<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, 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
August 8, 2000.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock 4,953,533
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 -
June 30, 2000, and
December 31, 1999 3
Consolidated Statements of Income -
Three Months Ended June 30, 2000, and
June 30, 1999, and Six Months Ended
June 30, 2000, and June 30, 1999 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000, and
June 30, 1999 5
Consolidated Statements of Comprehensive
Income - Three Months Ended June 30, 2000,
and June 30, 1999, and Six Months Ended
June 30, 2000, and June 30, 1999 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 20
SIGNATURES 21
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIVIC BANCORP AND SUBSIDIARY
----------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(unaudited)
(dollars in thousands) June 30 December 31
2000 1999
--------- ---------
ASSETS
------
Cash and due from banks $ 34,004 $ 12,205
Federal funds sold - 7,500
--------- ---------
Total cash and cash equivalents 34,004 19,705
Securities available for sale 32,894 31,665
Securities held to maturity
(market value of $45,889
and $42,468, respectively) 46,722 43,416
Other securities 1,710 2,126
Loans:
Commercial 228,289 173,124
Real estate-construction 17,716 10,053
Real estate-other 109,919 85,470
Installment and other 22,580 16,890
--------- ---------
Total loans 378,504 285,537
Less allowance for loan losses 6,217 4,850
--------- ---------
Loans - net 372,287 280,687
Interest receivable and other assets 9,757 5,544
Intangible Assets 9,104 607
Leasehold improvements and equipment - net 2,352 1,621
Foreclosed assets 164 -
--------- ---------
TOTAL ASSETS $ 508,994 $ 385,371
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 60,454 $ 65,277
Interest-bearing:
Checking 7,413 11,851
Money market 235,905 160,432
Time and savings 131,621 97,154
--------- ---------
Total deposits 435,393 334,714
Other borrowings 19,300
Accrued interest payable and other liabilities 4,867 4,453
--------- ---------
Total liabilities 459,560 339,167
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,
4,953,533 and 4,674,411 shares, respectively 38,093 34,751
Retained earnings, (subsequent to July 1, 1996
date of quasi-reorganization, total deficit
eliminated $5.5 million) 11,560 11,701
Accumulated other comprehensive loss - net (219) (248)
--------- ---------
Total shareholders' equity 49,434 46,204
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 508,994 $ 385,371
========= =========
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
(dollars in thousands)
2000 1999 2000 1999
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 9,105 $ 5,751 $ 16,649 $ 11,226
Taxable securities 980 941 1,860 1,723
Tax exempt securities 266 208 513 400
Federal funds sold 48 386 120 1,199
------------- ------------- -------------- ------------
Total interest income 10,399 7,286 19,142 14,548
INTEREST EXPENSE:
Deposits 2,801 1,993 5,089 4,181
Other borrowings 131 - 198 0
------------- ------------- -------------- ------------
Total interest expense 2,932 1,993 5,287 4,181
------------- ------------- -------------- ------------
NET INTEREST INCOME 7,467 5,293 13,855 10,367
Provision for loan losses 225 45 375 90
------------- ------------- -------------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,242 5,248 13,480 10,277
------------- ------------- -------------- ------------
NONINTEREST INCOME:
Customer service fees 373 225 681 427
Other 153 86 197 126
------------- ------------- -------------- ------------
Total noninterest income 526 311 878 553
NONINTEREST EXPENSE:
Salaries and employee benefits 3,343 2,018 5,975 4,037
Occupancy 390 272 711 549
Equipment 366 264 655 509
Data processing services 106 108 210 204
Telephone and postage 143 94 252 177
Consulting fees 254 66 326 132
Marketing 72 71 131 113
Legal fees 53 33 108 78
Goodwill and core deposit amortization 180 42 266 84
FDIC insurance 22 9 22 19
Foreclosed asset expense 36 1 36 1
Other 497 351 919 637
------------- ------------- -------------- ------------
Total other expenses 5,462 3,329 9,611 6,540
------------- ------------- -------------- ------------
INCOME BEFORE INCOME TAXES 2,306 2,230 4,747 4,290
Income tax expense 886 855 1,822 1,640
------------- ------------- -------------- ------------
NET INCOME $ 1,420 $ 1,375 $ 2,925 $ 2,650
============= ============= ============== ============
