10-Q 1 d10q.txt PERIOD ENDING JUNE 30, 2001 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 June 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 August 06, 2001. Class Number of Shares Outstanding ----- ---------------------------- Common Stock 5,260,721 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 - June 30, 2001, and December 31, 2000 3 Consolidated Statements of Income - Three Months Ended June 30, 2001, and June 30, 2000, and Six Months Ended June 30, 2001, and June 30, 2000 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001, and June 30, 2000 5 Consolidated Statements of Comprehensive Income - Three Months Ended June 30, 2001, and June 30, 2000, and Six Months Ended June 30, 2001, and June 30, 2000 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. Other Information 20 SIGNATURES 21 2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (unaudited)
(dollars in thousands) June 30 December 31 2001 2000 -------- ----------- ASSETS ------ Cash and due from banks $ 27,536 $ 25,692 Federal funds sold 25,100 - -------- -------- Total cash and cash equivalents 52,636 25,692 Securities available for sale 17,946 28,369 Securities held to maturity (market value of $38,721 and $46,679, respectively) 37,902 46,367 Other securities 2,185 1,722 Loans: Commercial 225,529 235,532 Real estate-construction 6,355 4,427 Real estate-other 119,355 115,693 Installment and other 20,800 22,467 -------- -------- Total loans 372,039 378,119 Less allowance for loan losses 6,864 6,573 -------- -------- Loans - net 365,175 371,546 Intangible assets - net 11,618 12,092 Interest receivable and other assets 9,080 10,106 Leasehold improvements and equipment - net 2,395 2,401 -------- -------- TOTAL ASSETS $498,937 $498,295 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ LIABILITIES Deposits: Noninterest-bearing $ 77,270 $ 89,090 Interest-bearing: Checking 9,023 9,090 Money market 213,093 210,178 Time and savings 132,958 120,837 -------- -------- Total deposits 432,344 429,195 Other borrowings - 6,100 Accrued interest payable and other liabilities 9,634 9,218 -------- -------- Total liabilities 441,978 444,513 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, 5,260,721 and 5,203,254 shares, respectively 42,560 38,227 Retained earnings, (subsequent to July 1, 1996 date of quasi-reorganization, total deficit eliminated $5.5 million) 14,261 15,395 Accumulated other comprehensive income - net 138 160 -------- -------- Total shareholders' equity 56,959 53,782 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $498,937 $498,295 ======== ========
See accompanying notes to unaudited consolidated financial statements 3 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (unaudited)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- -------------------------- (dollars in thousands) 2001 2000 2001 2000 ----------- ------------- ---------- ---------- INTEREST INCOME: Loans $ 7,662 $ 9,105 $ 16,194 $ 16,649 Taxable investment securities 697 980 1,583 1,860 Tax exempt securities 254 266 513 513 Federal funds sold 478 48 894 120 ---------- ---------- ---------- ---------- Total interest income 9,091 10,399 19,184 19,142 INTEREST EXPENSE: Deposits 2,724 2,801 5,661 5,089 Other borrowings - 131 3 198 ---------- ---------- ---------- ---------- Total interest expense 2,724 2,932 5,664 5,287 ---------- ---------- ---------- ---------- NET INTEREST INCOME 6,367 7,467 13,520 13,855 Provision for loan losses 150 225 375 375 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,217 7,242 13,145 13,480 ---------- ---------- ---------- ---------- NONINTEREST INCOME: Customer service fees 476 373 917 681 Other 168 153 296 197 ---------- ---------- ---------- ---------- Total noninterest income 644 526 1,213 878 NONINTEREST EXPENSE: Salaries and employee benefits 3,003 3,343 6,120 5,975 Occupancy 419 390 833 711 Equipment 399 366 780 655 Goodwill and core deposit amortization 237 180 474 266 Telephone and postage 124 143 261 252 Consulting fees 72 254 144 326 Data processing services 140 106 270 210 Marketing 39 72 85 131 Legal fees 110 53 186 108 Other 498 555 929 977 ---------- ---------- ---------- ---------- Total noninterest expenses 5,041 5,462 10,082 9,611 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 1,820 2,306 4,276 4,747 Income tax expense 695 886 1,626 1,822 ---------- ---------- ---------- ---------- NET INCOME $ 1,125 $ 1,420 $ 2,650 $ 2,925 ========== ========== ========== ========== BASIC EARNINGS PER COMMON SHARE $ 0.21 $ 0.27 $ 0.51 $ 0.56 ========== ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE $ 0.21 $ 0.27 $ 0.49 $ 0.55 ========== ========== ========== ========== Weighted average shares outstanding used to compute basic earnings per common share 5,259,077 5,201,210 5,245,882 5,183,932 Dilutive effects of stock options 149,595 116,367 154,028 115,742 ---------- ---------- ---------- ---------- Total weighted average shares outstanding used to compute diluted earnings per common share 5,408,672 5,317,577 5,399,910 5,299,674 ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements 4 CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (unaudited)
(dollars in thousands) Six Months Ended June 30, ------------------------- 2001 2000 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,650 $ 2,925 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 375 375 Depreciation and amortization 752 826 Write-down on foreclosed asset - 36 Increase in deferred loan fees 39 215 Change in assets and liabilities: Decrease (increase) in interest receivable and other assets 1,026 (4,213) Increase in accrued interest payable and other liabilities 431 395 ------- --------- Net cash provided by operating activities 5,273 559 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (522) (1,168) Net decrease (increase) in loans 5,957 (93,498) Acquisition, net of cash acquired - (7,655) Activities in securities held to maturity: Proceeds from maturing securities 8,376 1,432 Purchases of securities (464) (4,410) Activities in securities available for sale: Proceeds from maturing securities 10,725 12,000 Purchases of securities - (13,216) ------- --------- Net cash provided (used) by investing activities 24,072 (106,515) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 554 279 Cash paid in lieu of fractional shares (4) (3) (Repayments) proceeds from short-term borrowing (6,100) 19,300 Net increase in deposits 3,149 100,679 ------- --------- Net cash (used) provided by financing activities (2,401) 120,255 ------- --------- Net increase in cash and cash equivalents 26,944 14,299 Cash and cash equivalents at beginning of period 25,692 19,705 ------- --------- Cash and cash equivalents at end of period $52,636 $ 34,004 ======= ========= Cash paid during period for: Interest $ 5,373 $ 4,969 ======= ========= Income taxes $ 1,490 $ 2,231 ======= ========= 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 June 30, Six Months Ended June 30, --------------------------- ------------------------- 2001 2000 2001 2000 ------------ ----------- --------- --------- Net Income $1,125 $1,420 $2,650 $2,925 Other Comprehensive Income: Unrealized gain (loss) on securities available for sale (125) 65 (38) 48 Income tax expense related to unrealized loss on securities available for sale 50 (26) 16 (19) ------ ------ ------ ------ Other Comprehensive Income (Loss) (75) 39 (22) 29 ------ ------ ------ ------ COMPREHENSIVE INCOME $1,050 $1,459 $2,628 $2,954 ====== ====== ====== ======
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 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, 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, which it expects to account for using the pooling-of-interests method, and Statement 142 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 $474,000 for the year ended December 31, 2000 and the six months ended June 20, 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 aproximately $14.6 million in cash. East County Bank is 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 June 30, 2000 are included in the income statement of Civic BanCorp for the first six 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 six months ended June 30, 2001, the Company reported net income of $2,650,000, or $.49 earnings per diluted share compared to a net income of $2,925,000 or $.55 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 1.05% for the six months ended June 30, 2001 compared to 1.29% for the same period of the prior year. The annualized return on average shareholders' equity for the six months ended June 30, 2001 and 2000 was 9.50% and 12.17%, respectively. RESULTS OF OPERATIONS Net interest income for the six months ended June 30, 