-----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, IxoxFPt6CTjQ5K6GKgsV4KLjL+X/qYELrg8/GOKdma+2irpMBaHR/G4ZHfPKFRlN WYa8XANTiLlNkBwKXTjeDg== 0000929624-98-000571.txt : 19980323 0000929624-98-000571.hdr.sgml : 19980323 ACCESSION NUMBER: 0000929624-98-000571 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NASD 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-K405 SEC ACT: SEC FILE NUMBER: 000-13287 FILM NUMBER: 98569629 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-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the Fiscal Year Ended December 31, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from __________ to __________ COMMISSION FILE NO: 0-13287 ______________________________ CIVIC BANCORP 2101 Webster Street, 14th Floor Oakland, California 94612 (510) 836-6500 Incorporated in California I.R.S. Employer Identification No. 68-0022322 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Each Exchange on which Registered -------------- ----------------------------------------- Common Stock (no par value) NASDAQ Number of shares of Common Stock (no par value) outstanding as of March 2, 1998: 4,624,320 Aggregate market value of Common Stock (no par value) held by non-affiliates on December 31, 1997 based on closing price on March 2, 1998: $57,492,284.00 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X . NO . --- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] DOCUMENTS INCORPORATED BY REFERENCE: Document Part of Form 10-K -------- ----------------- Annual Report to stockholders for the fiscal year Parts I and II ended December 31, 1997 Proxy Statement for Annual Meeting of Stockholders to be held May 7, 1998 Part III 1 PART I - DESCRIPTION OF BUSINESS ITEM 1 - BUSINESS GENERAL Civic BanCorp (the "Company") is a California corporation incorporated on February 14, 1984 and is registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956, as amended. CivicBank of Commerce (the "Bank") is a wholly-owned subsidiary of the Company, organized as a California corporation in 1984. At present, the Company does not engage in any material business activities other than the ownership of the Bank. CIVICBANK OF COMMERCE The Bank is a state chartered bank and is a member of the Federal Reserve System. Deposits in the Bank are insured to $100,000 by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a full service commercial bank dedicated to providing personalized services to independent businesses and professional firms with annual sales of $500,000 to $30 million in Alameda, San Francisco, Santa Clara and Contra Costa counties. The Bank also provides banking services to individuals who are owners, partners or principals of these businesses or professional practices, and other corporate executives and professionals. The Bank offers its clients certain customary banking services, such as checking, savings and interest-bearing demand, money market and time deposit accounts; commercial, installment and real estate loans; safe deposit boxes; automated cash management services; collection services; wire and telephone transfer services; courier services; lockbox services; and account reconciliation. The Bank has one operating subsidiary, Pasco Services, Inc. which acts as trustee to perform loan servicing and reconveyance services under deeds of trust held by the Bank and other lenders. The principal offices of the Company and Bank are located at 2101 Webster Street, Oakland, California, 94612. Their telephone number is (510) 836-6500. The Bank has two banking offices in Walnut Creek and additional offices in Fremont, Palo Alto and San Leandro. The Bank has loan production offices at 595 Market Street, 28th Floor, San Francisco, California, 94577, and at 1731 Technology Drive, Suite 595, San Jose, California, 95110. SAVINGS AND DEPOSIT ACTIVITIES The Bank offers customary banking services such as personal and business checking, savings accounts, time certificates of deposit and IRA accounts. Most of the Bank's deposits are obtained from commercial businesses, professionals and individuals with high income or high net worth. At December 31, 1997, the Bank had a total of 6,330 accounts, consisting of demand deposit accounts with an average balance of approximately $43,000; savings, NOW and market rate accounts with an average balance of approximately $34,000; time certificates of $100,000 or more with an average balance of approximately $330,000; and other time deposits with an average balance of approximately $32,000. The Bank has not obtained any deposits through deposit brokers and has no present intention of using brokered deposits as a source of funding. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Deposits". 2 LENDING ACTIVITIES The Bank concentrates its lending activities in commercial loans, real estate construction loans and other forms of real estate loans made primarily to businesses and individuals; it has no foreign loans. The net loan portfolio as of December 31, 1997, totaled $228.6 million, which represented 81.0% of total deposits and 70.0% of total assets. The table below shows the mix of the loan portfolio as of December 31, 1997, 1996 and 1995.
December 31, ------------------------------------------------ (In thousands) 1997 1996 1995 ------------------------------------------------ Commercial loans $ 135,140 $ 92,756 $ 70,417 Real estate construction loans 12,929 6,608 4,067 Real estate loans - other 64,430 64,272 61,752 Installment and other loans 20,478 19,757 18,460 ------------------------------------------------ Subtotal 232,977 183,393 154,696 Less allowance for loan losses 4,351 4,969 4,960 ------------------------------------------------ LOANS-NET $228,626 $178,424 $149,736 ================================================
Commercial Loans - As of December 31, 1997, the Bank had outstanding commercial loans totaling $135.1 million, representing 58.0% of the Bank's total loan portfolio. The Bank lends primarily to businesses with annual gross revenues of $500,000 to $30 million and to professionals and other individuals located in Alameda, San Francisco, Santa Clara and Contra Costa counties. The Bank offers a variety of commercial lending services, including revolving lines of credit, working capital loans, equipment financing, letters of credit and inventory financing. Typically, commercial loans are floating rate obligations and are priced based on the Bank's reference rate. The Bank's commercial loans are made on a short term basis with the majority of such loans maturing within one year. Commercial loans are typically secured by several types of collateral, including qualifying accounts receivable, equipment, inventory, and real estate. No single commercial account customer accounted for more than 1.45% of total outstanding loans at December 31, 1997. Real Estate Loans - As of December 31, 1997, the Bank had outstanding real estate construction loans totaling $12.9 million representing 5.5% of the Bank's loan portfolio. The Bank makes loans to finance the construction of residential, commercial and industrial properties and to finance land development. Other real estate loans, consisting of loans for land development and "mini- perm" loans totaled $64.4 million at December 31, 1997, of which $60.1 million were mini-perms. Mini-perm loans are available for completed commercial and retail projects with terms of three to five years and principal and interest payments based on a 15 to 25 year amortization schedule with a balloon payment due at the end of the term. Neither the Bank nor the Company has taken an equity participation in connection with any real estate acquisition, development and construction loan held by the Bank. Installment Loans - Installment loans include loans to individual and business customers. Personal lines of credit extended to individuals were $3.0 million or 14.6% of total installment loans at December 31, 1997. The remainder includes home equity loans, automobile loans and other personal loans. 3 BANKING SERVICES To retain existing customers and attract new customers, the Bank offers a broad range of services, including automated teller machines, automated accounting services, daily courier services and account reconciliation. In addition, the Bank maintains close relationships with its customers by providing direct access to senior management, rapid response to customer requests and specialized market area knowledge of Alameda and Contra Costa counties. HUMAN RESOURCES At December 31, 1997, the Bank employed a total of 107 persons, consisting of 98 full time employees and 9 part time employees. COMPETITION The Bank actively competes for all types of deposits and loans with other banks and financial institutions located in its service area, and increased deregulation of financial institutions has increased competition. Many of the Bank's competitors have greater financial resources and facilities than the Bank and may offer certain services, such as trust services, that the Bank does not presently offer. In addition, California and federal law permit various forms of nationwide interstate banking with few restrictions. See "Regulation and Supervision - Interstate Banking". The Company believes that this will further increase competition as out-of-state financial institutions enter the California market. The Bank's strategy for meeting competition has been to maintain a sound capital base and liquidity position, employ experienced management, and concentrate on particular segments of the market, particularly businesses with annual revenues of $500,000 to $30 million and professionals, by offering customers a degree of personal attention that, in the opinion of management, is not generally available through the Bank's larger competitors. REGULATION AND SUPERVISION The Company The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Federal Reserve Board ("FRB"). A bank holding company is required to file with the FRB annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the FRB and is required to obtain FRB approval before acquiring, directly or indirectly, ownership or control of any voting shares of any bank, if after such acquisition it would directly or indirectly own or control more than 5% of the voting stock of that bank, unless it already owns a majority of the voting stock of that bank. The BHC Act further provides that the FRB shall not approve any such acquisition that would result in or further the creation of a monopoly, or the effect of which may be substantially to lessen competition, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the probable effect in meeting the convenience and needs of the community to be served. Furthermore, under the BHC Act, a bank holding company is, with limited exceptions, prohibited from (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or (ii) engaging in any activity other than managing or controlling banks. With prior notice to the 4 FRB (in the case of a "well-capitalized" and "well-managed" organizations) or with prior approval of the FRB in the case of other organizations, however, a bank holding company may own shares of a company engaged in activities which the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The FRB has by regulation determined that certain activities are so closely related to banking as to be a proper incident thereto within the meaning of the BHC Act. These activities include, but are not limited to: operating an industrial loan company, industrial bank, Morris Plan Bank, savings association, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing investment and financial advice; operating a trust company in certain instances, selling traveler's checks, United States savings bonds and certain money orders; providing certain courier services; providing management consulting advice to nonaffiliated depository institutions in some instances; providing securities brokerage services and certain private placement agent services; providing career counseling in financial services; community development financing and investment; acting as insurance agent for certain types of credit-related insurance; leasing property or acting as agent, broker or advisor for leasing property on a "full pay-out basis"; acting as a consumer financial counselor, including tax planning and return preparation; performing futures and options advisory services, check guarantee services and discount brokerage activities; operating a collection or credit bureau; or performing real and personal property appraisals. The Company has no present intention to engage in any of such permitted activities except as an incident to its normal banking operations. The FRB has also determined that certain activities are not so closely related to banking to be a proper incident thereto within the meaning of the BHC Act. Such activities include real estate brokerage and syndication; land development; property management; underwriting of life insurance not related to credit transactions; and with certain exceptions, securities underwriting and equity funding. In the future, the FRB may add to or delete from the list of activities permissible for bank holding companies. Historically, the BHC Act has prohibited bank holding companies and their bank subsidiaries from owning banks or branches in more than one state unless the laws of each state expressly permit or in case of certain emergencies arising from a bank failure or prospective failure. California and federal law now permit various forms of nationwide interstate banking with few restrictions. See "Regulation and Supervision - Legislation and Proposed Regulatory Changes - Interstate Banking". Regulations and policies of the FRB require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the FRB's policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to a subsidiary bank during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting a subsidiary bank. Under certain conditions, the FRB may conclude that certain actions of a bank holding company, such as payment of cash dividends, would constitute an unsafe and unsound practice because they violate the FRB's "source of strength" doctrine. A bank holding company and its subsidiaries are prohibited from certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries, or on a promise by its customer not to obtain other services from a competitor. In addition, federal law imposes certain restrictions on transactions between the Company and its subsidiaries, including the Bank. As an affiliate of the Bank, the Company is subject, with 5 certain exceptions, to provisions of federal law imposing limitations on, and requiring collateral for, extensions of credit by the Bank to its affiliates. Directors of the Company, and the companies with which they are associated, have had and will continue to have banking transactions with the Bank in the ordinary course of the Bank's business. It is the firm intention of the Company that any loans and commitments to loan included in such transactions be made in accordance with applicable law, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar creditworthiness, and on terms not involving more than the normal risk of collectibility or presenting other unfavorable features. At December 31, 1997, loans to directors totaled $1,544,000 or 4.0% of the Company's shareholders' equity. Company policy precludes loans to officers and employees of the Company or of the Bank. The Bank The Bank is a member of the FDIC which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, the Bank pays a semi-annual assessment and is subject to the rules and regulations of the FDIC pertaining to deposit insurance and other matters. The Bank is subject to regulation, supervision and regular examination by the California Department of Financial Institutions, formerly known as the State Banking Department (the "Department"). In addition, because the Bank is a member of the Federal Reserve System, it is subject to regulation, supervision and examination by the FRB. The regulations of these agencies govern most aspects of the Bank's business, including the making of periodic reports by the Bank and the Bank's activities relating to investments, loans, borrowings, certain check- clearing activities, branching, mergers and acquisitions, reserves against deposits and numerous other areas. Subject to the regulations of the California Superintendent of Financial Institutions (the "Superintendent"), the Bank may invest in capital stock, obligations or other securities of other corporations, provided such corporations are not insurance companies, agents or brokers. In addition, the Bank may acquire any or all of the securities of a company that engages in activities that the Bank may engage in directly under California law without the prior approval of the FRB. California state-chartered banks are also specifically authorized to provide real estate appraisal services, management consulting and advisory services and electronic data processing services. However, FRB and FDIC regulations restrict the ability of the Bank to engage in real estate development and investment activities and to engage, as principal, in other activities not permitted to national banks. The Company's primary potential source of income (other than interest earned on Company capital) is the receipt of dividends and management fees from the Bank. The ability of the Bank to pay management fees and dividends to the Company and its affiliates is subject to restrictions set forth in the California Financial Code and is subject to approval of the Department. The board of directors of a state-chartered bank may declare a dividend out of so much of net profits as such board deems appropriate, subject to California law which restricts the amount available for cash dividends to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event that a bank has no retained earnings or net income for the prior three fiscal years, cash dividends may be paid out of net income for such bank's last preceding fiscal year or current fiscal year upon the prior approval of the Department. Although there are no specific regulations restricting dividend payments by bank holding companies other than state corporation law, supervisory 6 concern focuses on the holding company's capital position, its ability to meet its financial obligations as they come due and the capacity to act as a source of financial strength to its subsidiary banks. The FRB and the Superintendent have authority to prohibit a bank from engaging in business practices which are considered to be unsafe or unsound. Depending upon the financial condition of the Bank and upon other factors, the FRB or Superintendent could assert that the payments of dividends or other payments by the Bank to the Company might be such an unsafe or unsound practice. Also, if the Bank were to experience either significant loan losses or rapid growth in loans or deposits, or some other event resulting in a depletion or deterioration of the Bank's capital account were to occur, the Company might be compelled by federal banking authorities to invest additional capital in the Bank necessary to return the capital account to a satisfactory level. FRB regulations require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally require that reserves of 3.0% must be maintained against net transaction accounts of $44.9 million or less, plus 10% against that portion of total transaction accounts in excess of $44.9 million. The first $4.4 million of otherwise reservable balances (subject to adjustment by the FRB) are exempted from the reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest- bearing account at a Federal Reserve Bank or a pass-through account as defined by the FRB, the effect of reserve requirements is to reduce interest-earning assets. Insurance Premiums and Assessments The FDIC has authority to impose a special assessment on members of the Bank Insurance Fund ("BIF") to insure there will be sufficient assessment income for repayment of BIF obligations and for any other purpose which it deems necessary. The FDIC is authorized to set semi-annual assessment rates for BIF members at levels sufficient to increase the BIF's reserve ratio to a designated level of 1.25% of insured deposits. The BIF achieved this level in mid-1995. Congress is considering various proposals to merge the BIF with the Savings Association Insurance Fund or otherwise to require banks to contribute to the insurance funds for savings associations. Adoption of any of these proposals might increase the cost of deposit insurance for all banks, including the Bank. Pursuant to FDICIA, the FDIC has developed a risk-based assessment system, under which the assessment rate for an insured depository institution will vary according to the level of risk incurred in its activities. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also to be assigned to one of the following "supervisory subgroups", subgroup A, B, or C. Subgroup A institutions are financially sound institutions with few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in a significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. The FDIC assigns each BIF member institution an annual FDIC assessment rate which, as of the date of this document, varies between 0.00% per annum with a $2,000 minimum (for well capitalized Subgroup A institutions) and 0.27% per annum (for undercapitalized Subgroup C institutions). The assessment rate may increase in the future. At December 31, 1997, the Bank's annual assessment rate was 1.256%. The FDIC has "prompt corrective action" authority to (1) request the appropriate regulatory agency to take any enforcement action against an institution, based upon an examination by the FDIC or the agency, (2) if no action is taken within 60 days and the FDIC determines the institution is in an unsafe and unsound condition or 7 failure to take the action will result in continuance of unsafe or unsound practices, order the action against the institution, and (3) exercise this enforcement authority under "exigent circumstances" merely upon notification to the institution's appropriate regulatory agency. The FDIC has the same enforcement powers with respect to any institution and its subsidiaries as the appropriate agency has with respect to those entities. Federal banking agencies are required to take corrective action with respect to depository institutions that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. Federal banking agencies have established capital measures (including both a leverage measure and a risk-based capital measure) and specified for each capital measure the levels at which depository institutions will be considered "well-capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". The appropriate federal banking agency, after notice and an opportunity for a hearing, may treat a well capitalized, adequately capitalized or undercapitalized depository institution as if it has a lower capital-based classification if it is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Thus, an adequately capitalized institution can be subjected to the restrictions on undercapitalized institutions (provided that a capital restoration plan cannot be required of the institution) described below and an undercapitalized institution can be subject to the restrictions applicable to significantly undercapitalized institutions described below. As of December 31, 1997, the Bank met the capital ratio requirements for a "well capitalized" bank. The appropriate federal regulatory agency must require an insured depository institution that (i) is significantly undercapitalized or (ii) is undercapitalized and either fails to submit an acceptable capital restoration plan within the time period allowed by regulation or fails in any material respect to implement a capital restoration plan accepted by the appropriate federal banking agency to take one or more of the following actions: (i) sell enough shares, including voting shares to become adequately capitalized; (ii) merge with (or be sold to) another institution (or holding company), but only if grounds exist for appointing a conservator or receiver; (iii) restrict certain transactions with banking affiliates as if the "sister bank" exception to the requirements of Section 23A of the Federal Reserve Act did not exist; (iv) otherwise restrict transactions with bank or nonbank affiliates; (v) restrict interest rates that the institution pays on deposits to "prevailing rates" in the institution's "region"; (vi) restrict asset growth or reduce total assets; (vii) alter, reduce or terminate activities; (viii) hold a new election of directors; (ix) dismiss any director or senior executive officer who held office for more than 180 days before the institution became undercapitalized; provided that in requiring dismissal of a director or senior executive officer, the agency must comply with certain procedural requirements, including the opportunity for an appeal in which the director or officer will have the burden of proving his or her value to the institution; (x) employ "qualified" senior executive officers; (xi) cease accepting deposits from correspondent depository institutions; (xii) divest certain nondepository affiliates which pose a danger to the institution; (xiii) be divested by a parent holding company; and (xiv) take any other action which the agency determines would better carry out the purposes of the prompt corrective action provisions. In addition to the foregoing sanctions, without the prior approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to any senior executive officer or increase the rate of compensation for such an officer without regulatory approval. Furthermore, in the case of an undercapitalized institution that has failed to submit or implement an acceptable capital restoration plan, the appropriate federal banking agency cannot approve any such bonuses. 8 Not later than 90 days after an institution becomes critically undercapitalized, the appropriate federal banking agency for the institution must appoint a receiver or, with the concurrence of the FDIC, a conservator, unless the agency, with the concurrence of the FDIC, determines that the purposes of the prompt corrective action provisions would be better served by another course of action. Any alternative determination must be "documented" and reassessed on a periodic basis. Notwithstanding the foregoing, a receiver must be appointed after 270 days unless the FDIC determines that the institution has positive net worth, is in compliance with a capital plan, is profitable or has a sustainable upward trend in earnings and is reducing its ratio of non-performing loans to total loans and the head of the appropriate federal banking agency and the chairperson of the FDIC certify that the institution is viable and not expected to fail. The FDIC is required, by regulation or order, to "restrict the activities" of such critically undercapitalized institutions. The restrictions must include prohibition on the institution's doing any of the following without prior FDIC approval: entering into material transactions not in the usual course of business; extending credit for highly leveraged transactions; engaging in any "covered transactions" (as defined in Section 23A of the Federal Reserve Act) with an affiliate, paying "excessive compensation or bonuses"; and paying interest on "new or renewed liabilities" that would increase the institution's average cost of funds to a level significantly exceeding prevailing rates in the market. A bank cannot accept brokered deposits (which term is defined to include payment of an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank is defined to be well capitalized for purposes of this restriction if it maintains a Tier 1 leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of 6.0% and a total risk-based capital ratio of at least 10.0% and is not otherwise in a "troubled condition" as specified by its appropriate federal regulatory agency. A bank is defined to be adequately capitalized if it meets all of its minimum capital requirements. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. In addition, a bank that is "adequately capitalized" may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates. There are no such restrictions on a bank that is "well capitalized." A Federal Reserve Bank may not make advances to an undercapitalized institution (including institutions with the lowest regulatory rating) for more than 60 days in any 120-day period without a viability certification by a federal banking agency or by the Chairman of the FRB (after an examination by the FRB). If an institution is deemed critically undercapitalized, an extension of Federal Reserve Bank credit cannot continue for five days without demand for payment unless the FRB is willing to accept responsibility for any resulting loss to the FDIC. As a practical matter, this provision is likely to mean that Federal Reserve Bank credit will not be extended beyond the limitations in this provision. Capital Adequacy Guidelines The FRB has adopted risk-based capital requirements for member banks and bank holding companies. See "Management's Discussion and Analysis - Liquidity and Capital Resources". National Flood Insurance Reform Act. These provisions increase the responsibility of mortgage lenders to ensure that homeowners in flood plains have purchased flood insurance. The bill also contains a program to encourage communities to mitigate future flood damage. 9 INTERSTATE BANKING The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") authorized interstate banking and interstate branching, subject to certain state options. Interstate acquisition of banks became permitted in all states on and after September 29, 1995; state law cannot vary this rule. However, states may continue to prohibit acquisition of banks that have been in existence less than five years and interstate chartering of new banks. Interstate mergers of affiliated or unaffiliated banks became permitted June 1, 1997, unless a state adopted legislation before June 1, 1997 to "opt out" of interstate merger authority, provided any limitations do not discriminate against out-of-state banks. Individual states may enact legislation to permit interstate mergers earlier than that date. Interstate acquisition of branches is permitted to a bank only if the law of the state where the branch is located expressly permits interstate acquisition of a branch without acquiring the entire bank. Interstate de novo branching is permitted to a bank only if a state adopts legislation to "opt in" to interstate de novo branching authority. Limitations on Concentrations. An interstate banking application may not be approved if the applicant and its depository institution affiliates would control more than 10% of insured deposits nationwide or more than 30% of insured deposits in the state in which the bank to be acquired is located. These limits do not apply to mergers solely between affiliates. States may waive the 30% cap on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market share of a depository institution and its affiliates are not affected. Agency Authority. A bank subsidiary of a bank holding company is authorized to receive deposits, renew time deposits, close loans, service loans and receive payments on loans as an agent for a depository institution affiliate without being deemed a branch of the affiliate. A bank is not be permitted to engage, as an agent for an affiliate, in any activity as agent that it could not conduct as a principal, or to have an affiliate, as its agent, conduct any activity that it could not conduct directly, under federal or state law. Host State and Home State Regulation. The Riegle-Neal Amendments Act of 1997 amends Federal law to provide that branches of state banks that operate in other states will be governed in most cases by the laws of the home state, rather than the laws of the host state. Exceptions are that a host state may apply its own laws of community reinvestment, consumer protection, fair lending and interstate branching. Host states cannot supplement or restrict powers granted by the Bank's home state. The amendment will assure state chartered banks with interstate branches uniform treatment in most areas of their operation. Community Reinvestment Act. Community Reinvestment Act ("CRA") evaluations are required for each state in which an interstate bank has a branch. Interstate banks are prohibited from using out-of-state branches "primarily for the purpose of deposit production". Federal banking agencies adopted regulations in 1997, to ensure that interstate branches are being operated with a view to the needs of the host communities. 10 Foreign Banks. Foreign banks are able to branch to the same extent as U.S. domestic banks. Interstate branches acquired by foreign banks are subject to the CRA to the extent the acquired branch was subject to CRA before the acquisition. California Law. In September 1995, California enacted state legislation in accordance with the authority under the Riegle-Neal Act. State law permits banks headquartered outside California to acquire or merge with California banks that have been in existence for at least five years, and thereby establish one or more California branch offices. An out-of-state bank may not enter California by acquiring one or more branches of a California bank or other operations constituting less than the whole bank. The law authorizes waiver of the 30% limit on state-wide market share for deposits as permitted by the Riegle-Neal Act. This law also authorizes California state-licensed banks to conduct certain banking activities (including receipt of deposits and loan payments and conducting loan closings) on an agency basis on behalf of out-of-state banks and to have out-of-state banks conduct similar agency activities on their behalf. SELF-TEST PRIVILEGE UNDER ECOA In January 1998, the FRB revised its regulations under the Equal Credit Opportunity Act ("ECOA") to create legal privilege for information developed by creditors as a result of "self-tests" they voluntarily conduct to determine the level of their compliance with ECOA. The privilege protects against use of such information by a government agency for examination purposes or by private litigants in any proceeding alleging a violation of ECOA. The privilege applies only if the institution takes appropriate corrective action to address possible violations that are discovered in the test. EXPOSURE TO AND MANAGEMENT OF RISK Federal banking agencies have announced proposals to examine bank holding companies and national banks with respect to their exposure to and management of different categories of risk. Categories of risk identified by the FRB include legal risk, operational risk, market risk, credit risk, liquidity risk and reputation risk. If adopted, this approach would cause bank regulators to focus on risk management procedures, rather than simply examining every asset and transaction. This approach, if adopted, would supplement rather than replace existing rating systems based on evaluation of an institution's capital, assets, management, earnings and liquidity. PROPOSED LEGISLATION Legislation enacted in 1996 provides for the merger of the BIF and the SAIF on January 1, 1999, if there are no savings associations in existence on the date. Pursuant to that legislation, the Department of Treasury in May 1997 recommended in a report to Congress that separate charters for thrifts and banks be abolished. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter, conform holding company regulation and abolish the Office of Thrift Supervision ("OTS") have been introduced in Congress. The House Committee on Banking and Financial Services has considered and reported H.R. 10, the Financial Services Competition Act of 1997, including Title III, the "Thrift Charter Transition Act of 1997." This act would (i) require federal savings associations to convert to national banks or some type of state charter within two years of enactment; (ii) merge the BIF and SAIF; and (iii) combine the OTS with the OCC. A converted federal thrift generally would be permitted to continue to engage in any activity, including the holding of any asset, lawfully conducted on the date prior to enactment, retain all branches established or proposed in a pending application as of enactment and establish new branches in any state in which it has a branch. 11 Otherwise it may establish new branches only under national bank rules. Beginning two years after enactment, national banks would be authorized to exercise all powers formerly authorized for federal savings associations. Under H.R. 10, holding companies for converted savings associations generally would become subject to the same regulation as bank holding companies, with a grandfather provision for former unitary savings and loan companies. Grandfathered companies would be permitted to maintain and establish affiliations with any type of company and to acquire additional depository institutions, as long as any acquired depository institution is merged into its converted savings association and such institution continues to comply with both the qualified thrift lender test and certain asset and investment limitations to which it was subject as a federal savings association. Such a converted holding company would be subject to the same capital requirements (if any) applicable under OTS regulation if it were a savings and loan holding company on June 19, 1997, and for three years would be subject to substantially similar regulation, reporting and examination as implemented by the OTS as of January 1, 1997. H.R. 10, if adopted, would substantially repeal the Glass-Stegall Act restrictions on bank affiliations with securities firms and thereby allow commercial banking and investment banking to be combined. It would also repeal restrictions on bank affiliations with insurance companies. Various revisions and alternatives to H.R. 10 have been proposed. There can be no assurance as to whether H.R. 10 or any other such legislation will be enacted, what the provisions of any such final legislation may be, or the extent to which legislation would restrict, disrupt or otherwise have a material effect on operations. IMPACT OF ECONOMIC CONDITIONS AND MONETARY POLICIES The earnings and growth of the Company are and will be affected by general economic conditions, both domestic and international, and by the monetary and fiscal policies of the United States Government and its agencies, particularly the FRB. One function of the FRB is to regulate the national supply of bank credit in order to mitigate recessionary and inflationary pressures. Among the instruments of monetary policy used to implement those objectives are open market transactions in United States Government securities, changes in the discount rate on borrowings and changes in reserve requirements held by depository institutions. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. However, the effect, if any, of such policies on the future business and earnings of the Company cannot be accurately predicted. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued FAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. It does not require a specific format for the statement, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. This statement is effective for fiscal years beginning after December 15, 1997. The Company does not believe the impact will be material to the consolidated financial statements. In June 1997, the FASB issued FAS No. 131, "Disclosures About Segment of an Enterprise and Related Information". This statement establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. This 12 statement is effective for financial statements for periods beginning after December 31, 1997. The Company does not believe it will have a material impact on its consolidated financial statements. LEGISLATION AND PROPOSED CHANGES From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Company. YEAR 2000 The Company has conducted a comprehensive review of its computer systems to identify systems which could be affected by the "Year 2000" issue and has developed an implementation plan to address the issue. 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 programs that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major miscalculations or system failure. To date, certifications have been received from the Company's primary processing vendors that plans have been developed to address processing of transactions for the year 2000. However, the Year 2000 problem is pervasive and complex, and virtually every computer operation will be affected in some way. Consequently, no assurance can be given that unforeseen problems in the Company's computer systems and its software maintained by third party providers, will not have a material impact on the Company's ability to conduct business. The Bank's customers, including its borrowers, are also faced with potential Year 2000 problems. The Bank has adopted procedures to inquire of its borrowers whether they are taking steps to address the problem. The failure of its borrowers to resolve the problem could adversely affect their operations and impair their ability to repay their loans to the Bank. Therefore, even if the Bank were to resolve its own Year 2000 problems, it could nevertheless be materially and adversely affected if its borrowers do not also successfully resolve their Year 2000 problems. Management has made a preliminary assessment regarding the Year 2000 compliance and expects to expense approximately $50,000 in 1998. There was no incremental expense in 1997 as effort towards compliance represented the redeployment of existing technology resources. ITEM 2 - PROPERTIES The Bank's corporate headquarters and headquarters banking office are located in a multi-story office building at 2101 Webster Street, Oakland, California. The Bank occupies approximately 12,500 rentable square feet of space on the 14th floor under a sublease with a term of ten years, commencing December 9, 1996 and ending on December 9, 2006. Various support and operating functions were relocated to this space in April, 1991. The headquarters banking office is located on the ground floor of 2101 Webster Street, Oakland, California. The headquarters banking office occupies approximately 7,250 rentable square feet of ground floor space. The lease with respect to this space provides for a term of ten years ending December 9, 2006. A regional office of the Bank is located at 2999 Oak Road, Suite 100, Walnut Creek, California; the Bank leases approximately 6,810 square feet on the ground floor of a multi-story office building. 13 The Bank has an office located at 2251 Alvarado Street, San Leandro, California; the Bank leases approximately 4,218 square feet on the lobby level of a one story office building. The Bank has an office located at 2201 Walnut Avenue, Fremont, California. The Bank has a lease agreement for 2,824 square feet of space. On April 30, 1992 the Bank assumed a lease for the Rossmoor Office, located at 1940 Tice Valley Boulevard, Walnut Creek. This space includes 6,900 square feet of frontage space located in a shopping center known as the Rossmoor Shopping Center. On September 1, 1996 the Bank assumed a lease for the San Francisco Loan Production Office, located at 595 Market Street, 28th Floor, San Francisco. The Bank leases approximately 1,612 square feet of space. On October 1, 1996 the Bank assumed a lease for the San Jose Loan Production Office, located at 1731 Technology Drive, Suite 595, San Jose. The Bank leases approximately 1,783 square feet of space. On August 1, 1997 the Bank assumed a lease for the Palo Alto Loan Production Office, located at 250 Cambridge Avenue, Suite 203, Palo Alto. The Bank leases approximately 1,031 square feet of space. Rental expense for all leases of premises was approximately $1,003,000 for the year ended December 31, 1997. Rental expense for leases of premises for 1998 is estimated to be approximately $1.1 million. ITEM 3 - LEGAL PROCEEDINGS From time to time the Company is party to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel to the Company as to the current status of various claims and proceedings to which the Company is a party, management is of the opinion that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on the consolidated financial condition or results of operations of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1997, no matters were submitted to a vote of security holders of the Company through solicitation of proxies or otherwise. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is listed on the Nasdaq National Market quotation service under the symbol "CIVC". The following table sets forth the high and low sales prices for the Company's Common Stock based on information obtained from Nasdaq. These prices reflect high and low sale prices reported during the periods specified. 14
Sales Price ------------------------- High Low ------------------------- 1996 First Quarter 7.27 $6.43 Second Quarter 8.33 7.14 Third Quarter 8.57 6.90 Fourth Quarter 10.12 8.22 1997 First Quarter $12.38 $9.65 Second Quarter 13.10 9.89 Third Quarter 16.08 12.38 Fourth Quarter 19.52 15.50 1998 First Quarter (through March 2, 1998) $19.50 $16.88
As of March 2, 1998, the shares of the Company were held by approximately 1,100 shareholders. On October 15, 1997, at a regularly scheduled meeting of the Board of Directors of Civic BanCorp, the Directors declared a 5% stock dividend to shareholders of record on October 29,1997, payable on November 12, 1997. Fractional shares were paid in cash. Sales prices above have been adjusted to reflect this stock dividend. As a bank holding company without significant assets other than its equity interest in the Bank, the Company's ability to pay dividends to its shareholders primarily depends upon dividends and management fees it receives from the Bank. Such dividends are subject to certain limitations. See "Regulation and Supervision-The Bank". SHAREHOLDERS' RIGHTS PLAN On October 16, 1996, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value (the "Preferred Shares"), of the Company at a price of $35.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. Initially, the Rights will be attached to all certificates representing common shares then outstanding or later issued. The Rights will separate from the common shares and a Distribution Date will occur upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 10% or more of the outstanding common shares (other than a person or such a group that beneficially owned 10% or more of the outstanding common shares at the time the plan was adopted or who obtains the prior written approval of the Board of Directors) (an "Acquiring Person"), or (ii) 10 business days (or later as determined by the Board of Directors) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 10% or more of such outstanding common shares (unless the Company's Board of Directors has approved the offer). 15 Until the Distribution Date, the Rights will be transferred with and only with the common shares. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the common shares. The Rights are not exercisable until the Distribution Date. The Rights will expire on October 31, 2006 (the "Final Expiration Date"), unless the Rights are earlier redeemed or exchanged by the Company, in each case as described below. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time under certain circumstances to prevent dilution. Because of the nature of the Preferred Shares' dividend, liquidation and voting rights, the value of the one one-hundredth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one common share. Following a Distribution Date, each holder of a Right, other than Rights beneficially owned by an Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of common shares (or, in the event that there are insufficient authorized common shares, substitute consideration such as cash, property, or other securities of the Company, such as Preferred Stock) having a market value of two times the exercise price of the Right. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, each holder of a Right will have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. At any time the acquisition by a person or group of affiliated or associated persons of beneficial ownership 10% or more of the outstanding common shares and prior to the acquisition by such person or group of 50% or more of the outstanding common shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one common share, or one one-hundredth of a Preferred Share (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). At any time before a person becomes an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (the "Redemption Price"). After the redemption period has expired, the Company's rights of redemption may be reinstated if, prior to completion of certain recapitalizations, mergers or other business combinations, an Acquiring Person reduces its beneficial ownership to less than 10% of the outstanding common shares in a transaction or series of transactions not involving the Company. The terms of Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that from and after such time as any person becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights. A copy of the Rights Agreement describing the Rights has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference. ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth certain selected consolidated financial data of the Company for each year of the five-year period ended December 31, 1997 and should be read in conjunction with Management's Discussion 16 and Analysis of Financial Condition and Results of Operations, and with the consolidated financial statements presented herein.
Year Ended December 31, 1997 1996 1995 1994 1993 (Dollars in thousands except per share data) ---------------------------------------------------------------------- Results of Operations: Interest income $ 26,032 $ 21,535 $ 20,868 $ 18,296 $ 19,073 Interest expense 7,346 5,398 5,036 4,876 6,499 Net interest income 18,686 16,137 15,832 13,420 12,574 Provision for loan losses 100 600 2,565 375 825 Other income 994 778 1,096 1,505 1,955 Other expense 11,920 10,905 11,218 12,068 26,162 Income (loss) from continuing operations before income taxes 7,660 5,410 3,145 2,482 (12,458) Provision for income taxes 2,935 1,260 135 25 - Net income (loss) from continuing operations 4,725 4,150 3,010 2,457 (12,458) Discontinued operations - - - (647) (434) Net income (loss) $ 4,725 $ 4,150 $ 3,010 $ 1,810 $(12,892) - ----------------------------------------------------------------------------------------------------------------------------------- Per-Share Data: Diluted net income (loss) from continuing operations $ 0.98 $ 0.86 $ 0.64 $ 0.53 $ (4.28) Diluted net loss from discontinued operations - - - (0.14) (0.15) Diluted net income (loss) 0.98 0.86 0.64 0.39 (4.43) Book value per share $ 8.37 $ 7.70 $ 6.54 $ 5.86 $ 5.45 Weighted average shares outstanding 4,617,104 4,727,904 4,674,569 4,670,186 2,908,562 Dilutive effects of stock options 220,965 101,639 54,389 98 3,464 Total weighted average shares outstanding 4,838,069 4,829,543 4,728,958 4,670,284 2,912,026 - ----------------------------------------------------------------------------------------------------------------------------------- Balance Sheet at December 31: Assets $325,420 $302,178 $250,839 $261,060 $263,598 Loans 232,977 183,393 154,696 154,716 172,496 Deposits 283,150 266,447 220,098 233,831 237,508 Shareholders' equity $ 38,687 $ 34,147 $ 29,360 $ 26,045 $ 24,231 - ----------------------------------------------------------------------------------------------------------------------------------- Financial Ratios: Return on average assets 1.56% 1.62% 1.23% 0.70% (4.18)% Return on average shareholders' equity 13.20% 13.22% 10.92% 7.25% (51.83)% Average shareholders' equity to average assets 11.79% 12.23% 11.22% 9.69% (8.07)% - -----------------------------------------------------------------------------------------------------------------------------------
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company reported net income of $4.7 million or $0.98 earnings per diluted share for the year ended December 31, 1997, compared to a net income of $4.2 million or $0.86 per diluted share for the year ended December 31, 1996. The increase in net income resulted primarily from an increase in net interest income and a reduction in the provision for loan losses. The Company reported net income of $4.2 million or $0.86 per diluted share for the year ended December 31, 1996, compared to a net income of $3.0 million or $0.64 net income per diluted share for the year ended December 31, 1995. The increase in net income resulted primarily from a reduction in the loan loss provision. 17 RESULTS OF OPERATIONS Net Interest Income. Net interest income is the Company's primary source of income and represents the excess of interest income and loan fees earned by the Company on its earning assets over the interest expense paid on its interest- bearing liabilities and other borrowed money. Net interest income as a percentage of average earning assets is referred to as net interest margin. Net interest income is affected by the rate, volume and mix of interest-earning assets and interest-bearing liabilities. During periods of rapidly changing interest rates, the Company's earnings can be significantly affected, as interest rates on the majority of its earning assets adjust to changes in interest rates immediately, while the interest rates paid on liabilities, such as time certificates of deposit, change only at the maturity of the deposit certificate. Net interest income for 1997 totaled $18.7 million compared to $16.1 million for 1996. Total interest income increased $4.5 million primarily attributable to an increase in volume of earning assets. Average earning assets increased $45.6 million to $284.1 million in 1997 compared to $238.5 million in 1996. Average loans, the largest component of earning assets, increased $45.8 million due to an improving economic environment and an overall increase in loan demand. Interest expense increased $1.9 million to $7.3 million in 1997 from $5.4 million in 1996 due to increases in the volume and the rate paid on interest bearing deposits. Average interest bearing liabilities increased $35.8 million to $190.3 million in 1997 from $154.5 million in 1996 while the rate paid on interest bearing deposits increased 37 basis points to 3.86% for 1997 from 3.49% in 1996. Net interest income for 1996 totaled $16.1 million compared to $15.8 million for 1995. Total interest income increased $0.7 million primarily due to an increase in volume of earnings assets. Average earning assets increased $11.9 million to $238.5 million in 1996 compared to $226.6 million in 1995, respectively. Average loans, the largest component of earning assets, increased $14.9 million due to an improving economic environment and an overall increase in loan demand. Total interest expense for 1996 increased $0.3 million to $5.4 million in 1996 from $5.0 million in 1995 due to increases in the volume and the rate paid on interest bearing deposits. Average interest bearing liabilities increased $4.2 million to $154.5 million in 1996 from $150.3 million in 1995 while the rate paid on interest bearing deposits increased 14 basis points to 3.49% for 1996 from 3.35% in 1995. The net interest margin decreased 13 basis points to 6.69% for 1997 from 6.82% for 1996. The decrease in the margin is attributed to the slight decrease in average rate earned on loans of 9 basis points and the increase in the average rate paid on interest bearing deposits of 37 basis points. Management attributes the decline in the yield on average loans to the Company's efforts to transact loans with lower risk. Terms which would reduce the level of risk on a loan include stronger sources of repayment, higher levels of collateralization and other terms which are considered more favorable to the Bank. Higher quality loans generally have a lower risk premium over the Bank's reference rate. Additionally, there is increased competition for such higher quality loans from other financial institutions. However, no assurance can be given that the effort to make loans with lower risk will result in fewer delinquencies and lower loan losses in the future. The increase in the average rate paid on interest bearing deposits reflects a higher interest rate environment for deposits and a shift in the mix of interest bearing liabilities toward savings and time deposits which have higher interest rates. The net interest margin decreased 17 basis points to 6.82% for 1996 from 6.99% for 1995 due to the decline in the average rate earned on earning assets of 13 basis points and the increase in average rate paid on interest bearing deposits of 14 basis points. 18 The following table presents an analysis of the components of net interest income for 1997, 1996 and 1995.
