------
Total other expenses 2,618 2,790 8,180 9,065
------ ------ ------- -------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 905 898 2,125 1,775
INCOME TAXES 30 - 100 1
------ ------ ------- -------
NET INCOME FROM CONTINUING
OPERATIONS 875 898 2,025 1,774
------ ------ ------- -------
DISCONTINUED OPERATIONS:
(Loss) from Mortgage
Division (less applicable income
taxes of 0 and 0, respectively - (395) - (647)
------ ------ ------- -------
NET INCOME $ 875 $ 503 $ 2,025 $ 1,127
====== ====== ======= =======
4
NET INCOME PER COMMON SHARE
FROM CONTINUING OPERATIONS $ .19 $ .20 $ .45 $ .40
NET (LOSS) PER COMMON SHARE
FROM DISCONTINUED OPERATIONS - (.09) - (.15)
------ ------ ------- -------
NET INCOME PER COMMON SHARE $ 0.19 $ 0.11 $ 0.45 $ 0.25
====== ====== ======= =======
Weighted average shares
outstanding to compute net
income per common share
on a fully diluted basis 4,526,584 4,447,945 4,508,405 4,457,035
========= ========= ========= =========
5
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(unaudited)
Nine Months Ended Sept. 30,
---------------------------
1995 1994
-------- --------
Cash flows from operating activities:
Net income from continuing operations $ 2,025 $ 1,774
Adjustments to reconcile net income from
continuing operations to net cash provided by
operating activities:
Depreciation and amortization 1,546 918
Provision for loan losses 2,365 225
Loss on disposal of fixed assets 40 58
Gain on sale of foreclosed assets (197) (407)
Write-down of foreclosed assets 20 345
Write-down of other assets held for sale - 39
Loss from discontinued operations - (647)
Decrease (increase) in interest receivable and other assets 805 (1,368)
(Decrease) increase in accrued interest payable
and other liabilities 36 (426)
Decrease in deferred loan fees (8) (87)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,632 424
Cash flows from investing activities:
Capital expenditures (275) (620)
Expenditures on foreclosed assets (23) (316)
Proceeds from sales of foreclosed assets 436 5,866
Pay-down on other assets held for sale 9 40
Net decrease in loans 4,502 15,203
Activity in securities available for sale:
Proceeds from maturities 10,014 23,471
Purchase of securities (10,107) (36,758)
Activity in securities held to maturity:
Proceeds from maturities 15,307 25,145
Purchase of securities (11,115) (24,957)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 8,748 7,074
Cash flows from financing activities:
Decrease in deposits (27,178) (6,488)
Proceeds from exercise of stock options 21 2
Proceeds from the issuance of stock - 9
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (27,157) (6,477)
-------- --------
(Decrease) increase in cash and cash equivalents
from continuing operations (11,777) 1,021
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 14,607
-------- --------
(Decrease) increase in cash and cash equivalents (11,777) 15,628
Cash and cash equivalents at beginning of year 31,730 20,537
-------- --------
Cash and cash equivalents at end of period $ 19,953 $ 36,165
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid for interest $ 3,726 $ 3,697
Cash paid for income taxes 85 1
NON-CASH INVESTING ACTIVITY:
Loans transferred to foreclosed assets $ 462 $ 1,252
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, 1994. The results of
operations and cash flows are not necessarily indicative of those expected
for the complete fiscal year.
2. INCOME PER SHARE OF COMMON STOCK
Net income per share is based upon the weighted average number of common
shares outstanding adjusted by the dilutive effect of stock options
outstanding on a fully diluted basis.
Three Months Ended September 30,
1995 1994
-------- --------
Weighted average shares:
Primary 4,514 4,448
Fully diluted 4,527 4,448
3. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121 (FAS 121), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
In May 1995, the FASB issued FAS 122, Accounting for Mortgage Servicing
Rights. This statement amends FAS 65, Accounting for Certain Mortgage
Banking Activities, to require that, for mortgage loans originated for
sale, rights to service those loans be recognized as separate assets,
similar to purchased mortgage servicing rights. This statement also
requires that mortgage servicing rights be assessed for impairment based on
the fair value of those rights.
