-----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, SBxMJ+9GegRO5BiM/8gGW5zDXk6852XCjfiQOPdxRQ3+6pCiGlxP9U15+GvSFrk6 lUbHqTgJtGCSo957TYJtNg== 0000929624-99-001456.txt : 19990810 0000929624-99-001456.hdr.sgml : 19990810 ACCESSION NUMBER: 0000929624-99-001456 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIVIC BANCORP CENTRAL INDEX KEY: 0000747205 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 680022322 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13287 FILM NUMBER: 99680528 BUSINESS ADDRESS: STREET 1: 2101 WEBSTER ST STREET 2: 14TH FLOOR CITY: OAKLAND STATE: CA ZIP: 94612 BUSINESS PHONE: 510-836-6500 MAIL ADDRESS: STREET 1: 2101 WEBSTER STREET STREET 2: 14TH FLOOR CITY: OAKLAND STATE: CA ZIP: 94612 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File No. 0-13287 CIVIC BANCORP 2101 Webster Street, 14th Floor Oakland, CA 94612 (510) 836-6500 Incorporated in California I.R.S. Employer Identification No. 68-0022322 The number of shares of common stock outstanding as of the close of business on August 1, 1999. Class Number of Shares Outstanding ----- ---------------------------- Common Stock 4,729,684 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- CIVIC BANCORP AND SUBSIDIARY
Index to Form 10-Q Page Number ----------- PART I. Item 1. Unaudited Financial Statements Consolidated Balance Sheets - June 30, 1999, June 30, 1998, and December 31, 1998 3 Consolidated Statements of Income - Three Months Ended June 30, 1999, and June 30, 1998, and Six Months Ended June 30, 1999, and June 30, 1998 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999, and June 30, 1998 5 Consolidated Statements of Comprehensive Income - Three Months Ended June 30, 1999, and June 30, 1998, and Six Months Ended June 30, 1999, and June 30, 1998 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. Other Information 19 SIGNATURES 20
2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (In thousands except shares)
June 30 June 30 December 31 1999 1998 1998 ----------- ----------- ----------- ASSETS - ------ Cash and due from banks $ 21,328 $ 22,600 $ 15,276 Federal funds sold 6,400 45,075 73,028 -------- -------- -------- Total cash and cash equivalents 27,728 67,675 88,304 Securities available for sale 40,106 30,922 30,869 Securities held to maturity (market value of $41,671, $28,423, and $33,218, respectively) 42,084 28,051 32,503 Other securities 2,414 2,145 2,243 Loans: Commercial 164,457 129,502 146,216 Real estate-construction 8,659 9,609 7,648 Real estate-other 74,858 61,140 62,328 Installment and other 13,672 16,869 17,019 -------- -------- -------- Total loans 261,646 217,120 233,211 Less allowance for loan losses 4,383 4,337 4,424 -------- -------- -------- Loans - net 257,263 212,783 228,787 Interest receivable and other assets 6,716 5,407 5,316 Leasehold improvements and equipment - net 1,637 1,314 1,558 Foreclosed assets - 1,182 - -------- -------- -------- TOTAL ASSETS $377,948 $349,479 $389,580 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ LIABILITIES Deposits: Noninterest-bearing $ 65,589 $ 90,567 $ 71,417 ======== ======== ======== Interest-bearing: Checking 4,708 7,783 6,231 Money market 153,524 105,945 139,851 Time and savings 105,362 101,464 125,450 -------- -------- -------- Total deposits 329,183 305,759 342,949 Accrued interest payable and other liabilities 4,564 3,592 4,817 -------- -------- -------- Total liabilities 333,747 309,351 347,766 COMMITMENTS AND CONTINGENCIES - - - SHAREHOLDERS' EQUITY Preferred stock no par value; authorized, 10,000,000 shares; none issued or outstanding Common stock no par value; authorized, 10,000,000 shares; issued and outstanding, 4,729,684, 4,804,741, and 4,666,202 shares 35,752 34,156 32,723 Retained earnings, (subsequent to July 1, 1996 date of quasi-reorganization, total deficit eliminated $5.5 million) 8,501 5,737 8,797 Accumulated other comprehensive income - net (52) 235 294 -------- -------- -------- Total shareholders' equity 44,201 40,128 41,814 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $377,948 $349,479 $389,580 ======== ======== ========
CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (In thousands except shares and per share amounts)
Three Months Ended June 30, Six Months Ended June 30, -------------------------- ------------------------ 1999 1998 1999 1998 ----------- ---------- ---------- ---------- INTEREST INCOME: Loans $5,751 $5,782 $11,226 $11,409 Securities available for sale, securities held to maturity and other securities 941 737 1,723 1,446 Tax exempt securities 208 168 400 328 Federal funds sold 386 400 1,199 737 ------- ------ ------- ------- Total interest income 7,286 7,087 14,548 13,920 INTEREST EXPENSE: Deposits 1,993 2,037 4,181 4,052 ------- ------ ------- ------- Total interest expense 1,993 2,037 4,181 4,052 ------- ------ ------- ------- NET INTEREST INCOME 5,293 5,050 10,367 9,868 Provision for loan losses 45 37 90 75 ------- ------ ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,248 5,013 10,277 9,793 ------- ------ ------- ------- NONINTEREST INCOME: Customer service fees 225 209 427 418 Other 86 24 126 52 ------- ------ ------- ------- Total noninterest income 311 233 553 470 NONINTEREST EXPENSE: Salaries and employee benefits 2,018 1,862 4,037 