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, 2001
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 6, 2001.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 5,266,387
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. Unaudited Financial Statements
Consolidated Balance Sheets -
September 30, 2001, and
December 31, 2000 3
Consolidated Statements of Income -
Three Months Ended September 30, 2001, and
September 30, 2000, and Nine Months Ended
September 30, 2001, and September 30, 2000 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2001, and
September 30, 2000 5
Consolidated Statements of Comprehensive
Income - Three Months Ended September 30, 2001,
and September 30, 2000, and Nine Months Ended
September 30, 2001, and September 30, 2000 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information 20
SIGNATURES 21
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(unaudited)
(dollars in thousands) September 30, December 31,
2001 2000
----------------- ----------------
ASSETS
------
Cash and due from banks $ 20,243 $ 25,692
Federal funds sold 46,100 -
----------------- ----------------
Total cash and cash equivalents 66,343 25,692
Securities available for sale 17,599 28,369
Securities held to maturity
(market value of $35,291
and $46,679, respectively) 33,865 46,367
Other securities 2,088 1,722
Loans:
Commercial 224,014 235,532
Real estate-construction 8,889 4,427
Real estate-other 122,688 115,693
Installment and other 19,007 22,467
----------------- ----------------
Total loans 374,598 378,119
Less allowance for loan losses 6,950 6,573
----------------- ----------------
Loans - net 367,648 371,546
Intangible Assets - net 11,381 12,092
Interest receivable and other assets 9,039 10,106
Leasehold improvements and equipment - net 2,317 2,401
----------------- ----------------
TOTAL ASSETS $ 510,280 $ 498,295
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 72,299 $ 89,090
Interest-bearing:
Checking 6,907 9,090
Money market 243,143 210,178
Time and savings 121,035 120,837
----------------- ----------------
Total deposits 443,384 429,195
Other borrowings - 6,100
Accrued interest payable and other liabilities 8,675 9,218
----------------- ----------------
Total liabilities 452,059 444,513
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,
5,266,387 and 5,203,254 shares, respectively 42,602 38,227
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 15,397 15,395
Accumulated other comprehensive loss - net 222 160
----------------- ----------------
Total shareholders' equity 58,221 53,782
----------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 510,280 $ 498,295
================= ================
See accompanying notes to unaudited consolidated financial statements
3
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
-------------------------------------- -------------------------------------
(dollars in thousands, except per share amounts)
2001 2000 2001 2000
------------------ ----------------- ----------------- -----------------
INTEREST INCOME:
Loans $ 7,331 $ 9,722 $ 23,525 $ 26,371
Taxable investment securities 484 890 2,067 2,750
Tax exempt and taxable securities 251 251 764 764
Federal funds sold 414 34 1,308 154
------------------ ----------------- ----------------- -----------------
Total interest income 8,480 10,897 27,664 30,039
INTEREST EXPENSE:
Deposits 2,326 3,050 7,987 8,139
Other borrowings - 170 3 368
------------------ ----------------- ----------------- -----------------
Total interest expense 2,326 3,220 7,990 8,507
------------------ ----------------- ----------------- -----------------
NET INTEREST INCOME 6,154 7,677 19,674 21,532
Provision for loan losses 225 225 600 600
------------------ ----------------- ----------------- -----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,929 7,452 19,074 20,932
------------------ ----------------- ----------------- -----------------
NONINTEREST INCOME:
Customer service fees 645 417 1,562 1,098
Other 221 130 517 327
------------------ ----------------- ----------------- -----------------
Total noninterest income 866 547 2,079 1,425
NONINTEREST EXPENSE:
Salaries and employee benefits 2,885 3,010 9,005 8,985
Occupancy 412 412 1,245 1,123
Equipment 402 385 1,182 1,040
Goodwill and core deposit amortization 237 182 711 448
Telephone and postage 130 128 391 380
Consulting fees 72 75 216 401
Data processing services 115 116 385 326
Marketing 53 80 138 211
Legal fees 74 76 260 184
Other 530 485 1,459 1,462
------------------ ----------------- ----------------- -----------------
Total noninterest expenses 4,910 4,949 14,992 14,560
------------------ ----------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES 1,885 3,050 6,161 7,797
Income tax expense 750 1,165 2,376 2,987
------------------ ----------------- ----------------- -----------------
NET INCOME $ 1,135 $ 1,885 $ 3,785 $ 4,810
================== ================= ================= =================
BASIC EARNINGS PER COMMON SHARE $ 0.22 $ 0.36 $ 0.72 $ 0.93
================== ================= ================= =================
DILUTED EARNINGS PER COMMON SHARE $ 0.21 $ 0.35 $ 0.70 $ 0.90
================== ================= ================= =================
Weighted average shares outstanding used to
compute basic earnings per common share 5,262,864 5,201,651 5,250,986 5,189,738
Dilutive effects of stock options 144,621 160,049 150,889 130,738
------------------ ----------------- ----------------- -----------------
Weighted average shares outstanding used to
compute diluted earnings per common share 5,407,485 5,361,700 5,401,875 5,320,476
================== ================= ================= =================
See accompanying notes to unaudited consolidated financial statements