2001, was $13.5 million, decreasing $.3 million or 2.4% from net interest income of $13.9 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 six months of 2001 equaled $19.2 million, which was consistent with total interest income 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 $43.7 million or 10.4% to $464.5 million for the first six months of 2001 compared to $420.7 million for the same period in 2000. The weighted average yield on those earning assets decreased to 8.44% for the first half of 2001 relative to 9.28% 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 7.99% for the first six months of 2001 from 8.96% for the comparative period of the prior year. Total interest expense for the first six months of 2001 was $5.7 million, an increase of $.4 million or 7.1% relative to $5.3 million for the first six months of 2000. The increase in interest expense reflects an increase in the volume of interest bearing liabilities that was partially offset by a decrease in average rate paid on those interest-bearing liabilities. Average interest bearing liabilities increased to $313.9 million for the first six months of 2001 as compared to $288.5 million for the same period of the prior year, an increase of $25.4 million or 8.8%. The weighted average rate paid on these liabilities decreased 5 basis points to 3.64% for the first six months of 2001 from 3.69% 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 77 basis points to 5.98% for the six months ended June 30, 2001, from 6.75% for the same period of the prior year. The decrease in the margin is attributed to a balance sheet which is asset sensitive resulting in a greater decrease in the average rate earned on earning assets of 84 basis points relative to the decrease in the average rate paid on interest bearing deposits of 5 basis points. Following actions by the Federal Reserve, the Company has reduced its Prime or Reference rate six times during the first six months of 2001 for a total of 275 basis points. The majority of the Banks' loans are made with terms which include floating interest rates tied to the Banks 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 six months ended June 30, 2001 and 2000.
Six months ended June 30, --------------------------------------------------------------------- 2001 2000 ---------------------------------- ------------------------------- dollars in thousands Interest Rate Interest Rates Average Income\ Earned\ Average Income\ Earned\ Balance Expense/(2)/ Paid Balance Expense/(2)/ Paid -------- ------------ ------- ------- ------------ ------- ASSETS Securities available for sale $22,724 $ 957 8.49% $ 34,423 $ 1,105 6.45% Securities held to maturity: U.S. Treasury securities 990 32 6.44% 555 18 6.37% U.S. Government agencies 19,107 533 5.62% 24,282 661 5.47% Municipal securities /(1)/ 21,064 776 7.43% 20,888 776 7.47% Other securities 2,103 61 5.84% 1,904 76 8.00% Federal funds sold and securities purchased under agreements to resell 37,537 894 4.80% 4,179 120 5.76% Loans: /(2),(3)/ Commercial 217,489 9,921 9.20% 200,041 10,187 10.24% Real estate-construction 4,489 195 8.76% 13,772 707 10.32% Real estate-other 116,937 5,135 8.85% 100,208 4,851 9.73% Installment and other 22,023 943 8.64% 20,471 904 8.88% -------- ------- ---- -------- ------- ----- Total Loans 360,938 16,194 9.05% 334,492 16,649 10.01% -------- ------- ---- -------- ------- ----- Total Earning Assets 464,463 19,447 8.44% 420,723 19,405 9.28% Cash and due from banks 24,465 24,192 Leasehold improvements and equipment - net 2,467 2,037 Interest receivable and other assets 20,704 12,945 Foreclosed assets 0 144 Less allowance for loan loss (6,762) (5,709) -------- -------- TOTAL ASSETS $505,337 $454,332 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking $ 43,151 96 0.45% $ 34,542 101 0.59% Money market 134,216 2,309 3.47% 119,620 2,053 3.45% Time and savings 136,414 3,256 4.81% 128,193 2,935 4.59% Other borrowed funds 111 3 4.93% 6,126 198 6.50% -------- ------- ---- -------- ------- ----- Total interest bearing liabilities 313,892 5,664 3.64% 288,481 5,287 3.69% Demand deposits 127,669 112,376 Other liabilities 7,993 5,401 Shareholders' equity 55,783 48,074 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $505,337 $454,332 ======== ======== Net Interest Income $13,783 $14,118 ======= ======= Net Interest Margin 5.98% 6.75% ==== ==== Tax Equivalent Adjustment /(1)/ $ 263 $ 263 ======= ======= ------------------------------------------------------------------------------------------------------------------------------------
