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