4
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
(dollars in thousands) Nine Months Ended Sept. 30,
------------------------------------------
2001 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,785 $ 4,810
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 600 600
Depreciation and amortization 1,288 1,294
Write-down on foreclosed asset - 36
Increase in deferred loan fees 136 226
Change in assets and liabilities:
Decrease (increase) in interest receivable and other assets 1,068 (4,315)
Increase in accrued interest payable and other liabilities (584) (22)
----------------- -----------------
Net cash provided by operating activities 6,293 2,629
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (722) (1,507)
Net decrease ( increase) in loans 3,161 (90,169)
Acquisition, net of cash acquired - (7,655)
Activities in securities held to maturity:
Proceeds from maturing securities 12,478 1,585
Purchases of securities (465) (4,319)
Activities in securities available for sale:
Proceeds from maturing securities 11,225 16,000
Purchases of securities - (13,216)
----------------- -----------------
Net cash provided (used) by investing activities 25,677 (99,281)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 596 286
Cash paid in lieu of fractional shares (4) (3)
(Repayments) proceeds from short-term borrowing (6,100) 12,100
Net increase in deposits 14,189 92,317
----------------- -----------------
Net cash (used) provided by financing activities 8,681 104,700
----------------- -----------------
Net increase in cash and cash equivalents 40,651 8,048
Cash and cash equivalents at beginning of period 25,692 19,705
----------------- -----------------
Cash and cash equivalents at end of period $ 66,343 $ 27,753
================= =================
Cash paid during period for:
Interest $ 8,310 $ 8,485
================= =================
Income taxes $ 1,775 $ 3,906
================= =================
Supplemental schedule of non-cash investing activity:
Fair value of assets acquired $ - $ 87,219
Liabilities assumed $ - $ 72,614
Cash paid for capital stock $ - $ 14,605
See accompanying notes to unaudited consolidated financial statements
5
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(unaudited)
(dollars in thousands) Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
-------------------------------- ---------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- ---------------
Net Income $ 1,135 $ 1,885 $ 3,785 $ 4,810
Other Comprehensive Income:
Unrealized gain (loss) on securities available for sale 141 303 103 351
Income tax expense related to unrealized loss
on securities available for sale (56) (121) (41) (140)
-------------- -------------- -------------- ---------------
Other Comprehensive Income (Loss) 85 182 62 211
-------------- -------------- -------------- ---------------
COMPREHENSIVE INCOME $ 1,220 $ 2,067 $ 3,847 $ 5,021
============== ============== ============== ===============
See accompanying notes to unaudited consolidated financial statements
6
CIVIC BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED 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 accounting
principles generally accepted in the United States of America 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, 2000. 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
paid in May 2001.
2. NEW PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill,
noting that any purchase price allocable to an assembled workforce may not
be accounted for separately. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that intangible
assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately, except with regard to business combinations initiated prior to
July 1, 2001, and Statement 142 is effective January 1, 2002. Furthermore,
any goodwill and any intangible asset determined to have an indefinite
useful life that are acquired in a purchase business combination completed
after June 30, 2001 will not be amortized, but will continue to be evaluated
for impairment in accordance with the appropriate pre-Statement 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized
prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141
for recognition apart from goodwill. Upon adoption of Statement 142, the
Company will be required to reassess the useful lives and residual values of
all intangible assets acquired in purchase business combinations, and make
any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible
asset is identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with the
provisions of Statement 142 within the first interim period. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether
there is an indication that goodwill [and equity-method goodwill] is
impaired as of the date of adoption. To accomplish this the Company must
identify its reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those
7
reporting units as of the date of adoption. The Company will then have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount. To
the extent a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired and the
Company must perform the second step of the transitional impairment test. In
the second step, the Company must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's
fair value to all of it assets (recognized and unrecognized) and liabilities
in a manner similar to a purchase price allocation in accordance with
Statement 141, to its carrying amount, both of which would be measured as of
the date of adoption. This second step is required to be completed as soon
as possible, but no later than the end of the year of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of
a change in accounting principle in the Company's statement of earnings.
