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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
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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
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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".
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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.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
(In thousands) 1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
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
================================================
</TABLE>
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.
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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
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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
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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
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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
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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.
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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.
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
Sales Price
-------------------------
High Low
-------------------------
1996
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
and Analysis of Financial Condition and Results of Operations, and with the
consolidated financial statements presented herein.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
(Dollars in thousands except per share data) ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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
<PAGE>
The following table presents an analysis of the components of net interest
income for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------------------
Dollars in thousands Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense 2 Paid Balance Expense 2 Paid
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======= =========
<CAPTION>
1995
------------------------------------
Interest Rates
Average Income/ Earned/
Dollars in thousands Balance Expense 2 Paid
------------------------------------
<S> <C> <C> <C>
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
========
</TABLE>
-------------------------------------------------------------------------------
(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
<PAGE>
<TABLE>
<CAPTION>
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
--------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Non-Interest Expense
Dollar Percent
(Dollars in thousands) 1997 1996 Change Change
-----------------------------------------------------------
<S> <C> <C> <C> <C>
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%
===========================================================
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Non-Interest Expense
Dollar Percent
(Dollars in thousands) 1996 1995 Change Change
--------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
==============================================================
</TABLE>
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
<PAGE>
The following table summarizes the year end loan balances for the periods shown:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
=========================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
Maturity of Loans
-----------------------------------------------------------
After One
Within But Within After
(Dollars in thousands) One Year Five Years Five Years Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
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
===========================================================
</TABLE>
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
<PAGE>
Analysis of the Allowance for Loan Losses. The following table summarizes the
changes in the allowance for loan losses for the periods shown:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
December 31,
1997 1996 1995
------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
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%
------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
December 31,
1994 1993
----------------------------------------------
(Dollars in thousands) Amount % Amount %
<S> <C> <C> <C> <C>
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%
----------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
Non-Performing Assets
December 31,
(Dollars in thousands) 1997 1996 1995 1994 1993
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
=================================================================
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Securities Available for Sale
--------------------------------------------
December 31,
(In thousands) 1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
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
--------------------------------------------
<CAPTION>
Securities Held to Maturity
--------------------------------------------
December 31,
(In thousands) 1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
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
--------------------------------------------
<CAPTION>
Other Securities
--------------------------------------------
December 31,
(In thousands) 1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Federal Reserve Bank stock $1,059 $974 $823
Federal Home Loan Bank stock 931 787 813
--------------------------------------------
Total $1,990 $1,761 $1,636
--------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
Securities Available for Sale
Maturing
----------------------------------------------------------------------------------------------
After One After Five
Within One Year But Within But Within After Ten Years Total
Five Years Ten Years
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(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%
----------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
----------------------------------------------------------------------------------------------
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
----------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
Average Deposits for the Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(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%
==================================================================================
</TABLE>
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
<PAGE>
Time certificates of deposit over $100,000 or more at December 31, 1997 had the
following schedule of maturities.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
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
========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Risk-Based Capital Ratios
-----------------------------
(Dollars in thousands) Amount Ratio
--------------------------
<S> <C> <C>
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%
========
</TABLE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
29
<PAGE>
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:
<TABLE>
<CAPTION>
(in thousands) Average
Interest
Maturing in: 1998 1999 2000 2001 2002 Beyond Total Rate
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
===========================================================================
</TABLE>
30
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996 (In Thousands Except Shares)
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C>
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
====================== ======================
</TABLE>
See notes to consolidated financial statements. 2
<PAGE>
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)
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
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
==================== ===================== =====================
</TABLE>
See notes to consolidated financial statements. 3
<PAGE>
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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ON SECURITIES
......COMMON STOCK....... RETAINED AVAILABLE
SHARES AMOUNT EARNINGS FOR SALE TOTAL
------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
============= =========== ========== ========= =========
</TABLE>
See notes to consolidated financial statements. 4
<PAGE>
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
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
</TABLE>
See notes to to consolidated financial statements. 5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Securities Available for Sale
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
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
============== =============== ============== ===============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1996:
Federal Reserve Bank stock $974 $- $- $974
Federal Home Loan Bank stock 787 - - 787
-------------- --------------- -------------- ---------------
Total $1,761 $- $- $1,761
============== =============== ============== ===============
</TABLE>
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.