1997 1996 --------------------------------------------------------------------------------------- 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 $ 30,952 $ 1,973 6.37% $ 14,829 $ 926 6.24% Securities held to maturity: U.S. Treasury securities 6,575 393 5.97% 10,815 660 6.10% U.S. Government agency/CMO's 15,298 1,143 7.47% 30,545 2,122 6.95% Municipal securities (1) 12,073 901 7.46% 4,833 348 7.21% Other securities 1,891 113 6.00% 2,481 143 5.76% Federal funds sold 7,921 434 5.47% 11,371 596 5.24% Loans: 2,3 Commercial 113,243 11,810 10.43% 82,940 8,682 10.47% Real estate-construction 11,166 1,140 10.21% 3,424 360 10.52% Real estate-other 64,762 6,420 9.91% 59,289 6,006 10.13% Installment and other 20,228 2,020 9.99% 17,944 1,814 10.11% ------------------- --------- --------------------- --------------- Total Loans 209,399 21,390 10.22% 163,597 16,862 10.31% ------------------- --------- --------------------- --------------- Total Earning Assets 284,109 26,347 9.27% 238,471 21,657 9.08% Cash and due from banks 17,532 17,094 Leasehold improvements and equipment 1,417 1,614 Interest receivable and other assets 4,809 3,644 Foreclosed assets 528 275 Assets held for sale 43 658 Less allowance for loan loss (4,817) (5,032) ---------- ---------- TOTAL ASSETS $303,621 $256,724 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking $ 12,275 232 1.89% $ 24,081 227 0.94% Money market 95,776 2,880 3.01% 76,568 2,523 3.29% Time and savings 81,537 4,195 5.14% 53,297 2,617 4.91% Other borrowed funds 671 39 5.85% 557 31 5.59% ------------------- --------- ---------- --------- ----------- Total interest bearing liabilities 190,259 7,346 3.86% 154,503 5,398 3.49% Demand deposits 74,570 68,841 Other liabilities 2,988 1,991 Shareholders' equity 35,804 31,389 -------------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $303,621 $256,724 ============== ========== Net Interest Income $19,001 $16,259 ======= ========= Net Interest Margin 6.69% 6.82% ========= =========== Tax Equivalent Adjustment (1) $315 $122 ======= ========= 1995 ------------------------------------ Interest Rates Average Income/ Earned/ Dollars in thousands Balance Expense 2 Paid ------------------------------------ ASSETS Securities available for sale $ 10,438 $ 648 6.21% Securities held to maturity: U.S. Treasury securities 12,694 707 5.57% U.S. Government agency/CMO's 41,299 2,728 6.61% Municipal securities (1) 151 15 9.77% Other securities 2,470 146 5.91% Federal funds sold 10,846 630 5.81% Loans: 2,3 Commercial 68,358 7,672 11.22% Real estate-construction 4,804 491 10.23% Real estate-other 56,679 5,843 10.31% Installment and other 18,823 1,993 10.59% -------------------- ------------ Total Loans 148,664 15,999 10.76% -------------------- ------------ Total Earning Assets 226,562 20,873 9.21% Cash and due from banks 16,007 Leasehold improvements and equipment 1,947 Interest receivable and other assets 4,064 Foreclosed assets 290 Assets held for sale 761 Less allowance for loan loss (3,990) ---------- TOTAL ASSETS $245,641 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking $ 21,499 240 1.12% Money market 82,403 2,665 3.23% Time and savings 46,227 2,120 4.59% Other borrowed funds 181 11 6.01% ---------- -------- ------------ Total interest bearing liabilities 150,310 5,036 3.35% Demand deposits 66,372 Other liabilities 1,394 Shareholders' equity 27,565 ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $245,641 ========== Net Interest Income $15,837 ======== Net Interest Margin 6.99% ============ Tax Equivalent Adjustment (1) $5 ========
------------------------------------------------------------------------------- (1) Tax-exempt interest income on municipal securities is computed using a Federal income tax rate of 35%. Interest on municipal securities was $586,000, $226,000, and $10,000 for 1997, 1996 and 1995, 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 amortized loan fees on commercial loans of $442,000, $409,000, and $428,000 for 1997, 1996 and 1995, respectively; fees on real estate loans of $411,000, $423,000, and $323,000 for 1997, 1996 and 1995, respectively; and fees on installment and other loans of $15,000. $34,000, and $19,000 for 1997, 1996 and 1995, respectively. 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 years ended December 31, 1997, 1996 and 1995. 19
Analysis of Changes in Interest Income and Expense Increase (Decrease) Due to Change in (Dollars in thousands) 1997 over 1996 1996 over 1995 --------------------------------------- -------------------------------------- Average Average Average Average Volume 1 Rate 2 Total Volume 1 Rate 2 Total --------------------------------------- -------------------------------------- Increase (decrease) in interest income: Securities available for sale $1,006 $41 $1,047 $273 $5 $278 Securities held to maturity: U.S. Treasury securities (259) (8) (267) (104) 57 (47) U.S. Government agencies/CMO's (1,059) 80 (979) (711) 105 (606) Municipal securities 522 31 553 457 (124) 333 Other securities (35) 5 (30) 1 (4) (3) Federal funds sold (180) 18 (162) 30 (64) (34) Loans: Commercial 3,172 (44) 3,128 1,636 (626) 1,010 Real estate-construction 815 (35) 780 (141) 10 (131) Real estate-other 555 (141) 414 270 (107) 163 Installment and other 231 (25) 206 (93) (86) (179) ----------- ----------- ----------- ----------- ----------- ---------- Total Loans 4,773 (245) 4,528 1,672 (809) 863 ----------- ----------- ----------- ----------- ----------- ---------- Total increase (decrease) $4,768 $ (78) $4,690 $1,618 $ (834) $784 ----------- ----------- ----------- ----------- ----------- ---------- (Increase) decrease in interest expense: Deposits: Interest bearing checking $ 111 $ (116) $ (5) $ (29) $ 42 $ 13 Money market (632) 275 (357) 189 (47) 142 Savings and time (1,387) (191) (1,578) (324) (173) (497) Other borrowed funds (6) (2) (8) (22) 2 (20) ----------- ----------- ----------- ----------- ----------- ---------- Total (increase) decrease $ (1,914) $ (34) $ (1,948) $ (186) $ (176) $ (362) ----------- ----------- ----------- ----------- ----------- ---------- Total change in net interest income $2,854 $ (112) $ 2,742 $1,432 $ (1,010) $ 422 =========== =========== =========== =========== =========== ========== - --------------------------------------------------------------------------------------------------------------------------------- (1) Changes not solely attributed to rate or volume have been allocated to volume. (2) Loan fees are reflected in rate variances. - ---------------------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses. The provision for loan losses, which is charged to operations to increase the allowance for loan losses, is based on the growth of the loan portfolio, the amount of net loan losses incurred and management's estimation of potential future losses based on an ongoing evaluation of the portfolio risk and economic conditions. Loan losses are charged against the allowance for loan loss when management believes the collectibility of principal is unlikely. The provision for loan losses in 1997 was $100,000, compared with $600,000 in 1996 and $2,565,000 in 1995. The increase in the provision in 1995 was due to a special provision in the second quarter of 1995 following the completion of a regular examination by Federal examiners. Components of the special provision included amounts attributable to a change in the methodology of assessing the adequacy of the allowance which included increasing the provisions for unclassified loans, increasing the provision for loans classified as "special mention" and downgrading certain classified loans. The ratio of the allowance for loan losses to period end loans equaled 1.87%, 2.71% and 3.21% at December 31, 1997, 1996 and 1995, respectively. Net charge-offs were $0.7 million, $0.6 million and $0.8 million in 1997, 1996 and 1995, respectively and represented 0.34%, 0.36%, and 0.55% of average loans outstanding for 1997, 1996 and 1995, respectively. 20 Non-Interest Income. Non-interest income for 1997 was $1.0 million compared to $0.8 million and $1.1 million for 1996 and 1995 respectively. Customer service fees were $814,000 for 1997 compared to $586,000 for 1996 and $595,000 for 1995. The increase in customer service fees in 1997 is reflective of the growth in the volume of deposits. Other non-interest income for 1997 was $180,000 compared to $192,000 and $501,000 for 1996 and 1995 respectively. Non-recurring income in 1995 included $132,000 of recoveries relating to the disposition of the mortgage division, interest earned on tax refunds of $57,000 and gains on the disposal of foreclosed assets of $155,000. Non-Interest Expense. Non-interest expense for 1997 totaled $11.9 million, an increase of $1.0 million or 9.3% from 1996. Non-interest expense totaled $10.9 million, a decrease of $313,000 or 2.8% from 1995. Salaries and employee benefits in 1997 increased $939,000 or 15.7% from 1996 due to an increase in staffing levels, management incentive accruals and enhanced employee benefits. Full time equivalent personnel numbered 107 on December 31, 1997 compared to 103 on December 31, 1996. FDIC insurance increased $29,000 to $31,000 for 1997 from $2,000 for 1996 due to the addition of a regulatory FICO assessment. Expenses related to foreclosed assets and loss on sales of foreclosed assets decreased $184,000 to $175,000 for 1997 from 1996 as foreclosed properties have been sold. Non-interest expense for 1996 declined $313,000 or 2.8% to $10.9 million from $11.2 million in 1995. Salaries and employee benefits in 1996 decreased $133,000 or 2.2% from 1995. Full time equivalent employees were 103 on December 31, 1996 as compared to 108 on December 31, 1995. FDIC insurance decreased $258,000 or 99.2% to $2,000 for 1996 from $260,000 for 1995 due to a reduction in assessment rates. Foreclosed asset expense increased $244,000 for 1996 from 1995 due to the payment of five years of related property taxes of $202,000 on one foreclosed property. The following table summarizes the significant components of non-interest expense for 1997, 1996 and 1995.
Non-Interest Expense Dollar Percent (Dollars in thousands) 1997 1996 Change Change ----------------------------------------------------------- Salaries and related benefits $6,902 $5,963 $939 15.7% Occupancy 1,037 1,037 0 0.0% Equipment 887 883 4 0.5% Data processing services 334 242 92 38.0% Telephone and postage 308 256 52 20.3% Legal fees 280 202 78 38.6% Goodwill and core deposit amortization 230 258 (28) -10.9% Marketing 189 219 (30) -13.7% Consulting fees 180 195 (15) -7.7% Foreclosed asset expenses 175 359 (184) -51.3% FDIC insurance 31 2 29 1450.0% Other 1,367 1,289 78 6.1% ----------------------------------------------------------- Total $11,920 $10,905 $1,015 9.3% ===========================================================
21
Non-Interest Expense Dollar Percent (Dollars in thousands) 1996 1995 Change Change -------------------------------------------------------------- Salaries and related benefits $5,963 $6,096 ($133) -2.2% Occupancy 1,037 995 42 4.2% Equipment 883 881 2 0.2% Foreclosed asset expenses 359 115 244 212.2% Goodwill and core deposit amortization 258 286 (28) -9.8% Telephone and postage 256 252 4 1.6% Data processing services 242 270 (28) -10.4% Marketing 219 189 30 15.9% Legal fees 202 202 0 0.0% Consulting fees 195 246 (51) -20.7% FDIC insurance 2 260 (258) -99.2% Other 1,289 1,426 (137) -9.6% -------------------------------------------------------------- Total $10,905 $11,218 ($313) -2.8% ==============================================================
PROVISION FOR INCOME TAXES The provision for income taxes in 1997 increased to $2.94 million from $1.26 million in 1996 and $135,000 in 1995. These provisions represent effective tax rates of 38%, 23%, and 4%, respectively. The 1997 provision presents a more normalized effective tax rate compared to the 1996 and 1995 provisions which included the tax benefits of prior period operating losses and tax carryforward items. Beginning July 1, 1996, the effective date of quasi-reorganization, certain tax benefits which arose prior to the date of the quasi-reorganization are being reported as a direct adjustment to shareholders' equity. FINANCIAL CONDITION Loans. Commercial loans totaled $135.1 million at December 31, 1997, an increase of $42.4 million or 46% from December 31, 1996. The increase is attributed to a recovering economy and an increase in loan demand. Other real estate loans, consisting of loans for land development and "mini- perm" loans, totaled $64.4 million at December 31, 1997 compared to $64.3 million at December 31, 1996. Mini-perm loans are available for completed commercial and retail projects that are primarily owner occupied and are generally granted based on the rental or lease income which is the primary source of repayment to service the loan. Mini-perm loans typically have a term of three to five years and provide for principal and interest payments based on a 15 to 25 year amortization schedule with a balloon payment due at the end of the term. The major risks associated with the origination of mini-perm loans are the ability of the tenant or tenants to maintain the rental or lease payments over the life of the loan and the ability of the borrower to obtain other financing for the balloon payment at maturity. Real estate construction loans as a percentage of total loans outstanding were 5.5% at December 31, 1997 compared to 3.6% at December 31, 1996. Risks associated with real estate construction lending are generally considered to be higher than risks associated with other forms of lending and accordingly, the Company continues to fund real estate construction commitments on a limited basis with stringent underwriting criteria. Installment loans include loans to individuals and business customers. Personal lines of credit extended to individuals were $3.0 million or 14.6% of total installment loans at December 31, 1997 compared to $3.1 million or 15.8% at December 31, 1996. The remainder includes home equity loans, automobile loans and other personal loans. 22 The following table summarizes the year end loan balances for the periods shown:
December 31 ------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ------------------------------------------------------------------------- Commercial $ 135,140 $ 92,756 $ 70,417 $ 74,164 $ 87,235 Real estate-construction 12,929 6,608 4,067 5,977 11,353 Real estate-other 64,430 64,272 61,752 53,715 50,022 Installment and other 20,478 19,757 18,460 20,860 23,886 ------------------------------------------------------------------------- Total Loans $232,977 $183,393 $154,696 $154,716 $172,496 =========================================================================
The following table shows the amount of total loans outstanding as of December 31, 1997, both by category of loan, as well as fixed versus floating interest rate which, based upon remaining scheduled repayments of principal, are due within the periods indicated.
Maturity of Loans ----------------------------------------------------------- After One Within But Within After (Dollars in thousands) One Year Five Years Five Years Total ----------------------------------------------------------- Commercial $129,372 $5,717 $51 $135,140 Real estate- construction 12,929 - - 12,929 Real estate - other 47,828 9,301 7,301 64,430 Installment and other 19,929 444 105 20,478 ----------------------------------------------------------- Total $210,058 $15,462 $7,457 $232,977 =========================================================== Loans with fixed interest rates $2,959 $13,134 $7,365 $23,458 Loans tied to floating interest rates 207,099 2,328 92 $209,519 ----------------------------------------------------------- Total $210,058 $15,462 $7,457 $232,977 ===========================================================
The amounts presented in the table represent the contractual maturities of the related loans and do not consider rollovers (renewals) of loans. The Company does not have a policy to automatically renew loans, rather it considers the request for a renewal in substantially the same manner in which it considers the request for an initial extension of credit. Foreclosed Assets. There were no foreclosed assets at December 31, 1997 compared to $923,000 at December 31, 1996. During 1997, the Company transferred $758,000 in real estate loans to foreclosed assets compared to $675,000 during 1996. Allowance for Loan Losses. The allowance for loan losses is maintained at a level that management of the Company considers to be adequate for losses that can be reasonably anticipated in relation to the risks inherent in the loan portfolio. The allowance is increased by a provision charged to operating expenses and reduced by net charge-offs. In assessing the adequacy of the allowance for loan losses, management relies on its ongoing review of the loan portfolio to identify potential problem loans in a timely manner, ascertain whether there are probable losses which must be charged off and assess the aggregate risk characteristics of the portfolio. Factors which influence management's judgment include the impact of forecasted economic conditions, historical loan loss experience, and the evaluation of risks which vary with the type of loan, creditworthiness of the borrower and the value of the underlying collateral. 23 Analysis of the Allowance for Loan Losses. The following table summarizes the changes in the allowance for loan losses for the periods shown:
Year Ended December 31 ------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ------------------------------------------------------------------------- Balance at beginning of year $4,969 $4,960 $3,216 $4,371 $5,092 Charge-offs: Commercial 16 95 188 786 579 Real estate - construction 564 370 885 205 452 Real estate - other 650 476 33 560 815 Installment and other 16 127 310 512 372 ------------------------------------------------------------------------- Total Charge-Offs 1,246 1,068 1,416 2,063 2,218 Recoveries: Commercial 43 242 336 399 485 Real estate - construction 139 55 145 1 - Real estate - other 280 140 34 116 143 Installment and other 66 40 80 17 44 ------------------------------------------------------------------------- Total Recoveries 528 477 595 533 672 ------------------------------------------------------------------------- Net charge-offs 718 591 821 1,530 1,546 Provision charged to operations 100 600 2,565 375 825 ------------------------------------------------------------------------- Balance at end of year $4,351 $4,969 $4,960 $3,216 $4,371 ========================================================================= Ratio of net charge-offs to average loans 0.34% 0.36% 0.55% 0.96% 0.77%
The balance in the allowance for loan losses at December 31, 1997 was $4.4 million or 1.87% of total loans compared to $5.0 million or 2.71% of total loans at December 31, 1996. The allowance for loan losses at December 31, 1995 was $5.0 million or 3.21% of total loans. Net charge-offs for the year ended December 31, 1997 totaled $718,000 compared with $591,000 in 1996 and $821,000 in 1995. The increase in net chargeoffs was primarily due to higher charge-offs in the real estate construction loans. The table below sets forth the allocation of the allowance for loan losses by loan type and the percentage of loans in each category to total loans as of the dates specified. The Company conducts a systematic detailed review of the loan portfolio on an ongoing basis. Considering historical experience, management's evaluation of current economic conditions, the detailed review of the loan portfolio and trends in the overall level of delinquent and classified loans, management believes the allowance for loan losses was adequate at December 31, 1997.
