-----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, NwU2EJdFgIJdR0pNeS3WNqrSMrheqLPhvPRmoIXyp/REPrODNXfLwL+VJX4kz9Wi +dE26rFonW78nrEz0RUS9A== /in/edgar/work/0000929624-00-001549/0000929624-00-001549.txt : 20001114 0000929624-00-001549.hdr.sgml : 20001114 ACCESSION NUMBER: 0000929624-00-001549 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIVIC BANCORP CENTRAL INDEX KEY: 0000747205 STANDARD INDUSTRIAL CLASSIFICATION: [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: 757928 BUSINESS ADDRESS: STREET 1: 2101 WEBSTER ST STREET 2: 14TH FLOOR CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 5108366500 MAIL ADDRESS: STREET 1: 2101 WEBSTER STREET STREET 2: 14TH FLOOR CITY: OAKLAND STATE: CA ZIP: 94612 10-Q 1 0001.txt 3RD QTR 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 September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to ______ Commission File No. 0-13287 CIVIC BANCORP 2101 Webster Street, 14th Floor Oakland, CA 94612 (510) 836-6500 Incorporated in California I.R.S. Employer Identification No. 68-0022322 The number of shares of common stock outstanding as of the close of business on November 1, 2000. Class Number of Shares Outstanding ----- ---------------------------- Common Stock 4,954,580 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- CIVIC BANCORP AND SUBSIDIARY
Index to Form 10-Q Page Number ----------- PART I. Item 1. Unaudited Financial Statements Consolidated Balance Sheets - September 30, 2000, and December 31, 1999 3 Consolidated Statements of Income - Three Months Ended September 30, 2000, and September 30, 1999, and Nine Months Ended September 30, 2000, and September 30, 1999 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000, and September 30, 1999 5 Consolidated Statements of Comprehensive Income - Three Months Ended September 30, 2000, and September 30, 1999, and Nine Months Ended September 30, 2000, and September 30, 1999 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. Other Information 20 SIGNATURES 21
2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (unaudited)
September 30 December 31 (dollars in thousands) 2000 1999 -------------- ------------- ASSETS - ------ Cash and due from banks $ 27,753 $ 12,205 Federal funds sold - 7,500 -------------- ------------- Total cash and cash equivalents 27,753 19,705 Securities available for sale 29,215 31,665 Securities held to maturity (market value of $45,993 and $42,468, respectively) 46,414 43,416 Other securities 1,718 2,126 Loans: Commercial 229,093 173,124 Real estate-construction 13,586 10,053 Real estate-other 110,958 85,470 Installment and other 21,557 16,890 -------------- ------------- Total loans 375,194 285,537 Less allowance for loan losses 6,472 4,850 -------------- ------------- Loans - net 368,722 280,687 Interest receivable and other assets 9,859 5,544 Intangible Assets - net 8,923 607 Leasehold improvements and equipment - net 2,442 1,621 Foreclosed assets 164 - -------------- ------------- TOTAL ASSETS $ 495,210 $ 385,371 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ LIABILITIES Deposits: Noninterest-bearing $ 77,826 $ 65,277 Interest-bearing: Checking 8,363 11,851 Money market 216,358 160,432 Time and savings 124,484 97,154 -------------- ------------- Total deposits 427,031 334,714 Other borrowings 12,100 Accrued interest payable and other liabilities 4,571 4,453 -------------- ------------- Total liabilities 443,702 339,167 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, 4,954,580 and 4,908,132 shares, respectively 38,100 34,751 Retained earnings, (subsequent to July 1, 1996 date of quasi-reorganization, total deficit eliminated $5.5 million) 13,445 11,701 Accumulated other comprehensive loss - net (37) (248) -------------- ------------- Total shareholders' equity 51,508 46,204 -------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 495,210 $ 385,371 ============== =============