And finally, any unamortized negative goodwill [and negative equity-method
goodwill] existing at the date Statement 142 is adopted must be written off
as the cumulative effect of a change in accounting principle.
As of the date of adoption, the Company expects to have unamortized goodwill
in the amount of $11.1 million, unamortized identifiable intangible assets
in the amount of $74,000, and no unamortized negative goodwill, all of which
will be subject to the transition provisions of Statements 141 and 142.
Amortization expense related to goodwill was $689,000 and $681,000 for the
year ended December 31, 2000 and the nine months ended September 30, 2001,
respectively. Because of the extensive effort needed to comply with adopting
Statements 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at
the date of this report, including whether any transitional impairment
losses will be required to be recognized as the cumulative effect of a
change in accounting principle.
In June 1999, the FASB issued Statement of Financial Accounting 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 all fiscal quarters of all fiscal
years beginning after June 15, 2000. 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. For
instruments existing at the date of adoption, Statement No. 133 provides an
entity with the option of not applying this provision to such hybrid
instruments entered into before January 1, 1998 and not modified 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 2000 and not
modified substantially thereafter. The Company adopted this statement on
January 1, 2001. The Company does not have any derivatives, therefore there
was no impact from the adoption of the pronouncement and no transition
adjustment was necessary.
3. BUSINESS COMBINATION
On February 29, 2000, CivicBank of Commerce acquired East County Bank for
approximately $14.6 million in cash. East County Bank was a community bank
headquartered in Antioch, California with two branches in Concord and Walnut
Creek serving businesses and individuals in Contra Costa County. Unaudited
total assets of East County Bank were approximately $79 million. The
transaction was treated as a purchase for accounting purposes with goodwill
amortized on a straight-line basis over 15 years. The results of operations
of the acquired enterprise from March 1 through September 30, 2000 are
included in the income statement of Civic BanCorp for the first nine months
of fiscal 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is intended to provide greater details of
the results of operations and financial condition of the Company. In addition to
historical information, certain statements in this filing constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve certain
8
risks and uncertainties and could cause actual results to differ materially from
those expressed or implied in the forward-looking statements. Factors which
might cause such a difference include, but are not limited to, interest rate
risks, asset quality, general economic conditions, adverse economic conditions
in California resulting from increases in energy costs, legislative or
regulatory changes and increases in personal or commercial customers'
bankruptcies.
OVERVIEW
For the nine months ended September 30, 2001, the Company reported net income of
$3,785,000, or $.70 earnings per diluted share compared to a net income of
$4,810,000 or $.90 earnings per diluted share for the same period of the prior
year as adjusted for the impact of the 5% stock dividend paid in May 2001. The
annualized return on average assets was .99% for the nine months ended September
30, 2001 compared to 1.37% for the same period of the prior year. The annualized
return on average shareholders' equity for the nine months ended September 30,
2001 and 2000 was 8.94% and 13.12%, respectively.
RESULTS OF OPERATIONS
Net interest income for the nine months ended September 30, 2001, was $19.7
million, decreasing $1.8 million or 8.4% from net interest income of $21.5
million for the same period in 2000. The decrease in net interest income was
primarily due to the declining interest rate environment.
Total interest income for the first nine months of 2001 equaled $27.7 million, a
decrease of $2.3 million or 7.7% compared to $30.0 for the same period in 2000
as the increase in interest income generated by an increase in average earning
assets was offset by a falling interest rate environment. Total average earning
assets increased $34.0 million or 7.9% to $467.0 million for the first nine
months of 2001 compared to $433.0 million for the same period in 2000. The
weighted average yield on those earning assets decreased to 8.03% for the first
nine months of 2001 relative to 9.39% for the same period of the prior year. The
decrease in the yield was attributed to the declining interest rate environment
of 2001. The average Prime or Reference rate decreased to 7.52% for the first
nine months of 2001 from 9.14% for the comparative period of the prior year.