(1) Tax-exempt interest income on municipal securities is computed using a Federal income tax rate of 34%. Interest on municipal securities was $513,000 and $513,000 for June 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 $228,000 and $205,000 for June 30, 2001 and 2000, respectively; fees on real estate loans of $150,000 and $245,000 for June 30, 2001 and 2000, respectively; and fees on installment and other loans of $20,000 and $17,000 for June 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 six-month periods ended June 30, 2001 and 2000. Analysis of Changes in Net Interest Income Increase (Decrease) Due to Changes in dollars in thousands Volume/(1)/ Rate/(2)/ Total ----------- -------- ----- Increase (decrease) in interest income: Securities available for sale $ (378) $ 230 $(148) Securities held to maturity: U.S. Treasury securities 14 - 14 U.S. Government agencies (142) 14 (128) Municipal securities 4 (4) (0) Other securities 8 (23) (15) Federal funds sold 952 (178) 774 Loans: Commercial 858 (1,124) (266) Real estate-construction (477) (35) (512) Real estate-other 794 (510) 284 Installment and other 66 (27) 39 ------ ------- ----- Total Loans 1,241 (1,696) (455) ------ ------- ----- Total increase $1,699 $(1,657) $ 42 ------ ------- ----- (Increase) decrease in interest expense: Deposits: Interest bearing checking $ (25) $ 30 $ 5 Money market (244) (12) (256) Savings and time (171) (150) (321) Other borrowed funds 195 - 195 ------ ------- ----- Total increase (245) (132) (377) ------ ------- ----- Total change in net interest income $1,454 $(1,789) $(335) ====== ======= ===== (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 the six months ended June 30, 2001 and 2000 was $375,000. See "Allowance for Loan Losses" for further discussion. 11 Non-Interest Income Non-interest income for the six months ended June 30, 2001, was $1,213,000, an increase of $335,000 or 38.2% from the six months ended June 30, 2000. Customer service fees, the largest component of non-interest income, increased $236,000 due to the increase in deposit volume and an increase in fee income associated with increased customer international transaction activity. The increase in Other noninterest income is related to an increase in SBA servicing income. Non-Interest Expense Non-interest expense totaled $10.1 million and $9.6 million for the six months period ended June 30, 2001 and 2000, respectively. Salaries and employee benefits for the six months ended June 30, 2001, increased $145,000 or 2.4% from the same period in 2000. The increase in salaries and employee benefits is related to normal merit increases that were offset by reduced accruals for incentive compensation. Full time equivalent personnel numbered 154 on June 30, 2001 and 157 on June 30, 2000. Occupancy expense increased with the addition of three East County Bank offices. Increases in data processing and equipment are related to the merger with East County Bank on February 29, 2000, as is the increase in goodwill. Conversely, the decrease in consulting relates to 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 Six Months Ended, June 30 June 30 Dollar % (dollars in thousands) 2001 2000 Change Change ------- ------ ------ ------ Salaries and employee benefits $ 6,120 $5,975 $ 145 2.4% Occupancy 833 711 122 17.2% Equipment 780 655 125 19.1% Goodwill and core deposit amortization 474 266 208 78.2% Telephone and postage 261 252 9 3.6% Consulting fees 144 326 (182) -55.8% Data processing services 270 210 60 28.6% Marketing 85 131 (46) -35.1% Legal fees 186 108 78 72.2% Other 929 977 (48) -4.9% ------- ------ ----- ---- TOTAL NONINTEREST EXPENSE $10,082 $9,611 $ 471 4.9% ======= ====== ===== ====
Provision for Income Taxes The provisions for income taxes for the first half of 2001 and 2000 were $1,626,000 and $1,822,000, respectively. These provisions represent effective tax rates of 38.0% and 38.4%, respectively. FINANCIAL CONDITION Loans Total loans at June 30, 2001decreased $6.1 million or 1.6% 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 1.7% at June 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.
