<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 September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____to ______
Commission File No. 0-13287
CIVIC BANCORP
2101 Webster Street, 14th Floor
Oakland, CA 94612
(510) 836-6500
Incorporated in California I.R.S. Employer Identification No.
68-0022322
The number of shares of common stock outstanding as of the close of business on
November 1, 2000.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 4,954,580
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
<PAGE>
CIVIC BANCORP
AND
SUBSIDIARY
<TABLE>
<CAPTION>
Index to Form 10-Q Page Number
-----------
<S> <C>
PART I. Item 1. Unaudited Financial Statements
Consolidated Balance Sheets -
September 30, 2000, and
December 31, 1999 3
Consolidated Statements of Income -
Three Months Ended September 30, 2000, and
September 30, 1999, and Nine Months Ended
September 30, 2000, and September 30, 1999 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000, and
September 30, 1999 5
Consolidated Statements of Comprehensive
Income - Three Months Ended September 30, 2000,
and September 30, 1999, and Nine Months Ended
September 30, 2000, and September 30, 1999 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information 20
SIGNATURES 21
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(unaudited)
<TABLE>
<CAPTION>
September 30 December 31
(dollars in thousands) 2000 1999
-------------- -------------
<S> <C> <C>
ASSETS
------
Cash and due from banks $ 27,753 $ 12,205
Federal funds sold - 7,500
-------------- -------------
Total cash and cash equivalents 27,753 19,705
Securities available for sale 29,215 31,665
Securities held to maturity
(market value of $45,993
and $42,468, respectively) 46,414 43,416
Other securities 1,718 2,126
Loans:
Commercial 229,093 173,124
Real estate-construction 13,586 10,053
Real estate-other 110,958 85,470
Installment and other 21,557 16,890
-------------- -------------
Total loans 375,194 285,537
Less allowance for loan losses 6,472 4,850
-------------- -------------
Loans - net 368,722 280,687
Interest receivable and other assets 9,859 5,544
Intangible Assets - net 8,923 607
Leasehold improvements and equipment - net 2,442 1,621
Foreclosed assets 164 -
-------------- -------------
TOTAL ASSETS $ 495,210 $ 385,371
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 77,826 $ 65,277
Interest-bearing:
Checking 8,363 11,851
Money market 216,358 160,432
Time and savings 124,484 97,154
-------------- -------------
Total deposits 427,031 334,714
Other borrowings 12,100
Accrued interest payable and other liabilities 4,571 4,453
-------------- -------------
Total liabilities 443,702 339,167
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock no par value; authorized,
10,000,000 shares; none issued or outstanding
Common stock no par value; authorized,
10,000,000 shares; issued and outstanding,
4,954,580 and 4,908,132 shares, respectively 38,100 34,751
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 13,445 11,701
Accumulated other comprehensive loss - net (37) (248)
-------------- -------------
Total shareholders' equity 51,508 46,204
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 495,210 $ 385,371
============== =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
(dollars in thousands)
2000 1999 2000 1999
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 9,722 $ 6,410 $ 26,371 $ 17,636
Taxable securities 890 959 2,750 2,682
Tax exempt securities 251 223 764 623
Federal funds sold 34 47 154 1,246
--------- --------- --------- ---------
Total interest income 10,897 7,639 30,039 22,187
INTEREST EXPENSE:
Deposits 3,050 1,948 8,139 6,129
Other borrowings 170 12 368 12
--------- --------- --------- ---------
Total interest expense 3,220 1,960 8,507 6,141
--------- --------- --------- ---------
NET INTEREST INCOME 7,677 5,679 21,532 16,046
Provision for loan losses 225 75 600 165
--------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,452 5,604 20,932 15,881
--------- --------- --------- ---------
NONINTEREST INCOME:
Customer service fees 417 260 1,098 687
Other 130 348 327 474
--------- --------- --------- ---------
Total noninterest income 547 608 1,425 1,161
NONINTEREST EXPENSE:
Salaries and employee benefits 3,010 2,096 8,985 6,133
Occupancy 412 279 1,123 828
Equipment 385 245 1,040 754
Data processing services 116 101 326 305
Telephone and postage 128 86 380 263
Consulting fees 75 66 401 198
Marketing 80 53 211 166
Legal fees 76 50 184 128
Goodwill and core deposit amortization 182 42 448 126
FDIC insurance 27 11 49 30
Foreclosed asset expense - - 36 1
Other 458 473 1,377 1,111
--------- --------- --------- ---------
Total other expenses 4,949 3,502 14,560 10,043
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 3,050 2,710 7,797 6,999
Income tax expense 1,165 1,035 2,987 2,674
--------- --------- --------- ---------
NET INCOME $ 1,885 $ 1,675 $ 4,810 $ 4,325
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE $ 0.38 $ 0.34 $ 0.97 $ 0.87
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 0.37 $ 0.33 $ 0.95 $ 0.85
========= ========= ========= =========
Weighted average shares outstanding used to
compute basic earnings per common share 4,953,953 4,944,458 4,942,608 4,963,701
Dilutive effects of stock options 152,428 144,601 124,512 145,707