Total interest expense for the first nine months of 2001 was $8.0 million, a
decrease of $.5 million or 5.9% relative to $8.5 million for the first nine
months of 2000. The decrease in interest expense reflects a decrease in average
rate paid on those interest-bearing liabilities that was partially offset by an
increase in the volume of interest bearing liabilities. Average interest bearing
liabilities increased to $316.8 million for the first nine months of 2001 as
compared to $297.8 million for the same period of the prior year, an increase of
$19.0 million or 6.4%. The weighted average rate paid on these liabilities
decreased 45 basis points to 3.37% for the first nine months of 2001 from 3.82%
for the same period of 2000. The decrease in the average rate is attributed to a
falling interest rate environment for deposits.
Net Interest Margin
Net interest margin decreased 101 basis points to 5.75% for the nine months
ended September 30, 2001, from 6.76% for the same period of the prior year. The
decrease in the margin is attributed to an asset sensitive balance sheet
resulting in a greater decrease in the average rate earned on earning assets of
136 basis points relative to the decrease in the average rate paid on interest
bearing deposits of 45 basis points. Following actions by the Federal Reserve,
the Company has reduced its Prime or Reference rate eight times during the first
nine months of 2001 for a total of 350 basis points. The majority of the Banks'
loans are made with terms which include floating interest rates tied to the
Bank's reference rate and accordingly, the rates on these loans have followed
these reductions in a timely fashion. Conversely, most of the interest bearing
deposits have not repriced to the same extent or at the same rate due to
competitive pressures or, in the case of time deposits, interest rates that do
not adjust until the term of the deposit contract expires. This set of
circumstances will result in a declining net interest margin until such time as
the liabilities have repriced to the current interest rate environment.
9
The following table presents an analysis of the components of net interest
income for the first nine months ended September 30, 2001 and 2000.
Nine months ended September 30,
--------------------------------------------------------------------------------------
2001 2000
------------------------------------------ ------------------------------------------
(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 $ 21,054 $ 1,213 7.70% $ 33,622 $ 1,622 6.44%
Securities held to maturity:
U.S. Treasury securities 991 48 6.42% 700 34 6.40%
U.S. Government agencies 17,190 714 5.55% 24,262 991 5.45%
Municipal securities /(1)/ 20,983 1,160 7.39% 21,041 1,160 7.37%
Other securities 2,128 92 5.75% 1,888 103 7.27%
Federal funds sold and securities
purchased under agreements to resell 40,830 1,308 4.28% 3,492 154 5.88%
Loans: /2,3/
Commercial 218,831 14,286 8.73% 208,486 16,132 10.34%
Real estate-construction 5,595 342 8.17% 14,929 1,170 10.47%
Real estate-other 118,108 7,578 8.58% 103,402 7,601 9.82%
Installment and other 21,335 1,319 8.26% 21,210 1,468 9.25%
-------------- ------------ ---------- ------------- ----------- -----------
Total Loans 363,869 23,525 8.64% 348,027 26,371 10.12%
-------------- ------------ ---------- ------------- ----------- -----------
Total Earning Assets 467,045 28,060 8.03% 433,032 30,435 9.39%
Cash and due from banks 24,497 24,424
Leasehold improvements and equipment - net 2,432 2,162
Interest receivable and other assets 20,453 14,707
Foreclosed assets - 150
Less allowance for loan loss (6,823) (5,925)
-------------- -------------
TOTAL ASSETS $ 507,604 $ 468,550
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 41,725 130 0.42% $ 36,015 155 0.57%
Money market 142,232 3,409 3.20% 125,283 3,402 3.63%
Time and savings 132,723 4,448 4.48% 129,290 4,582 4.73%
Other borrowed funds 74 3 4.90% 7,224 368 6.81%
-------------- ------------ ---------- ------------- ----------- -----------
Total interest bearing liabilities 316,754 7,990 3.37% 297,812 8,507 3.82%
Demand deposits 126,313 116,372
Other liabilities 8,113 5,491
Shareholders' equity 56,424 48,875
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 507,604 $ 468,550
============== =============
Net Interest Income $20,070 $21,928
============ ===========
Net Interest Margin 5.75% 6.76%
========== ===========
Tax Equivalent Adjustment /(1)/ $ 396 $ 396
============ ===========
-----------------------------------------------------------------------------------------------------------------------------------
(1) The tax-equivalent income adjustment on municipal securities is computed
using a Federal income tax rate of 34%. Interest on municipal securities was
$764,000 and $764,000 for September 30, 2001 and 2000, 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
$346,000 and $311,000 for September 30, 2001 and 2000, respectively; fees on
real estate loans of $227,000 and $366,000 for September 30, 2001 and 2000,
respectively; and fees on installment and other loans of $32,000 and $23,000 for
September 30, 2001 and 2000, respectively.