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
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
============== =============== ============== ===============
</TABLE>
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:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
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
=============== =============== ================
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans considered
to be impaired is as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
------------- -----------
<S> <C> <C>
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
</TABLE>
10
<PAGE>
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:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
-------------- -------------
<S> <C> <C>
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
============== =============
</TABLE>
5. OTHER ASSETS
A summary of interest receivable and other assets as of December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
(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
============= ============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
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
- ----------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- ---------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
The Company's actual capital amounts and ratios are also presented in the
table:
<TABLE>
<CAPTION>
Minimum Capital
Requirements To Be
Considered Well Capitalized
Minimum Under Prompt Corrective
Actual Capital Requirements Action Provisions
---------------------------- ---------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<TABLE>
<CAPTION>
(In Thousands)
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
401(k) salary deferral component $ 143 $ 82 $ 80
Profit sharing component 127 69 75
----- ----- -----
$ 270 $ 151 $ 155
===== ===== =====
</TABLE>
14
<PAGE>
10. INCOME TAXES
Total income taxes for the years ended December 31, 1997, 1996 and 1995
were recorded as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ---------- -------
<S> <C> <C> <C>
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
=====================================
</TABLE>
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:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
----------- ------------ -------------
<S> <C> <C> <C>
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
=========== ============ =============
</TABLE>
The temporary differences and tax carryforwards which created deferred tax
assets and liabilities are detailed below:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
------------ -------------- ------------
<S> <C> <C> <C>
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 $ -
============ ============== ============
</TABLE>
15
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
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%
============= ============ ============
</TABLE>
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
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
----------------- ----------------
<S> <C> <C>
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
================= ================
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
-------- --------
<S> <C> <C>
Commitments to extend credit $121,005 $101,190
Standby letters of credit $ 1,793 $ 2,757
</TABLE>
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:
<TABLE>
<CAPTION>
(Dollars In Thousands)
Year ending December 31:
<S> <C>
1998 $1,104
1999 954
2000 899
2001 755
2002 755
Later Years 2,210
--------------
Total Future Minimum Rentals $6,677
==============
</TABLE>
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
<PAGE>
The summary of these financial instruments and their related fair values at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
---------------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
BALANCE SHEET
As of December 31, 1997 and 1996
(In Thousands Except Share Amounts)
1997 1996
---------------- ---------------
ASSETS
<S> <C> <C>
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
================ ===============
<CAPTION>
STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------------ ---------------- ---------------
<S> <C> <C> <C>
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
================== ================ ===============
</TABLE>
19
<PAGE>
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
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
============ ============= ============
</TABLE>
20
<PAGE>
Exhibit 21
List of Subsidiaries
CivicBank of Commerce
P.A.S.C.O. Services, Inc.*
* Subsidiary of CivicBank of Commerce
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 16,503 16,929
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 13,230 29,300
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 31,097 26,871
<INVESTMENTS-CARRYING> 27,280 41,311
<INVESTMENTS-MARKET> 27,727 41,667
<LOANS> 232,977 183,393
<ALLOWANCE> 4,351 4,969
<TOTAL-ASSETS> 325,420 302,178
<DEPOSITS> 283,150 266,447
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 3,583 1,584
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 35,149 31,739
<OTHER-SE> 3,538 2,408
<TOTAL-LIABILITIES-AND-EQUITY> 325,420 302,178
<INTEREST-LOAN> 21,390 16,862
<INTEREST-INVEST> 4,208 4,077
<INTEREST-OTHER> 434 596
<INTEREST-TOTAL> 26,032 21,535
<INTEREST-DEPOSIT> 7,307 5,367
<INTEREST-EXPENSE> 7,346 5,398
<INTEREST-INCOME-NET> 18,686 16,137
<LOAN-LOSSES> 100 600
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 11,920 10,905
<INCOME-PRETAX> 7,660 5,410
<INCOME-PRE-EXTRAORDINARY> 7,660 5,410
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,725 4,150
<EPS-PRIMARY> 1.02 0.88
<EPS-DILUTED> 0.98 0.86
<YIELD-ACTUAL> .067 .068
<LOANS-NON> 3,465 2,811
<LOANS-PAST> 496 322
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 4,969 4,960
<CHARGE-OFFS> 1,246 1,068
<RECOVERIES> 528 477
<ALLOWANCE-CLOSE> 4,351 4,969
<ALLOWANCE-DOMESTIC> 4,351 4,969
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,492 1,809
</TABLE>