Allocation of the Allowance for Loan Losses December 31, 1997 1996 1995 ------------------------------------------------------------------------ (Dollars in thousands) Amount % Amount % Amount % Commercial $1,487 58.0% $1,554 50.6% $1,881 45.6% Real estate - construction 137 5.5% 169 3.6% 61 2.6% Real estate - other 1,001 27.7% 1,162 35.0% 1,298 39.9% Installment and other 235 8.8% 274 10.8% 386 11.9% Unallocated 1,491 - 1,810 - 1,334 - ------------------------------------------------------------------------ Total $4,351 100.0% $4,969 100.0% $4,960 100.0% ------------------------------------------------------------------------
24
Allocation of the Allowance for Loan Losses December 31, 1994 1993 ---------------------------------------------- (Dollars in thousands) Amount % Amount % Commercial $1,243 47.9% $1,725 50.6% Real estate - construction 254 3.9% 282 6.6% Real estate - other 609 34.7% 502 29.0% Installment and other 313 13.5% 418 13.8% Unallocated 797 - 1,444 - ---------------------------------------------- Total $3,216 100.0% $4,371 100.0% ----------------------------------------------
Non-Performing Assets. The Company's policy is to recognize interest income on an accrual basis unless the full collectibility of the principal and interest is uncertain. Loans are placed on a nonaccrual status when principal or interest is 90 days past due and any accrued but uncollected interest is reversed, unless the loans are well secured and in the process of collection. Thereafter interest is recognized on a cash basis as it is collected. A non-accrual loan may be returned to accrual status when all delinquent principal and interest are brought current and the loan is judged by management to be fully collectible. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. If the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting the existing allocation of the allowance for loan losses. Impaired loans are treated as nonaccrual loans for accounting and reporting purposes. For the year ended December 31, 1997, interest income that would have been recorded on nonaccrual loans had they performed in accordance with their original terms was $486,000. There was no interest income recognized on nonaccrual loans in 1997. The following table provides information with respect to all non-performing assets.
Non-Performing Assets December 31, (Dollars in thousands) 1997 1996 1995 1994 1993 ----------------------------------------------------------------- Loans 90 days or more past due and still accruing $ 496 $ 322 $ 325 $ 491 $ 1,774 Non-accrual and impaired loans 3,465 2,811 2,859 3,412 1,978 Other assets held for sale 43 275 275 306 489 Foreclosed assets - 923 770 600 5,389 ----------------------------------------------------------------- Total Non-Performing Assets $4,004 $4,331 $4,229 $4,809 $ 9,630 ================================================================= Non-performing assets to period end loans plus assets held for sale and foreclosed assets 1.72% 2.35% 2.70% 3.09% 5.40% =================================================================
Non-accrual and impaired loans included $3.3 million in real estate loans and $210,000 in commercial loans. Loans past due 90 days or more and still accruing included three commercial loans and one consumer loan. Potential Problem Loans. At December 31, 1997 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 or capital resources, or (ii) represented material credits about which 25 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 Bank invests excess funds in a variety of instruments in order to manage liquidity and enhance profitability. A portion of available funds are invested in liquid investments such as overnight federal funds with the balance invested in investment securities such as U.S. Treasury and Agency securities, as well as tax-exempt municipal bonds. The Company has increased its investment in municipal securities to benefit from the higher after-tax yields on bank qualified municipal securities. See "Liquidity". The composition of the Company's portfolio of securities available for sale, securities held to maturity and other securities is shown in the table below at book value.
Securities Available for Sale -------------------------------------------- December 31, (In thousands) 1997 1996 1995 -------------------------------------------- U.S. Treasury obligations $ 12,227 $ 12,207 $ 5,011 Obligations of governmental agencies 18,870 14,664 5,010 -------------------------------------------- Total $31,097 $26,871 $10,021 -------------------------------------------- Securities Held to Maturity -------------------------------------------- December 31, (In thousands) 1997 1996 1995 -------------------------------------------- U.S. Treasury obligations $5,949 $10,882 $10,756 Obligations of governmental agencies 8,004 19,029 40,272 Collateralized mortgage obligations 90 128 171 Municipal securities 13,237 11,272 - -------------------------------------------- Total $27,280 $41,311 $51,199 -------------------------------------------- Other Securities -------------------------------------------- December 31, (In thousands) 1997 1996 1995 -------------------------------------------- Federal Reserve Bank stock $1,059 $974 $823 Federal Home Loan Bank stock 931 787 813 -------------------------------------------- Total $1,990 $1,761 $1,636 --------------------------------------------
The following tables summarize the maturities and yields of the Company's investment securities at December 31, 1997. Yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the average book value of the securities. Yields on tax-exempt securities have not been adjusted to a fully tax equivalent basis. There were no scheduled maturities greater than fifteen years.
Securities Available for Sale Maturing ---------------------------------------------------------------------------------------------- After One After Five Within One Year But Within But Within After Ten Years Total Five Years Ten Years ---------------------------------------------------------------------------------------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury obligations - -% $12,227 6.46% - -% - -% $12,227 6.46% Obligations of governmental agencies - -% $18,870 6.27% - -% - -% $18,870 6.27% ---------------------------------------------------------------------------------------------- Total - -% $31,097 6.34% - -% - -% $31,097 6.34% ----------------------------------------------------------------------------------------------
26
After One After Five Within One Year But Within But Within After Ten Years Total Five Years Ten Years ---------------------------------------------------------------------------------------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury obligations $ 5,949 5.97% $ - -% $ - -% $ - -% $ 5,949 5.97% Obligations of governmental agencies 8,004 7.75% - -% - -% - -% 8,004 7.75% Collateralized mortgage obligations - -% - -% 90 8.88% - -% 90 8.88% Municipal securities - -% 684 4.56% 11,095 4.77% 1,458 5.43% 13,237 4.79% ---------------------------------------------------------------------------------------------- Total $13,953 6.99% $ 684 4.56% $11,185 4.83% $1,458 5.43% $27,280 5.93% ---------------------------------------------------------------------------------------------- Other Securities Maturing ---------------------------------------------------------------------------------------------- After One After Five Within One Year But Within But Within After Ten Years Total Five Years Ten Years ---------------------------------------------------------------------------------------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Federal Reserve Bank stock $1,059 6.00% $- -% $ - -% - -% $1,059 6.00% Federal Home Loan Bank stock - -% - -% 931 6.43% - -% 931 6.43% ---------------------------------------------------------------------------------------------- Total $1,059 6.00% $- -% $931 6.43% - -% $1,990 6.20% ----------------------------------------------------------------------------------------------
As of December 31, 1997 no securities of single issuer in the investment portfolio exceeded ten percent of the Company's shareholders' equity. Deposits. The table below sets forth certain information regarding trends in the Bank's average deposits for 1997, 1996, and 1995.
Average Deposits for the Year Ended December 31, ---------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------------------------------------------------------------- (Dollars in thousands) Amount % Amount % Amount % Demand $ 74,570 28.2% $ 68,841 30.9% $ 66,372 30.7% Interest-bearing checking 12,275 4.6% 24,081 10.8% 21,499 9.9% Money market 95,776 36.3% 76,568 34.4% 82,403 38.1% Savings and time 81,537 30.9% 53,297 23.9% 46,226 21.4% ---------------------------------------------------------------------------------- Total $264,158 100.0% $222,787 100.0% $216,500 100.0% ==================================================================================
Average deposits increased $41.4 million or 18.6% in 1997 to $264.2 million from $222.8 million in 1996 and increased $6.3 million or 2.9% from 1995 of $216.5 million. The increase in deposits was attributed to an increase in average deposits maintained by various loan customers. Average loans outstanding increased $45.8 million or 28.0% in 1997 and increased $14.9 million or 10.0% in 1996 compared to 1995. Average time certificates of deposit over $100,000 constituted 24.3%, 20.5%, and 13.8% of total average deposits for 1997, 1996, and 1995, respectively. Average public time deposits constituted 1.5%, 1.5%, and 2.0% of average total deposits for 1997, 1996, and 1995, respectively. All public time certificates of deposit were from local government agencies located in Alameda and Contra Costa counties. At December 31, 1997, certificates of deposit over $100,000 totaling $60.6 million or 21.4% of total deposits were scheduled to mature within a year. At December 31, 1996, certificates of deposit over $100,000 totaling $45.2 million or 16.0% of total deposits were scheduled to mature within a year. Certificates of deposit over $100,000 are generally considered a higher cost and less stable form of funding than lower denomination deposits and may represent a greater risk of interest rate and volume volatility than small retail deposits. Management believes that the presumed volatility of such deposits presents acceptable risk and payment of such certificates of deposit would not have a material impact on the liquidity position of the Company. The Company has no brokered deposits and does not intend to solicit such deposits. 27 Time certificates of deposit over $100,000 or more at December 31, 1997 had the following schedule of maturities.
(In thousands) Three months or less $31,103 Over three months through six months 14,100 Over six months through twelve months 15,371 Over twelve months 3,804 -------- Total $64,378 ========
LIQUIDITY AND CAPITAL RESOURCES Liquidity. Liquidity management refers to the Bank's ability to acquire funds to meet loan demand, fund deposit withdrawals and service other liabilities as they come due. To augment liquidity, the Bank has informal Federal funds borrowing arrangements with correspondent banks totaling $24.0 million, maintains a credit arrangement with the Federal Reserve Bank of San Francisco for open window borrowing and is a member of the Federal Home Loan Bank of San Francisco and through such membership has the ability to pledge qualifying collateral for short term (up to six months) and long term (up to five years) borrowing. At December 31, 1997 and 1996 there were no outstanding advances under any of these facilities. Additionally, at December 31, 1997, unpledged U.S. government securities that were available to secure additional borrowing in the form of reverse repurchase agreements totaled approximately $46.5 million. At December 31, 1997 and 1996, the Bank had no outstanding borrowings under such arrangements. The liquidity position of the Company as of December 31, 1997 improved from the prior year as cash and cash equivalents provided from operating and financing activities exceeded cash and cash equivalents required by investing activities. Cash and cash equivalents provided by operations and financing activities were $7.8 million and $16.0 million respectively. Cash and cash equivalents totaling $40.0 million were used in the Company's investing activities to fund the growth in the loan portfolio and to purchase additional securities. The liquidity position of the Company may be expressed as the ratio of (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 December 31, 1997, the Company had a liquidity ratio of 25.6% compared to 36.5% at December 31, 1996. 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 client funding needs. Capital Resources. Shareholders' equity was $38.7 million at December 31, 1997, an increase of $4.5 million or 13.3% compared with $34.1 million at December 31, 1996. The Company and the Bank are subject to capital adequacy guidelines issued by the Federal Reserve Board of Governors which 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 28 allowance for loan losses. General loan loss reserves included in Tier 2 capital cannot exceed 1.25% of risk-weighted assets. At December 31, 1997, the Company's total risk-based capital ratio was 14.97%. The following table sets forth the Company's regulatory capital position as of December 31, 1997.
