-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NhpmT8MktymJPcnHV/WbVNfRqQAIwJlSgECczVvRvUwfpszMw4pbWd8EGpTelhwX 9fRtCPhdmw4jqrmLuwdCjA== 0000929624-99-000873.txt : 19990513 0000929624-99-000873.hdr.sgml : 19990513 ACCESSION NUMBER: 0000929624-99-000873 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIVIC BANCORP CENTRAL INDEX KEY: 0000747205 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 680022322 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13287 FILM NUMBER: 99618717 BUSINESS ADDRESS: STREET 1: 2101 WEBSTER ST STREET 2: 14TH FLOOR CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 510-836-6500 MAIL ADDRESS: STREET 1: 2101 WEBSTER STREET STREET 2: 14TH FLOOR CITY: OAKLAND STATE: CA ZIP: 94612 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-13287 CIVIC BANCORP 2101 Webster Street, 14th Floor Oakland, CA 94612 (510) 836-6500 Incorporated in California I.R.S. Employer Identification No. 68-0022322 The number of shares of common stock outstanding as of the close of business on April 1, 1999: Class Number of Shares Outstanding ----- ---------------------------- Common Stock 4,529,174 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 1 CIVIC BANCORP AND SUBSIDIARY Index to Form 10-Q Page Number ----------- PART I. Item 1. Financial Statements Consolidated Balance Sheets March 31, 1999, March 31, 1998 and December 31, 1998 3 Consolidated Statements of Income - Three Months Ended March 31, 1999 and March 31, 1998 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and March 31, 1998 5 Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 1999 and March 31, 1998 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. Other Information 19 SIGNATURES 20 2 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
(In thousands except shares) March 31 March 31 December 31 1999 1998 1998 ------------------ ----------------- ------------------ ASSETS Cash and due from banks $ 17,339 $ 18,178 $ 15,276 Federal funds sold 81,750 25,100 73,028 ------------------ ----------------- ------------------ Total cash and cash equivalents 99,089 43,278 88,304 Securities available for sale 35,727 34,982 30,869 Securities held to maturity (market value of $37,027, $24,437 and $33,218, respectively) 36,574 24,080 32,503 Other securities 2,257 2,055 2,243 Loans: Commercial 154,226 129,630 146,216 Real estate-construction 8,643 9,674 7,648 Real estate-other 64,887 64,172 62,328 Installment and other 16,495 17,899 17,019 ------------------ ----------------- ------------------ Total loans 244,251 221,375 233,211 Less allowance for loan losses 4,710 4,073 4,424 ------------------ ----------------- ------------------ Loans - net 239,541 217,302 228,787 Interest receivable and other assets 6,231 5,175 5,316 Leasehold improvements and equipment - net 1,612 1,336 1,558 Foreclosed assets - 554 - ------------------ ----------------- ------------------ TOTAL ASSETS $ 421,031 $ 328,762 $ 389,580 ================== ================= ================== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing $ 72,941 $ 80,398 $ 71,417 Interest-bearing: Checking 4,692 9,844 6,231 Money market 173,463 89,998 139,851 Time and savings 120,805 104,883 125,450 ------------------ ----------------- ------------------ Total deposits 371,901 285,123 342,949 Accrued interest payable and other liabilities 5,617 3,823 4,817 ------------------ ----------------- ------------------ Total liabilities 377,518 288,946 347,766 COMMITMENTS AND CONTINGENCIES - - - SHAREHOLDERS' EQUITY Preferred stock no par value; authorized, 10,000,000 shares; none issued or outstanding Common stock no par value; authorized, 10,000,000 shares; issued and outstanding, 4,529,174, 4,620,635 and 4,444,002 shares 33,259 35,115 32,723 Retained earnings, (subsequent to July 1, 1996 date of quasi-reorganization, total deficit eliminated $5.5 million) 10,072 4,462 8,797 Accumulated other comprehensive income - net 182 239 294 ------------------ ----------------- ------------------ Total shareholders' equity 43,513 39,816 41,814 ------------------ ----------------- ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 421,031 $ 328,762 $ 389,580 ================== ================= ==================
3 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except shares and per share amounts) Three Months Ended March 31, --------------------------------------------- 1999 1998 ------------------ ------------------ INTEREST INCOME: Loans $ 5,475 $ 5,627 Securities available for sale, securities held to maturity and other securities 782 709 Tax exempt securities 192 160 Federal funds sold 813 337 ------------------ ------------------ Total interest income 7,262 6,833 INTEREST EXPENSE: Deposits 2,188 2,015 ------------------ ------------------ Total interest expense 2,188 2,015 ------------------ ------------------ NET INTEREST INCOME 5,074 4,818 Provision for loan losses 45 38 ------------------ ------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,029 4,780 ------------------ ------------------ NONINTEREST INCOME: Customer