3,704 Occupancy 272 266 549 537 Equipment 264 216 509 428 Data processing services 108 92 204 181 Telephone and postage 94 88 177 154 Consulting fees 66 60 132 120 Marketing 71 68 113 137 Legal fees 33 59 78 114 Goodwill and core deposit amortization 42 49 84 97 FDIC insurance 9 9 19 17 Foreclosed asset expense 1 3 1 6 Other 351 319 637 643 ------- ------ ------- ------- Total other expenses 3,329 3,091 6,540 6,138 ------- ------ ------- ------- INCOME BEFORE INCOME TAXES 2,230 2,155 4,290 4,125 Income tax expense 855 880 1,640 1,675 ------- ------ ------- ------- NET INCOME $ 1,375 $ 1,275 $ 2,650 $ 2,450 ========= ======== ======== ======== BASIC EARNINGS PER COMMON SHARE $0.29 $0.26 $0.56 $0.51 ========= ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE $0.28 $0.25 $0.54 $0.48 ========= ======== ======== ======== Weighted average shares outstanding used to compute basic earnings per common share 4,749,077 4,841,588 4,736,648 4,847,859 Dilutive effects of stock options 132,977 270,477 139,147 275,714 --------- --------- --------- --------- Weighted average shares outstanding used to compute diluted earnings per common share 4,882,054 5,112,065 4,875,795 5,123,573 ========= ========= ========= =========
CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (In thousands)
Six Months Ended June 30, 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,650 $2,450 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 90 75 Depreciation and amortization 636 495 Increase (decrease) in deferred loan fees 121 (69) Change in assets and liabilities: (Increase) decrease in interest receivable and other assets (550) 163 (Decrease) in accrued interest payable and other liabilities (957) (99) -------- ------- Net cash provided by operating activities 1,990 3,015 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (386) (136) Paydown on assets held for sale - 43 Proceeds from sales of foreclosed assets - 1,233 Net (increase) decrease in loans (28,687) 13,448 Expenditures on foreclosed assets - (26) Activities in securities held to maturity: Proceeds from maturing securities - 8,011 Purchases of securities (9,836) (8,931) Activities in securities available for sale: Proceeds from maturing securities 6,000 - Purchases of securities (15,974) - -------- ------- Net cash (used in) provided by investing activities (48,883) 13,642 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 623 255 Purchase of common stock (537) (1,579) Cash paid in lieu of fractional shares (3) - Net (decrease) increase in deposits (13,766) 22,609 -------- ------- Net cash (used in) provided by financing activities (13,683) 21,285 -------- ------- Net (decrease) increase in cash and cash equivalents (60,576) 37,942 Cash and cash equivalents at beginning of period 88,304 29,733 -------- ------- Cash and cash equivalents at end of period $27,728 $67,675 ======== ======= Cash paid during period for: Interest $4,507 $3,761 ======== ======= Income taxes $1,360 $900 ======== ======= Supplemental schedule of non-cash investing activity: Loans transferred to foreclosed assets $ - $2,339 ======== =======
5 CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ----------------------------------------------- (In thousands)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------- Net Income $1,375 $1,275 $2,650 $2,450 Other Comprehensive Income: Unrealized loss on securities available for sale (389) (7) (576) (27) Income tax expense related to unrealized loss on securities available for sale 155 2 230 11 ------------ ------------ ------------ ------------- Other Comprehensive Income (234) (5) (346) (16) ------------ ------------ ------------ ------------- COMPREHENSIVE INCOME $1,141 $1,270 $2,304 $2,434 ============ ============ ============ =============
CIVIC BANCORP AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The unaudited consolidated financial statements of Civic BanCorp and subsidiary (the Company) have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q. In the opinion of management, all necessary adjustments have been made to fairly present the financial position, results of operations and cash flows for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of operations and cash flows are not necessarily indicative of those expected for the complete fiscal year. The weighted average shares outstanding and per share amounts for all periods presented have been adjusted to give effect for a 5% stock dividend paid in May 1999. 2. NEW PRONOUNCEMENTS In June 1999, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative Financial Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133." Statement No. 137 defers the effective date of Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" for one year. Statement No. 133 is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For instruments existing at the date of adoption, Statement No. 133 provides an entity with the option of not applying this provision to such hybrid instruments entered into before January 1, 1998 and not modified thereafter. Consistent with the deferral of the effective date for one year, Statement No. 137 provides an entity the option of not applying this provision to hybrid instruments entered into before January 1, 1998 or 1999 and not modified