Risk-Based Capital Ratios ----------------------------- (Dollars in thousands) Amount Ratio -------------------------- Tier 1 Capital $37,533 13.71% Tier 1 minimum requirement 10,947 4.00% -------------------------- Excess $26,586 9.71% ========================== Total Capital $40,965 14.97% Total Capital minimum requirement 21,894 8.00% -------------------------- Excess $19,071 6.97% ========================== Risk-adjusted assets $273,670 ============== Leverage ratio 12.01% Leverage ratio minimum requirement 4.00% -------- Excess 8.01% ========
The leverage ratio guidelines effectively require maintenance of a minimum ratio of 4% Tier 1 capital to total assets for the most highly-rated bank holding company organizations. The leverage guidelines operate in tandem with and are in addition to the risk-based ratio requirements. At December 31, 1997, the Company's leverage ratio was 11.97%. The Company has not been advised by any regulatory agency that it is deficient with respect to its capital ratios. Management is unaware of any current recommendations by regulatory authorities which, if implemented, would have a material adverse impact on future operating results, liquidity or capital resources. QUARTERLY DATA The following table sets forth unaudited data regarding the Company's operations for each quarter of 1997 and 1996. This information, in the opinion of management, includes all adjustments necessary to present fairly the Company's results of operations for such periods, consisting only of normal recurring adjustments for the periods indicated. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended Dec 31, Sep 30, June 30, Mar 31 Dec 31, Sep 30, June 30, Mar 31 1997 1997 1997 1997 1996 1996 1996 1996 --------------------------------------------------------------------------- (In thousands, except per share data) Total interest income $6,932 $6,779 $6,402 $5,919 $5,950 $5,465 $5,028 $5,092 Total interest expense 1,979 1,941 1,791 1,635 1,713 1,417 1,132 1,136 Net interest income 4,953 4,838 4,611 4,284 4,237 4,048 3,896 3,956 Provision for loan losses 25 25 25 25 75 75 225 225 Net income 1,300 1,250 1,125 1,050 1,190 1,050 985 925 Per Common Share: Net income - basic $0.28 $0.27 $0.24 $0.23 $0.25 $0.22 $0.21 $0.20 Net Income - diluted $0.27 $0.26 $0.23 $0.22 $0.25 $0.22 $0.20 $0.19
29 EFFECTS OF INFLATION Assets and liabilities of financial institutions are principally monetary in nature. Accordingly, interest rates, which generally move with the rate of inflation, have a potentially significant effect on the Company's net interest income. The Company attempts to limit inflation's impact on rates and net income margins through continuing asset/liability management programs. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative financial instruments includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. The Company currently does not enter into futures, forwards, swaps, or options. However, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Company. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised. The Company's exposure to market risk is reviewed on a regular basis by the Risk Management Committee. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can occur as a loss of future net interest income and/or a loss of current fair market values. The objective of the Company is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include the standard GAP report and an interest rate shock simulation report. The Company has no market risk sensitive instruments held for trading purposes. It appears the Company's market risk is reasonable at this time. The condensed GAP report summarizing the Company's interest rate sensitivity at December 31, 1997 is as follows:
(in thousands) Average Interest Maturing in: 1998 1999 2000 2001 2002 Beyond Total Rate ASSETS Securities $13,953 $14,203 $16,475 $- $683 $12,644 $ 57,958 6.20% Loans 128,801 15,949 14,535 16,533 14,965 42,194 232,977 9.85% --------------------------------------------------------------------------- Total 142,754 30,152 31,010 16,533- 15,648 54,838 $290,935 =========================================================================== LIABILITIES Savings, NOW and Money Market Dep. 106,875 - - - - - 106,875 2.90% Certificate of Deposits 81,093 1,305 3,552 125 307 70 86,452 5.23% --------------------------------------------------------------------------- Total $187,968 $1,305 $3,552 $125 $307 $70 $193,327 ===========================================================================
30 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See index to Financial Statements and Schedules included on page 32 of this report. PART III ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning directors and executive officers of the Company is incorporated by reference from the section entitled "Election of Directors" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 11 - EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from the section entitled "Election of Directors - Executive Compensation" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the section entitled "Election of Directors - Security Ownership of Management" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated by reference from the section entitled "Election of Directors - Transactions with Directors and Officers" of the Company's definitive Proxy Statement to be filed within 120 days after the end of the last fiscal year. 31 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statement Schedule The following is an index of the financial statements filed in this report: CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report - KPMG Peat Marwick LLP................ F-1 Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996............................................... F-2 Consolidated Statements of Operations for the years ended December 31, 1997, December 31, 1996 and December 31, 1995.......... F-3 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, December 31, 1996 and December 31, 1995................................................... F-4 Consolidated Statements of Cash Flow for the years ended December 31, 1997, December 31, 1996 and December 31, 1995.......... F-5 Notes to Consolidated Financial Statements.......................... F-6 Information required in the schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission either is not applicable or is shown in the Consolidated Financial Statements or Notes thereto. (b) Reports on Form 8-K No reports on Form 8-K were filed for the three months ended December 31, 1997. (c) Exhibits The exhibits listed below are filed or incorporated by reference, as part of this report pursuant to Item 601 of Regulation S-K. Sequentially Numbered Page ------------- Exhibit Number Exhibit - -------- ------- 3.1 (5) Restated Articles of Incorporation of the Company................ - 3.2 (1) Bylaws of the Company............................................ - 3.3 (2) Amendment to Article Five of bylaws adopted January 20, 1988..... - 3.4 (7) Amendment to Article Four of the bylaws adopted July 15, 1992.... - 4 (14) Rights Agreement between Civic BanCorp and ChaseMellon Shareholder Services LLC dated as of November 8, 1996 including Form of Right Certificate attached thereto as Exhibit B.......... - 10.1 (1)* 1984 Stock Option Plan and Form of Stock Option Agreement........................................................ - 10.2 (2)* Amendment to 1984 Stock Option Plan adopted November 20, 1985.... - 10.3 (3)* Amendment No. 2 to 1984 Stock Option Plan adopted February 18, 1988............................................................. - 10.4 (3)* Amendment No. 3 to 1984 Stock Option Plan adopted May 7, 1988.... - 32 10.5 (7)* Amendment No. 4 to 1984 Stock Option Plan adopted May 3, 1990.... - 10.7 (6) Lease for bank premises in Oakland dated December 21, 1989 between Bank and Blue Cross of California as sublessor........... - 10.10 Lease for Bank premises in Oakland dated April 13, 1994 between Bank and Webster Street Partners, Ltd., a California limited partnership, as lessor........................................... - 10.12*(8) Employment agreement between the Bank and Herbert C. Foster dated December 31, 1992.......................................... - 10.13*(9) 1994 Stock Option Plan........................................... - 10.14(10) Servicing Rights and Servicing Contracts Purchase Agreement dated as of September 1, 1994 between the Bank and United National Mortgage Corporation.................................... - 10.15(12) 1995 Non-employee Director Stock Option Plan..................... - 10.16(13) CivicBank of Commerce Profit Sharing Retirement Plan 21 List of Subsidiaries............................................. - 23.1 Consent of KPMG Peat Marwick LLP as to incorporation by reference of report on financial statements in Form S-8.................... * Management contract, compensation plan or arrangement ________________________________________________________________________________ (1) Incorporated by reference from the exhibits included with the Form S-1 Registration Statement (Registration Number 2-91493) previously filed with the Commission. (2) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 31, 1985, previously filed with the Commission. (3) Incorporated by reference from the exhibits included with the Company's Form S-8 Registration Statement (Registration Number 33-15783) filed with the Commission on July 13, 1988. (4) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 31, 1986, previously filed with the Commission. (5) Incorporated by reference from the exhibits included with the Company's S-2 Registration Statement (Registration Number 33-31355) filed with the Commission on October 3, 1989. (6) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 30, 1989, previously filed with the Commission. (7) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 31, 1990, previously filed with the Commission. (8) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 31, 1992, previously filed with the Commission. (9) Incorporated by reference from the exhibits included with the Form S-8 Registration Statement (Registration Number 33-82460) 33 previously filed with the Commission. (10) Incorporated by reference from the exhibits included with the Form 8-K Current Report dated September 30, 1994. (11) Incorporated by reference from the exhibits included with the Form 8-K Current Report dated April 28, 1994. (12) Incorporated by reference from the exhibits included with the Form S-8 Registration Statement (Registration Number 33-94566) previously filed with the commission. (13) Incorporated by reference from the exhibits included with the Form S-8 Registration Statement (Registration Number 33-65309) previously filed with the commission. (14) Incorporated by reference from the exhibits included with the Form 8-A Rights Agreement (Registration Number 0-13287). 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CIVIC BANCORP By:/s/ Herbert C. Foster ------------------------------------- Herbert C. Foster President and Chief Executive Officer Date: March 19, 1998 -------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Herbert C. Foster /s/ Gerald J. Brown - --------------------------- -------------------------------- Herbert C. Foster Gerald J. Brown President Chief Financial Officer and Chief Executive Officer and Principal Accounting Officer Director /s/ C. Donald Carr /s/ David L. Cutter - --------------------------- -------------------------------- C. Donald Carr, Director David L. Cutter, Director /s/ John W. Glenn /s/ Paul R. Handlery - --------------------------- -------------------------------- John W. Glenn, Director Paul R. Handlery, Director /s/ Paul C. Kepler /s/ James C. Johnson - --------------------------- -------------------------------- Paul C. Kepler, Director James C. Johnson, Director /s/ Edward G. Mein /s/ Dale D. Reed - ---------------------------- -------------------------------- Edward G. Mein, Director Dale D. Reed, Director /s/ Edward G. Roach /s/ Barclay Simpson - --------------------------- -------------------------------- Edward G. Roach, Director Barclay Simpson, Director Date: March 19, 1998 -------------------- 35 INDEPENDENT AUDITORS' REPORT - ---------------------------- The Board of Directors Civic BanCorp: We have audited the accompanying consolidated balance sheets of Civic BanCorp and subsidiary (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Civic BanCorp and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Oakland, California January 21, 1998 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (In Thousands Except Shares)
1997 1996 ---------------------- ---------------------- ASSETS Cash and due from banks $16,503 $16,929 Federal funds sold 13,230 29,300 ---------------------- ---------------------- Total cash and cash equivalents 29,733 46,229 Securities available for sale 31,097 26,871 Securities held to maturity (market value of $27,727 and $41,667, respectively) 27,280 41,311 Other securities 1,990 1,761 Loans: Commercial 135,140 92,756 Real estate-construction 12,929 6,608 Real estate-other 64,430 64,272 Installment and other 20,478 19,757 ---------------------- ---------------------- Total loans 232,977 183,393 Less allowance for loan losses 4,351 4,969 ---------------------- ---------------------- Loans - net 228,626 178,424 Interest receivable and other assets 5,216 4,921 Leasehold improvements and equipment - net 1,435 1,463 Foreclosed assets - 923 Other assets held for sale 43 275 ---------------------- ---------------------- TOTAL ASSETS $325,420 $302,178 ====================== ====================== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Noninterest bearing $89,823 $84,337 Interest-bearing: Checking 6,950 26,245 Money market 95,770 85,035 Time and savings 90,607 70,830 ---------------------- ---------------------- Total deposits 283,150 266,447 Accrued interest payable and other liabilities 3,583 1,584 ---------------------- ---------------------- Total liabilities 286,733 268,031 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock no par value; authorized 10,000,000 shares; none issued and outstanding - - Common stock no par value; authorized 10,000,000 shares; issued and outstanding, 4,619,768 and 4,431,895 shares, respectively 35,149 31,739 Retained earnings, (subsequent to July 1,1996 date of quasi-reorganization, total deficit eliminated $5.5 million) 3,287 2,240 Net unrealized gain on securities available for sale 251 168 ---------------------- ---------------------- Total shareholders' equity 38,687 34,147 ---------------------- ---------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $325,420 $302,178 ====================== ======================
See notes to consolidated financial statements. 2 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (In Thousands Except Shares and Per Share Amounts)
1997 1996 1995 -------------------- --------------------- --------------------- INTEREST INCOME: Loans $ 21,390 $ 16,862 $ 15,999 Taxable investment securities 3,622 3,851 4,229 Tax exempt securities 586 226 10 Federal funds sold 434 596 630 -------------------- --------------------- --------------------- Total interest income 26,032 21,535 20,868 INTEREST EXPENSE: Deposits 7,307 5,367 5,025 Other borrowings 39 31 11 -------------------- --------------------- --------------------- Total Interest Expense 7,346 5,398 5,036 -------------------- --------------------- --------------------- NET INTEREST INCOME 18,686 16,137 15,832 Provision for loan losses 100 600 2,565 -------------------- --------------------- --------------------- Net Interest Income After Provision for Loan Losses 18,586 15,537 13,267 NON-INTEREST INCOME: Customer service fees 814 586 595 Other 180 192 501 -------------------- --------------------- --------------------- Total Non-Interest Income 994 778 1,096 NON-INTEREST EXPENSE: Salaries and employee benefits 6,902 5,963 6,096 Occupancy 1,037 1,037 995 Equipment 887 883 881 Data processing services 334 242 270 Telephone and postage 308 256 252 Legal fees 280 202 202 Goodwill and core deposit amortization 230 258 286 Marketing 189 219 189 Consulting fees 180 195 246 Foreclosed asset expense 175 316 115 FDIC insurance 31 2 260 Loss on sale of foreclosed assets - 43 - Other 1,367 1,289 1,426 -------------------- --------------------- --------------------- Total Non-Interest Expense 11,920 10,905 11,218 -------------------- --------------------- --------------------- INCOME BEFORE INCOME TAXES 7,660 5,410 3,145 Income tax expense 2,935 1,260 135 -------------------- --------------------- --------------------- NET INCOME $ 4,725 $ 4,150 $ 3,010 ==================== ===================== ===================== NET INCOME PER COMMON SHARE - BASIC $1.02 $0.88 $0.64 ==================== ===================== ===================== NET INCOME PER COMMON SHARE - DILUTED $0.98 $0.86 $0.64 ==================== ===================== ===================== Weighted average shares outstanding used to compute net income per common share 4,617,104 4,727,904 4,674,569 Dilutive effects of stock options 220,965 101,639 54,389 -------------------- --------------------- --------------------- Total diluted weighted average shares outstanding used to compute diluted income per common share 4,838,069 4,829,543 4,728,958 ==================== ===================== =====================