service fees 202 209 Other 40 28 ------------------ ------------------ Total noninterest income 242 237 NONINTEREST EXPENSE: Salaries and employee benefits 2,019 1,842 Occupancy 277 271 Equipment 245 212 Data processing services 96 89 Telephone and postage 83 66 Consulting fees 66 60 Marketing 42 69 Legal fees 45 55 Goodwill and core deposit amortization 42 48 FDIC insurance 10 8 Other 286 327 ------------------ ------------------ Total noninterest expense 3,211 3,047 ------------------ ------------------ INCOME BEFORE INCOME TAXES 2,060 1,970 Income tax expense 785 795 ------------------ ------------------ NET INCOME $ 1,275 $ 1,175 ================== ================== BASIC EARNINGS PER COMMON SHARE $ 0.28 $ 0.25 ================== ================== DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ 0.24 ================== ================== Weighted average shares outstanding used to compute basic earnings per common share 4,499,125 4,623,047 Dilutive effects of stock options 138,339 267,732 ------------------ ------------------ Total weighted average shares outstanding used to compute diluted earnings per common share 4,637,464 4,890,779 ================== ==================
4 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended March 31, 1999 1998 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,275 $ 1,175 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 45 38 Depreciation and amortization 313 251 Increase (decrease) in deferred loan fees 22 (28) Change in assets and liabilities: (Increase) decrease in interest receivable and other assets (23) 193 (Decrease) in accrued interest payable and other liabilities (59) 130 ----------------- ----------------- Net cash provided by operating activities 1,573 1,759 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (205) (31) Paydown on assets held for sale - 43 Net (increase) decrease in loans (10,821) 10,760 Activities in securities held to maturity: Proceeds from maturing securities 6 4,005 Purchases of securities (4,130) (870) Activities in securities available for sale: Proceeds from maturing securities 3,000 - Purchases of securities (8,126) (3,979) ----------------- ----------------- Net cash (used in) provided by investing activities (20,276) 9,928 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 536 71 Purchase of common stock - (186) Net increase in deposits 28,952 1,973 ----------------- ----------------- Net cash provided by financing activities 29,488 1,858 ----------------- ----------------- Net increase in cash and cash equivalents 10,785 13,545 Cash and cash equivalents at beginning of period 88,304 29,733 ----------------- ----------------- Cash and cash equivalents at end of period $ 99,089 $ 43,278 ================= ================= Cash paid during period for: Interest $ 2,372 $ 1,664 ================= ================= Income taxes $ 250 $ - ================= ================= Supplemental schedule of non-cash investing activity: Loans transferred to foreclosed assets $ - $ 554 ================= =================
5 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) Three Months Ended March 31, --------------------------------------------- 1999 1998 ------------------ ------------------ Net Income $ 1,275 $ 1,175 Other Comprehensive Income: Unrealized loss on securities available for sale (187) (21) Income tax expense related to unrealized loss on securities available for sale 75 9 ----------------- ----------------- Other Comprehensive Income (112) (12) ----------------- ----------------- COMPREHENSIVE INCOME $ 1,163 $ 1,163 ----------------- -----------------
6 CIVIC BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The unaudited consolidated financial statements of Civic BanCorp and its subsidiary bank CivicBank of Commerce (the Company) have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q. In the opinion of management, all necessary adjustments have been made to fairly present the financial position, results of operations, cash flows and comprehensive income for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of operations and cash flows are not necessarily indicative of those expected for the complete fiscal year. 2. NEW PRONOUNCEMENTS In June 1997 the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for fiscal quarters of fiscal years beginning after June 15, 1999. The company expects to adopt this statement January 1, 2000. The Company has not completed its evaluation of the impact of its adoption, however, management does not believe it will have a significant impact on the Company's consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the Three Months Ended March 31, 1999 and 1998 OVERVIEW For the three months ended March 31, 1999, the Company reported net income of $1,275,000, or $0.27 earnings per diluted share compared to net income of $1,175,000 or $0.24 earnings per diluted share for the same period of the prior year. The annualized return on average assets was 1.28% for the three months ended March 31, 1999 compared to 1.43% for the same