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 periods ended September 30, 2001 and 2000.
Analysis of Changes in Interest Income and Expense
(dollars in thousands)
Volume /1/ Rate /2/ Total
------------ ------------- --------------
Increase (decrease) in interest income:
Securities available for sale $ (608) $ 199 $ (409)
Securities held to maturity:
U.S. Treasury securities 14 - 14
U.S. Government agencies (290) 13 (277)
Municipal securities (3) 3 -
Other securities 13 (24) (11)
Federal funds sold 1,642 (488) 1,154
Loans:
Commercial 792 (2,638) (1,846)
Real estate-construction (732) (96) (828)
Real estate-other 1,074 (1,097) (23)
Installment and other 9 (158) (149)
------------ ------------- --------------
Total Loans 1,143 (3,989) (2,846)
------------ ------------- --------------
Total increase $ 1,911 $ (4,286) $ (2,375)
------------ ------------- --------------
(Increase) decrease in
interest expense:
Deposits:
Interest bearing checking (23) $ 48 $ 25
Money market (459) 452 (7)
Savings and time (113) 247 134
Other borrowed funds 365 - 365
------------ ------------- --------------
Total increase $ (230) $ 747 $ 517
------------ ------------- --------------
Total change in net interest income $ 1,681 $ (3,539) $ (1,858)
============ ============= ==============
(1) Changes not solely attributed to rate or volume have been allocated to
volume.
(2) Loan fees are reflected in rate volumes.
Provision for Loan Losses
The provision for loan losses 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 each of the nine-month periods ended
September 30, 2001 and 2000 was $600,000. See "Allowance for Loan Losses" for
further discussion.
11
Non-Interest Income
Non-interest income for the nine months ended September 30, 2001, was
$2,079,000, an increase of $654,000 or 45.9% from the nine months ended
September 30, 2000. Customer service fees, the largest component of non-interest
income, increased $464,000 due to a combination of factors which include an
increase in the number of deposit accounts, a general increase in many of the
Bank's service fees, and a lower earnings credit rate applied to compensating
balances which offset transaction and service charges for the Bank's business
customers. The increase in Other Noninterest Income is related to an increase in
the number of non-customer transactions, an increase in earnings on the cash
surrender value of bank owned life insurance and an increase in SBA servicing
income.
Non-Interest Expense
Non-interest expense totaled $15.0 million and $14.6 million for the nine-month
periods ended September 30, 2001 and 2000, respectively. Occupancy expense
increased with the addition of three East County Bank offices on February 29,
2000. Increases in data processing and equipment are also related to the merger
with East County Bank, as is the increase in goodwill. Conversely, the decrease
in consulting relates to East County Bank data processing conversion efforts in
the second quarter of 2000. The increase in legal fees is related to litigation
in the ordinary course of business.
The following table summarizes the significant components of noninterest expense
for the dates indicated.
Noninterest Expense for the Nine Months Ended,
Sept. 30 Sept. 30 Dollar %
(dollars in thousands) 2001 2000 Change Change
------------------- -------------- ---------------- --------------
Salaries and employee benefits $ 9,005 $ 8,985 $ 20 0.2%
Occupancy 1,245 1,123 122 10.9%
Equipment 1,182 1,040 142 13.7%
Goodwill and core deposit amortization 711 448 263 58.7%
Telephone and postage 391 380 11 2.9%
Consulting fees 216 401 (185) -46.1%
Data processing services 385 326 59 18.1%
Marketing 138 211 (73) -34.6%
Legal fees 260 184 76 41.3%
Other 1,459 1,462 (3) -0.2%
------------------- -------------- ---------------- --------------
TOTAL NONINTEREST EXPENSE $ 14,992 $14,560 $ 432 3.0%
=================== ============== ================ ==============
Provision for Income Taxes
The provisions for income taxes for the first nine months of 2001 and 2000 were
$2,376,000 and $2,987,000, respectively. These provisions represent effective
tax rates of 38.6% and 38.3%, respectively.