June 30, 2001 Dec. 31, 2000 June 30, 2000 -------------------- -------------------- -------------------- (dollars in thousands) Amount Percent Amount Percent Amount Percent --------- ------- --------- ------- --------- -------- Commercial $225,529 60.6% $235,532 62.3% $228,289 60.3% Real estate - construction 6,355 1.7% 4,427 1.2% 17,716 4.7% Real estate - other 119,354 32.1% 115,693 30.6% 109,919 29.0% Installment and other 20,801 5.6% 22,467 5.9% 22,580 6.0% -------- ----- -------- ------ -------- ----- TOTAL $372,039 100.0% $378,119 100.0% $378,504 100.0% ======== ===== ======== ====== ======== =====
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.
June 30 Dec. 31 June 30 2001 2000 2000 ------- ------- -------- (Dollars in thousands) Loans 90 days or more past due and still accruing $ - $ 389 $ 145 Non-accrual loans 1,548 355 737 Non-accrual SBA guaranteed loans 950 868 836 Foreclosed assets - - 164 ------ ------ ------ Total non-performing assets $2,498 $1,612 $1,882 ====== ====== ====== Non-performing assets to period end loans, other assets held for sale plus foreclosed assets 0.67% 0.43% 0.50% ------ ------ ------
The increase in non-performing assets from December 31, 2000 to June 30, 2001 is primarily due to one commercial loan, acquired in the merger with East County Bank, being placed on non-accrual. Management does not anticipate a principal loss on this loan at the present time, however collection may be protracted. 13 At June 30, 2001, the recorded investment in loans considered to be impaired was $2,498,000, all of which were on a non-accrual basis. Of this total, $2,176,000 of non-performing loans has supporting collateral or government guarantees that equal or exceed the book value and accordingly do not have an associated allowance for loan loss. Loans totaling $322,000 have an associated allowance for loan loss of $45,000. For the six months ended June 30, 2001, the average recorded investment in impaired loans was $1,695,000 and no interest income was recognized on impaired loans. If interest income on those loans had been recognized, such income would have approximated $89,000. 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) June 30, 2001 Dec. 31, 2000 June 30, 2000 ------------- ------------- ------------- Substandard $10,428 $8,530 $ 9,656 Doubtful 194 205 715 Loss - - - ------- ------ ------- Total Classified $10,622 $8,735 $10,371 ======= ====== ======= Classified Loans to Total Loans 2.86% 2.31% 2.74%
As of June 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
June 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 $4,236 60.6% $3,752 62.3% Real estate - construction 22 1.7% 26 1.2% Real estate - other 983 32.1% 1,071 30.6% Installment and other 204 5.6% 251 5.9% Unallocated 1,419 N/A 1,473 N/A ------------------------ ------------------------ Total $6,864 100.0% $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:
Six Months Year Six Months Ended Ended Ended (dollars in thousands) June 30, 2001 Dec. 31, 2000 June 30, 2000 ------------- ------------- ------------- Balance, at beginning of period $6,573 $4,850 $4,850 Charge-offs: Commercial 140 245 169 Real estate - construction - - - Real estate - other - 116 - Installment and other - 91 87 ------ ------ ------ Total charge-offs 140 452 256 Recoveries: Commercial 45 70 14 Real estate - construction - - - Real estate - other - 88 87 Installment and other 11 84 39 ------ ------ ------ Total recoveries 56 242 140 ------ ------ ------ Net charge-offs 84 210 116 Provision acquired through merger - 1,108 1,108 Provision charged to operations 375 825 375 ------ ------ ------ Balance, at end of period $6,864 $6,573 $6,217 ====== ====== ====== Ratio of net charge-offs to average loans (annualized) 0.05% 0.06% 0.07% ====== ====== ====== Allowance at period end to total loans outstanding 1.84% 1.74% 1.64% ====== ====== ======
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 six 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.