These statements are effective January 1, 1996; earlier implementation is
encouraged. The Company has not yet determined when it will implement these
statements; however, it is expected that, upon adoption, the statements
will not have a material effect on its financial statements.
7
In October 1995, the FASB issued FAS 123, Accounting for Stock-Based
Compensation. This statement establishes a method for accounting for stock-
based compensation plans and encourages employers to adopt the new method
in place of the provisions of Accounting Principles Board Opinion (APB 25),
Accounting for Stock Issued to Employees. FAS 123 establishes a fair value
based accounting method for stock-based compensation arrangements.
Companies may continue to apply the accounting provisions of APB 25 in
determining net income; however, they must apply the disclosure
requirements of FAS 123.
The recognition provisions may be adopted immediately and apply to all
awards granted after the beginning of the fiscal year in which the
recognition provisions are first applied. The disclosure requirements of
this statement are effective January 1, 1996; however, earlier application
of the disclosure requirements is encouraged. The Company has not yet
determined whether to adopt the accounting provisions of FAS 123.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS
For the Nine Months Ended September 30, 1995 and 1994
OVERVIEW
For the nine months ended September 30, 1995, the Company reported net
income of $2,025,000, or $.45 per share compared to a net income of
$1,127,000 or $.25 per share for the same period in 1994. The annualized
return on average assets was 1.09% for the nine months ended September 30,
1995 compared to .58% for the same period in 1994. The annualized return on
average shareholders' equity for the nine months ended September 30, 1995
and 1994 was 9.93% and 6.24%, respectively.
RESULTS OF OPERATIONS
Net interest income for the nine months ended September 30, 1995 was $11.8
million, an increase of $2.0 million or 20.4% from net interest income of
$9.8 million for the same period in 1994. The increase in net interest
income is due to an increase in the rates of interest earned on securities
available for sale and securities held to maturity and an increase in
market rates of interest earned on loans.
Total interest income for the first nine months of 1995 equalled $15.7
million, an increase of $2.3 million compared to interest earned during the
same period in 1994. The increase in total interest income was attributed
to an increase in the rates of interest earned on securities available for
sale and securities held to maturity and an increase in market rates of
interest earned on loans. The reference rate used by the Company to price
loan products increased 1.00% to 8.75% at September 30, 1995 from a
reference rate of 7.75% at September 30, 1994.
Average earning assets for the first nine months of 1995 were $228.5
million compared to $224.8 million for the same period in 1994, an increase
of $3.7 million or 1.6%. In September 1994 the Company sold the mortgage
division which was reflected as discontinued operations on the financial
8
statements. The increase in earning assets is primarily due to the sale of
the mortgage division as certain non-earning assets were reinvested in
investment securities and, to a lesser degree, in federal funds sold.
Total interest expense equalled $3.8 million and increased 5.6% from the
$3.6 million for the nine months ended September 30, 1994 due to higher
rates of interest paid on interest-bearing deposits. The average rate paid
on interest-bearing liabilities increased .47% to 3.34% for the nine months
ended September 30, 1995 from 2.87% at September 30, 1994.
The net interest margin increased to 6.93% at September 30, 1995 from 5.81%
at September 30, 1994, an increase of 1.12%. The increase is primarily
attributed to higher market rates of interest earned on earning assets, the
increase in the level of average earning assets and a decline in the volume
of average interest-bearing liabilities.
9
The following table presents an analysis of the average daily balances, interest
income and expense and average interest rates calculated for each major category
of interest earning assets and interest-bearing liabilities for the nine month
periods ended September 30, 1995 and 1994.