FINANCIAL CONDITION
Loans
Total loans at September 30, 2001 decreased $3.5 million or .9% from December
31, 2000 due to the loss of one of the Bank's larger loan customers with
approximately $8.7 million in outstanding loan balances by virtue of a merger.
12
The Bank concentrates its lending activities on commercial, real estate
construction and other forms of real estate loans made primarily to businesses.
Installment and other consumer loans are generally made to the owners and
principals of companies with whom the Bank maintains commercial relationships.
Real estate construction loans as a percentage of total loans were 2.4% at
September 30, 2001 and 1.2% at December 31, 2000. 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 relative to
other forms of commercial 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 that are primarily owner-occupied and are generally granted
based on the rental or lease income stream generated by the property.
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.
Sept 30, 2001 Dec 31, 2000 Sept 30, 2000
--------------------------------- --------------------------------- -----------------------------
(dollars in thousands) Amount Percent Amount Percent Amount Percent
------------------ ------------- ------------------- ------------ ----------------- ----------
Commercial $ 224,014 59.8% $ 235,532 62.3% $ 229,093 61.1%
Real estate - construction 8,889 2.4% 4,427 1.2% 13,586 3.6%
Real estate - other 122,688 32.8% 115,693 30.6% 110,958 29.6%
Installment and other 19,007 5.1% 22,467 5.9% 21,557 5.7%
------------------ ------------- ------------------- ------------ ----------------- ----------
TOTAL $ 374,598 100.0% $ 378,119 100.0% $ 375,194 100.0%
================== ============= =================== ============ ================= ==========
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.
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 Dec. 31 September 30
2001 2000 2000
--------------- -------------- -------------
(dollars in thousands)
Loans 90 days or more past due and still accruing $ 203 $ 389 $ 110
Non-accrual loans 3,815 355 507
Non-accrual SBA guaranteed loans 663 868 559
Foreclosed assets - - 164
--------------- --------------------------------
Total non-performing assets $ 4,681 $ 1,612 $ 1,340
=============== ============== =============
Non-performing assets to period end loans,
other assets held for sale plus foreclosed assets 1.25% 0.43% 0.36%
--------------- -------------- -------------
The increase in non-performing assets from December 31, 2000 to September 30,
2001 is primarily due to three commercial loans placed on non-accrual in
calendar year 2001. Management does not anticipate a principal loss on these
loans at the present time, however collection may be protracted.
13
At September 30, 2001, the recorded investment in loans considered to be
impaired was $4,478,000, all of which were on a non-accrual basis. Of this
total, $4,324,000 of non-performing loans has supporting collateral or
government guarantees that equal or exceed the book value and accordingly they
do not have an associated allowance for loan loss. Loans totaling $154,000 have
an associated allowance for loan loss of $62,000. For the nine months ended
September 30, 2001, the average recorded investment in impaired loans was
$2,040,000 and no interest income was recognized on impaired loans. If interest
income on those loans had been recognized, such income would have approximated
$302,000.
The Company has an active credit administrative 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 that 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 increases the probability of a principal loss. A loan
classified as a loss is considered uncollectable and will be discharged against
the allowance.
The following table sets forth the classified assets as of the dates indicated.
(dollars in thousands)
Sept 30, 2001 Dec 31, 2000 Sept 30, 2000
------------------------ ---------------------- ---------------------
Substandard $ 13,861 $ 8,530 $ 9,815
Doubtful 2,127 205 630
Loss - - -
------------------------ ---------------------- ---------------------
Total Classified $ 15,988 $ 8,735 $ 10,445
Classified Loans to Total Loans 4.27% 2.31% 2.78%
The increase in the Substandard and Doubtful balances relate to circumstances
unique to the borrowers and management does not believe these circumstances to
be indicative of trends or circumstances that would be applicable to the
portfolio as a whole. As of September 30, 2001, with the exception of the
aforementioned classified loans and non-performing assets, management was not
aware of any loan about which it 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, or 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 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 recoveries of loans previously charged-
off and by provisions charged against earnings and is reduced by loan charge-
offs. Loans are charged off when they are judged to be 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.
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. The following table presents the
14
allocations for loan loss as of the dates indicated by loan category and the
percentage of loans in each category relative to total loans.