period of the prior year. The annualized return on average shareholders' equity for the three months ended March 31, 1999 and 1998 was 11.97% and 11.96%, respectively. RESULTS OF OPERATIONS Net interest income for the three months ended March 31, 1999 was $5.1 million, increasing $256,000 or 5.3% from net interest income of $4.8 million for the same period in 1998. The increase in net interest income is primarily attributed to an increase in the volume of earning assets which was partially offset by an increase in the volume of interest bearing liabilities and a decline in the net interest margin. Total interest income for the first three months of 1999 was $7.3 million, an increase of $429,000 over the same period ended 1998. The increase in total interest income reflects an increase in volume of earning assets which was partially offset by a decline in the yield on earning assets. Average earning assets increased $69.1 million or 22.5% to $376.5 million in the first quarter of 1999 compared to $307.4 million for the same period ended 1998. However, the yield on earning assets declined 119 basis points due to an overall lower interest rate environment and a less favorable mix of earning assets. Total interest expense for the first three months of 1999 was $2.2 million, an increase of $0.2 million over the same period ended 1998. The increase in total interest expense reflects an increase in volume of interest bearing deposits. Average 7 interest bearing deposits increased $48.4 million or 23.5% to $253.9 million in the first quarter of 1999 compared to $205.5 million for the same period ended 1998. 8 The following table presents an analysis of the components of net interest income for the first quarter of 1999 and 1998.
Three months ended March 31, ------------------------------------------------------------------------------------------ (Dollars in thousands) 1999 1998 -------------------------------------------- ------------------------------------------ Interest Rates Interest Rates Average Income\ Earned\ Average Income\ Earned\ Balance Expense /2/ Paid Balance Expense /2/ Paid -------------- ------------ ---------- ------------ ----------- ---------- ASSETS Securities available for sale $ 33,177 $ 520 6.36% $ 31,331 $ 496 6.42% Securities held to maturity: U.S. Treasury securities - - 0.00% 5,955 88 5.99% U.S. Government agencies 17,369 230 5.37% 4,756 95 8.09% Municipal securities/(1)/ 16,147 291 7.32% 13,366 242 7.33% Other securities 2,254 32 5.81% 2,032 30 6.04% Federal funds sold and securities purchased under agreements to resell 70,177 813 4.70% 24,948 337 5.47% Loans:/2,3/ Commercial 149,601 3,482 9.44% 130,022 3,338 10.41% Real estate-construction 7,874 185 9.52% 11,771 299 10.30% Real estate-other 63,047 1,429 9.19% 64,118 1,523 9.63% Installment and other 16,847 379 9.12% 19,141 467 9.90% -------------- ------------ ---------- ------------ ----------- ---------- Total Loans 237,369 5,475 9.35% 225,052 5,627 10.14% -------------- ------------ ---------- ------------ ----------- ---------- Total Earning Assets 376,493 7,361 7.93% 307,440 6,915 9.12% Cash and due from banks 18,254 19,040 Leasehold improvements and equipment - net 1,605 1,392 Interest receivable and other assets 5,932 4,896 Foreclosed assets - 239 Assets held for sale - 20 Less allowance for loan loss (4,518) (4,245) -------------- ------------ TOTAL ASSETS $ 397,766 $ 328,782 ============== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking $ 27,773 $ 40 0.58% $ 27,807 $ 65 0.95% Money market 101,736 806 3.21% 74,099 621 3.40% Time and savings 124,369 1,342 4.38% 103,619 1,329 5.20% -------------- ------------ ---------- ------------ ----------- ---------- Total interest bearing liabilities 253,878 2,188 3.50% 205,525 2,015 3.98% Demand deposits 95,638 80,134 Other liabilities 5,628 3,816 Shareholders' equity 42,622 39,307 -------------- ------------ TOTAL LIABILITIES AND $ 397,766 $ 328,782 ============== ============ SHAREHOLDERS' EQUITY Net Interest Income 5,173 4,900 ============ =========== Net Interest Margin 5.57% 6.46% ========== ========== Tax Equivalent Adjustment/(1)/ 99 82 ============ ===========
- -------------------------------------------------------------------------------- /(1)/ Tax-exempt interest income on municipal securities is computed using a Federal income tax rate of 34%. Interest on municipal securities was $192 and $160 for March 31, 1999 and 1998, respectively. /(2)/ Non-performing loans have been included in the average loan balances. Interest income is included on non-accrual loans only to the extent cash payments have been received. /(3)/ Interest income includes loan fees on commercial loans of $139,000 and $124,000 for March 31, 1999 and 1998, respectively; fees on real estate loans of $67,000 and $88,000 for March 31, 1999 and 1998, respectively; and fees on installment and other loans of $7,000 and $9,000 for March 31, 1999 and 1998, respectively. 9 The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the three month period ended March 31, 1999.