--------- --------- --------- ---------
Weighted average shares outstanding used to
compute diluted earnings per common share 5,106,381 5,089,059 5,067,120 5,109,408
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
(dollars in thousands)
Nine Months Ended Sept. 30,
--------------------------------
2000 1999
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,810 $ 4,325
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 600 165
Depreciation and amortization 1,294 945
Gain on sale of foreclsed asset - (67)
Write-down on foreclosed asset 36 -
Increase (decrease) in deferred loan fees 226 146
Change in assets and liabilities:
Increase in interest receivable and other assets (4,315) (121)
Decrease in accrued interest payable and other liabilities (22) (935)
----------- ---------
Net cash provided by operating activities 2,629 4,458
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,507) (461)
Proceeds from sales of foreclosed assets - 67
Net increase in loans (90,169) (46,799)
Acquisition, net of cash acquired (7,655) -
Activities in securities held to maturity:
Proceeds from maturing securities 1,585 23
Purchases of securities (4,319) (11,311)
Activities in securities available for sale:
Proceeds from maturing securities 16,000 10,000
Purchases of securities (13,216) (15,974)
----------- ---------
Net cash used by investing activities (99,281) (64,455)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 286 769
Purchase of common stock - (1,845)
Cash paid in lieu of fractional shares (3) (3)
Proceeds from short-term borrowing 12,100 -
Net increase (decrease) in deposits 92,317 (6,711)
----------- ---------
Net cash provided (used) by financing activities 104,700 (7,790)
----------- ---------
Net increase (decrease) in cash and cash equivalents 8,048 (67,787)
Cash and cash equivalents at beginning of period 19,705 88,304
----------- ---------
Cash and cash equivalents at end of period $ 27,753 $ 20,517
=========== =========
Cash paid during period for:
Interest $ 8,485 $ 6,588
=========== =========
Income taxes $ 3,906 $ 2,375
=========== =========
Supplemental schedule of non-cash investing activity:
Fair value of assets acquired $ 87,219 $ -
Liabilities assumed $ 72,614 $ -
Cash paid for capital stock $ 14,605 $ -
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------- --------------------------------
2000 1999 2000 1999
-------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C>
Net Income $ 1,885 $ 1,675 $ 4,810 $ 4,325
Other Comprehensive Income:
Unrealized gain (loss) on securities available for sale 303 (125) 351 (701)
Income tax expense related to unrealized loss
on securities available for sale (121) 50 (140) 280
-------------- --------------- ---------------- -------------
Other Comprehensive Income (Loss) 182 (75) 211 (421)
-------------- --------------- ---------------- -------------
COMPREHENSIVE INCOME $ 2,067 $ 1,600 $ 5,021 $ 3,904
============== =============== ================ =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<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, 1999. The results of operations and cash
flows are not necessarily indicative of those expected for the complete
fiscal year.
The weighted average shares outstanding and per share amounts for all periods
presented have been adjusted to give effect for a 5% stock dividend paid in
April 2000.
2. NEW PRONOUNCEMENTS
In June 1999, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 137, "Accounting for Derivative Financial Instruments and Hedging
Activities - Deferral of Effective Date of FASB Statement No. 133." Statement
No. 137 defers the effective date of Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" for one year. Statement No.
133 is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For instruments
existing at the date of adoption, Statement No. 133 provides an entity with
the option of not applying this provision to such hybrid instruments entered
into before January 1, 1998 and not modified thereafter. Consistent with the
deferral of the effective date for one year, Statement No. 137 provides an
entity the option of not applying this provision to hybrid instruments
entered into before January 1, 1998 or 1999 and not modified substantially
thereafter.
3. BUSINESS COMBINATION
On February 29, 2000, CivicBank of Commerce acquired East County Bank for
approximately $14.6 million in cash. East County Bank is a community bank
headquartered in Antioch, California with two branches in Concord and Walnut
Creek serving businesses and individuals in Contra Costa County. Unaudited
total assets of East County Bank were approximately $79 million. The
transaction was treated as a purchase for accounting purposes with goodwill
amortized on a straight-line basis over 15 years. The results of operations
of the acquired enterprise from March 1 through September 30 are included in
the income statement of Civic BanCorp.
The following unaudited pro-forma financial information presents the combined
results of operations of the Company and East County Bank as if the
acquisition had occurred at January 1, 1999, after effect to certain
adjustments, including the amortization of goodwill. The pro-forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and East County Bank constituted a single
entity during such periods.