Allocation of the Allowance for Loan Losses
September 30, 2001 December 31, 2000
---------------------------------------- ----------------------------------------
(Dollars in thousands) Percent of Percent of
loans in each loans in each
category to category to
Amount total loans Amount total loans
---------------------------------------- ----------------------------------------
Commercial $ 5,209 59.8% $ 3,752 62.3%
Real estate - construction 44 2.4% 26 1.2%
Real estate - other 1,062 32.8% 1,071 30.6%
Installment and other 194 5.1% 251 5.9%
Unallocated 441 N/A 1,473 N/A
---------------------------------------- ----------------------------------------
Total $ 6,950 100.0% $ 6,573 100.0%
======================================= ========================================
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, 2001 Dec 31, 2000 Sept 30, 2000
-------------- ---------------- ----------------
Balance, at beginning of period $ 6,573 $ 4,850 $ 4,850
Charge-offs:
Commercial 380 245 169
Real estate - construction - - -
Real estate - other - 116 -
Installment and other - 91 87
-------------- --------------- ---------------
Total charge-offs 380 452 256
Recoveries:
Commercial 140 70 35
Real estate - construction - - -
Real estate - other - 88 88
Installment and other 16 84 47
-------------- --------------- ---------------
Total recoveries 156 242 170
-------------- --------------- ---------------
Net charge-offs 223 210 86
Allowance acquired through merger - 1,108 1,108
Provision charged to operations 600 825 600
-------------- --------------- ---------------
Balance, at end of period $ 6,950 $ 6,573 $ 6,472
============== =============== ===============
Ratio of net charge-offs to average loans (annualized) 0.08% 0.06% 0.03%
============== =============== ===============
Allowance at period end to total loans outstanding 1.86% 1.74% 1.72%
============== =============== ===============
Investment Portfolio
The Company's Available for Sale portion of the investment portfolio is used
primarily for liquidity purposes and the Held to Maturity portion of the
portfolio is principally for investment income. The portfolio is primarily
composed of US Treasury securities, US government agency instruments and bank
qualified municipal obligations. Approximately $10.7 million of
15
Federal agency securities classified as available for sale were called by the
issuing agencies during the first nine months of 2001. Approximately $1.7
million of callable securities remain in the portfolio.
The table below summarizes the book value and estimated market values of
investment securities at the dates indicated.
September 30, 2001 December 31, 2000
-------------------------------- ---------------------------------
(dollars in thousands) Book Market Book Market
Value Value Value Value
-------------- ---------------- ---------------- ----------------
SECURITIES HELD TO MATURITY:
U.S. government agencies $ 12,044 $ 12,345 $ 24,141 $ 24,087
Municipal securities 20,818 21,905 21,218 21,564
U.S. Treasury Securities 992 1,029 989 1,008
Mortgage backed securities 11 12 19 20
-------------- ---------------- ---------------- ----------------
TOTAL $ 33,865 $ 35,291 $ 46,367 $ 46,679
============== ================ ================ ================
SECURITIES AVAILABLE FOR SALE:
U.S. government agencies 17,229 17,599 28,102 28,369
-------------- ---------------- ---------------- ----------------
TOTAL $ 17,229 $ 17,599 $ 28,102 $ 28,369
============== ================ ================ ================
Deposits
Total deposits increased $14.2 million or 3.3% to $443.4 million as of September
30, 2001, from $429.2 million as of December 31, 2000. For the nine months ended
September 30, 2001, average deposits totaled $443.0 million, an increase of
$36.0 million or 8.8% from $407.0 million for the same period in 2000.
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,
2001 and 2000.