See accompanying notes to unaudited consolidated financial statements 3 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------- --------------------------- (dollars in thousands) 2000 1999 2000 1999 ---------- ---------- --------- ---------- INTEREST INCOME: Loans $ 9,722 $ 6,410 $ 26,371 $ 17,636 Taxable securities 890 959 2,750 2,682 Tax exempt securities 251 223 764 623 Federal funds sold 34 47 154 1,246 --------- --------- --------- --------- Total interest income 10,897 7,639 30,039 22,187 INTEREST EXPENSE: Deposits 3,050 1,948 8,139 6,129 Other borrowings 170 12 368 12 --------- --------- --------- --------- Total interest expense 3,220 1,960 8,507 6,141 --------- --------- --------- --------- NET INTEREST INCOME 7,677 5,679 21,532 16,046 Provision for loan losses 225 75 600 165 --------- --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,452 5,604 20,932 15,881 --------- --------- --------- --------- NONINTEREST INCOME: Customer service fees 417 260 1,098 687 Other 130 348 327 474 --------- --------- --------- --------- Total noninterest income 547 608 1,425 1,161 NONINTEREST EXPENSE: Salaries and employee benefits 3,010 2,096 8,985 6,133 Occupancy 412 279 1,123 828 Equipment 385 245 1,040 754 Data processing services 116 101 326 305 Telephone and postage 128 86 380 263 Consulting fees 75 66 401 198 Marketing 80 53 211 166 Legal fees 76 50 184 128 Goodwill and core deposit amortization 182 42 448 126 FDIC insurance 27 11 49 30 Foreclosed asset expense - - 36 1 Other 458 473 1,377 1,111 --------- --------- --------- --------- Total other expenses 4,949 3,502 14,560 10,043 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 3,050 2,710 7,797 6,999 Income tax expense 1,165 1,035 2,987 2,674 --------- --------- --------- --------- NET INCOME $ 1,885 $ 1,675 $ 4,810 $ 4,325 ========= ========= ========= ========= BASIC EARNINGS PER COMMON SHARE $ 0.38 $ 0.34 $ 0.97 $ 0.87 ========= ========= ========= ========= DILUTED EARNINGS PER COMMON SHARE $ 0.37 $ 0.33 $ 0.95 $ 0.85 ========= ========= ========= ========= Weighted average shares outstanding used to compute basic earnings per common share 4,953,953 4,944,458 4,942,608 4,963,701 Dilutive effects of stock options 152,428 144,601 124,512 145,707 --------- --------- --------- --------- Weighted average shares outstanding used to compute diluted earnings per common share 5,106,381 5,089,059 5,067,120 5,109,408 ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements 4 CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (unaudited)
(dollars in thousands) Nine Months Ended Sept. 30, -------------------------------- 2000 1999 ----------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,810 $ 4,325 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 600 165 Depreciation and amortization 1,294 945 Gain on sale of foreclsed asset - (67) Write-down on foreclosed asset 36 - Increase (decrease) in deferred loan fees 226 146 Change in assets and liabilities: Increase in interest receivable and other assets (4,315) (121) Decrease in accrued interest payable and other liabilities (22) (935) ----------- --------- Net cash provided by operating activities 2,629 4,458 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,507) (461) Proceeds from sales of foreclosed assets - 67 Net increase in loans (90,169) (46,799) Acquisition, net of cash acquired (7,655) - Activities in securities held to maturity: Proceeds from maturing securities 1,585 23 Purchases of securities (4,319) (11,311) Activities in securities available for sale: Proceeds from maturing securities 16,000 10,000 Purchases of securities (13,216) (15,974) ----------- --------- Net cash used by investing activities (99,281) (64,455) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 286 769 Purchase of common stock - (1,845) Cash paid in lieu of fractional shares (3) (3) Proceeds from short-term borrowing 12,100 - Net increase (decrease) in deposits 92,317 (6,711) ----------- --------- Net cash provided (used) by financing activities 104,700 (7,790) ----------- --------- Net increase (decrease) in cash and cash equivalents 8,048 (67,787) Cash and cash equivalents at beginning of period 19,705 88,304 ----------- --------- Cash and cash equivalents at end of period $ 27,753 $ 20,517 =========== ========= Cash paid during period for: Interest $ 8,485 $ 6,588 =========== ========= Income taxes $ 3,906 $ 2,375 =========== ========= Supplemental schedule of non-cash investing activity: Fair value of assets acquired $ 87,219 $ - Liabilities assumed $ 72,614 $ - Cash paid for capital stock $ 14,605 $ -