7
<PAGE>
Pro-forma results of operations:
(dollars in thousands except per share)
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
-------------- --------------
<S> <C> <C>
Net Interest Income $ 22,281 $ 20,829
Net Income $ 4,854 $ 4,833
Diluted Earnings per Share $ 0.95 $ 0.98
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is intended to provide greater details of
the results of operations and financial condition of the Company. In addition to
historical information, certain statements in this filing constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements involve certain risks and uncertainties and
could cause actual results to differ materially from those expressed or implied
in the forward-looking statements. Factors which might cause such a difference
include, but are not limited to, interest rate risks, asset quality, general
economic conditions, legislative or regulatory changes and increases in personal
or commercial customers' bankruptcies.
OVERVIEW
For the nine months ended September 30, 2000, the Company reported net income of
$4,810,000, or $.95 earnings per diluted share compared to a net income of
$4,325,000 or $.85 earnings per diluted share for the same period of the prior
year. The annualized return on average assets was 1.37% for the nine months
ended September 30, 2000 compared to 1.48% for the same period of the prior
year. The annualized return on average shareholders' equity for the nine months
ended September 30, 2000 and 1999 was 13.12% and 13.12%, respectively. Included
in the second quarter, were one-time noninterest expenses associated with the
merger of East County Bank that approximated $350,000 on an after-tax basis.
Such expenses included an accrual for executive severance payments, an accrual
for executive employment contract payments, conversion programming costs and
other one-time expenses. Excluding such one-time items, pro-forma earnings for
the nine months ended September 30, 2000 would have approximated $5.2 million,
or $1.02 per diluted share. Pro-forma return on assets would have increased to
1.47% and pro-forma return on equity would have increased to 14.08%.
RESULTS OF OPERATIONS
Net interest income for the nine months ended September 30, 2000, was $21.5
million, increasing $5.5 million or 34.2% from net interest income of $16.0
million for the same period in 1999. The increase in net interest income was
primarily due to increases in the volume and the yield of average earning
assets.
Total interest income for the first nine months of 2000 equaled $30.0 million,
an increase of $7.9 million over total interest income for the same period in
1999. The increase in total interest income is primarily attributed to the
increases in the volume and the weighted average yield on those assets. Total
average earning assets increased $65.9 million or 18.0% to $433.0 million for
the first nine months of 2000 compared to $367.1 million for the same period in
1999. The weighted average yield of earning assets increased to 9.39% for the
first half of 2000 relative to 8.02% for the same period of the prior year. The
increase in the yield is attributed to a higher interest rate environment of the
current year.
8
<PAGE>
The following table presents an analysis of the components of net interest
income for the first nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------------------------------------------------------
2000 1999
--------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
dollars in thousands Interest Rates Interest Rates
Average Income\ Earned\ Average Income\ Earned\
Balance Expense /2/ Paid Balance Expense /2/ Paid
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Securities available for sale $ 33,622 $ 1,622 6.44% $ 37,162 $ 1,723 6.20%
Securities held to maturity:
U.S. Treasury securities 700 34 6.40% - - -
U.S. Government agencies 24,262 991 5.45% 210,404 862 5.38%
Municipal securities /(1)/ 21,041 1,160 7.37% 17,522 944 7.21%
Other securities 1,888 103 7.27% 2,355 97 5.52%
Federal funds sold and securities
purchased under agreements to resell 3,492 154 5.88% 35,416 1,246 4.70%
Loans: /2,3/
Commercial 208,486 16,132 10.34% 159,401 11,215 9.41%
Real estate-construction 14,929 1,170 10.47% 8,903 631 9.48%
Real estate-other 103,402 7,601 9.82% 69,637 4,758 9.13%
Installment and other 21,210 1,468 9.25% 15,319 1,032 9.01%
----------- ------------ ----------- ----------- ----------- -----------
Total Loans 348,027 26,371 10.12% 253,260 17,636 9.31%
---------- ------------ ----------- ----------- ----------- -----------
Total Earning Assets 433,032 30,435 9.39% 367,119 22,508 8.20%
Cash and due from banks 24,424 18,167
Leasehold improvements and equipment - net 2,162 1,610
Interest receivable and other assets 14,707 6,109
Foreclosed assets 150 -
Less allowance for loan loss (5,925) (4,603)
----------- -----------
TOTAL ASSETS $ 468,550 $ 388,402
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 36,015 155 0.57% $ 32,106 128 0.53%
Money market 125,283 3,402 3.63% 101,169 2,456 3.25%
Time and savings 129,290 4,582 4.73% 111,422 3,545 4.25%
Other borrowed funds 7,224 368 6.81% 273 12 5.81%
---------- ------------ ---------- ----------- ----------- -----------
Total interest bearing liabilities 297,812 8,507 3.82% 244,970 6,141 3.35%
Demand deposits 116,372 94,206
Other liabilities 5,491 5,260
Shareholders' equity 48,875 43,966
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 468,550 $ 388,402
========== ===========
Net Interest Income $ 21,928 $ 16,367
============ ===========
Net Interest Margin 6.76% 5.96%
========== ===========
Tax Equivalent Adjustment /(1)/ $ 396 $ 321
============ ===========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The tax-equivalent income adjustment on municipal securities is computed
using a Federal income tax rate of 34%. Interest on municipal securities was
$764,000 and $623,000 for September 30, 2000 and 1999, respectively. (2) Non-
performing loans have been included in the average loan balances. Interest
income is included on non-accrual loans only to the extent cash payments have
been received. (3) Interest income includes loan fees on commercial loans of
$311,000 and $356,000 for September 30, 2000 and 1999, respectively; fees on
real estate loans of $366,000 and $238,000 for September 30, 2000 and 1999,
respectively; and fees on installment and other loans of $23,000 and $21,000 for
September 30, 2000 and 1999, respectively.