Nine Months Ended September 30,
----------------------------------------------------------------------------
1995 1994
-------------------------------- -------------------------------
Interest Rates Interest Rates
Average Income\ Earned\ Average Income\ Earned\
Balance Expense/2/ Paid Balance Expense/2/ Paid
--------- ---------- ------- --------- ---------- -------
ASSETS (dollars in thousands)
Time deposits $ - $ - 0.00% $ 437 $ 9 2.66%
Federal Funds sold 12,863 561 5.83 9,604 269 3.74
Securities available for sale:
U.S. Treasury securities 10,577 488 6.17 12,339 351 3.81
Securities held to maturity:
U.S. Treasury securities 13,354 543 5.43 25,649 810 4.22
U.S. government agencies 40,912 2,023 6.61 10,070 412 5.47
Municipal securities/1/ 202 10 6.35 1,449 70 6.49
Commercial paper 1,082 51 6.30 439 14 4.33
Other securities 1,550 64 5.50 1,705 69 5.43
Loans/2, 3,4/
Commercial 68,055 5,718 11.23 79,883 5,546 9.28
Real estate - construction 4,892 376 10.28 10,260 684 8.92
Real estate - other 55,910 4,314 10.32 49,907 3,745 10.03
Installment and other 19,133 1,517 10.60 23,081 1,401 8.12
------- ------ ----- ------- ------ -----
Loans - net 147,990 11,925 10.77 163,131 11,376 9.32
-------- ------ ----- ------- ------ -----
Total Earning Assets 228,530 15,665 9.16 224,823 13,380 7.96
Cash and due from banks 15,789 15,594
Leasehold improvements and equipment 1,991 2,197
Interest receivable and other assets 4,346 5,459
Foreclosed assets 743 1,609
Assets held for sale 297 409
Discontinued operations/4/ - 12,018
Less allowance for loan losses 3,684 4,135
------- -------
TOTAL ASSETS $248,012 $257,974
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-bearing:
Checking 21,588 190 1.18 22,031 206 1.25
Money market 85,128 2,076 3.26 91,432 1,939 2.84
Time and savings 46,321 1,557 4.50 54,320 1,451 3.57
Other borrowed funds 0 0 0.00 687 18 3.57
------ ----- ---- ------- ----- -----
Total Interest-Bearing Liabilities 153,037 3,823 3.34 168,470 3,614 2.87
Demand deposits 66,226 64,101
Other liabilities 1,559 1,313
Shareholders' equity 27,190 24,090
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $248,012 $257,974
======== ========
Net Interest Income $11,842 $9,766
======= ======
Net Interest Margin 6.93% 5.81%
==== =====
- - --------------------------------------------------------------------------------------------------------------------------
(1) Tax-exempt interest income has not been adjusted to a fully taxable
equivalent basis.
(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 $321,000 and
$306,000 for September 30, 1995 and 1994, respectively; fees on real estate
loans of $244,000 and $482,000 for September 30, 1995 and 1994,
respectively; and fees on installment and other loans of $31,000 and $32,000
for September 30, 1995 and 1994, respectively.
(4) The above table excludes $302,000 in interest income on loans held for sale
for the nine months ended September 30, 1994. This amount is included in the
results of discontinued operations. See note 18 to the December 31, 1994
Consolidated Financial Statements.
10
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 period ended September 30, 1995.
Analysis of Changes in Interest Income and Expenses
Increase (Decrease) Due to Change in
1995 Over 1994
Volume Rate/1/ Total
---------- ------------- -----------
(In thousands)
Increase (decrease)
in interest and fee income:
Interest bearing deposits with banks $ (9) $ - $ (9)
Federal funds sold 91 201 292
Securities available for sale:
U.S. Treasury securities (50) 187 137
Securities held to maturity:
U.S. Treasury securities (388) 121 (267)
U.S. government agency 1,261 350 1,611
Municipal securities/2/ (60) - (60)
Commercial paper 21 16 37
Other securities (6) 1 (5)
Loans held for investment:
Commercial (822) 994 172
Real estate-construction (358) 50 (308)
Real estate-other 451 118 569
Installment and other (239) 355 116
------ ------ ------
Total increase (decrease) (108) 2,393 2,285
Increase (decrease) in interest expense:
Deposits:
Interest-bearing checking (5) (11) (16)
Money market (133) 270 137
Savings and time (214) 320 106
Other borrowed funds (18) - (18)
------ ------ ------
Total increase (decrease) (370) 579 209
------ ------ ------
Total change in net interest income $ 262 $1,814 $2,076
====== ====== ======
(1) Loan fees are reflected in rate variances.
(2) Tax-exempt interest income has not been adjusted to a fully taxable
equivalent basis.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 1995 was
$2.4 million, an increase of $2.1 million from $225,000 for the nine months
ended September 30, 1994.