substantially thereafter. The Company has not completed its evaluation of the impact of its adoption, however, management does not believe it will have a significant impact on the Company's consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is intended to provide greater details of the results of operations and financial condition of the Company. In addition to historical information, certain statements in this filing constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties and could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors which might cause such a difference include, but are not limited to, interest rate risks, asset quality, general economic conditions, legislative or regulatory changes, increases in personal or commercial customers' bankruptcies and "Year 2000" information systems compliance being more difficult or expensive to complete than expected. OVERVIEW For the six months ended June 30, 1999, the Company reported net income of $2,650,000, or $.54 earnings per diluted share compared to a net income of $2,450,000 or $.48 earnings per diluted share for the same period of the prior year. The annualized return on average assets was 1.35% for the six months ended June 30, 1999 compared to 1.48% for the same period of the prior year. The annualized return on average shareholders' equity for the six months ended June 30, 1999 and 1998 was 12.21% and 12.30%, respectively. 7 RESULTS OF OPERATIONS Net interest income for the six months ended June 30, 1999, was $10.4 million, increasing $.5 million or 5.1% from net interest income of $9.9 million for the same period in 1998. The increase in net interest income was primarily due to an increase in the volume of average earning assets, the benefit of which were partially offset by a decrease in the weighted average yield on those assets. Total interest income for the first six months of 1999 equaled $14.5 million, an increase of $.6 million over the interest income earned for the same period in 1998. The increase in total interest income is primarily attributed to the increase in the volume of average earning assets which was partially offset by the decline in the weighted average yield earned on those assets. Total average earning assets increased $61.3 million or 19.8% to $370.9 million for the first six months of 1999 compared to $309.5 million for the same period in 1998. The weighted average rate earned on earning assets declined to 8.02% for the first half of 1999 relative to 9.18% for the same period of the prior year. The decline in the yield is attributed to a lower interest rate environment and a higher level of sales of Federal funds sold. Total interest expense for the first six months of 1999 was $4.2 million an increase of $.1 million or 3% from the $4.1 million for the first six months of 1998. The increase in interest expense owning to the growth in the volume of interest earning liabilities was essentially offset by a decline in the weighted average rate paid on those liabilities. Average interest bearing liabilities were $248.4 million for the first six months of 1999 as compared to $206.5 million for the same period of the prior year, an increase of $41.9 million or 20.3%. The weighted average rate paid on these liabilities decreased 57 basis points to 3.39% for the first six months of 1999 from 3.96% for the same period of 1998. The decrease in the average rate is attributed to a lower interest rate environment for deposits. Net Interest Margin Net interest margin declined 79 basis points to 5.75% for the six months ended June 30, 1999, from 6.54% for the same period of the prior year. The decrease in the margin is attributed to a greater decline in average rate earned on earning assets of 116 basis points relative to the decline in the average rate paid on interest bearing deposits of 57 basis points. 8
The following table presents an analysis of the components of net interest income for the six month periods ended June 30, 1999 and 1998. Six months ended June 30, --------------------------------------------------------------- 1999 1998 ----------------------------- ------------------------------ dollars in thousands Interest Rates Interest Rates Average Income\ /2/Earned\ Average Income\ /2/Earned\ Balance Expense Paid Balance Expense Paid --------- --------- ------ --------- --------- ------- ASSETS Securities available for sale $ 36,365 $ 1,128 6.25% $ 31,566 $ 988 6.31% Securities held to maturity: U.S. Treasury securities - - - 5,963 177 5.98% U.S. Government agencies 19,895 531 5.38% 5,976 220 7.41% Municipal securities /(1)/ 16,763 606 7.29% 13,698 497 7.31% Other securities 2,318 64 5.53% 2,076 61 5.94% Federal funds sold and securities purchased under agreements to resell 51,508 1,199 4.70% 27,177 737 5.47% Loans:/2,3/ Commercial 153,914 7,145 9.36% 130,544 6,741 10.41% Real estate-construction 8,545 401 9.47% 10,833 550 10.24% Real estate-other 65,845 2,974 9.11% 63,415 3,219 10.24% Installment and other 15,704 706 9.07% 18,275 899 9.93% -------- ------- ------ -------- ------ ----- Total Loans 244,008 11,226 9.28% 223,067 11,409 10.31% -------- ------- ------ -------- ------ ----- Total Earning Assets 370,857 14,754 8.02% 309,523 14,089 9.18% Cash and due from banks 18,191 19,326 