9
<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 nine-month periods ended September 30, 2000 and 1999.
Analysis of Changes in Interest Income and Expense
<TABLE>
<CAPTION>
in thousands
Volume /1/ Rate /2/ Total
------------ ------------- --------------
<S> <C> <C> <C>
Increase (decrease) in interest income:
Securities available for sale $ (162) $ 61 $ (101)
Securities held to maturity:
U.S. Treasury securities 34 - 34
U.S. Government agencies 115 14 129
Municipal securities 191 25 216
Other securities (19) 25 6
Federal funds sold (1,123) 31 (1,092)
Loans:
Commercial 3,468 1,449 4,917
Real estate-construction 428 111 539
Real estate-other 2,308 535 2,843
Installment and other 398 38 436
------------ ------------- --------------
Total Loans 6,602 2,133 8,735
------------ ------------- --------------
Total increase $ 5,638 $ 2,289 $ 7,927
------------ ------------- --------------
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking $ (15) $ (12) $ (27)
Money market (593) (353) (946)
Savings and time (569) (468) (1,037)
Other borrowed funds (356) - (356)
------------ ------------- --------------
Total increase $ (1,533) $ (833) $ (2,366)
------------ ------------- --------------
Total change in net interest income $ 4,105 $ 1,456 $ 5,561
============ ============= ==============
</TABLE>
(1) Changes not solely attributed to rate or volume have been allocated to
volume.
(2) Loan fees are reflected in rate volumes.
Total interest expense for the first nine months of 2000 was $8.5 million, an
increase of $2.4 million or 38.5% relative to $6.1 million for the first nine
months of 1999. The increase in interest expense reflects the increases in the
volume and the weighted average rate paid on interest earning liabilities.
Average interest bearing liabilities were $297.8 million for the first nine
months of 2000 as compared to $245.0 million for the same period of the prior
year, an increase of $52.8 million or 21.1%. The weighted average rate paid on
these liabilities increased 47 basis points to 3.82% for the first nine months
of 2000 from 3.35% for the same period of 1999. The increase in the average rate
is attributed to a higher interest rate environment for deposits.
10
<PAGE>
Net Interest Margin
Net interest margin increased 80 basis points to 6.76% for the nine months ended
September 30, 2000, from 5.96% for the same period of the prior year. The
increase in the margin is attributed to a greater increase in average rate
earned on earning assets of 119 basis points relative to the increase in the
average rate paid on interest bearing deposits of 47 basis points.
Provision for Loan Losses
The provision for loan losses is charged to operations and creates an allowance
for future loan losses. The amount of the provision is dependent on many factors
which include the amount of the allowance for loan losses, growth in the loan
portfolio, net charges against the allowance, changes in the composition of the
portfolio, the number and dollar amount of delinquent loans, assessment of the
overall quality of the portfolio, value of the collateral on problem loans,
recommendations by regulatory authorities and general economic conditions among
others. The provision for loan losses for the nine months ended September 30,
2000, was $600,000 as compared to $165,000 for the nine months ended September
30, 1999. The increase in the provision was based principally on the growth in
the loan portfolio. See "Allowance for Loan Losses" for further discussion.
Non-Interest Income
Non-interest income for the nine months ended September 30, 2000, was
$1,425,000, an increase of $264,000 or 22.7% from the nine months ended
September 30, 1999. Customer service fees, the largest component of non-
interest income, increased $411,000 due to the increase in deposit volume and
the addition of the retail deposit base of East County Bank. Retail deposit
accounts generally have higher service charges per account as compared to
commercial accounts that generally compensate bank services with deposit
balances.