See accompanying notes to unaudited consolidated financial statements 5 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(dollars in thousands) Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------------- -------------------------------- 2000 1999 2000 1999 -------------- --------------- ---------------- ------------ Net Income $ 1,885 $ 1,675 $ 4,810 $ 4,325 Other Comprehensive Income: Unrealized gain (loss) on securities available for sale 303 (125) 351 (701) Income tax expense related to unrealized loss on securities available for sale (121) 50 (140) 280 -------------- --------------- ---------------- ------------- Other Comprehensive Income (Loss) 182 (75) 211 (421) -------------- --------------- ---------------- ------------- COMPREHENSIVE INCOME $ 2,067 $ 1,600 $ 5,021 $ 3,904 ============== =============== ================ =============
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, 1999. 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 April 2000. 2. NEW PRONOUNCEMENTS 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 1999 and not modified substantially thereafter. 3. BUSINESS COMBINATION On February 29, 2000, CivicBank of Commerce acquired East County Bank for approximately $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 September 30 are included in the income statement of Civic BanCorp. The following unaudited pro-forma financial information presents the combined results of operations of the Company and East County Bank as if the acquisition had occurred at January 1, 1999, after effect to certain adjustments, including the amortization of goodwill. The pro-forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and East County Bank constituted a single entity during such periods. 7 Pro-forma results of operations: (dollars in thousands except per share) Unaudited
Nine Months Ended September 30, 2000 1999 -------------- -------------- Net Interest Income $ 22,281 $ 20,829 Net Income $ 4,854 $ 4,833 Diluted Earnings per Share $ 0.95 $ 0.98
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 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, legislative or regulatory changes and increases in personal or commercial customers' bankruptcies. OVERVIEW For the nine months ended September 30, 2000, the Company reported net income of $4,810,000, or $.95 earnings per diluted share compared to a net income of $4,325,000 or $.85 earnings per diluted share for the same period of the prior year. The annualized return on average assets was 1.37% for the nine months ended September 30, 2000 compared to 1.48% for the same period of the prior year. The annualized return on average shareholders' equity for the nine months ended September 30, 2000 and 1999 was 13.12% and 13.12%, respectively. Included in the second quarter, were one-time noninterest expenses associated with the merger of East County Bank that approximated $350,000 on an after-tax basis. Such expenses included an accrual for executive severance payments, an accrual for executive employment contract payments, conversion programming costs and other one-time expenses. Excluding such one-time items, pro-forma earnings for the nine months ended September 30, 2000 would have approximated $5.2 million, or $1.02 per diluted share. Pro-forma return on assets would have increased to 1.47% and pro-forma return on equity would have increased to 14.08%. RESULTS OF OPERATIONS Net interest income for the nine months ended September 30, 2000, was $21.5 million, increasing $5.5 million or 34.2% from net interest income of $16.0 million for the same period in 1999. The increase in net interest income was primarily due to increases in the volume and the yield of average earning assets. Total interest income for the first nine months of 2000 equaled $30.0 million, an increase of $7.9 million over total interest income for the same period in 1999. The increase in total interest income is primarily attributed to the increases in the volume and the weighted average yield on those assets. Total average earning assets increased $65.9 million or 18.0% to $433.0 million for the first nine months of 2000 compared to $367.1 million for the same period in 1999. The weighted average yield of earning assets increased to 9.39% for the first half of 2000 relative to 8.02% for the same period of the prior year. The increase in the yield is attributed to a higher interest rate environment of the current year. 8 The following table presents an analysis of the components of net interest income for the first nine months ended September 30, 2000 and 1999.