In the second quarter, 1995 the Company made a special provision to the
allowance for loan losses of $1.2 million following completion of a regular
examination by federal examiners. The components of the $1.2 million special
provision include amounts attributable to a change in the methodology in
assessing the adequacy of the allowance by increasing the provision for
unclassified loans, increasing the provision for loans classified as "special
mention" and downgrading of certain loans. Excluding the special provision, the
incremental increase in the provision in 1995 reflects anticipated growth in
loan volume.
11
Non-Interest Income
Non-interest income for the nine months ended September 30, 1995 was $828,000, a
decrease of $471,000 or 36.3% from the nine months ended September 30, 1994. The
decrease in other income is attributed to gains on sales of foreclosed assets of
$407,000, rental income earned on foreclosed assets of $164,000 and interest
received on a Federal income tax refund in the amount of $125,000 during the
first nine months of 1994. Gains on sales of foreclosed assets were $67,000 for
the first nine months of 1995 and there was no rental income in 1995. Customer
service fees for the nine months ended September 30, 1995 declined $42,000 or
8.7% from the nine months ended September 30, 1994 primarily due to the decrease
in deposit volume.
Non-Interest Expense
Non-interest expense totalled $8.2 million and $9.1 million for the nine months
ended September 30, 1995 and 1994, respectively. The reduction in non-interest
expense is due to a reduction in expenses associated with managing foreclosed
assets and a reduction in FDIC premiums. Salaries and benefits expense for the
nine months ended September 30, 1995 increased $85,000 or 2.0% from September
30, 1994. Full time equivalent personnel numbered 113 on September 30, 1995
compared to 111 on September 30, 1994.
For the nine months ended September 30, 1995 the Company recorded expense
recoveries associated with foreclosed assets of $45,000 compared to expenses
incurred of $564,000 for the same period of the prior year associated with
managing, maintaining and liquidating foreclosed assets. FDIC insurance expense
totalled $240,000 for the nine months ended September 30, 1995, a decrease of
$243,000 or 50.3% compared with $483,000 for the nine months ended September 30,
1994. The reduction is due to a reduction in the assessment level from $.23 per
$100 to $.04 per $100 and the decline in the deposit levels upon which the
insurance premium is based.
The following table summarizes the significant components of non-interest
expense for the dates indicated:
Non-Interest Expense
Sept. 30 Sept. 30 Dollar %
1995 1994 Change Change
-------- -------- -------- --------
(Dollars in thousands)
Salaries and related benefits........... $ 4,347 $ 4,262 $ 85 (1.99)%
Foreclosed assets expense............... (45) 564 (609) (107.98)
Occupancy............................... 747 807 (60) (7.43)
FDIC insurance.......................... 240 483 (243) (50.31)
Equipment............................... 670 681 (11) (1.62)
Data processing services................ 210 216 (6) (2.78)
Telephone and postage................... 195 196 (1) (0.51)
Consulting fees......................... 206 255 (49) (19.22)
Legal fees.............................. 152 126 26 20.63
Marketing............................... 161 134 27 20.15
Goodwill and core deposit amortization.. 215 299 (84) (28.09)
Write-down on other assets held for sale - 39 (39) (100.00)
Other................................... 1,082 1,003 79 7.88
------- ------- ------- ------
TOTAL................................. $ 8,180 $ 9,065 $ (885) (9.76)%
======= ======= ======= ======
12
Provision for Income Taxes
At December 31, 1994 the Company had estimated approximately $12.0 million and
$9.7 million of federal and state net operating loss carryforwards,
respectively. Subsequent to preparation and filing of the 1994 tax returns and
as a result of a settlement with the Internal Revenue Service for audits of tax
returns for prior years, the federal and state net operating loss carryforwards
were reduced to approximately $4.5 million and $5.3 million, respectively. The
net operating loss carryforwards begin to expire in 1998. The Company recorded a
provision for income taxes totalling $100,000 for federal and state alternative
minimum taxes for the nine months ended September 30, 1995.
FINANCIAL CONDITION
Loans
Average loans declined $15.1 million or 9.3% to $148.0 million for the nine
months ended September 30, 1995 from $163.1 million for the same period in 1994.
At September 30, 1995 loans totalled $149.0 million and represented 63.2% of
total assets compared with $155.2 million or 60.2% of total assets at September
30, 1994.