Non-Interest Expense
Non-interest expense totaled $14.6 million and $10.0 million for the nine month
periods ended September 30, 2000 and 1999, respectively. Salaries and employee
benefits for the nine months ended September 30, 2000, increased $2.9 million or
48.0% from the same period in 1999. The increase in salaries and employee
benefits is related to the increase in the number of employees associated with
the acquisition of East County Bank, the accrual of one-time executive severance
and employment contract payments in the second quarter and normal promotional
and merit increases. Full time equivalent personnel numbered 152 on September
30, 2000 compared to 116 on September 30, 1999.
Occupancy expense increased with the addition of three East County Bank offices.
Increases in the consulting and equipment expenses result from data processing
conversion of East County Bank and the increase in goodwill relates to the
amortization of goodwill created in the East County Bank merger.
The following table summarizes the significant components of noninterest expense
for the dates indicated.
11
<PAGE>
<TABLE>
<CAPTION>
Noninterest Expense for the Nine Months Ended,
Sept. 30 Sept. 30 Dollar %
(dollars in thousands) 2000 1999 Change Change
------------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Salaries and related benefits $ 8,985 $ 6,133 $ 2,852 46.5%
Occupancy 1,123 828 295 35.6%
Equipment 1,040 754 286 37.9%
Data processing services 326 305 21 6.9%
Telephone and postage 380 263 117 44.5%
Consulting fees 401 198 203 102.5%
Marketing 211 166 45 27.1%
Legal fees 184 128 56 43.8%
Goodwill and core deposit amortization 448 126 322 255.6%
FDIC insurance 49 30 19 63.3%
Foreclosed asset expenses 36 1 35 3500.0%
Other 1,377 1,111 266 23.9%
------------------- -------------- ----------------
TOTAL NONINTEREST EXPENSE $ 14,560 $10,043 $ 4,517 45.0%
=================== ============== ================ ==============
</TABLE>
Provision for Income Taxes
The provisions for income taxes for the first nine months of the years 2000 and
1999 were $2,987,000 and $2,674,000, respectively. These provisions represent
effective tax rates of 38.3% and 38.2%, respectively.
FINANCIAL CONDITION
Loans
Total loans at September 30, 2000 increased $89.7 million or 31.4% from December
31, 1999 due to the merger with East County Bank in combination with a strong
regional economy in 2000 and an overall strong demand for loans. On an unaudited
basis, East County Bank had total loans of $49 million on February 29, 2000.
The Bank concentrates its lending activities on commercial, real estate
construction and other forms of real estate loans made primarily to businesses.
Installment and other consumer loans are generally made to the owners and
principals of companies with whom the Bank maintains commercial relationships.
Real estate construction loans as a percentage of total loans were 3.6% at
September 30, 2000 and 3.5% at December 31, 1999. The Bank maintains a limited
portfolio of real estate construction loans as the risks associated with real
estate construction lending are generally considered to be higher relative to
other forms of commercial lending. However, the Bank continues to fund real
estate construction commitments on a limited basis with stringent underwriting
criteria. Other real estate loans consist of mini-perm loans and land
acquisition loans that are primarily owner-occupied and are generally granted
based on the rental or lease income stream generated by the property.
The following table sets forth the amount of loans outstanding in each category
and the percentage of total loans outstanding for each category at the dates
indicated.
12
<PAGE>
<TABLE>
<CAPTION>
Sept 30, 2000 Dec 31, 1999
---------------------------------- ----------------------------------
(dollars in thousands) Amount Percent Amount Percent
------------------- ------------- ------------------- ------------
<S> <C> <C> <C> <C>
Commercial $ 229,093 61.1% $ 173,124 60.6%
Real estate - construction 13,586 3.6% 10,053 3.5%
Real estate - other 110,958 29.6% 85,470 29.9%
Installment and other 21,557 5.7% 16,890 5.9%
------------------- ------------- ------------------- ------------
TOTAL $ 375,194 100.0% $ 285,537 100.0%
=================== ============= =================== ============
</TABLE>
Foreclosed Assets
Foreclosed assets totaled $164,000 at September 30, 2000, and consisted of one
parcel of undeveloped land. The Bank has received an offer for this property and
has written-down the book value of the property to approximate the net proceeds
anticipated on the transaction.
Non-Performing Assets
The Company's policy is to recognize interest income on an accrual basis unless
a loan becomes impaired. A loan is considered to be impaired when it becomes
probable that the Company will not recognize all amounts due under the original
terms of the loan agreement. At the time a loan is judged to be impaired, the
accrual of interest is discontinued and any accrued, but uncollected interest is
reversed. Thereafter, all payments are applied against principal until principal
is fully recovered with subsequent collections recognized as interest income as
they are received.