Volume/1/ Rate/2/ Total ---------- ----------- ----------- (In thousands) Increase (decrease) in interest income: Securities available for sale $ 29 $ (5) $ 24 Securities held to maturity: U.S. Treasury securities (88) - (88) U.S. government agency 253 (118) 135 Municipal securities 50 (1) 49 Other securities 3 (1) 2 Federal funds sold 611 (135) 476 Loans: Commercial 506 (362) 144 Real estate-construction (99) (15) (114) Real estate-other (25) (69) (94) Installment and other (55) (33) (88) ---------- ----------- ----------- Total Loans 327 (479) (152) ---------- ----------- ----------- Total increase (decrease) $1,185 $ (739) $ 446 ---------- ----------- ----------- (Increase) decrease in interest expense: Deposits: Interest bearing checking $ (0) $ 25 $ 25 Money market (231) 46 (185) Savings and time (269) 256 (13) ---------- ----------- ----------- Total (increase) decrease $ (500) $ 327 $ (173) ---------- ----------- ----------- Total change in net interest income $ 685 $ (412) $ 273 ========== =========== ===========
/(1)/ Changes not solely attributed to rate or volume have been allocated to volume. /(2)/ Loan fees are reflected in rate variances. Net Interest Margin The net interest margin declined 89 basis points to 5.57% for the first quarter of 1999 from 6.46% for the same period in 1998 due to a declining interest rate environment and unfavorable changes in the mix of earning assets. The average yield on the securities portfolio, Federal funds sold and the loan porfolio declined 39, 77 and 79 basis points respectively, for the three months ended March 31, 1999 as compared to the same period in 1998. There was a shift in the composition of average earning assets as Federal funds sold increased to 18.6% of total earning assets for the first quarter of 1999 compared to 8.1% for the same period of the prior year while loans declined to 63.0% from 73.2% for the same periods respectively. Loans have the 10 highest yield while Federal funds have the lowest yield and the shift reduced the weighted average yield on the group of earning assets. The average yield on interest bearing deposits decreased 48 basis points to 3.50% for the three months ended March 31, 1999 compared to 3.98% for the same period ended one year ago. Provision for Loan Losses The provision for loan losses is charged to operations and creates an allowance for future loan losses. The amount of the provision is dependent on many factors which include the amount of the allowance for loan losses, growth in the loan portfolio, net charges against the allowance, changes in the composition of the portfolio, the number and dollar amount of delinquent loans, assessment of the overall quality of the portfolio, value of the collateral on problem loans, recommendations by regulatory authorities and general economic conditions among others. The provision for loan losses for the three months ended March 31, 1999 was $45,000, an increase of $7,000 or 18.4% from the three months ended March 31, 1998. The increase in the provision was based on the growth in the loan portfolio. Noninterest Income Noninterest income for the three months ended March 31, 1999 was $242,000, an increase of $5,000 or 2.1% from the three months ended March 31, 1998. The increase is primarily attributable to a $12,000 increase in merchant discount fees which was partially offset by a $9,000 decrease in international fees. Noninterest Expense Noninterest expense totaled $3.2 million for the three months ended March 31, 1999, an increase of $164,000 or 5.4% from $3.0 million for the same period of the prior year. Salaries and employee benefits, the largest component of noninterest expense increased $177,000 or 9.6% due to additional staff, normal merit increases and an increase in the use of temporary help. Full time equivalent personnel numbered 112 on March 31, 1999 compared to 107 on March 31, 1998. The following table summarizes the significant components of noninterest expense for the dates indicated.