Commercial loans totalled $69.0 million at September 30, 1995, a decrease of
$4.8 million or 6.5% from September 30, 1994. Real estate construction loans
totalled $3.7 million at September 30, 1995, a decrease of $4.5 million or 54.6%
from September 30, 1994. Other real estate loans, consisting of loans for land
acquisition and "mini-perm" loans totalled $58.8 million at September 30, 1995,
an increase of $7.0 million or 13.6% from $51.8 million at September 30, 1994.
Real estate construction loans as a percentage of total loans outstanding were
2.5% at September 30, 1995 compared to 5.3% at September 30, 1994. Risks
associated with real estate construction loans are generally considered to be
higher than risks associated with other forms of lending in which commercial
banks traditionally engage. In response to the prevailing state of the local
real estate market and losses incurred in 1992 and 1993, management has sharply
curtailed new real estate construction loan commitments.
Other real estate loans consist of mini-perm and land acquisition loans. Mini-
perm loans were introduced to provide for interim financing due to a shortage of
long term permanent financing alternatives. Mini-perm loans are currently
available for completed commercial and retail projects that are primarily owner-
occupied and are generally granted based on the rental or lease income stream
generated by the property. The rental/lease income is the primary source of
repayment to service the loan. The major risks associated with the origination
of mini-perm loans are the ability of the tenant or tenants to maintain the
rental or lease payments over the life of the loan and the ability of the
borrower to obtain other financing for the balloon payment at maturity.
Installment loans and other personal loans totalled $17.6 million at September
30, 1995, a decrease of $3.9 million or 18.2% from September 30, 1994.
13
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,
----------------------------------------------
1995 1994
------------------- -------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in thousands)
Commercial................ $ 68,976 46.3% $ 73,806 47.6%
Real estate-construction.. 3,716 2.5 8,179 5.3
Real estate - other....... 58,773 39.4 51,750 33.3
Installment and other..... 17,557 11.8 21,451 13.8
-------- ----- -------- -----
TOTAL.................... $149,022 100.0% $155,186 100.0%
======== ===== ======== =====
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.
September 30,
--------------------------------
1995 1994
---------- ----------
(Dollars in thousands)
Loans 90 days or more past due and
still accruing...................... $ 627 $ 570
Non-accrual loans.................... 2,956 2,009
Restructured loans................... - 266
Other assets held for sale........... 297 306
Foreclosed assets.................... 826 1,153
------ ------
Total non-performing assets......... $4,706 $4,304
====== ======
Non-performing assets to period end
loans, foreclosed assets and
other assets held for sale.......... 3.13% 2.75%
====== ======
The Company's policy is to recognize interest income on an accrual basis unless
the full collectibility of principal and interest is uncertain. Loans that are
delinquent 90 days or more, unless well secured and in the process of
collection, are placed on non-accrual status and previously accrued but
uncollected interest is reversed against income. Thereafter, income is only
recognized as it is collected in cash. Collectibility is determined by
considering the borrower's financial condition, cash flow, quality of
management, the existence of collateral or guarantees and the state of the local
economy.
Interest income recorded on loans 90 days or more past due and still accruing
totalled $50,700 for the nine months ended September 30, 1995 compared to
$46,600 for the same period a year ago. Interest income that would have been
recorded on non-accrual loans had they performed in accordance with their
original terms would have been $181,000 for the nine months ended September 30,
1995. There was no interest income recognized on non-accrual loans for the nine
months ended September 30, 1995.
The increase in non-performing assets at September 30, 1995 from September 30,
1994 is primarily due to an increase in non-accrual loans. At September 30, 1995
non-accrual loans included $610,000 of commercial loans, $930,000 of land
development loans, $1.3 million of mini-perm loans and consumer and installment
loans totalling $113,000.
14
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, ascertain whether there are probable losses which must be
charged off and assess the aggregate risk characteristics of the portfolio.
Factors which influence management's judgment include the impact of forecasted
economic conditions, historical loan loss experience, and the evaluation of
risks which vary with the type of loan, creditworthiness of the borrower and the
value of the underlying collateral.