The following table provides information with respect to the Company's past due
loans and components of non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
(dollars in thousands) Sept 30, 2000 Dec 31, 1999 Sept 30, 1999
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Loans 90 days or more past due and still accruing $ 110 $ 193 $ 622
Non-accrual loans 507 632 596
Non-accrual SBA guaranteed loans 559 - -
Foreclosed assets 164 - -
-------------------- ------------------------------------------
Total non-performing assets $ 1,340 $ 825 $ 1,218
==================== ==================== ====================
Non-performing assets to period end loans,
plus foreclosed assets 0.36% 0.29% 0.44%
==================== ==================== ====================
</TABLE>
The increase in non-performing assets from December 31, 1999 to September 30,
2000 is primarily due to the non-performing SBA loans and the foreclosed asset
acquired in the merger with East County Bank. At September 30, 2000, the
recorded investment in loans considered to be impaired was $1,066,000, all of
which were on a non-accrual basis. Of this total, $566,000 of non-performing
loans have supporting collateral or government guarantees that equal or exceed
the book value and accordingly do not have an associated allowance for loan
loss. Loans totaling $500,000 have an associated allowance for loan loss of
$185,000. For the nine months ended September 30, 2000, the average recorded
investment in impaired loans was $969,000 and no interest income was recognized
on impaired loans. If interest income on those loans had been recognized, such
income would have approximated $89,000.
13
<PAGE>
The Company has an active credit administrative function, which includes the
regular use of an external loan review firm, that periodically reviews all loans
to identify potential problem credits using quality standards and criteria
similar to those of regulatory agencies. Loans receiving lesser grades are
considered to be classified and fall into "substandard," "doubtful," or "loss"
categories. Substandard loans are characterized as having one or more defined
weaknesses that could result in a loss to the Company if the deficiencies are
not corrected. Doubtful loans have the weakness of substandard loans with the
added complication that those weaknesses are less likely to be remedied and are
of a character that increases the probability of a principal loss. A loan
classified as a loss is considered uncollectable and will be discharged against
the allowance.
The following table sets forth the classified assets as of the dates indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
2000 1999
-------------------- --------------------
<S> <C> <C>
Substandard $ 9,815 $ 8,415
Doubtful 630 45
Loss - -
-------------------- --------------------
Total Classified $ 10,445 $ 8,460
Classified Loans to Total Loans 2.78% 2.96%
</TABLE>
As of September 30, 2000, with the exception of the aforementioned classified
loans and non-performing assets, management was not aware of any loan about
which it has material reservations regarding the borrower's ability to comply
with existing loan repayment terms or which might result in such loans becoming
impaired or classified at some future date. Management cannot, however, predict
the impact of future economic events or conditions, or the impact such an
environment may have on the Company's loan portfolio. Accordingly, there can be
no assurances that other loans will not become impaired or classified in the
future.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses, the amount of which is based on many factors. See "Provision for Loan
Losses". The allowance is increased by recoveries of loans previously charged-
off and by provisions charged against earnings and is reduced by loan charge-
offs. Loans are charged off when they are judged to be impaired. A loan is
considered to be impaired when it becomes probable that the Company will not
recognize all amounts due under the original terms of the loan agreement.
Recoveries of amounts previously charged off are recorded only when cash is
received.
The policy of the Company is to review loans in the portfolio to identify
potential problem credits and to assess the credit quality of the loan
portfolio. Specific allocations are made for loans where the probability of a
loss can be defined and reasonably estimated while the balance of the
allocations are based on the size of the portfolio, delinquency trends,
historical data, industry averages and general economic conditions in the
Company's market area.
Although management believes that the allowance for loan losses is adequate for
both potential losses of identified credits and estimated inherent losses in the
portfolio, future provisions will be subject to continuing evaluations of the
portfolio, and if the economy declines or the quality of the loan portfolio
deteriorates, additional provisions may be required.
The following table summarizes the changes in the allowance for loan losses for
the periods indicated:
14
<PAGE>
<TABLE>
<CAPTION>
Nine Months Year Nine Months
Ended Ended Ended
(dollars in thousands) Sept 30, 2000 Dec 31, 1999 Sept 30, 1999
--------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, at beginning of period $ 4,850 $ 4,424 $ 4,424
Charge-offs:
Commercial 169 800 500
Real estate - construction - - -
Real estate - other - - -
Installment and other 87 4 -
--------------- ---------------- ----------------
Total charge-offs 256 804 500
Recoveries:
Commercial 35 480 124
Real estate - construction - - -
Real estate - other 88 351 280
Installment and other 47 84 75
--------------- ---------------- ----------------
Total recoveries 170 915 479
--------------- ---------------- ----------------
Net charge-offs 86 (111) 21
Allowance acquired through merger 1,108 - -
Provision charged to operations 600 315 165
--------------- ---------------- ----------------
Balance, at end of period $ 6,472 $ 4,850 $ 4,568
=============== ================ ================
Ratio of net charge-offs to average loans (annualized) 0.03% -0.04% 0.01%
=============== ================ ================
Allowance at period end to total loans outstanding 1.72% 1.70% 1.63%
=============== ================ ================
</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 securities, US government agency instruments and bank
qualified municipal obligations.