Leasehold improvements and equipment - net 1,613 1,364 Interest receivable and other assets 6,020 4,992 Foreclosed assets - 578 Less allowance for loan loss (4,661) (4,237) -------- -------- TOTAL ASSETS $392,020 $331,546 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking $ 30,572 84 0.55% $ 26,996 127 0.95% Money market 102,453 1,639 3.23% 77,033 1,296 3.39% Time and savings 115,375 2,458 4.30% 102,504 2,629 5.17% -------- ------- ------ -------- ----- ----- Total interest bearing liabilities 248,400 4,181 3.39% 206,533 4,052 3.96% Demand deposits 94,930 80,965 Other liabilities 5,287 4,219 Shareholders' equity 43,403 39,829 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $392,020 $331,546 ======== ======== Net Interest Income $ 10,573 $ 10,037 ======== ======== Net Interest Margin 5.75% 6.54% ===== ====== Tax Equivalent Adjustment /(1)/ $ 206 $ 169 ======= =====
- -------------------------------------------------------------------------------- (1) Tax-exempt interest income on municipal securities is computed using a Federal income tax rate of 34%. Interest on municipal securities was $400,000 and $328,000 for June 30, 1999 and 1998, respectively. (2) Non-performing loans have been included in the average loan balances. Interest income is included on non-accrual loans only to the extent cash payments have been received. (3) Interest income includes loan fees on commercial loans of $254,000 and $252,000 for June 30, 1999 and 1998, respectively; fees on real estate loans of $141,000 and $197,000 for June 30, 1999 and 1998, respectively; and fees on installment and other loans of $16,000 for both June 30, 1999 and 1998. 9 The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the six month periods ended June 30, 1999 and 1998. Analysis of Changes in Interest Income and Expense Increase (Decrease) Due to Changes in
Dollars in thousands Volume/1/ Rate/ 2/ Total ---------- ---------- --------- Increase (decrease) in interest income: Securities available for sale $ 151 $ (11) $ 140 Securities held to maturity: U.S. Treasury securities (177) - (177) U.S. Government agencies 511 (200) 311 Municipal securities 111 (2) 109 Other securities 8 (5) 3 Federal funds sold 659 (197) 462 Loans: Commercial 1,207 (803) 404 Real estate-construction (116) (33) (149) Real estate-other 124 (369) (245) Installment and other (126) (67) (193) ------- -------- ------ Total Loans 1,089 (1,272) (183) ------- -------- ------ Total increase $ 2,352 $ (1,687) $ 665 ------- -------- ------ (Increase) decrease in interest expense: Deposits: Interest bearing checking $ (17) $ 60 $ 43 Money market (428) 85 (343) Savings and time (330) 501 171 Other borrowed funds - - - ------- -------- ------ Total increase $ (775) $ 646 $ (129) ------- -------- ------ Total change in net interest income $ 1,577 $ (1,041) $ 536 ======= ======== ======
(1) Changes not solely attributed to rate or volume have been allocated to volume. (2) Loan fees are reflected in rate volumes. Provision for Loan Losses The provision for loan losses is charged to operations and creates an allowance for future loan losses. The amount of the provision is dependent on many factors which include the amount of the allowance for loan losses, growth in the loan portfolio, net charges against the allowance, changes in the composition of the portfolio, the number and dollar amount of delinquent loans, assessment of the overall quality of the portfolio, value of the collateral on problem loans, recommendations by regulatory authorities and general economic conditions among others. The provision for loan losses for the six months ended June 30, 1999, was $90,000 as compared to $75,000 for the six months ended June 30, 1998. The increase in the provision was based principally on the growth in the loan portfolio. See "Allowance for Loan Losses" for further discussion. 10 Non-Interest Income Non-interest income for the six months ended June 30, 1999, was $553,000, an increase of $83,000 or 17.7% from the six months ended June 30, 1998. Customer service fees, the largest component of non-interest income, have increased $9,000 due to the increase in deposit volume. Included in other noninterest income are gains realized on the disposal of foreclosed assets of $82,000. Non-Interest Expense Non-interest expense totaled $6.5 million and $6.1 million for the six months period ended June 30, 1999 and 1998, respectively. Salaries and employee benefits for the six months ended June 30, 1999, increased $333,000 or 9.0% from the same period in 1998. The increase in salaries and employee benefits is related to an increase in the number of employees and normal promotional and merit increases. Full time equivalent personnel numbered 116 on June 30, 1999, compared to 108 on June 30, 1998. Increased equipment expenses are related to the addition of computer hardware, software and software maintenance fees associated with the preparation for the year 2000. Legal expenses have decreased due to reduced legal activity directed toward loan loss recoveries. Marketing expenses declined due to the cost of an 1998 advertising campaign to promote the bank in new markets. The following table summarizes the significant components of noninterest expense for the dates indicated.