Nine months ended September 30, -------------------------------------------------------------------------------------- 2000 1999 --------------------------------------- --------------------------------------------- dollars in thousands Interest Rates Interest Rates Average Income\ Earned\ Average Income\ Earned\ Balance Expense /2/ Paid Balance Expense /2/ Paid ----------- ----------- ----------- ----------- ----------- ----------- ASSETS Securities available for sale $ 33,622 $ 1,622 6.44% $ 37,162 $ 1,723 6.20% Securities held to maturity: U.S. Treasury securities 700 34 6.40% - - - U.S. Government agencies 24,262 991 5.45% 210,404 862 5.38% Municipal securities /(1)/ 21,041 1,160 7.37% 17,522 944 7.21% Other securities 1,888 103 7.27% 2,355 97 5.52% Federal funds sold and securities purchased under agreements to resell 3,492 154 5.88% 35,416 1,246 4.70% Loans: /2,3/ Commercial 208,486 16,132 10.34% 159,401 11,215 9.41% Real estate-construction 14,929 1,170 10.47% 8,903 631 9.48% Real estate-other 103,402 7,601 9.82% 69,637 4,758 9.13% Installment and other 21,210 1,468 9.25% 15,319 1,032 9.01% ----------- ------------ ----------- ----------- ----------- ----------- Total Loans 348,027 26,371 10.12% 253,260 17,636 9.31% ---------- ------------ ----------- ----------- ----------- ----------- Total Earning Assets 433,032 30,435 9.39% 367,119 22,508 8.20% Cash and due from banks 24,424 18,167 Leasehold improvements and equipment - net 2,162 1,610 Interest receivable and other assets 14,707 6,109 Foreclosed assets 150 - Less allowance for loan loss (5,925) (4,603) ----------- ----------- TOTAL ASSETS $ 468,550 $ 388,402 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking $ 36,015 155 0.57% $ 32,106 128 0.53% Money market 125,283 3,402 3.63% 101,169 2,456 3.25% Time and savings 129,290 4,582 4.73% 111,422 3,545 4.25% Other borrowed funds 7,224 368 6.81% 273 12 5.81% ---------- ------------ ---------- ----------- ----------- ----------- Total interest bearing liabilities 297,812 8,507 3.82% 244,970 6,141 3.35% Demand deposits 116,372 94,206 Other liabilities 5,491 5,260 Shareholders' equity 48,875 43,966 ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 468,550 $ 388,402 ========== =========== Net Interest Income $ 21,928 $ 16,367 ============ =========== Net Interest Margin 6.76% 5.96% ========== =========== Tax Equivalent Adjustment /(1)/ $ 396 $ 321 ============ =========== - ------------------------------------------------------------------------------------------------------------------------------------
(1) The tax-equivalent income adjustment on municipal securities is computed using a Federal income tax rate of 34%. Interest on municipal securities was $764,000 and $623,000 for September 30, 2000 and 1999, 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 $311,000 and $356,000 for September 30, 2000 and 1999, respectively; fees on real estate loans of $366,000 and $238,000 for September 30, 2000 and 1999, respectively; and fees on installment and other loans of $23,000 and $21,000 for September 30, 2000 and 1999, 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 nine-month periods ended September 30, 2000 and 1999. Analysis of Changes in Interest Income and Expense
in thousands Volume /1/ Rate /2/ Total ------------ ------------- -------------- Increase (decrease) in interest income: Securities available for sale $ (162) $ 61 $ (101) Securities held to maturity: U.S. Treasury securities 34 - 34 U.S. Government agencies 115 14 129 Municipal securities 191 25 216 Other securities (19) 25 6 Federal funds sold (1,123) 31 (1,092) Loans: Commercial 3,468 1,449 4,917 Real estate-construction 428 111 539 Real estate-other 2,308 535 2,843 Installment and other 398 38 436 ------------ ------------- -------------- Total Loans 6,602 2,133 8,735 ------------ ------------- -------------- Total increase $ 5,638 $ 2,289 $ 7,927 ------------ ------------- -------------- (Increase) decrease in interest expense: Deposits: Interest bearing checking $ (15) $ (12) $ (27) Money market (593) (353) (946) Savings and time (569) (468) (1,037) Other borrowed funds (356) - (356) ------------ ------------- -------------- Total increase $ (1,533) $ (833) $ (2,366) ------------ ------------- -------------- Total change in net interest income $ 4,105 $ 1,456 $ 5,561 ============ ============= ==============