Quarter Ended March 31, Dollar % 1999 1998 Change Change (Dollars in thousands) --------- -------- ---------- ---------- Salaries and employee benefits $ 2,019 $ 1,842 $ 177 9.6% Occupancy 277 271 6 2.2% Equipment 245 212 33 15.6% Data processing services 96 89 7 7.9% Telephone and postage 83 66 17 25.8% Consulting fees 66 60 6 10.0% Marketing 42 69 (27) (39.1%) Legal fees 45 55 (10) (18.2%) Goodwill and core deposit amortization 42 48 (6) (12.5%) FDIC insurance 10 8 2 25.0%) Other 286 327 (41) (12.5%) -------- -------- ------ ------- TOTAL NONINTEREST EXPENSE $ 3,211 $ 3,047 $ 164 5.4% ======== ======== ====== =======
11 Provision for Income Taxes The provision for income taxes for the first quarter of 1999 decreased to $785,000 from $795,000 for the same quarter of the prior year. These provisions represent effective tax rates of 38% and 40%, respectively. FINANCIAL CONDITION Loans Average loans for the first quarter of 1999 increased $12.3 million or 5.5% to $237.4 million compared to $225.1 million for the same quarter of 1998. Loans outstanding at March 31, 1999 increased $11.1 million to $244.3 million from $233.2 million at December 31, 1998. The increase in loans outstanding during the first quarter was due to a strong regional economy and an overall increase in loan demand. Real estate construction loans as a percentage of total loans outstanding were 3.5% at March 31, 1999 compared to 4.4% at March 31, 1998. The Bank maintains a limited portfolio of real estate constructions loans as the risks associated with real estate construction lending are generally considered to be higher than risks associated with other forms of lending. However, the Bank continues to fund real estate construction commitments on a limited basis with stringent underwriting criteria. Other real estate loans consist of mini-perm loans and land acquisition loans which are primarily owner-occupied and are generally granted based on the rental or lease income stream generated by the property. Other real estate loans totaled $64.9 million at March 31, 1999, an increase of $715,000 or 1.1% from March 31, 1998. The following table sets forth the amount of loans outstanding in each category and the percentage of total loans outstanding for each category as of the date indicated.
March 31, 1999 December 31, 1998 March 31, 1998 ------------------------------ --------------------------------- -------------------------------- Amount Percent Amount Percent Amount Percent --------------- ------------ ----------------- ------------- ----------------- ------------ (Dollars in thousands) Commercial $ 154,226 63.1% $ 146,216 62.7% $ 129,630 58.6% Real estate - construction 8,643 3.5% 7,648 3.3% 9,674 4.4% Real estate - other 64,887 26.6% 62,328 26.7% 64,172 29.0% Installment and other 16,495 6.8% 17,019 7.3% 17,899 8.0% --------------- ------------ ----------------- ------------- ----------------- ------------ TOTAL $ 244,251 100.0% $ 233,211 100.0% $ 221,375 100.0% =============== ============ ================= ============= ================= ============
Non-Performing Assets The following table provides information with respect to the Company's past due loans and components of non-performing assets at the dates indicated. 12
March 31 Dec. 31 March 31 1999 1998 1998 --------------- -------------- ------------- (Dollars in thousands) Loans 90 days or more past due and still accruing $ - $ 112 $ 182 Non-accrual loans 79 208 3,238 Foreclosed assets - - 554 --------------- -------------- ------------- Total non-performing assets $ 79 $ 320 $ 3,974 =============== ============== ============= Non-performing assets to period end loans, other assets held for sale plus foreclosed assets 0.03% 0.14% 1.80% =============== ============== =============
At March 31, 1999, the recorded investment in loans considered to be impaired consisted of one loan totaling $79,000 which was on a non-accrual basis. For the quarter ended March 31, 1999, the average recorded investment in impaired loans was $86,000. No interest income was recognized on impaired loans. If interest income on those loans had been recognized, such income would have approximated $2,000. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses, the amount of which is based on many factors. See "Provision for Loan Losses". The allowance is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged off when they are judged to be impaired. A loan is considered impaired when, based on current information and circumstances, it becomes probable that the Company will be unable to collect all amounts due according to the original terms and conditions of the loan agreement. Recoveries of amounts previously charged off are recorded only when cash is received. The policy of the Company is to review each loan in the portfolio to identify potential problem credits and to assess the credit quality of each loan in the portfolio. Specific allocations are made for loans where the probability of a loss can be defined and reasonably estimated while the balance of the allocations are based on the size of the portfolio, delinquency trends, historical data, industry averages and general economic conditions in the Company's market area. Although management believes that the allowance for loan losses is adequate for both potential losses of identified credits and estimated inherent losses in the portfolio, future provisions will be subject to continuing evaluations of the portfolio, and if the economy declines or the quality of the loan portfolio deteriorates, additional provisions may be required. 13 The following table summarizes the changes in the allowance for loan losses for the periods indicated:
Three Months Year Three Months Ended Ended Ended 3-31-99 12-31-98 3-31-98 ------------ -------------- --------------- (Dollars in thousands) Balance, at beginning of period $ 4,424 $ 4,351 $ 4,351 Charge-offs: Commercial - 200 171 Real estate - construction - 150 150 Real estate - other - 390 58 Installment and other - 95 - ------------ -------------- --------------- Total charge-offs - 835 379 Recoveries: Commercial 82 48 6 Real estate - construction - 164 9 Real estate - other 101 487 15 Installment and other 58 59 33 ------------ -------------- --------------- Total recoveries 241 758 63 ------------ -------------- --------------- Net (recoveries) charge-offs (241) 77 316 Provision charged to operations 45 150 38 ------------ -------------- --------------- Balance, at end of period $ 4,710 $ 4,424 $ 4,073 ============ ============== =============== Ratio of net (recoveries) charge-offs to average loans (annualized) (0.41%) 0.03% 0.56% ============ ============== =============== Allowance at period end to total loans outstanding 1.93% 1.90% 1.84% ============ ============== =============== Average Loans 237,369 221,758 225,072 EOP Loans 244,251 233,211 221,375
Potential Problem Loans At March 31, 1999 there were no loans classified for regulatory purposes as loss, doubtful, substandard or special mention that have not been disclosed in the discussion above that (i) represented or resulted from trends or uncertainties which management anticipated would have a material impact on future operating results, liquidity, capital resources or (ii) represented material credits about which management was aware of information that would cause serious doubt as to the ability of the borrower to comply with the loan repayment terms. Investment Portfolio The Company's investment portfolio is used primarily for liquidity purposes and secondarily for investment income. The portfolio is primarily composed of U.S. Treasury, U.S. government agency instruments and investment grade municipal obligations. The company has increased its investment in municipal securities to benefit from higher after-tax yields available on bank-qualified municipal securities. 14 The table below summarizes the amortized cost and estimated market values of investment securities at the dates indicated.
March 31, 1999 December 31, 1998 ------------------------------------- -------------------------------------- Amortized Market Amortized Market Cost Value Cost Value --------------- ---------------- ---------------- --------------- (Dollars in thousands) SECURITIES HELD TO MATURITY: U.S. government agencies and corporation $ 20,378 $ 20,358 $ 16,290 $ 16,400 Municipal securities 16,140 16,611 61 64 Mortgage Backed Securities 56 58 16,152 16,754 --------------- ---------------- ---------------- --------------- TOTAL $ 36,574 $ 37,027 $ 32,503 $ 33,218 =============== ================ ================ =============== SECURITIES AVAILABLE FOR SALE: U.S. Treasury securities $ 23,414 $ 23,572 $ 12,013 $ 12,228 U.S. government agencies and corporation 12,010 12,155 18,366 18,641 --------------- ---------------- ---------------- --------------- TOTAL $ 35,424 $ 35,727 $ 30,379 $ 30,869 =============== ================ ================ ===============
Deposits For the three months ended March 31, 1999 average deposits totaled $349.5 million, an increase of $63.8 million or 22.3% from $285.7 million for the same period in 1998. Management attributes the increase in deposits to an improving economic environment and an increase in loan demand. It is the Company's objective to become the primary bank for its customers by servicing both the loan and deposit needs. Accordingly, a correlation is expected between the loan and the deposit volumes such that deposit volumes are expected to increase as the loan volume increases. For the three months ended March 31, 1999, average demand deposits totaled $95.6 million, an increase of $15.5 million or 19.3% from the same period in 1998. Average demand deposits as a percentage of total deposits decreased to 27.4% for the first quarter of 1999 from 28.1% for the same period of the prior year. Average interest-bearing deposits increased $48.3 million or 23.5% for the three months ended March 31, 1999 from the same period in 1998. Average interest- bearing deposits comprised 72.6% of average total deposits for the three months ended March 31, 1999 and 71.9% of average total deposits for the three months ended March 31, 1998. The table below sets forth information regarding the Bank's average deposits by amount and percentage of total deposits for the three months ended March 31, 1999 and 1998.