Noninterest Expense June 30 June 30 Dollar % (Dollars in thousands) 1999 1998 Change Change --------- -------- --------- -------- Salaries and related benefits $4,037 $3,704 $333 9.0% Occupancy 549 537 12 2.2% Equipment 509 428 81 18.9% Data processing services 204 181 23 12.7% Telephone and postage 177 154 23 14.9% Legal fees 78 114 (36) -31.6% Goodwill and core deposit amortization 84 97 (13) -13.4% Marketing 113 137 (24) -17.5% Consulting fees 132 120 12 10.0% Foreclosed asset expenses 1 6 (5) -83.3% FDIC insurance 19 17 2 11.8% Other 637 643 (6) -0.9% ------- ------- ------- ------- TOTAL NONINTEREST EXPENSE $6,540 $6,138 $402 6.5% ======= ======= ======= =======
Provision for Income Taxes The provisions for income taxes for the first half of 1999 and 1998 were $1,640,000 and $1,675,000, respectively. These provisions represent effective tax rates of 38.2% and 40.6%, respectively. The effective rate has decreased for 1999 due to an increase in tax exempt municipal securities and the increase in interest income earned on loans to customers located in state designated enterprise zones which have state income tax benefits. 11 FINANCIAL CONDITION Loans Average loans for the first half of 1999 increased $20.9 million or 9.4% to $244.0 million from $223.1 million for the same period of the prior year. Total loans at June 30, 1999, have increased $28.4 million or 12.2% from December 31, 1998, due to a stronger regional economy in 1999 and an overall strong demand for loans. The Bank concentrates its lending activities on commercial, real estate construction and other forms of real estate loans made primarily to business. Installment and other consumer loans are generally made to the owners and principals of companies with whom the Bank maintains commercial relationships. Real estate construction loans as a percentage of total loans were 3.3% at June 30, 1999, and at December 31, 1998. The Bank maintains a limited portfolio of real estate construction loans as the risks associated with real estate construction lending are generally considered to be higher relative to other forms of commercial lending. However, the Bank continues to fund real estate construction commitments on a limited basis with stringent underwriting criteria. Other real estate loans consist of mini-perm loans and land acquisition loans which are primarily owner-occupied and are generally granted based on the rental or lease income stream generated by the property. The following table sets forth the amount of loans outstanding in each category and the percentage of total loans outstanding for each category at the dates indicated.
June 30 Dec. 31 June 30 ----------------------- ------------------------ ---------------------- 1999 1998 1998 ----------------------- ------------------------ ---------------------- (Dollars in thousands) Amount Percent Amount Percent Amount Percent ----------- ---------- ---------- --------- -------- ---------- (Dollars in thousands) Commercial $164,457 62.9% $146,216 62.7% $129,502 59.6% Real estate - construction 8,659 3.3% 7,648 3.3% 9,609 4.4% Real estate - other 74,858 28.6% 62,328 26.7% 61,140 28.2% Installment and other 13,672 5.2% 17,019 7.3% 16,869 7.8% -------- ----- ------- ----- -------- ----- TOTAL $261,646 100.0% $233,211 100.0% $217,120 100.0% ======== ===== ======== ===== ======== =====
Foreclosed Assets Foreclosed assets totaled $1.2 million at June 30, 1998, and were liquidated during the third quarter of 1998. Non-Performing Assets The Company's policy is to recognize interest income on an accrual basis unless a loan becomes impaired. A loan is considered to be impaired when it becomes probable that the Company will not recognize all amounts due under the original terms of the loan agreement. At the time a loan is judged to be impaired, the accrual of interest is discontinued and any accrued, but uncollected interest is reversed. Thereafter, all payments are applied against principal until principal is fully recovered with subsequent collections recognized as interest income as they are received 12 The following table provides information with respect to the Company's past due loans and components of non-performing assets at the dates indicated.
June 30 Dec. 31 June 30 1999 1998 1998 ---------- ---------- ---------- (Dollars in thousands) Loans 90 days or more past due and still accruing $ 554 $ 112 $ 548 Non-accrual loans 594 208 1,710 Foreclosed assets - - 1,182 ------ ------ ------ Total non-performing assets $1,148 $ 320 $3,440 ====== ====== ====== Non-performing assets to period end loans, other assets held for sale plus foreclosed assets 0.44% 0.14% 1.58% ====== ====== ======
At June 30, 1999, the recorded investment in loans considered to be impaired was $594,000 all of which were on a non-accrual basis. These loans all have supporting collateral which exceed the book value and accordingly do not have an associated allowance for loan loss. For the six months ended June 30, 1999, the average recorded investment in impaired loans was $171,000 and no interest income was recognized on impaired loans. If interest income on those loans had been recognized, such income would have approximated $8,000. The Company has an active credit administrative function, which includes the regular use of an external loan review firm, that periodically reviews all loans to identify potential problem credits using quality standards and criteria similar to those of regulatory agencies. Loans receiving lesser grades are considered to be classified and fall into "substandard," "doubtful," of "loss" categories. Substandard loans are characterized as having one or more defined weakness which could result in a loss to the Company if the deficiencies are not corrected. Doubtful loans have the weakness of a substandard loans with the added complication that those weaknesses are less likely to be remedied and are of a character that increase the probability of a principal loss. A loan classified as a loss is considered uncollectable and is discharged against the allowance. The following table sets forth the classified assets as of the dates indicated.