The table below summarizes the book value and estimated market values of
investment securities at the dates indicated.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------------- ---------------------------------
(dollars in thousands) Book Market Book Market
Value Value Value Value
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 988 $ 995 $ - $ -
U.S. government agencies and
corporation 24,175 23,882 24,277 23,773
Municipal securities 21,228 21,092 19,105 18,660
Collateralized mortgage obligations 23 24 34 35
-------------- ---------------- ---------------- ----------------
TOTAL $ 46,414 $ 45,993 $ 43,416 $ 42,468
============== ================ ================ ================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ - $ - $ 8,003 $ 8,015
U.S. government agencies 29,277 29,215 24,075 23,650
-------------- ---------------- ---------------- ----------------
TOTAL $ 29,277 $ 29,215 $ 32,078 $ 31,665
============== ================ ================ ================
</TABLE>
15
<PAGE>
Deposits
Total deposits increased $92.3 million or 27.6% to $427.0 million as of
September 30, 2000, from $334.7 million as of December 31, 1999. The increase in
deposits includes those deposits acquired in the merger with East County Bank.
On an unaudited basis, East County Bank had deposits of approximately $72
million on February 29, 2000.
For the nine months ended September 30, 2000, average deposits totaled $407.0
million, an increase of $68.1 million or 20.0% from $338.9 million for the same
period in 1999. In addition to the deposits acquired from East County Bank,
management attributes the increase in deposits to strong regional economy and an
increase in the loan demand. The Company emphasizes developing total banking
relationships with its customers as a means of increasing its core deposit base.
Accordingly, the Company expects a correlation between total loans and total
deposits such that deposits are expected to increase as loan volume increases.
The table below sets forth information regarding the Bank's average deposits by
amount and percentage of total deposits for the nine months ended September 30,
2000 and 1999.
<TABLE>
<CAPTION>
Average Deposits
-------------------------------------------------------------------------
Nine Months Ended September 30,
-----------------------------------------------------------------------------
(dollars in thousands) 2000 1999
------------------------------------ ------------------------------------
Amount Percentage Amount Percentage
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Demand accounts $ 116,372 28.5% $ 94,206 27.9%
Interest-bearing checking 36,015 8.8% 32,106 9.5%
Money market 125,283 30.8% 101,169 29.9%
Savings and time 129,290 31.8% 111,422 32.9%
-------------- ----------- -------------- -----------
Total $ 406,960 100.0% $ 338,903 100.0%
============== =========== ============== ===========
</TABLE>
Certificates of deposit over $100,000 are generally considered a higher cost and
less stable form of funding than lower denomination deposits and may represent a
greater risk of interest rate and volume volatility than small retail deposits.
Time certificates of $100,000 or more at September 30, 2000, had the following
schedule of maturities:
(dollars in thousands) Total Maturing
-------------------
Three months or less $ 40,681
After three months through six months $ 22,059
After six months through twelve months $ 19,090
After twelve months $ 3,040
-------------------
Total $ 84,870
===================
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity risk refers to the Bank's ability to acquire funds to meet loan
demand, to fund deposit withdrawals and to service other liabilities as they
become due. The Bank's exposure to liquidity risk is monitored monthly by the
Risk Management Committee which includes members of the Board of Directors and
Senior Management. The Committee monitors such liquidity factors as maturing
loans and time deposits, unadvanced loan commitments, regional economic
conditions and historical seasonality to minimize the exposure to liquidity
risk.
To augment liquidity, the Bank has informal federal funds borrowing arrangements
with correspondent banks totaling $40.0 million. The Bank is a member of the
Federal Home Loan Bank of San Francisco and through membership has the ability
to pledge qualifying collateral for short term (up to six months) and long-term
(up to five years) borrowing. At September 30,
16
<PAGE>
2000, the Bank had no outstanding borrowings against these arrangements.
Additionally, at September 30, 2000, unpledged government securities that are
available to secure additional borrowing in the form of reverse repurchase
agreements totaled approximately $45.5 million. At September 30, 2000, the Bank
had no reverse repurchase agreements.
The liquidity position of the Company improved during the first half of 2000
from December 31, 1999. Cash and cash equivalents of $104.7 million were
provided by the increase in deposits and the proceeds of short-term investing.