(1) Changes not solely attributed to rate or volume have been allocated to volume. (2) Loan fees are reflected in rate volumes. Total interest expense for the first nine months of 2000 was $8.5 million, an increase of $2.4 million or 38.5% relative to $6.1 million for the first nine months of 1999. The increase in interest expense reflects the increases in the volume and the weighted average rate paid on interest earning liabilities. Average interest bearing liabilities were $297.8 million for the first nine months of 2000 as compared to $245.0 million for the same period of the prior year, an increase of $52.8 million or 21.1%. The weighted average rate paid on these liabilities increased 47 basis points to 3.82% for the first nine months of 2000 from 3.35% for the same period of 1999. The increase in the average rate is attributed to a higher interest rate environment for deposits. 10 Net Interest Margin Net interest margin increased 80 basis points to 6.76% for the nine months ended September 30, 2000, from 5.96% for the same period of the prior year. The increase in the margin is attributed to a greater increase in average rate earned on earning assets of 119 basis points relative to the increase in the average rate paid on interest bearing deposits of 47 basis points. 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 nine months ended September 30, 2000, was $600,000 as compared to $165,000 for the nine months ended September 30, 1999. The increase in the provision was based principally on the growth in the loan portfolio. See "Allowance for Loan Losses" for further discussion. Non-Interest Income Non-interest income for the nine months ended September 30, 2000, was $1,425,000, an increase of $264,000 or 22.7% from the nine months ended September 30, 1999. Customer service fees, the largest component of non- interest income, increased $411,000 due to the increase in deposit volume and the addition of the retail deposit base of East County Bank. Retail deposit accounts generally have higher service charges per account as compared to commercial accounts that generally compensate bank services with deposit balances. Non-Interest Expense Non-interest expense totaled $14.6 million and $10.0 million for the nine month periods ended September 30, 2000 and 1999, respectively. Salaries and employee benefits for the nine months ended September 30, 2000, increased $2.9 million or 48.0% from the same period in 1999. The increase in salaries and employee benefits is related to the increase in the number of employees associated with the acquisition of East County Bank, the accrual of one-time executive severance and employment contract payments in the second quarter and normal promotional and merit increases. Full time equivalent personnel numbered 152 on September 30, 2000 compared to 116 on September 30, 1999. Occupancy expense increased with the addition of three East County Bank offices. Increases in the consulting and equipment expenses result from data processing conversion of East County Bank and the increase in goodwill relates to the amortization of goodwill created in the East County Bank merger. The following table summarizes the significant components of noninterest expense for the dates indicated. 11
Noninterest Expense for the Nine Months Ended, Sept. 30 Sept. 30 Dollar % (dollars in thousands) 2000 1999 Change Change ------------------- -------------- ---------------- -------------- Salaries and related benefits $ 8,985 $ 6,133 $ 2,852 46.5% Occupancy 1,123 828 295 35.6% Equipment 1,040 754 286 37.9% Data processing services 326 305 21 6.9% Telephone and postage 380 263 117 44.5% Consulting fees 401 198 203 102.5% Marketing 211 166 45 27.1% Legal fees 184 128 56 43.8% Goodwill and core deposit amortization 448 126 322 255.6% FDIC insurance 49 30 19 63.3% Foreclosed asset expenses 36 1 35 3500.0% Other 1,377 1,111 266 23.9% ------------------- -------------- ---------------- TOTAL NONINTEREST EXPENSE $ 14,560 $10,043 $ 4,517 45.0% =================== ============== ================ ==============