(Dollars in thousands) 6-30-99 12-31-98 6-30-98 ----------- ----------- ----------- Substandard $ 8,485 $ 4,307 $ 4,515 Doubtful 849 110 1,121 Loss - - - ------- ------- ------- Total Classified $ 9,334 $ 4,417 $ 5,636 Classified Loans to Total Loans 2.32% 1.89% 2.55% Classified Loans to Reserve for Loan Loss 138.69% 99.84% 138.37%
As of June 30, 1999, with the exception of the aforementioned classified loans and nonperforming assets, management was not aware of any loans about which it has material reservations regarding the borrower's ability to comply with existing loan repayment terms or which might result in such loans becoming impaired or classified at some future date. Management cannot, however, predict the impact of future economic events or conditions nor the impact such an 13 environment may have on the Company's loan portfolio. Accordingly, there can be no assurances that other loans will not become impaired or classified in the future. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses, the amount of which is based on many factors. See "Provision for Loan Losses". The allowance is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged off when they are judged to be impaired. Recoveries of amounts previously charged off are recorded only when cash is received. The policy of the Company is to review loans in the portfolio to identify potential problem credits and to assess the credit quality of the loan portfolio. Specific allocations are made for loans where the probability of a loss can be defined and reasonably estimated while the balance of the allocations are based on the size of the portfolio, delinquency trends, historical data, industry averages and general economic conditions in the Company's market area. Although management believes that the allowance for loan losses is adequate for both potential losses of identified credits and estimated inherent losses in the portfolio, future provisions will be subject to continuing evaluations of the portfolio, and if the economy declines or the quality of the loan portfolio deteriorates, additional provisions may be required. The following table summarizes the changes in the allowance for loan losses for the periods indicated:
Six Months Year Six Months Ended Ended Ended (Dollars in thousands) 6-30-99 12-31-98 6-30-98 --------- ---------- ----------- Balance, at beginning of period $4,424 $4,351 $4,351 Charge-offs: Commercial 500 200 171 Real estate - construction - 150 150 Real estate - other - 390 207 Installment and other - 95 - ------ ------ ------ Total charge-offs 500 835 528 Recoveries: Commercial 84 48 10 Real estate - construction - 164 16 Real estate - other 217 487 372 Installment and other 69 59 41 ------ ------ ------ Total recoveries 369 758 439 ------ ------ ------ Net charge-offs 131 77 89 Provision charged to operations 90 150 75 ------ ------ ------ Balance, at end of period $4,383 $4,424 $4,337 ====== ====== ====== Ratio of net charge-offs to average loans (annualized) 0.11% 0.03% 0.08% ====== ====== ====== Allowance at period end to total loans outstanding 1.68% 1.90% 2.00% ====== ====== ======
Investment Portfolio The Company's Available for Sale portion of the investment portfolio is used primarily for liquidity purposes and the Held to Maturity portion of the portfolio is principally for investment income. The portfolio is primarily composed of US Treasury and US government agency instruments and investment grade municipal obligations. The Company has increased 14 the balances in the securities portfolio to benefit from the higher interest rates on US government agency securities relative to US Treasury securities and overnight Federal funds. The table below summarizes the book value and estimated market values of investment securities at the dates indicated.
June 30, -------------------------------------------------- 1999 1998 ---------------------- ---------------------- Book Market Book Market (Dollars in thousands) Value Value Value Value -------- --------- -------- ------- SECURITIES HELD TO MATURITY: U.S. Treasury securities - - $5,979 $5,993 U.S. government agencies and corporation 24,346 24,038 7,974 7,999 Municipal securities 17,693 17,586 14,019 14,348 Collateralized mortgage obligations 45 47 79 83 ------- ------- ------- ------- TOTAL $42,084 $41,671 $28,051 $28,423 ======= ======= ======= ======= SECURITIES AVAILABLE FOR SALE: U.S. Treasury securities $12,007 $12,086 $12,021 $12,196 U.S. government agencies and corporation 28,185 28,020 18,509 18,726 -------- --------- -------- ------- TOTAL $40,192 $40,106 $30,530 $30,922 ======== ========= ======= =======
Deposits Total deposits decreased $14 million or 4% to $329 million as of June 30, 1999, from $343 million as of December 31, 1998. The decrease is primarily due to the maturity and withdrawal of two large consumer time deposit accounts totaling $20 million. For the six months ended June 30, 1999, average deposits totaled $343.3 million, an increase of $55.8 million or 19.4% from $287.5 million for the same period in 1998. Management attributes the increase in deposits to strong regional economy and an increase in the loan demand. The Company emphasizes developing total banking relationships with its customers as a means of increasing its core deposit base. Accordingly, the Company expects a correlation between total loans and total deposits such that deposits are expected to increase as loan volume increases. Average loans increased 9.4% for the same comparative periods. The table below sets forth information regarding the Bank's average deposits by amount and percentage of total deposits for the six months ended June 30, 1999 and 1998.