Analysis of the Allowance for Loan Losses
The following table summarizes changes in the allowance for loan losses for the
periods indicated:
Nine Months Year Nine Months
Ended Ended Ended
9-30-95 12-31-94 9-30-94
------- -------- -------
(Dollars in thousands)
Balance, at beginning of period...... $3,216 $4,371 $4,371
Charge-offs:
Commercial......................... 98 786 522
Real estate - other................ 884 205 205
Real estate - construction......... - 560 560
Installment and other.............. 228 512 419
------ ------ ------
Total charge-offs............... 1,210 2,063 1,706
Recoveries:
Commercial......................... 278 399 362
Real estate - other................ 114 1 1
Real estate - construction......... 7 116 116
Installment and other.............. 73 17 2
------ ------ ------
Total recoveries.................. 472 533 481
------ ------ ------
Net charge-offs...................... 738 1,530 1,225
Provision charged to operations...... 2,365 375 225
------ ------ ------
Balance at end of period............. $4,843 $3,216 $3,371
====== ====== ======
Ratio of net charge-offs to average
loans (annualized).................. 0.66% 0.96% 1.00%
==== ==== ====
The balance in the allowance for loan losses at September 30, 1995 was $4.8
million or 3.25% of total loans compared to $3.4 million or 2.17% at September
30, 1994. Based on management's evaluation of current economic conditions, the
review of the loan portfolio and trends in the overall level of delinquent and
classified loans, management believes that the allowance for loan losses was
adequate at September 30, 1995.
15
Potential Problem Loans
At September 30, 1995, there were no loans which represented material credits
about which management has serious doubts as to the ability of the borrowers to
comply with the original terms and conditions.
At September 30, 1995 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.
Effective December 31, 1993 the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" and changed its accounting policy to classify its securities
as available for sale or held to maturity.
The table below summarizes the book value and estimated market values of
investment securities at the dates indicated.
September 30,
-----------------------------------------------
1995 1994
--------------------- ---------------------
Book Market Book Market
Value Value Value Value
--------- -------- --------- --------
(In thousands)
SECURITIES HELD TO MATURITY:
U.S. Treasury securities........ $10,724 $10,760 $21,826 $21,666
U.S. government agencies........ 42,391 42,919 21,787 21,500
Municipal securities............ - - 230 235
Collateralized mortgage
obligations................... 179 187 220 223
------- ------- ------- -------
TOTAL.......................... $53,294 $53,866 $44,063 $43,624
======= ======= ======= =======
SECURITIES AVAILABLE FOR SALE:
U. S. Treasury securities....... $ 4,994 $ 4,989 $ 9,974 $ 9,968
U. S. government agencies....... 5,033 5,050 - -
------- ------- ------- -------
TOTAL.......................... $10,027 $10,039 $ 9,974 $ 9,968
======= ======= ======= =======
Deposits
For the nine months ended September 30, 1995, average deposits totalled $219.3
million, a decrease of $12.6 million or 5.4% from $231.9 million for the same
period in 1994. Total deposits at September 30, 1995 were $206.7 million, a
decrease of $24.4 million or 10.5% from $231.0 million at September 30, 1994.
The decline in deposits is attributed to low rates of interest paid for deposits
compared to non-bank investments such as mutual funds and a reduction in average
deposits maintained by various customers. Average loans outstanding declined
$15.1 million and these loan customers also had established deposit
relationships
16
which decreased as the loans were reduced or paid off.
For the nine months ended September 30, 1995, average demand deposits totalled
$66.2 million, an increase of $2.1 million or 3.3% from the same period in 1994.
Average demand deposits comprised 30.2% of average total deposits for the nine
months ended September 30, 1995. Average interest-bearing deposits decreased
$14.7 million or 8.8% for the nine months ended September 30, 1995 from the same
period in 1994. Average interest-bearing deposits comprised 69.8% of average
total deposits for the nine months ended September 30, 1995 and 72.3% of average
total deposits for the nine months ended September 30, 1994.
The table below sets forth information regarding trends in the Bank's average
deposits by amount and percentage of deposits for the nine months ended
September 30, 1995 and 1994.