BASIC EARNINGS PER COMMON SHARE $ 0.29 $ 0.28 $ 0.59 $ 0.53
============= ============= ============== ============
DILUTED EARNINGS PER COMMON SHARE $ 0.28 $ 0.27 $ 0.58 $ 0.52
============= ============= ============== ============
Weighted average shares outstanding used
to compute basic earnings per common share 4,953,533 4,986,531 4,937,078 4,973,480
Dilutive effects of stock options 110,826 139,626 110,230 146,104
------------- ------------- -------------- ------------
Weighted average shares outstanding used
to compute diluted earnings per common
share 5,064,359 5,126,157 5,047,308 5,119,585
============= ============= ============== ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
CIVIC BANCORP AND SUBSIDIARY
----------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
(dollars in thousands) Six Months Ended June 30,
-----------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,925 $ 2,650
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 375 90
Depreciation and amortization 826 636
Write-down on foreclosed asset 36 -
Increase (decrease) in deferred loan fees 215 121
Change in assets and liabilities:
Increase in interest receivable and other assets (4,213) (550)
Increase (decrease) in accrued interest payable and other liabilities 395 (957)
-------------- ---------------
Net cash provided by operating activities 559 1,990
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,168) (386)
Net increase in loans (93,498) (28,687)
Acquisition, net of cash acquired (7,655) -
Activities in securities held to maturity:
Proceeds from maturing securities 1,432 -
Purchases of securities (4,410) (9,836)
Activities in securities available for sale:
Proceeds from maturing securities 12,000 6,000
Purchases of securities (13,216) (15,974)
-------------- ---------------
Net cash used by investing activities (106,515) (48,883)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 279 623
Purchase of common stock - (537)
Cash paid in lieu of fractional shares (3) (3)
Proceeds from short-term borrowing 19,300 -
Net increase (decrease) in deposits 100,679 (13,766)
-------------- ---------------
Net cash provided (used) by financing activities 120,255 (13,683)
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 14,299 (60,576)
Cash and cash equivalents at beginning of period 19,705 88,304
-------------- ---------------
Cash and cash equivalents at end of period $ 34,004 $ 27,728
============== ===============
Cash paid during period for:
Interest $ 4,969 $ 4,507
============== ===============
Income taxes $ 2,231 $ 1,360
============== ===============
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>
5
<PAGE>
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -----------------------------
2000 1999 2000 1999
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Income $ 1,420 $ 1,375 $ 2,925 $ 2,650
Other Comprehensive Income:
Unrealized gain (loss) on securities available
for sale 65 (389) 48 (576)
Income tax expense related to unrealized loss
on securities available for sale
(26) 155 (19) 230
-------- ---------- ---------- -----------
Other Comprehensive Income (Loss) 39 (234) 29 (346)
-------- ---------- ---------- -----------
COMPREHENSIVE INCOME $ 1,459 $ 1,141 $ 2,954 $ 2,304
======== ========== ========== ===========
</TABLE>
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. 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.
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 June 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 Six Months Ended June 30,
-----------------------------
2000 1999
--------- --------
Net interest income $ 14,604 $ 12,610
Net income $ 2,969 $ 2,861
Dilued Earnings per Share $ 0.59 $ 0.56
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 six months ended June 30, 2000, the Company reported net income of
$2,925,000, or $.58 earnings per diluted share compared to a net income of
$2,650,000 or $.52 earnings per diluted share for the same period of the prior
year. The annualized return on average assets was 1.29% for the six months ended
June 30, 2000 compared to 1.35% for the same period of the prior year. The
annualized return on average shareholders' equity for the six months ended June
30, 2000 and 1999 was 12.17% and 12.21%, 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 six months
ended June 30, 2000 would have approximated $3.3 million, or $.65 per diluted
share. Pro-forma return on assets would have increased to 1.44% and pro-forma
return on equity would have increased to 13.62%.