Further cash and cash equivalents of $2.6 million were provided by operating
activities. Cash and cash equivalents of $99.3 million were consumed by
investing activities to fund loan growth.
The liquidity position of the Company may be expressed as a ratio defined as (a)
cash, Federal funds sold, other unpledged short term investments and marketable
securities, including those maturing after one year, divided by (b) total assets
less pledged securities. Using this definition, the liquidity position at
September 30, 2000 was 19.8%, which is relatively consistent with the ratio at
December 31, 1999 of 23.6%.
Part of the Bank's normal lending activity involves making commitments to extend
credit. One risk associated with loan commitments is the demand on the Bank's
liquidity that would result if a significant portion of the commitments were
unexpectedly funded at one time. The Bank assesses the likelihood of projected
funding requirements by reviewing historical patterns, current and forecasted
economic conditions and individual funding needs.
On a stand-alone basis, the Company's primary source of liquidity is dividends
from the Bank. The ability of the Bank to pay dividends is subject to regulatory
guidelines.
Capital Resources
Total shareholders' equity increased to $51.5 million at September 30, 2000,
from $46.2 million at December 31, 1999, reflecting retained income of
$4,810,000 for the first nine months of the year 2000 and proceeds from the
exercise of stock options of $286,000.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Federal Reserve Board of Governors that require a minimum risk-based capital
ratio of 8%. At least 4% must be in the form of "Tier 1" capital which consists
of common equity, non-cumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries. "Tier 2" capital
consists of cumulative and limited-life preferred stock, mandatory convertible
securities, subordinated debt and, subject to certain limitations, the allowance
for loan losses. General loan loss reserves included in Tier 2 capital cannot
exceed 1.25% of risk-weighted assets.
At September 30, 2000, the Company's total risk-based capital ratio was 10.50%.
The following table presents the Company's risk-based capital and leverage
ratios as of September 30, 2000, and December 31, 1999.
17
<PAGE>
<TABLE>
<CAPTION>
Minimum Capital
Requirements To Be
Considered Well Capitalized
Minimum Under Prompt Corrective
(dollars in thousand) Actual Capital Requirements Action Provisions
----------------------------- ---------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Total Capital
(to Risk Weighted Assets) $48,388 10.50% $36,850 8.00% $46,063 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 42,621 9.25% 18,425 4.00% 27,638 6.00%
Tier 1 Capital
(to Average Assets) 42,621 9.10% 18,742 4.00% 23,428 5.00%
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $50,070 14.48% $27,666 8.00% $34,582 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 45,741 13.23% 13,833 4.00% 20,749 6.00%
Tier 1 Capital
(to Average Assets) 45,741 11.80% 15,505 4.00% 19,381 5.00%
</TABLE>
Year 2000
For the past several years, the Company has been working to resolve the
potential impact of Year 2000 on its computer systems. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. A time-sensitive program could interpret a date
using "00" as 1900 rather than the year 2000 and such interpretation could
result in major miscalculations or system failure. The Company also identified
and contacted customers with material loan or deposit balances to insure they
were prepared to meet the Year 2000 processing requirements. Further, the
Company took steps to avoid disruptions on February 29, 2000, the first leap
year in the new millennium.
The Company did not experience any failures or other disruptions of its
computerized systems resulting from the Year 2000 nor does it have any
information that indicates its customers or service providers were negatively
impacted by Year 2000 related issues.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. The Company's primary market
risk is interest rate risk. Interest rate risk occurs as a result of interest
sensitive assets and liabilities not repricing at the same time or by the same
amount and is quantified by estimating the potential gain or loss in the market
value of assets and net interest income that can result from changes in interest
rates. The Company's exposure to interest rate risk is monitored monthly by the
Risk Management Committee which includes members of the Board of Directors and
Senior Management. The Company attempts to manage its exposure to changes in
interest rates; however, due to its size and the direct competition from major
banks, the Company must offer products which are competitive in the market
place, even if less than optimum with respect to interest rate exposure.
18
<PAGE>
The Company's balance sheet was liability sensitive at September 30, 2000, due
to the amount of fixed rate assets. Generally, if more liabilities than assets
reprice at a given time in a rising rate environment, net interest income will
deteriorate, and in a declining rate environment, net interest income would
increase. Management believes there has been no significant change in the
Bank's market risk exposure as disclosed in the Company's Annual Report on Form
10-K for the year December 31, 1999.
19
<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 - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - There were no reports on Form 8-K
during the period.
Exhibit No.
27. Financial Data Schedule.
20
<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: November 7, 2000 By: /s/ Herbert C. Foster
-----------------------------------------
Herbert C. Foster
President
Chief Executive Officer
By: /s/ Gerald J. Brown
-----------------------------------------
Gerald J. Brown
Chief Financial Officer
Principal Accounting Officer
21