Average Deposits
----------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------
1995 1994
---------------------- ----------------------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
(Dollars in thousands)
Demand accounts............... $ 66,226 30.2% $ 64,101 27.7%
Interest-bearing checking..... 21,588 9.9 22,031 9.5
Money market.................. 85,128 38.8 91,432 39.4
Savings and time.............. 46,321 21.1 54,320 23.4
-------- ----- -------- -----
Total......................... $219,263 100.0% $231,884 100.0%
======== ===== ======== =====
Time certificates of deposit over $100,000 or more at September 30, 1995 had the
following schedule of maturities:
(In thousands)
Three months or less..................... $ 14,932
After three months through six months.... 2,036
After six months though twelve months.... 1,605
After twelve months...................... 862
--------
Total.................................... $ 19,435
========
The decrease in time deposits is due to lower market rates of interest.
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.
Management estimates that at least 70% of certificates over $100,000 are
deposits held by persons or entities with other relationships with the Company.
At September 30, 1995, certificates of deposit over $100,000 totalling $18.6
million or 9.0% of total deposits were scheduled to mature within a year.
Management believes that the presumed volatility of such deposits presents
acceptable risk and payment of such certificates of deposit would not have a
material impact on the liquidity position of the Company.
17
LIQUIDITY AND CAPITAL RESOURCES.
Liquidity
Liquidity management refers to the Bank's ability to acquire funds to meet loan
demand and fund deposit withdrawals and to service other liabilities as they
come due. To augment liquidity, the Bank has informal federal funds borrowing
arrangements with correspondent banks totalling $24.0 million and maintains a
credit arrangement with the Federal Reserve Bank of San Francisco for open
window borrowing. At September 30, 1995 and 1994, the Bank had no outstanding
borrowings against these arrangements. Additionally, at September 30, 1995,
unpledged U.S. government securities that are available to secure additional
borrowing in the form of reverse repurchase agreements totalled approximately
$44.1 million. At September 30, 1995 and 1994, the Bank had no outstanding
borrowings against these arrangements.
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, 1995
and 1994 there were no outstanding advances.
The liquidity position of the Company declined during the first nine months of
1995 as cash flows required for financing activities exceeded the funds provided
by operating and investing activities by $11.8 million. Cash and cash
equivalents of $27.2 million were required to accommodate deposit withdrawals
which were partially funded by a combination of operating activities which
provided $6.6 million and investing activities, principally maturing loans and
investment securities, which provided $8.8 million of cash and cash equivalents.
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, 1995, the
Company had a liquidity ratio of 33.4% as compared to 33.7% at September 30,
1994.
Capital Resources
Total shareholders' equity increased to $28.1 million at September 30, 1995 from
$26.0 million at December 31, 1994 reflecting retained income of $2.0 million
for the first nine months of 1995, net of the change in the net unrealized gain
on securities available for sale.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board which require a minimum risk-based capital ratio of
8%. At least 4% must be in the form of "Tier 1" capital and 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.
18
At September 30, 1995, the Company's risk-based capital ratio was 17.33%. The
following table presents the Company's risk-based capital and leverage ratios as
of September 30, 1995 and December 31, 1994.
RISK-BASED CAPITAL RATIOS
--------------------------------------------
(Dollars in thousands)
September 30, 1995 December 31, 1994
------------------ ------------------
Amount Ratio Amount Ratio
-------- ------- -------- -------
Company Capital Ratios:
Tier 1 Capital.............. $26,811 16.08% $24,284 13.87%
Tier 1 minimum requirement.. 6,671 4.00 7,006 4.00
------- ----- ------- -----
Excess...................... $20,140 12.08% $17,278 9.87%
======= ===== ======= =====
Total Capital............... $28,895 17.33% $26,473 15.12%
Total Capital minimum
requirement................ 13,342 8.00 14,011 8.00
------- ----- ------- -----
Excess...................... $15,553 9.33% $12,462 7.12%
======= ===== ======= =====
Risk-adjusted assets $166,769 $175,138
======== ========
Leverage ratio.............. 11.13% 9.18%
Leverage ratio minimum...... 4.00 4.00
----- -----
Leverage ratio excess....... 7.13% 5.18%
===== =====
19
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
20
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 6, 1995 By: /s/ Herbert C. Foster
-----------------------------------
Herbert C. Foster
President
Chief Executive Officer
21