RESULTS OF OPERATIONS
Net interest income for the six months ended June 30, 2000, was $13.9 million,
increasing $3.5 million or 33.6% from net interest income of $10.4 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 six months of 2000 equaled $19.1 million, an
increase of $4.6 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 $49.9 million or 13.4% to $420.7 million for the first
six months of 2000 compared to $370.9 million for the same period in 1999. The
weighted average yield of earning assets increased to 9.28% 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 six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------------------------------------------------
2000 1999
-------------------------------- ----------------------------------
dollars in thousands Interest Rates Interest Rates
Average Income\ Earned\ Average Income\ Earned\
Balance Expense /2/ Paid Balance Expense /2/ Paid
---------- -------- ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities available for sale $ 34,423 $ 1,105 6.45% $ 36,365 $ 1,128 6.25%
Securities held to maturity:
U.S. Treasury securities 555 18 6.37% - - -
U.S. Government agencies 24,282 661 5.47% 19,895 531 5.38%
Municipal securities /(1)/ 20,888 776 7.47% 16,763 606 7.29%
Other securities 1,904 76 8.00% 2,318 64 5.53%
Federal funds sold and securities
purchased under agreements to resell 4,179 120 5.76% 51,508 1,199 4.70%
Loans: /2/,/3/
Commercial 200,041 10,187 10.24% 153,914 7,145 9.36%
Real estate-construction 13,772 707 10.32% 8,545 401 9.47%
Real estate-other 100,208 4,851 9.73% 65,845 2,974 9.11%
Installment and other 20,471 904 8.88% 15,704 706 9.07%
---------- -------- ------- ---------- -------- --------
Total Loans 334,492 16,649 10.01% 244,008 11,226 9.28%
---------- -------- ------- ---------- -------- --------
Total Earning Assets 420,723 19,405 9.28% 370,857 14,754 8.02%
Cash and due from banks 24,192 18,191
Leasehold improvements and equipment - net 2,037 1,613
Interest receivable and other assets 12,945 6,020
Foreclosed assets 144 -
Less allowance for loan loss (5,709) (4,661)
---------- ----------
TOTAL ASSETS $454,332 $ 392,020
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $ 34,542 101 0.59% $ 30,572 84 0.55%
Money market 119,620 2,053 3.45% 102,453 1,639 3.23%
Time and savings 128,193 2,935 4.60% 115,375 2,458 4.30%
Other borrowed funds 6,126 198 6.50% - - -
---------- -------- ---------- -------- --------
Total interest bearing liabilities 288,481 5,287 3.69% 248,400 4,181 3.38%
Demand deposits 112,376 94,930
Other liabilities 5,401 5,287
Shareholders' equity 48,074 43,403
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $454,332 $ 392,020
========== ==========
Net Interest Income $ 14,118 $ 10,573
======== ========
Net Interest Margin 6.75% 5.75%
======= ========
Tax Equivalent Adjustment /(1)/ $ 263 $ 206
======== ========
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Tax-exempt interest income on municipal securities is computed using a
Federal income tax rate of 34%. Interest on municipal securities was $513,000
and $400,000 for June 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 loan fees on commercial loans of $205,000 and $254,000 for June
30, 2000 and 1999, respectively; fees on real estate loans of $245,000 and
$141,000 for June 30, 2000 and 1999, respectively; and fees on installment and
other loans of $17,000 and $16,000 for June 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 six-month periods ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Analysis of Changes in Net Interest Income
Increase (Decrease) Due to Changes in
dollars in thousands
Volume /1/ Rate /2/ Total
-------------- ------------- ---------
<S> <C> <C> <C>
Increase (decrease) in interest income:
Securities available for sale $ (57) $ 34 $ (23)
Securities held to maturity:
U.S. Treasury securities 18 - 18
U.S. Government agencies 119 11 130
Municipal securities 151 19 170
Other securities (11) 23 12
Federal funds sold (1,101) 22 (1,079)
Loans:
Commercial 2,164 878 3,042
Real estate-construction 248 58 306
Real estate-other 1,564 313 1,877
Installment and other 217 (19) 198
--------- -------- --------
Total Loans 4,193 1,230 5,423
--------- -------- --------
Total increase $ 3,312 $ 1,339 $ 4,651
========= ======== ========
(Increase) decrease in interest expense:
Deposits:
Interest bearing checking $ (11) $ (6) $ (17)
Money market (281) (133) (414)
Savings and time (281) (196) (477)
Other borrowed funds (198) - (198)
--------- -------- --------
Total increase (771) 335 (1,106)
--------- -------- --------
Total change in net interest income $ 2,541 $ 1,004 $ 3,545
========= ======== ========
</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 six months of 2000 was $5.3 million, an
increase of $1.1 million or 26.5% relative to $4.2 million for the first six
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 $288.5 million for the first six