Provision for Income Taxes The provisions for income taxes for the first nine months of the years 2000 and 1999 were $2,987,000 and $2,674,000, respectively. These provisions represent effective tax rates of 38.3% and 38.2%, respectively. FINANCIAL CONDITION Loans Total loans at September 30, 2000 increased $89.7 million or 31.4% from December 31, 1999 due to the merger with East County Bank in combination with a strong regional economy in 2000 and an overall strong demand for loans. On an unaudited basis, East County Bank had total loans of $49 million on February 29, 2000. 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 3.6% at September 30, 2000 and 3.5% at December 31, 1999. 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. 12
Sept 30, 2000 Dec 31, 1999 ---------------------------------- ---------------------------------- (dollars in thousands) Amount Percent Amount Percent ------------------- ------------- ------------------- ------------ Commercial $ 229,093 61.1% $ 173,124 60.6% Real estate - construction 13,586 3.6% 10,053 3.5% Real estate - other 110,958 29.6% 85,470 29.9% Installment and other 21,557 5.7% 16,890 5.9% ------------------- ------------- ------------------- ------------ TOTAL $ 375,194 100.0% $ 285,537 100.0% =================== ============= =================== ============
Foreclosed Assets Foreclosed assets totaled $164,000 at September 30, 2000, and consisted of one parcel of undeveloped land. The Bank has received an offer for this property and has written-down the book value of the property to approximate the net proceeds anticipated on the transaction. 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.
(dollars in thousands) Sept 30, 2000 Dec 31, 1999 Sept 30, 1999 -------------------- -------------------- -------------------- Loans 90 days or more past due and still accruing $ 110 $ 193 $ 622 Non-accrual loans 507 632 596 Non-accrual SBA guaranteed loans 559 - - Foreclosed assets 164 - - -------------------- ------------------------------------------ Total non-performing assets $ 1,340 $ 825 $ 1,218 ==================== ==================== ==================== Non-performing assets to period end loans, plus foreclosed assets 0.36% 0.29% 0.44% ==================== ==================== ====================
The increase in non-performing assets from December 31, 1999 to September 30, 2000 is primarily due to the non-performing SBA loans and the foreclosed asset acquired in the merger with East County Bank. At September 30, 2000, the recorded investment in loans considered to be impaired was $1,066,000, all of which were on a non-accrual basis. Of this total, $566,000 of non-performing loans have 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 $500,000 have an associated allowance for loan loss of $185,000. For the nine months ended September 30, 2000, the average recorded investment in impaired loans was $969,000 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. 13 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) September 30, December 31, 2000 1999 -------------------- -------------------- Substandard $ 9,815 $ 8,415 Doubtful 630 45 Loss - - -------------------- -------------------- Total Classified $ 10,445 $ 8,460 Classified Loans to Total Loans 2.78% 2.96%
As of September 30, 2000, 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. 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: 14
Nine Months Year Nine Months Ended Ended Ended (dollars in thousands) Sept 30, 2000 Dec 31, 1999 Sept 30, 1999 --------------- ---------------- ---------------- Balance, at beginning of period $ 4,850 $ 4,424 $ 4,424 Charge-offs: Commercial 169 800 500 Real estate - construction - - - Real estate - other - - - Installment and other 87 4 - --------------- ---------------- ---------------- Total charge-offs 256 804 500 Recoveries: Commercial 35 480 124 Real estate - construction - - - Real estate - other 88 351 280 Installment and other 47 84 75 --------------- ---------------- ---------------- Total recoveries 170 915 479 --------------- ---------------- ---------------- Net charge-offs 86 (111) 21 Allowance acquired through merger 1,108 - - Provision charged to operations 600 315 165 --------------- ---------------- ---------------- Balance, at end of period $ 6,472 $ 4,850 $ 4,568 =============== ================ ================ Ratio of net charge-offs to average loans (annualized) 0.03% -0.04% 0.01% =============== ================ ================ Allowance at period end to total loans outstanding 1.72% 1.70% 1.63% =============== ================ ================
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. The table below summarizes the book value and estimated market values of investment securities at the dates indicated.