See notes to consolidated financial statements. 3 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (In Thousands Except Shares) - --------------------------------------------------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES ......COMMON STOCK....... RETAINED AVAILABLE SHARES AMOUNT EARNINGS FOR SALE TOTAL ------------- ----------- ---------- --------- --------- Balance, January 1, 1995 4,447,945 $36,467 ($10,421) ($1) $26,045 Stock issued and options exercised 40,540 284 284 Net income 3,010 3,010 Net unrealized gain on securities available for sale 21 21 ------------- ----------- ---------- --------- --------- Balance, December 31, 1995 4,488,485 36,751 (7,411) 20 29,360 Stock options exercised 43,410 277 277 Stock repurchased (100,000) (986) (986) Transfer of retained deficit to paid-in capital to effect quasi-reorganization as of July 1, 1996 (5,501) 5,501 - Net income 4,150 4,150 Recognition of net deferred tax assets originating prior to quasi-reorganization 1,198 1,198 Net unrealized gain on securities available for sale 148 148 ------------- ----------- ---------- --------- --------- Balance, December 31, 1996 4,431,895 $31,739 $2,240 $168 $34,147 Stock options exercised 47,571 308 308 Tax benefit of stock options exercised 119 119 Stock repurchased (79,100) (994) (994) 5% stock dividend 219,402 3,675 (3,678) (3) Recognition of net deferred tax assets originating prior to quasi-reorganization 302 302 Net Income 4,725 4,725 Net unrealized gain on securities available for sale 83 83 ------------- ----------- ---------- --------- --------- Balance, December 31, 1997 4,619,768 $35,149 $3,287 $251 38,687 ============= =========== ========== ========= =========
See notes to consolidated financial statements. 4 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (In Thousands)
1997 1996 1995 -------------- -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,725 $ 4,150 $ 3,010 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 100 600 2,565 Depreciation and amortization 1,105 862 1,806 (Gain) write-down on foreclosed assets (65) 66 (135) Net loss on other assets owned - 50 39 Amortization of deferred loan fees 75 (36) 57 Other non-cash expense - - 21 Change in other assets and liabilities: (Increase) decrease in interest receivable and other assets (221) (176) 745 Increase in accrued interest and other liabilities 2,061 203 197 -------------- -------------- ------------- Net cash provided by operating activities 7,780 5,719 8,305 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (547) (434) (300) Paydown on assets held for sale 232 - 31 Net increase in loans (51,135) (29,927) (1,320) Expenditures on foreclosed assets - - (23) Proceeds from sales of foreclosed assets 1,746 456 450 Activity in securities held to maturity: Proceeds from maturities 16,028 18,361 17,288 Purchases of securities (2,232) (8,392) (11,126) Activity in securities available for sale: Proceeds from maturities - 10,000 10,000 Purchases of securities (4,382) (26,752) (10,007) -------------- -------------- ------------- Net cash (used in) provided by investing activities (40,290) (36,688) 4,993 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 16,703 46,349 (13,733) Proceeds from exercise of stock options 308 277 263 Purchase of common stock (994) (986) - Cash paid in lieu of fractional shares (3) - - -------------- -------------- ------------- Net cash provided by (used in) financing activities 16,014 45,640 (13,470) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,496) 14,671 (172) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 46,229 31,558 31,730 -------------- -------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $29,733 $46,229 $31,558 ============== ============== ============= OTHER CASH FLOW INFORMATION Cash paid for interest $ 7,001 $ 5,140 $4,896 Cash paid for income taxes $ 2,426 $ 1,882 $ 85 Transferred from retained earnings to common stock due to stock dividend $ 3,675 $ - $ - Loans transferred to other real estate owned $ 758 $ 675 $ 462
See notes to to consolidated financial statements. 5 CIVIC BANCORP AND SUBSIDIARY - ---------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Civic BanCorp (BanCorp) is a registered bank holding company headquartered in Oakland, California. BanCorp's principal line of business is serving as a holding company for CivicBank of Commerce (Bank), a commercial bank. BanCorp is tailored to providing personalized services to independent businesses and professional firms in Alameda, San Francisco, Santa Clara and Contra Costa counties. The consolidated financial statements of BanCorp and Bank (collectively the Company) are prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements. Principles of consolidation - The consolidated financial statements include --------------------------- the accounts of BanCorp and Bank. All material intercompany transactions and accounts have been eliminated in consolidation. Cash and cash equivalents - Cash and cash equivalents include cash on hand, ------------------------- amounts due from banks and federal funds sold with maturities less than 90 days. Investment securities - Securities available for sale are held for --------------------- indefinite periods of time. Management intends to use these securities as part of its asset/liability management, and may sell these securities in response to changes in interest rates and other factors. These securities are carried at market value, with unrealized gains and losses, after applicable income taxes, recorded as a separate component of shareholders' equity. Gains on the sale of securities available for sale, determined on the specific cost identification basis, are recorded in other income at the time of sale. Specific cost is determined by using historical cost adjusted for any previously recorded unrealized losses. Held to maturity securities are those securities which management has the ability and intent to hold to maturity. These securities are stated at cost, adjusted for amortization of premiums to call date and accretions of discount to maturity using methods approximating the interest method. The Company does not engage in trading activities. Other securities - Other securities include stock in the Federal Reserve ---------------- Bank and Federal Home Loan Bank, and are carried at the lower of cost or market. Loans - Loans are stated at the principal amount outstanding, reduced by the allowance for loan losses. Interest on loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loans are placed on nonaccrual status when the loan is considered to be impaired. An impaired loan is one which, based on current information and events, it is probable that the Company will be unable to collect 6 all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When a loan is placed on nonaccrual status, interest accruals are discontinued and any interest income previously accrued but not collected is reversed. Any payments received on nonaccrual loans are applied against principal until principal is fully recovered with subsequent collections recognized as interest income as they are received. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. The Company measures certain impaired loans based on the present value of future cash flows discounted at the loan's effective interest rate, or at the loans' market value or the fair value of the collateral if the loan is secured. If the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting the existing allocation of the allowance for loan losses. All nonrefundable loan origination fees and commitment fees, net of related costs, are deferred and amortized over the term of the loan, or until the loan is sold, as an adjustment to the yield of the related loan. Allowance for loan losses - The allowance for loan losses is established ------------------------- through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. While management uses available information to determine the allowance for possible losses on loans, future additions to the allowance may be necessary based on changes in economic conditions or for other reasons. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for possible loan losses. Such agencies may require the Bank to recognize additions to the allowance for possible loan losses based on their judgments of information available to them at the time of their examination. Leasehold improvements and equipment - Leasehold improvements and equipment ------------------------------------ are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease terms. Costs of improvements are capitalized, and maintenance, repairs and minor improvements are expensed as incurred. Intangibles - Goodwill is amortized on a straight-line basis over fifteen ----------- years. The portion of the acquisition cost allocated to values associated with acquired deposits is being amortized on an accelerated method over ten years. Management assesses the value of its intangibles and believes the amortized value appropriately represents the ongoing value to the Company. Foreclosed assets - Foreclosed assets are stated at the lower of the ----------------- recorded investment in the property or its fair value minus estimated costs to sell. Immediately upon foreclosure, the value of the underlying loan is written down to the fair value of the real estate acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties are included in non-interest expenses, while any rental revenues are included in non-interest income. Gains and losses on their disposition are included in non-interest income and non-interest expenses, respectively. Other assets held for sale - Other assets held for sale include non- -------------------------- performing loans which are reported at the lower of cost or market. 7 Income taxes - BanCorp and the Bank file consolidated federal income tax ------------ and combined California franchise tax returns. Provisions for federal and state income taxes are based on taxes currently payable and deferred taxes expected to be payable in the future. Deferred taxes are recognized by applying enacted tax rates applicable to future years to temporary differences between the tax bases of existing assets and liabilities and their respective carrying values for financial reporting purposes. Deferred tax assets are subject to a valuation allowance if it is more likely than not that some of the deferred tax asset will not be realized. Net income per common share - The Company adopted SFAS No. 128 "Earnings --------------------------- Per Share" at December 31, 1997 which specifies the computation, presentation and disclosure requirements for earnings per share. All prior periods have been adjusted to conform to this statement. Additionally, 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 November 1997. Quasi-reorganization - The Company, with the approval of the Board of -------------------- Directors and its shareholders, adjusted its July 1, 1996 balance sheet to fair value and transferred the accumulated deficit of $5.5 million to common stock in accordance with quasi-reorganization accounting principles. The Company's deficit retained earnings were incurred primarily as a result of substantial writedowns of real estate loans and foreclosed assets in 1992 and 1993 and the conditions giving rise to those losses have substantially changed. In a quasi-reorganization, assets and liabilities are restated to fair value at the effective date. No adjustments were made to the assets and liabilities of the Company since, in the opinion of management, the book value of the Company's assets and liabilities approximated fair value at July 1, 1996. As part of the quasi-reorganization, retained earnings have been dated to reflect only the results of operations subsequent to the effective date of the quasi-reorganization. Recognition of future income tax benefits resulting from temporary differences, operating loss and tax credit carryforward items which arose prior to the effective date of the quasi-reorganization are reported as a direct adjustment to common stock as they are realized. New accounting pronouncements - In June 1997, the Financial Accounting ----------------------------- Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. It does not require a specific format for the statement, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. This statement is effective for fiscal years beginning after December 15, 1997. The Company will be adopting SFAS No. 130 but has not decided as to the presentation format. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". This statement establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. This statement is effective for financial statements for periods beginning after December 31, 1997. The Company does not believe it will have a material impact on its consolidated financial statements. 8 Use of estimates - The preparation of the financial statements in ---------------- conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual amounts could differ from those estimates. 2. SECURITIES The amortized cost and estimated market values of securities available for sale, securities held to maturity and other securities as of December 31, 1997 and 1996 are summarized as follows (in thousands):
Securities Available for Sale Amortized Unrealized Unrealized Market Cost Gain Loss Value -------------- --------------- -------------- --------------- December 31, 1997: U.S. Treasury obligations $12,028 $199 $- $12,227 U.S. agency securities 18,650 220 - 18,870 -------------- --------------- -------------- --------------- Total $30,678 $419 $- $31,097 ============== =============== ============== =============== December 31, 1996: U.S. Treasury obligations $12,042 $165 $- $12,207 U.S. agency securities 14,551 113 - 14,664 -------------- --------------- -------------- --------------- Total $26,593 $278 $- $26,871 ============== =============== ============== =============== Securities Held to Maturity Amortized Unrealized Unrealized Market Cost Gain Loss Value -------------- --------------- -------------- --------------- December 31, 1997: U.S. Treasury obligations $5,949 $19 $- $5,968 U.S. agency securities 8,004 32 - 8,036 Collateralized mortgage obligations 90 4 - 94 Municipal securities 13,237 392 - 13,629 -------------- --------------- -------------- --------------- Total $27,280 $447 $- $27,727 ============== =============== ============== =============== December 31, 1996: U.S. Treasury obligations $10,882 $4 $- $10,886 U.S. agency securities 19,029 281 - 19,310 Collateralized mortgage obligations 128 6 - 134 Municipal securities 11,272 65 - 11,337 -------------- --------------- -------------- --------------- Total $41,311 $356 $- $41,667 ============== =============== ============== =============== Other Securities Amortized Unrealized Unrealized Market Cost Gain Loss Value -------------- --------------- -------------- --------------- December 31, 1997: Federal Reserve Bank stock $1,059 $- $- $1,059 Federal Home Loan Bank stock 931 - - 931 -------------- --------------- -------------- --------------- Total $1,990 $- $- $1,990 ============== =============== ============== ===============
9
December 31, 1996: Federal Reserve Bank stock $974 $- $- $974 Federal Home Loan Bank stock 787 - - 787 -------------- --------------- -------------- --------------- Total $1,761 $- $- $1,761 ============== =============== ============== ===============
Total securities required and pledged under state regulation to secure certain deposits and for other purposes amounted to approximately $9,259,000 and $9,138,000 at December 31, 1997 and 1996, respectively. The amortized cost and estimated market values of securities at December 31, 1997 and 1996 by contractual maturity are shown below (in thousands). Expected maturities will differ from contractual maturities as certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
1997 1996 --------------------------------- --------------------------------- Amortized Market Amortized Market Cost Value Cost Value -------------- --------------- -------------- --------------- Securities available for sale: After one year but within five years $30,678 $31,097 $26,593 $26,871 ============== =============== ============== =============== Securities held to maturity: Within one year $13,953 $14,004 $15,983 $16,086 After one year but within five years 684 699 13,928 14,110 After five years but within ten years 11,185 11,532 11,400 11,471 After ten years but within fifteen years 1,458 1,492 - - -------------- --------------- -------------- --------------- Total $27,280 $27,727 $41,311 $41,667 ============== =============== ============== ===============
3. ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 is summarized as follows:
(In Thousands) 1997 1996 1995 --------------- --------------- ---------------- Balance, beginning of year $4,969 $4,960 $3,216 Provision charged to expense 100 600 2,565 Loans charged off (1,246) (1,068) (1,416) Recoveries 528 477 595 --------------- --------------- ---------------- Balance, end of year $4,351 $4,969 $4,960 =============== =============== ================
At December 31, 1997 and 1996, the recorded investment in loans considered to be impaired is as follows:
(In thousands) 1997 1996 ------------- ----------- Non-accrual (impaired) loans $3,465 $2,811 Loans supported by collateral 3,465 2,776 Loans not supported by collateral - 35 Related allowance for non-collateralized loans - 15
10 For the years ended December 31, 1997 and 1996, the average recorded investment in impaired loans was $3,943,000 and $3,102,000, respectively. There was no interest income recognized on impaired loans for those years, however, if interest income had been accrued under the original terms of the loans, such income would have approximated $486,000 and $160,000 for 1997 and 1996, respectively. 4. LEASEHOLD IMPROVEMENTS AND EQUIPMENT A summary as of December 31, 1997 and 1996 is as follows:
(In Thousands) 1997 1996 -------------- ------------- Leasehold improvements $1,063 $1,025 Furniture and fixtures 959 1,015 Equipment 2,814 2,964 -------------- ------------- 4,836 5,004 Less accumulated depreciation 3,401 3,541 -------------- ------------- Leasehold improvements and equipment, net $1,435 $1,463 ============== =============
5. OTHER ASSETS A summary of interest receivable and other assets as of December 31, 1997 and 1996 is as follows:
1997 1996 ------------- ------------ (In Thousands) Interest receivable $2,417 $2,318 Intangible assets 968 1,198 Deferred tax benefit 809 1,088 Taxes receivable 691 - Prepaid expense and other assets 331 317 ------------- ------------ Total interest receivable and other assets $5,216 $4,921 ============= ============