Average Deposits
-----------------------------------------------------------------------------
Nine Months Ended September 30,
-----------------------------------------------------------------------------
(dollars in thousands) 2001 2000
------------------------------------ ------------------------------------
Amount Percentage Amount Percentage
-------------- --------------- -------------- ---------------
Demand accounts $ 126,313 28.4% $ 116,372 28.5%
Interest-bearing checking 41,725 9.4% 36,015 8.8%
Money market 142,232 32.1% 125,283 30.8%
Savings and time 132,723 30.0% 129,290 31.8%
-------------- ----------- -------------- -----------
Total $ 442,993 100.0% $ 406,960 100.0%
============== =========== ============== ===========
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, 2001, had the following
schedule of maturities:
16
(dollars in thousands) Total Maturing
-------------------
Three months or less $ 45,383
After three months through six months 30,114
After six months through twelve months 10,417
After twelve months 1,542
-------------------
Total $ 87,456
===================
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity risk refers to the Bank's ability to acquire funds to meet loan
demand, to fund deposit withdrawals and to service other liabilities as they
become due. The Risk Management Committee is responsible for monitoring the
Bank's exposure to liquidity risk. The Committee meets on a monthly basis and
includes members of the Board of Directors and senior 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 $40 million. At September 30, 2001, the Bank
had no outstanding borrowings against these arrangements. Additionally, at
September 30, 2001, unpledged government securities that are available to secure
additional borrowing in the form of reverse repurchase agreements totaled
approximately $22 million. At September 30, 2001, the Bank had no reverse
repurchase agreements.
The liquidity position, as measured by the level of cash equivalents, increased
by $40.7 million at September 30, 2001 from December 31, 2000. Cash equivalents,
which include cash and Federal funds sold, of $25.7 million were provided by
investing activities, principally by the maturity of securities. Operating
activities provided cash equivalents of $6.3 million and financing activities,
principally the increase in deposits, provided cash equivalents of $8.7 million.
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, the liquidity position at
September 30, 2001 was 22.1%, slightly improved from the ratio at December 31,
2000 of 19.8% due to increased levels of Federal funds.
Part of the Bank's normal lending activity involves making commitments to extend
credit. One risk associated with loan commitments is the demand on the Bank's
liquidity that would result if a significant portion of the commitments were
unexpectedly funded at one time. The Bank assesses the likelihood of projected
funding requirements by reviewing historical patterns, current and forecasted
economic conditions and individual funding needs.
On a stand-alone basis, the Company's primary source of liquidity is dividends
from the Bank. The ability of the Bank to pay dividends is subject to regulatory
approval.
Capital Resources
Total shareholders' equity increased to $58.2 million at September 30, 2001,
from $53.8 million at December 31, 2000, reflecting retained income of
$3,785,000 for the first nine months of 2001 and proceeds from the exercise of
stock options of $596,000.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board of Governors that require a minimum risk-based capital
ratio of 8%. At least 4% must be in the form of "Tier 1" capital that 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,
17
subordinated debt and, subject to certain limitations, the allowance for loan
losses. General loan loss reserves included in Tier 2 capital cannot exceed
1.25% of risk-weighted assets.
At September 30, 2001, the Company's total risk-based capital ratio was 11.30%.
The following table presents the Company's risk-based capital and leverage
ratios as of September 30, 2001, and December 31, 2000.
Minimum
Actual Actual Minimum Capital
Ratio Amount Ratio Requirement
--------- ------------- --------------------------
(In thousands)
As of September 30, 2001:
Total risk-based capital ratio
Company 11.30% $ 52,434 8.00% $ 37,221
Bank 11.12% $ 51,597 8.00% $ 37,221
Tier 1 risk-based capital ratio
Company 10.04% $ 46,618 4.00% $ 18,611
Bank 9.86% $ 45,781 4.00% $ 18,611
Tier 1 leverage
Company 9.31% $ 46,618 4.00% $ 18,611
Bank 9.14% $ 45,781 4.00% $ 18,611
As of December 31, 2000:
Total risk-based capital ratio
Company 10.34% $ 47,252 8.00% $ 36,551
Bank 10.27% $ 46,914 8.00% $ 36,551
Tier 1 risk-based capital ratio
Company 9.09% $ 41,530 4.00% $ 18,275
Bank 9.02% $ 41,192 4.00% $ 18,275
Tier 1 leverage ratio
Company 8.59% $ 41,530 4.00% $ 19,339
Bank 8.52% $ 41,192 4.00% $ 19,339
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.
18
The Company's balance sheet was asset sensitive at September 30, 2001, due to
the amount of floating rate assets. Generally, if more assets than liabilities
reprice at a given time in a falling rate environment, net interest income will
deteriorate, and in a rising rate environment, net interest income would
increase. Apart from the reduction in net interest income attributable to the
declining interest rate environment, (see "Net Interest Margin"), management
believes there has been no significant change in the Bank's market risk exposure
disclosed in the Company's Annual Report on Form 10-K for the year December 31,
2000.
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 - There were no reports on Form 8-K
during the period.
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 06, 2001 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
21