Average Deposits ---------------------------------------------- Six Months Ended June 30, ---------------------------------------------- 1999 1998 --------------------- --------------------- Dollars in thousands Amount Percentage Amount Percentage -------- ---------- -------- ---------- Demand accounts $ 94,930 27.5% $80,965 28.1% Interest-bearing checking 30,572 8.9% 26,996 9.4% Money market 102,453 29.8% 77,033 26.8% Savings and time 115,375 33.6% 102,504 35.7% -------- ------ -------- ------ Total $343,330 100.0% $287,498 100.0% ======== ====== ======== ======
15 Certificates of deposit over $100,000 are generally considered a higher cost and less stable form of funding than lower denomination deposits and may represent a greater risk of interest rate and volume volatility than small retail deposits. Time certificates of $100,000 or more at June 30, 1999, had the following schedule of maturities:
(IDollars in thousands) Total Maturing ------- Three months or less $49,420 After three months through six months 16,482 After six months through twelve months 11,203 After twelve months 3,456 ------- Total $80,561 ======
LIQUIDITY AND CAPITAL RESOURCES Liquidity Liquidity risk refers to the Bank's ability to acquire funds to meet loan demand, to fund deposit withdrawals and to service other liabilities as they become due. The Bank's exposure to liquidity risk is monitored monthly by the Risk Management Committee which includes members of the Board of Directors and Senior Management. The Committee monitors such liquidity factors as maturing loans and time deposits, unadvanced loan commitments, regional economic conditions and historical seasonality to minimize the exposure to liquidity risk. To augment liquidity, the Bank has informal federal funds borrowing arrangements with correspondent banks totaling $35.0 million. The Bank is a member of the Federal Home Loan Bank of San Francisco and through membership has the ability to pledge qualifying collateral for short term (up to six months) and long term (up to five years) borrowing. At June 30, 1999, the Bank had no outstanding borrowings against these arrangements. Additionally, at June 30, 1999, unpledged government securities that are available to secure additional borrowing in the form of reverse repurchase agreements totaled approximately $38.4 million. At June 30, 1999, the Bank had no reverse repurchase agreements. The liquidity position of the Company decreased during the first half of 1999 from December 31, 1998, as cash and cash equivalents of $48.9 million and $13.7 million were used for investing and financing activities, respectively. Cash and cash equivalents used in investing activities included $28.6 million to satisfy the growth in loan volume and $20.3 million to purchase investment securities. Cash and cash equivalents used in financing activities were primarily the result of a decline in deposits of $13.8 million. Net cash provided by operating activities totaled $2 million. The liquidity position of the Company may be expressed as a ratio defined as (a) cash, Federal funds sold, other unpledged short term investments and marketable securities, including those maturing after one year, divided by (b) total assets less pledged securities. Using this definition at June 30, 1999, the Company had a liquidity ratio of 28.2% as compared to 38.2% at December 31, 1998. The decrease in liquidity position reflects the decrease in over-night Federal Funds sold. Federal Funds sold at June 30, 1999, were $6.4 million as compared to $73 million at December 31, 1998. Capital Resources Total shareholders' equity increased to $44.2 million at June 30, 1999, from $41.8 million at December 31, 1998, reflecting retained income of $2,650,000 for the first half of 1999 which was partially offset by the mark-to-market adjustment of the available for sale securities portfolio, net of deferred income taxes, of $346,000 and net repurchases of common stock of $83,000. 16 Since the fourth quarter of 1996, the Board of Directors of the Company has authorized the repurchase of up to 446,000 shares of common stock from time to time, subject to appropriate regulatory and other accounting requirements. Purchases have been made on the open market with the intention to lessen the dilutive impact of stock options and to maximize shareholder value. Pursuant to this program, 38,600 shares have been purchased in the first six months of 1999, and 83,000 and 252,000 shares were purchased in 1997 and 1998, respectively. 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 allowance for loan losses. General loan loss reserves included in Tier 2 capital cannot exceed 1.25% of risk-weighted assets. At June 30, 1999, the Company's total risk-based capital ratio was 15.05%. The following table presents the Company's risk-based capital and leverage ratios as of June 30, 1999, and December 31, 1998.
Minimum Capital Requirements To Be Considered Well Capitalized Minimum Under Prompt Corrective Actual Capital Requirement Action Provisions ------------------ --------------------- -------------------------- (Dollars in thousand) Amount Ratio Amount Ratio Amount Ratio ------- --------- -------- --------- --------- --------- As of June 30, 1999: Total Capital (to Risk Weighted Assets) $47,527 15.05% $25,271 8.00% $31,588 10.00% Tier 1 Capital (to Risk Weighted Assets) 43,573 13.79% 12,635 4.00% 18,953 6.00% Tier 1 Capital (to Average Assets) 43,573 11.37% 15,322 4.00% 19,153 5.00% As of December 31, 1998: Total Capital (to Risk Weighted Assets) $44,381 15.39% $23,070 8.00% $28,837 10.00% Tier 1 Capital (to Risk Weighted Assets) 40,766 14.14% 11,535 4.00% 17,302 6.00% Tier 1 Capital (to Average Assets) 40,766 10.20% 15,987 4.00% 19,984 5.00%