September 30, 2000 December 31, 1999 -------------------------------- --------------------------------- (dollars in thousands) Book Market Book Market Value Value Value Value -------------- ---------------- ---------------- ---------------- SECURITIES HELD TO MATURITY: U.S. Treasury securities $ 988 $ 995 $ - $ - U.S. government agencies and corporation 24,175 23,882 24,277 23,773 Municipal securities 21,228 21,092 19,105 18,660 Collateralized mortgage obligations 23 24 34 35 -------------- ---------------- ---------------- ---------------- TOTAL $ 46,414 $ 45,993 $ 43,416 $ 42,468 ============== ================ ================ ================ SECURITIES AVAILABLE FOR SALE: U.S. Treasury securities $ - $ - $ 8,003 $ 8,015 U.S. government agencies 29,277 29,215 24,075 23,650 -------------- ---------------- ---------------- ---------------- TOTAL $ 29,277 $ 29,215 $ 32,078 $ 31,665 ============== ================ ================ ================
15 Deposits Total deposits increased $92.3 million or 27.6% to $427.0 million as of September 30, 2000, from $334.7 million as of December 31, 1999. The increase in deposits includes those deposits acquired in the merger with East County Bank. On an unaudited basis, East County Bank had deposits of approximately $72 million on February 29, 2000. For the nine months ended September 30, 2000, average deposits totaled $407.0 million, an increase of $68.1 million or 20.0% from $338.9 million for the same period in 1999. In addition to the deposits acquired from East County Bank, management attributes the increase in deposits to strong regional economy and an increase in the loan demand. The Company emphasizes developing total banking relationships with its customers as a means of increasing its core deposit base. Accordingly, the Company expects a correlation between total loans and total deposits such that deposits are expected to increase as loan volume increases. The table below sets forth information regarding the Bank's average deposits by amount and percentage of total deposits for the nine months ended September 30, 2000 and 1999.
Average Deposits ------------------------------------------------------------------------- Nine Months Ended September 30, ----------------------------------------------------------------------------- (dollars in thousands) 2000 1999 ------------------------------------ ------------------------------------ Amount Percentage Amount Percentage -------------- --------------- -------------- --------------- Demand accounts $ 116,372 28.5% $ 94,206 27.9% Interest-bearing checking 36,015 8.8% 32,106 9.5% Money market 125,283 30.8% 101,169 29.9% Savings and time 129,290 31.8% 111,422 32.9% -------------- ----------- -------------- ----------- Total $ 406,960 100.0% $ 338,903 100.0% ============== =========== ============== ===========
Certificates of deposit over $100,000 are generally considered a higher cost and less stable form of funding than lower denomination deposits and may represent a greater risk of interest rate and volume volatility than small retail deposits. Time certificates of $100,000 or more at September 30, 2000, had the following schedule of maturities: (dollars in thousands) Total Maturing ------------------- Three months or less $ 40,681 After three months through six months $ 22,059 After six months through twelve months $ 19,090 After twelve months $ 3,040 ------------------- Total $ 84,870 =================== 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 Bank's exposure to liquidity risk is monitored monthly by the Risk Management Committee which 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 $40.0 million. The Bank is a member of the Federal Home Loan Bank of San Francisco and through membership has the ability to pledge qualifying collateral for short term (up to six months) and long-term (up to five years) borrowing. At September 30, 16 2000, the Bank had no outstanding borrowings against these arrangements. Additionally, at September 30, 2000, unpledged government securities that are available to secure additional borrowing in the form of reverse repurchase agreements totaled approximately $45.5 million. At September 30, 2000, the Bank had no reverse repurchase agreements. The liquidity position of the Company improved during the first half of 2000 from December 31, 1999. Cash and cash equivalents of $104.7 million were provided by the increase in deposits and the proceeds of short-term investing. Further cash and cash equivalents of $2.6 million were provided by operating activities. Cash and cash equivalents of $99.3 million were consumed by investing activities to fund loan growth. The liquidity position of the Company may be expressed as a ratio defined as (a) cash, Federal funds sold, other unpledged short term investments and marketable securities, including those maturing after one year, divided by (b) total assets less pledged securities. Using this definition, the liquidity position at September 30, 2000 was 19.8%, which is relatively consistent with the ratio at December 31, 1999 of 23.6%. 