June 30, 2001 December 31, 2000 ------------------ ----------------- (dollars in thousands) Book Market Book Market Value Value Value Value -------- --------- ------- ------- SECURITIES HELD TO MATURITY: U.S. government agencies $16,070 $16,233 $24,141 $24,087 Municipal securities 20,828 21,457 21,218 21,564 U.S Treasury securities 991 1,018 989 1,008 Mortgage Backed securities 13 13 19 20 ------- ------- ------- ------- TOTAL $37,902 $38,721 $46,367 $46,679 ======= ======= ======= ======= SECURITIES AVAILABLE FOR SALE: U.S. government agencies $17,717 $17,946 $28,102 $28,369 ------- ------- ------- ------- TOTAL $17,717 $17,946 $28,102 $28,369 ======= ======= ======= =======
Deposits Total deposits increased $3.15 million or .7% to $432.3 million as of June 30, 2001, from $429.2 million as of December 31, 2000. For the six months ended June 30, 2001, average deposits totaled $441.5 million, an increase of $46.7 million or 11.8% from $394.7 million for the same period in 2000. Management attributes the increase in deposits to acquisition of East County Bank on February 29, 2000, which added approximately $70 million in deposits for four months in 2000. The table below sets forth information regarding the Bank's average deposits by amount and percentage of total deposits for the six months ended June 30, 2001 and 2000.
Average Deposits ---------------------------------------- Six Months Ended June 30, ---------------------------------------- (dollars in thousands) 2001 2000 ------------------- ------------------- Amount Percentage Amount Percentage -------- ---------- -------- ---------- Demand accounts $127,669 28.8% $112,376 28.5% Interest-bearing checking 43,151 9.8% 34,542 8.8% Money market 134,216 30.4% 119,620 30.3% Savings and time 136,414 30.9% 128,193 32.5% -------- ----- -------- ----- Total $441,450 100.0% $394,731 100.0% ======== ===== ======== =====
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 June 30, 2001, had the following schedule of maturities: 16
(In thousands) -------------- Three months or less $64,137 After three months through six months 12,865 After six months through twelve months 18,668 After twelve months 1,698 ------- Total $97,368 =======
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 June 30, 2001, the Bank had no outstanding borrowings against these arrangements. Additionally, at June 30, 2001, unpledged government securities that are available to secure additional borrowing in the form of reverse repurchase agreements totaled approximately $26 million. At June 30, 2001, the Bank had no reverse repurchase agreements. The liquidity position, as measured by the level of cash equivalents, increased by $26.9 million at June 30, 2001 from December 31, 2000. Cash equivalents, which include cash, amounts in the process of collection and Federal funds sold, of $25.1 million were provided by investing activities, principally by the maturity of securities. Operating activities provided cash equivalents of $5.3 million, however financing activities, principally the repayment of the borrowing at year-end 2000, used cash equivalents of $2.4 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 June 30, 2001 was 20.8%, consistent with the ratio at December 31, 2000 of 19.1%. 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 $57.0 million at June 30, 2001, from $53.8 million at December 31, 2000, reflecting retained income of $2,650,000 for the first half of 2001 and proceeds from the exercise of stock options of $554,000. 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 June 30, 2001, the Company's total risk-based capital ratio was 11.13%. The following table presents the Company's risk-based capital and leverage ratios as of June 30, 2001, and December 31, 2000.
Minimum Actual Actual Minimum Capital Ratio Amount Ratio Requirement ------ ------- ------- ----------- (In thousands) As of June 30, 2001: Total risk-based capital ratio Company 11.13% $50,938 8.00% $36,701 Bank 10.95% $50,105 8.00% $36,701 Tier 1 risk-based capital ratio Company 9.88% $45,203 4.00% $18,350 Bank 9.70% $44,370 4.00% $18,350 Tier 1 leverage Company 9.15% $45,203 4.00% $18,350 Bank 8.98% $44,370 4.00% $18,350 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 June 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. 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 (a) The annual meeting of shareholders of Civic BanCorp was held on May 3, 2001. (b) With respect to the election of directors at the annual meeting of shareholders on May 3, 2001, (i) proxies were solicited pursuant to Regulation 14 under the Securities and Exchange Act of 1934, (ii) there was no solicitation in opposition to management's nominees as listed in the proxy statement, and (iii) all such nominees were elected. (c) At the meeting, shareholders ratified the selection of KPMG LLP as independent accountants as described in the proxy statement. The selection was approved by 4,260,353 votes in favor, 9,793 votes against 4,259 votes abstaining and 726,173 shares not voted. The total number of shares of the Company's common stock outstanding as of March 6, 2001, the record date of the annual meeting was 5,000,578. 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: August 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