Average Deposits ---------------------------------------------------------------------- (Dollars in thousands) Three Months Ended March 31, ---------------------------------------------------------------------- 1999 1998 ----------------------------------- ------------------------------- Amount Percentage Amount Percentage ------------- ---------------- ------------- ------------ Demand accounts $ 95,638 27.4% $ 80,134 28.1% Interest-bearing checking 27,773 7.9% 27,807 9.7% Money market 101,736 29.1% 74,099 25.9% Savings and time 124,369 35.6% 103,619 36.3% ------------- ----------- ------------- ------------ Total $ 349,516 100.0% $ 285,659 100.0% ============= =========== ============= ============
15 Certificates of deposit over $100,000 are generally considered a higher cost and less stable form of funding than lower denomination deposits and may represent a greater risk of interest rate and volume volatility than small retail deposits. Time certificates of $100,000 or more at March 31, 1999 had the following schedule of maturities:
(In thousands) ------------- Three months or less $ 60,286 After three months through six months 26,417 After six months through twelve months 5,581 After twelve months 3,339 ------------- Total $ 95,623 =============
LIQUIDITY AND CAPITAL RESOURCES Liquidity Liquidity management refers to the Bank's ability to acquire funds to meet loan demand, fund deposit withdrawals and to service other liabilities. To augment liquidity, the Bank has informal federal funds borrowing arrangements with correspondent banks totaling $35.0 million and is a member of the Federal Home Loan Bank of San Francisco and through membership has the ability to pledge qualifying collateral for short term (up to six months) and long term (up to five years) borrowing. At March 31, 1999 the Bank had no outstanding borrowings against these arrangements. Additionally, at March 31, 1999, unpledged government securities that are available to secure additional borrowing in the form of reverse repurchase agreements totaled approximately $48.1 million. At March 31, 1999 the Bank had no reverse repurchase agreements. The liquidity position of the Company improved during the first quarter of 1999. Deposit growth provided $29.0 million of cash in addition to the $1.6 million provided by operating activities. Cash and cash equivalents of $20.3 million were used in the Company's investing activities to purchase securities and to fund the growth of the loan portfolio. The net increase in cash and cash equivalents for the quarters ended March 31, 1999 and 1998 was $10.8 million and $13.5 million, respectively. The liquidity position of the Company may be expressed as a ratio defined as (a) cash, Federal funds sold, other unpledged short term investments and marketable securities, including those maturing after one year, divided by (b) total assets less pledged securities. Using this definition at March 31, 1999, the Company had a liquidity ratio of 40.1% as compared to 38.2% at December 31, 1998. The increase in over-night Federal funds sold reflects the increase in liquidity. Federal Funds sold at March 31, 1999 were $81.8 million compared to $73.0 million at December 31, 1998. Capital Resources Total shareholders' equity increased to $43.5 million at March 31, 1999 from $41.8 million at December 31, 1998 reflecting retained income of $1,275,000 and common stock option exercises of $536,000. These benefits were partially offset by the market adjustment of securities available for sale. The Company and the Bank are subject to capital adequacy guidelines issued by the Federal Reserve Board of Governors which requires a minimum risk-based capital ratio of 8%. At least 4% must be in the form of "Tier 1" capital, which consists of common equity, non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries. "Tier 2" capital consists of cumulative and limited-life preferred stock, mandatory convertible securities, subordinated debt and, subject to 16 certain limitations, the allowance for loan losses. General loan loss reserves included in Tier 2 capital cannot exceed 1.25% of risk-weighted assets. At March 31, 1999 the Company's risk-based capital ratio was 15.35%. The following table presents the Company's risk-based capital and leverage ratios as of March 31, 1999 and December 31, 1998.