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 guidelines. Capital Resources Total shareholders' equity increased to $51.5 million at September 30, 2000, from $46.2 million at December 31, 1999, reflecting retained income of $4,810,000 for the first nine months of the year 2000 and proceeds from the exercise of stock options of $286,000. 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 which consists of common equity, non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries. "Tier 2" capital consists of cumulative and limited-life preferred stock, mandatory convertible securities, subordinated debt and, subject to certain limitations, the allowance for loan losses. General loan loss reserves included in Tier 2 capital cannot exceed 1.25% of risk-weighted assets. At September 30, 2000, the Company's total risk-based capital ratio was 10.50%. The following table presents the Company's risk-based capital and leverage ratios as of September 30, 2000, and December 31, 1999. 17
Minimum Capital Requirements To Be Considered Well Capitalized Minimum Under Prompt Corrective (dollars in thousand) Actual Capital Requirements Action Provisions ----------------------------- ---------------------------- ----------------------------- Amount Ratio Amount Ratio Amount Ratio ------------- ------------ ------------ ------------ ------------- ------------ As of September 30, 2000: Total Capital (to Risk Weighted Assets) $48,388 10.50% $36,850 8.00% $46,063 10.00% Tier 1 Capital (to Risk Weighted Assets) 42,621 9.25% 18,425 4.00% 27,638 6.00% Tier 1 Capital (to Average Assets) 42,621 9.10% 18,742 4.00% 23,428 5.00% As of December 31, 1999: Total Capital (to Risk Weighted Assets) $50,070 14.48% $27,666 8.00% $34,582 10.00% Tier 1 Capital (to Risk Weighted Assets) 45,741 13.23% 13,833 4.00% 20,749 6.00% Tier 1 Capital (to Average Assets) 45,741 11.80% 15,505 4.00% 19,381 5.00%
Year 2000 For the past several years, the Company has been working to resolve the potential impact of Year 2000 on its computer systems. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. A time-sensitive program could interpret a date using "00" as 1900 rather than the year 2000 and such interpretation could result in major miscalculations or system failure. The Company also identified and contacted customers with material loan or deposit balances to insure they were prepared to meet the Year 2000 processing requirements. Further, the Company took steps to avoid disruptions on February 29, 2000, the first leap year in the new millennium. The Company did not experience any failures or other disruptions of its computerized systems resulting from the Year 2000 nor does it have any information that indicates its customers or service providers were negatively impacted by Year 2000 related issues. 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 liability sensitive at September 30, 2000, due to the amount of fixed rate assets. Generally, if more liabilities than assets reprice at a given time in a rising rate environment, net interest income will deteriorate, and in a declining rate environment, net interest income would increase. 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, 1999. 19 Part II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K - There were no reports on Form 8-K during the period. Exhibit No. 27. Financial Data Schedule. 20 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacity indicated. CIVIC BANCORP ------------- (Registrant) Date: November 7, 2000 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 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS 9-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 SEP-30-2000 SEP-30-1999 27,753 16,717 0 0 0 3,800 0 0 29,215 35,919 48,132 43,467 47,711 42,874 375,194 279,843 6,472 4,568 495,210 384,652 427,031 336,238 12,100 0 4,571 3,775 0 0 0 0 0 0 38,100 34,590 13,408 10,049 495,210 384,652 26,371 17,636 3,668 4,551 0 0 30,039 22,187 8,139 6,141 8,507 6,141 21,532 16,046 600 165 0 0 14,560 10,043 7,797 6,999 7,797 6,999 0 0 0 0 4,810 4,325 .97 .87 .95 .85 6.76 5.96 1,066 596 110 622 0 0 0 0 4,850 4,424 256 500 170 479 6,472 4,568 6,472 4,568 0 0 1,868 176
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