Year 2000 The Company is working to resolve the potential impact of Year 2000 on its computer system and the associated software applications. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's time-sensitive programs could interpret a date using "00" as 1900 rather than the year 2000. This could result in major miscalculations or system failure. If the Company and its third party software vendors are unable to address this issue in a timely manner, there could be substantial financial risk to the Company. Contingency plans include the conversion to alternative Year 2000 compliant applications, outsourcing of critical functions 17 to third-party providers or interim manual processing. In the worst case scenario, the Company would retain sufficient additional staffing to convert to manual processing. The added expense in this scenario would be a function of the number of applications requiring such manual processing and the duration of time until a Year 2000 compliant application could be acquired, tested and installed. To insure this does not occur, the Company has formed a committee of representatives of all operational areas within the Bank. This committee convenes on a monthly basis and reports quarterly to the Audit Committee of the Board of Directors. The Committee has developed an action plan which includes five phases. The Awareness and Assessment Phases included forming a committee of appropriate members, preparing an inventory of all hardware and software applications, identifying mission-critical systems and developing an overall plan to address the issue. These phases were completed in December 1997. The Renovation Phase included implementing the changes in hardware and software necessary to bring the computer systems compliant with Year 2000 processing. This phase was completed in December 1998. The Validation and Implementation Phases include testing and installation of Year 2000 compliant hardware and applications. The Bank completed this phase in June 1999. The Company has also investigated "environmental systems providers" which include such services as building elevators, telephone and alarm systems for Year 2000 compliance and has received assurances that those systems have been tested and are Year 2000 compliant. However, due to the nature of certain of the environmental applications, such as the utility companies, the Company will be unable to test and validate compliance in these areas. Additionally, the Company has identified customers who have a material loan or deposit relationship with the Bank and is monitoring the Year 2000 readiness of those customers and assessing the overall risk to the Company resulting from the status of such customers' Year 2000 compliance. The primary cost associated with the Company's efforts to review, test and validate its computer applications for Year 2000 compliance has been, and will continue to be, the reallocation of internal resources. The Company has expensed approximately $120,000 through June 30, 1999, relating to its Year 2000 compliance efforts and anticipates an additional $30,000 of expenses for the remainder of 1999. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The Company's primary market risk is interest rate risk. Interest rate risk occurs as a result of interest sensitive assets and liabilities not repricing at the same time or by the same amount and is quantified by estimating the potential gain or loss in the market value of assets and net interest income that can result from changes in interest rates. The Company's exposure to interest rate risk is monitored monthly by the Risk Management Committee which includes members of the Board of Directors and Senior Management. The Company attempts to manage its exposure to changes in interest rates; however, due to its size and the direct competition from major banks, the Company must offer products which are competitive in the market place, even if less than optimum with respect to interest rate exposure. The Company's balance sheet position at June 30, 1999, was asset sensitive due to the significant amount of variable rate loans. Generally, if more assets than liabilities reprice at a given time in a rising rate environment, net interest income will increase, and in a declining rate environment, net interest income would deteriorate. Management believes there has been no significant change in the Bank's market risk exposure disclosed in the Company's Annual Report on Form 10-K for the year December 31, 1998. 18 Part II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of shareholders of Civic BanCorp was held on May 6, 1999. (b) With respect to the election of directors at the annual meeting of shareholders on May 6, 1999, (i) proxies were solicited pursuant to Regulation 14 under the Securities and Exchange Act of 1934, (ii) there was no solicitation in opposition to management's nominees as listed in the proxy statement, and (iii) all such nominees were elected. (c) At the meeting, shareholders approved the Civic Bank Employee Stock Purchase Plan as described in the proxy statement. The Plan was approved by 3,388,491 votes in favor, 84,631 votes against and 5,699 votes abstaining. (e) At the meeting, shareholders approved the extension of the 1995 Non-Employee Director Stock Option Plan and an increase in the number of shares reserved for issuance under the Plan as described in the proxy statement. The extension was approved by 2,782,618 votes in favor, 687,342 votes against and 8,861 votes abstaining. (d) At the meeting, shareholders ratified the selection of KPMG LLP as independent accountants as described in the proxy statement. The selection was approved by 3,426,170 votes in favor, 35,865 votes against and 16,786 votes abstaining. The total number of shares of the Company's common stock outstanding as of March 9, 1999, the record date of the annual meeting was 4,528,749. Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K - There were no reports on Form 8-K during the period reported on. Exhibit No. 27. Financial Data Schedule. 19 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacity indicated. CIVIC BANCORP ------------- (Registrant) Date: August 10, 1999 By: /s/ Herbert C. Foster ---------------------------------- Herbert C. Foster President Chief Executive Officer By: /s/ Gerald J. Brown ---------------------------------- Gerald J. Brown Chief Financial Officer Principal Accounting Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS 6-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 JUN-30-1998 21,328 22,600 0 0 6,400 45,075 0 0 40,106 30,922 42,084 28,051 41,671 28,423 261,646 217,120 4,383 4,337 377,948 349,479 329,183 305,759 0 0 4,564 3,592 0 0 0 0 0 0 35,752 34,156 8,449 5,972 377,948 349,479 11,226 11,409 3,322 2,511 0 0 14,548 13,920 4,181 4,052 4,181 4,052 10,367 9,868 90 75 0 0 6,540 6,138 4,290 4,125 4,290 4,125 0 0 0 0 2,650 2,450 .56 .51 .54 .48 5.75 6.54 594 1,710 554 548 0 0 0 0 4,424 4,351 500 528 369 439 4,383 4,337 4,383 4,337 0 0 578 2,143
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