Minimum Capital Requirements To Be Considered Well Capitalized Minimum Under Prompt Corrective Actual Capital Requirements Action Provisions ----------------------------- ---------------------------- ----------------------------- Amount Ratio Amount Ratio Amount Ratio ------------- ------------ ------------ ------------ ------------- ------------ As of March 31, 1999 Total Capital (to Risk Weighted Assets) $ 46,407 15.35% $ 24,193 8.00% $ 30,241 10.00% Tier 1 Capital (to Risk Weighted Assets) 42,615 14.09% 12,096 4.00% 18,145 6.00% Tier 1 Capital (to Average Assets) 42,615 10.73% 15,889 4.00% 19,861 5.00% As of December 31, 1998: Total Capital (to Risk Weighted Assets) $ 44,381 15.39% $ 23,070 8.00% $ 28,837 10.00% Tier 1 Capital (to Risk Weighted Assets) 40,766 14.14% 11,535 4.00% 17,302 6.00% Tier 1 Capital (to Average Assets) 40,766 10.20% 15,987 4.00% 19,984 5.00%
Year 2000 The Company is working to resolve the potential impact of Year 2000 on its computer system and the associated software applications. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's time-sensitive programs could interpret a date using "00" as 1900 rather than the year 2000. This could result in major miscalculations or system failure. If the Company and its third party software vendors are unable to address this issue in a timely manner, there could be substantial financial risk to the Company. Contingency plans include the conversion to alternative Year 2000 compliant applications, outsourcing of critical functions to third-party providers or interim manual processing. In the worst case scenario, the Company would retain sufficient additional staffing to convert to manual processing. The added expense in this scenario would be a function of the number of applications requiring such manual processing and the duration of time until a Year 2000 compliant application could be acquired, tested and installed. To insure this does not occur, the Company has formed a committee of representatives of all operational areas within the Bank. This committee convenes on a monthly basis and reports quarterly to the Audit Committee of the Board of 17 Directors. The Committee has developed an action plan which includes five phases. The Awareness and Assessment Phases included forming a committee of appropriate members, preparing an inventory of all hardware and software applications, identifying mission-critical systems and developing an overall plan to address the issue. These phases were completed by June 1998. The Renovation Phase included implementing the changes in hardware and software necessary to bring the computer systems compliant with Year 2000 processing. This phase was 98% completed in March of 1999. The Validation and Implementation Phases include testing and installation of Year 2000 compliant hardware and applications. The Bank has completed 90% of this phase with completion expected by June of 1999. The Company has also investigated "environmental systems providers" which include such services as building elevators, telephone and alarm systems for Year 2000 compliance and has received assurances that those systems have been tested and are Year 2000 compliant. However, due to the nature of certain of the environmental applications, such as the utility companies, the Company will be unable to test and validate compliance in these areas. Additionally, the Company has identified customers who have a material loan or deposit relationship with the Bank and is in the process of surveying those customers to inform them of the Year 2000 issues, insure they are taking appropriate steps to meet Year 2000 processing requirements and to assess the overall risk to the Company resulting from the status of such customer's Year 2000 compliance. The primary cost associated with the Company's efforts to review, test and validate its computer applications for Year 2000 compliance has been, and will continue to be, the reallocation of internal resources. The Company has expensed approximately $120,000 through March 31, 1999 relating to its Year 2000 compliance efforts, and anticipates an additional $30,000 of expenses for the remainder of 1999. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The Company's primary market risk is interest rate risk. Interest rate risk occurs as a result of interest sensitive assets and liabilities not repricing at the same time or by the same amount and is quantified by estimating the potential gain or loss in the market value of assets and net interest income that can result from changes in interest rates. The Company's exposure to interest rate risk is monitored monthly by the Risk Management Committee which includes members of the Board of Directors and Senior Management. The Company attempts to manage its exposure to changes in interest rates; however, due to its size and the direct competition from major banks, the Company must offer products which are competitive in the market place, even if less than optimum with respect to interest rate exposure. The Company's balance sheet position at Market 31, 1999 was asset sensitive due to the significant amount of variable rate loans and Federal funds sold. Generally, if more assets than liabilities reprice at a given time in a rising rate environment, net interest income will increase, and in a declining rate environment, net interest income would deteriorate. Management believes there has been no significant change in the Bank's market risk exposure as disclosed in the Company's Annual Report on Form 10-K for the year December 31, 1998. 18 Part II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K - None 19 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacity indicated. CIVIC BANCORP (Registrant) Date: May 7, 1999 By: /s/ Herbert C. Foster ------------------------------------- Herbert C. Foster President Chief Executive Officer By: /s/ Gerald J. Brown ------------------------------------- Gerald J. Brown Chief Financial Officer Principal Accounting Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 MAR-31-1998 17,339 18,178 0 0 81,750 25,100 0 0 35,727 34,982 36,574 24,080 37,027 24,437 244,251 221,375 4,710 4,073 421,031 328,762 371,901 285,123 0 0 5,617 3,823 0 0 0 0 0 0 33,259 35,115 10,254 4,701 421,031 328,762 5,475 5,627 1,787 1,206 0 0 7,262 6,833 2,188 2,015 2,188 2,015 5,074 4,818 45 38 0 0 3,211 3,047 2,060 1,970 2,060 1,970 0 0 0 0 1,275 1,175 0.28 0.25 0.27 0.24 0.56 0.65 79 3,238 0 182 0 0 0 0 4,424 4,351 0 379 241 63 4,710 4,073 4,710 4,073 0 0 1,367 1,479
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