Amortization expense relative to intangible assets was $230,000, $257,000, and $286,000 for the years ended December 31, 1997, 1996 and 1995. 6. DEPOSITS The aggregate amount of time certificates of deposit in denominations of $100,000 or more was $64,378,000 and $45,802,000 at December 31, 1997 and 1996. Interest expense incurred on certificates of deposit in denominations of $100,000 or more was $2,936,000 and $1,467,000 for the years ended December 31, 1997 and 1996. Time deposits in excess of one year at December 31, 1997 are $5,360,000. 7. STOCK OPTIONS BanCorp has a stock option plan which provides for incentive stock options (ISO) and nonqualified stock options. In 1995, the Company adopted the Non- Employee Director Stock Option Plan which reserved 115,500 shares of the 1994 Stock Option Plan for grants to eligible directors. The plan was amended in 1994 to increase the shares available for grant to 685,500. Outstanding options for the purchase of common shares, which expire at various dates through 2006, have been granted under the plan at prices 11 ranging from $5.00 to $13.39 per share (restated for stock dividends). These prices correspond to the market value of the stock on the dates the options were granted. The plan provides that the right to exercise options vests at the discretion of the plan committee on the date of grant which is generally 20% per year over 5 years. Options generally expire within ten years of the date of grant. Option activity is summarized below:
1997 1996 1995 ------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------------------------------------------------------------ Shares under option at beginning of year 399,581 $6.06 407,760 $5.97 467,447 $5.92 Options granted 119,384 10.92 50,164 7.12 73,972 6.26 Options exercised (47,571) 6.27 (45,580) 6.08 (42,568) 6.16 Options cancelled (22,402) 8.08 (12,763) 6.79 (91,091) 5.87 ------------ ----------- ---------- Shares under option at end of year 448,992 7.24 399,581 6.06 407,760 5.97 ============ =========== ========== Options exercisable 252,004 253,867 229,067 Weighted-average fair value of options granted during the periods at exercise prices equal to market price at grant date $5.55 $2.32 $2.61
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ------------------------------------------- --------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ----------------------------------------------------------------- --------------------------- $5.00 - $5.36 6,457 6.61 $5.28 3,685 $5.23 $5.48 - $5.48 124,110 6.27 5.48 64,260 5.48 $5.71 - $5.71 54,337 5.09 5.71 53,602 5.71 $5.95 - $5.95 26,250 6.05 5.95 26,250 5.95 $6.19 - $6.19 54,180 2.44 6.19 51,714 6.19 $6.31 - $7.02 59,871 6.21 6.76 29,190 6.79 $7.14 - $10.48 18,731 7.53 9.31 6,394 8.28 $10.83 - $10.83 88,147 9.03 10.83 0 0.00 $11.67 - $13.39 16,909 4.03 11.77 16,907 11.77
In accordance with the provision of SFAS No. 123, the Company has elected to continue with the intrinsic value method and accordingly does not recognize compensation cost equal to the value of the stock options. If the Company had elected to recognize compensation cost based on the fair value of the options granted as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts in the following table: 12
(Dollars in thousands) 1997 1996 1995 ---------- ---------- ---------- Net income - as reported $4,725 $4,150 $3,010 Net income - pro forma $4,521 $4,038 $2,919 Diluted income per share - as reported $ 0.98 $ 0.86 $ 0.67 Diluted income per share - pro forma $ 0.93 $ 0.84 $ 0.65
The fair value of each option grant is estimated on the date of vesting using the Black-Scholes option-pricing model with the following assumptions:
1997 1996 1995 ----------------- ---------------- --------------- Expected dividend yield 0% 0% 0% Expected stock price volatility 29.52% 38.90% 38.90% Risk-free interest rate 5.73-5.88% 5.58-6.59% 5.19-5.74% Expected life of options 5.0 - 10.0 years 7.50 years 7.50 years
8. REGULATORY MATTERS BanCorp is subject to regulation under the Bank Holding Company Act of 1956 and to regulation by the Federal Reserve Board. The regulations require the maintenance of cash reserve balances at the Federal Reserve Bank for transaction accounts. The average reserve requirement for the Bank was $3,754,000 and $3,839,000 for the years ended December 31, 1997 and 1996, respectively. BanCorp and the Bank are required by the Board of Governors of the Federal Reserve System to maintain minimum risk-based capital ratios. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that BanCorp and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 1997, the most recent notification from the Federal Reserve Bank of San Francisco categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk- based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 13 The Company's actual capital amounts and ratios are also presented in the table:
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 December 31, 1997: Total Capital (to Risk Weighted Assets) $40,965 14.97% $21,894 8.00% $27,367 10.00% Tier 1 Capital (to Risk Weighted Assets) 37,533 13.71% 10,947 4.00% 16,420 6.00% Tier 1 Capital (to Average Assets) 37,533 12.01% 12,499 4.00% 15,624 5.00% As of December 31, 1996: Total Capital (to Risk Weighted Assets) $35,412 16.10% $17,594 8.00% $21,993 10.00% Tier 1 Capital (to Risk Weighted Assets) 32,635 14.84% 8,797 4.00% 13,196 6.00% Tier 1 Capital (to Average Assets) 32,635 11.27% 11,580 4.00% 14,475 5.00%
9. BENEFIT PLANS The Bank has a discretionary defined contribution retirement plan (the Plan), which covers all employees with over one year of continuous service. The Plan consists of a 401(k) salary deferral component and a profit sharing component. Under the 401(k) salary deferral component, an employee may contribute up to 12% of pretax salary to the Plan. Employer contributions to the 401(k) salary deferral component are made at the discretion of the Board of Directors. The profit sharing component provides for contributions of pretax profits of the Bank to all employees with one year of continuous service subject to certain eligibility requirements. The contributions to the profit sharing component are made the following year at the discretion of the Board of Directors. The following is a summary of the related expenses for the years ended December 31, 1997, 1996 and 1995, which are included in salaries and employee benefits
(In Thousands) 1997 1996 1995 ----- ----- ----- 401(k) salary deferral component $ 143 $ 82 $ 80 Profit sharing component 127 69 75 ----- ----- ----- $ 270 $ 151 $ 155 ===== ===== =====
14 10. INCOME TAXES Total income taxes for the years ended December 31, 1997, 1996 and 1995 were recorded as follows:
1997 1996 1995 -------------- ---------- ------- Income taxes applicable to income before income tax expense $2,935 $1,260 $135 Shareholders' equity for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes (119) - - Shareholders' equity for tax effect of the change in net unrealized gain on investment securities 58 110 - Shareholders' equity for recognition of net deferred tax assets originating prior to quasi-reorganization (302) (1,198) - ------------------------------------- $2,572 $172 $135 =====================================
The provision for income taxes reflected in the consolidated statements of income for the years ended December 31, 1997, 1996 and 1995 is as follows:
(In Thousands) 1997 1996 1995 ----------- ------------ ------------- Current provision (benefits): Federal $1,967 $1,124 $97 State 500 63 38 ----------- ------------ ------------- Total 2,467 1,187 135 Deferred Federal 295 (353) - State 173 426 - ----------- ------------ ------------- Total $2,935 $1,260 $135 =========== ============ =============
The temporary differences and tax carryforwards which created deferred tax assets and liabilities are detailed below:
(In Thousands) 1997 1996 1995 ------------ -------------- ------------ Deferred tax assets: Loan loss and foreclosed asset reserves not currently deductible $1,026 $1,313 $1,693 Deferred rent 52 62 79 Deferred loan fees 101 81 77 Core deposits 339 373 392 Tax credits - - 524 Book over tax depreciation 154 88 24 Other write-downs 188 477 477 Net operating loss carryforwards - - 66 State tax 170 21 10 ------------ -------------- ------------ Gross deferred tax asset 2,030 2,415 3,342 Valuation Allowance (977) (1,158) (3,293) ------------ -------------- ------------ Net deferred tax asset $1,053 $1,257 $49 ------------ -------------- ------------ Deferred tax liabilities: Net unrealized gain on securities available for sale (168) (110) - Other (76) (59) (49) ------------ -------------- ------------ Total (244) (169) (49) ------------ -------------- ------------ Net Deferred Tax Asset $809 $1,088 $ - ============ ============== ============
15 As of December 31, 1997, management estimates that the Company will more likely than not realize at least $809,000 of the $1,786,000 net deferred tax asset. Accordingly, a valuation allowance of $977,000 has been provided for the balance of the net deferred tax assets. In 1997 and 1996, $302,000 and $1,198,000, respectively, of deferred tax benefits were recognized in shareholders' equity. These tax benefits originated prior to the quasi- reorganization as of July 1, 1996. Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary from amounts shown on the tax return as filed. Accordingly, the variances from amounts reported for 1996 and 1995 are primarily the result of adjustments to conform to the 1996 and 1995 filed tax returns. The effective tax rate differs from the federal statutory income tax rate for the years ended December 31, 1997, 1996 and 1995 as follows:
1997 1996 1995 ------------- ------------ ------------ Federal statutory income tax rate 34% 34% 34% State franchise tax, less federal income tax effect 6% 6% - Change in valuation allowance and utilization of net operating losses - -16% -30% Other permanent differences -2% -1% - ------------- ------------ ------------ Effective income tax rate 38% 23% 4% ============= ============ ============
11. RELATED PARTY TRANSACTIONS Certain directors and companies with which they are associated are customers of and have banking transactions with the Bank in the ordinary course of business. It is the Bank's policy that all loans and commitments lend to directors be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers. The activity is summarized as follows for the years ended December 31, 1997 and 1996: CIVICBANK OF COMMERCE
(In Thousands) 1997 1996 ----------------- ---------------- Balance, beginning of year $723 $4,224 Loans proceeds disbursed 4,458 1,636 Loan repayments (3,637) (5,137) ----------------- ---------------- Balance, end of year $ 1,544 $ 723 ================= ================
12. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK The Bank is involved in legal actions arising from normal business activities. Management, upon the advice of legal counsel handling such actions, believes that the ultimate resolution of these actions will not have a material adverse effect on the financial position of BanCorp. 16 In the normal course of business, to meet the financing needs of its customers and manage its own exposure to fluctuations in interest rates, the Bank is a party to financial instruments, including commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of these instruments, which are not included in the consolidated balance sheets, are an indicator of the extent of the Company's activities in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Bank controls the credit risk of these transactions through credit approvals, limits and monitoring procedures, and generally requires collateral or other security to support commitments to extend credit. The Bank's exposure to credit loss is usually limited to amounts funded or drawn. A summary of these financial instruments at December 31, 1997 and 1996 follows:
(In Thousands) 1997 1996 -------- -------- Commitments to extend credit $121,005 $101,190 Standby letters of credit $ 1,793 $ 2,757
13. OPERATING LEASES BanCorp and the Bank lease their banking and office facilities under noncancelable operating leases. These leases expire from December 1998 to December 2006. Certain leases contain options to extend. Rental expense for the years ended December 31, 1997, 1996 and 1995 was $1,003,000, $1,008,000, and $955,000. Total future minimum rental payments under these operating leases at December 31, 1997 are as follows:
(Dollars In Thousands) Year ending December 31: 1998 $1,104 1999 954 2000 899 2001 755 2002 755 Later Years 2,210 -------------- Total Future Minimum Rentals $6,677 ==============
14. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 17 The summary of these financial instruments and their related fair values at December 31, 1997 and 1996 are as follows:
(In Thousands) 1997 1996 ---------------------------------- ------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------- ------------------ ------------- ---------------- Assets: Cash and cash equivalents $29,733 $29,733 $46,229 $46,229 Securities available for sale 31,097 31,097 26,871 26,871 Securities held to maturity 27,280 27,727 41,311 41,667 Other securities 1,990 1,990 1,761 1,761 Loans 228,626 226,958 178,424 176,538 Liabilities: Noninterest-bearing deposits 89,823 89,823 84,337 84,337 Interest-bearing deposits 193,327 193,322 182,110 182,177
The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practical to estimate that value: Cash and cash equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. Securities available for sale, held to maturity, and other securities -The fair value of securities is based on quoted market prices, dealer quotes and prices obtained from independent pricing services. Loans - The fair value of performing loans is estimated by discounting the future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated fair value of certain nonperforming loans has been determined on an individual basis, taking into account management's plans regarding potential foreclosure and subsequent sale of collateral and the borrower's plan for the continuance of principal and interest payments. Demand deposits and time deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Commitments to extend credit and standby letters of credit - The fair value of commitments and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. Management estimates that there is no material difference between the notional amount and estimated fair value of commitments to extend credit and standby letters of credit. The Bank may structure variable rate loans to include embedded interest rate floors. Such floors are designed to mitigate interest rate risk to the Bank in a declining interest rate environment. As of December 18 31, 1997, the Bank had outstanding loans totaling approximately $36,000,000 that were subject to interest rate floors. 15. FINANCIAL STATEMENTS OF CIVIC BANCORP (parent company only) The condensed financial statements of Civic BanCorp (parent company only) are presented below:
BALANCE SHEET As of December 31, 1997 and 1996 (In Thousands Except Share Amounts) 1997 1996 ---------------- --------------- ASSETS Cash (on deposit with the Bank) $ 847 $ 103 Other assets 1,517 1,105 Investment in Bank at equity in underlying assets 36,402 32,954 ---------------- --------------- Total assets $38,766 $34,162 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities $ 79 $ 15 Shareholders' equity 38,687 34,147 ---------------- --------------- Total liabilities and shareholders' equity $38,766 $34,162 ================ =============== STATEMENTS OF INCOME For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 ------------------ ---------------- --------------- Interest income $35 $44 $60 Less administration expense 117 113 135 ------------------ ---------------- --------------- Loss from operations (82) (69) (75) Equity in income of Bank 4,807 4,219 3,085 ------------------ ---------------- --------------- Net income $4,725 $4,150 $3,010 ================== ================ ===============
19 STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------- ------------ Cash flows from operating activities: Net income $4,725 $4,150 $3,010 Adjustments to reconcile net income to cash used in operating activities: Equity in net income of Bank (3,307) (4,219) (3,085) Gain on sale of securities available for sale - - (33) Other non-cash expense - - 21 Change in assets and liabilities 15 (13) 22 ------------ ------------- ------------ Net cash provided by (used in) operating activities 1,433 (82) (65) ------------ ------------- ------------ Cash flows from investing activities: Proceeds from sale of securities available for sale - - 46 ------------ ------------- ------------ Cash provided by investing activities - - 46 ------------ ------------- ------------ Cash flows from financing activities: Cash dividends paid (3) - - Stock repurchase (994) (986) - Proceeds from exercise of stock options 308 277 263 ------------ ------------- ------------ Net cash (used in) provided by financing activities (689) (709) 263 ------------ ------------- ------------ Net increase (decrease) in cash 744 (791) 244 Cash at beginning of year 103 894 650 ------------ ------------- ------------ Cash at end of year $847 $103 $894 ============ ============= ============
20 EX-21 2 LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries CivicBank of Commerce P.A.S.C.O. Services, Inc.* * Subsidiary of CivicBank of Commerce EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Civic BanCorp: We consent to incorporation by reference in the registration statements (Nos. 33-94566 and 33-65309) on Form S-8 of Civic BanCorp of our report dated January 21, 1998, relating to the consolidated balance sheets of Civic BanCorp and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997, annual report on Form 10-K of Civic BanCorp. San Jose, California March 19, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 16,503 16,929 0 0 13,230 29,300 0 0 31,097 26,871 27,280 41,311 27,727 41,667 232,977 183,393 4,351 4,969 325,420 302,178 283,150 266,447 0 0 3,583 1,584 0 0 0 0 0 0 35,149 31,739 3,538 2,408 325,420 302,178 21,390 16,862 4,208 4,077 434 596 26,032 21,535 7,307 5,367 7,346 5,398 18,686 16,137 100 600 0 0 11,920 10,905 7,660 5,410 7,660 5,410 0 0 0 0 4,725 4,150 1.02 0.88 0.98 0.86 .067 .068 3,465 2,811 496 322 0 0 0 0 4,969 4,960 1,246 1,068 528 477 4,351 4,969 4,351 4,969 0 0 1,492 1,809
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