months of 2000 as compared to $248.4 million for the same period of the prior
year, an increase of $40.1 million or 16.1%. The weighted average rate paid on
these liabilities increased 31 basis points to 3.69% for the first six months of
2000 from 3.38% 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 100 basis points to 6.75% for the six months ended
June 30, 2000, from 5.75% 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 126 basis points relative to the increase in the average rate paid on
interest bearing deposits of 31 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 six months ended June 30, 2000,
was $375,000 as compared to $90,000 for the six months ended June 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 six months ended June 30, 2000, was $878,000, an
increase of $325,000 or 58.8% from the six months ended June 30, 1999. Customer
service fees, the largest component of non-interest income, increased $254,000
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 $9.6 million and $6.5 million for the six months
period ended June 30, 2000 and 1999, respectively. Salaries and employee
benefits for the six months ended June 30, 2000, increased $1.9 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 157 on June 30, 2000
compared to 116 on June 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 Six Months Ended,
June 30 June 30 Dollar %
(dollars in thousands) 2000 1999 Change Change
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Salaries and related benefits $ 5,975 $4,037 $ 1,938 48.0%
Occupancy 711 549 162 29.5%
Equipment 655 509 146 28.7%
Data processing services 210 204 6 2.9%
Telephone and postage 252 177 75 42.4%
Legal fees 108 78 30 38.5%
Goodwill and core deposit amortization 266 84 182 216.7%
Marketing 131 113 18 15.9%
Consulting fees 326 132 194 147.0%
Foreclosed asset expenses 36 1 35 3500.0%
FDIC insurance 22 19 3 15.8%
Other 919 637 282 44.3%
----------- ------------ ------------ -----------
TOTAL NONINTEREST EXPENSE $ 9,611 $6,540 $ 3,071 47.0%
=========== ============ ============ ===========
</TABLE>
Provision for Income Taxes
The provisions for income taxes for the first half of 2000 and 1999 were
$1,822,000 and $1,640,000, respectively. These provisions represent effective
tax rates of 38.4% and 38.2%, respectively.
FINANCIAL CONDITION
Loans
Total loans at June 30, 2000 increased $93.0 million or 32.6% 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 4.7% at June
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>
June 30, 2000 Dec 31, 1999
--------------------------------- ---------------------------------------
(dollars in thousands) Amount Percent Amount Percent
----------- -------------- ------------------ -------------
<S> <C> <C> <C> <C>
Commercial $228,289 60.3% $173,124 60.6%
Real estate - construction 17,716 4.7% 10,053 3.5%
Real estate - other 109,919 29.0% 85,470 29.9%
Installment and other 22,580 6.0% 16,890 5.9%
----------- -------------- ------------------ ---------
TOTAL $378,504 100.0% $285,537 100.0%
=========== ============== ================== =========
</TABLE>
Foreclosed Assets
Foreclosed assets totaled $164,000 at June 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) June 30, 2000 Dec 31, 1999 June 30, 1999
------------- ------------ -------------
<S> <C> <C> <C>
Loans 90 days or more past due and still accruing $ 145 $ 193 $ 554
Non-accrual loans 737 632 594
Non-accrual SBA guaranteed loans 836 - -
Foreclosed assets 164 - -
------------- ------------ -------------
Total non-performing assets $1,882 $ 825 $1,148
============= ============ =============
Non-performing assets to period end loans,
plus foreclosed assets 0.50% 0.29% 0.47%
-------------- ------------ -------------
</TABLE>
The increase in non-performing assets from December 31, 1999 to June 30, 2000 is
primarily due to the non-performing SBA loans and the foreclosed asset acquired
in the merger with East County Bank. At June 30, 2000, the recorded investment
in loans considered to be impaired was $1,573,000, all of which were on a non-
accrual basis. Of this total, $977,000 of non-performing loans has 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
$596,000 have an associated allowance for loan loss of $132,000. For the six
months ended June 30, 2000, the average recorded investment in impaired loans
was $820,000 and no interest income was recognized on impaired loans. If
interest income on those loans had been recognized, such income would have
approximated $32,000.
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)
June 30, 2000 Dec 31, 1999
------------------ -----------------
<S> <C> <C>
Substandard $ 9,656 $ 8,415
Doubtful
715 45
Loss - -
------------------ -----------------
Total Classified $ 10,371 $ 8,460
Classified Loans to Total Loans 2.74% 2.96%
</TABLE>
As of June 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>
Six Months Year Six Months
Ended Ended Ended
(dollars in thousands) June 30, 2000 Dec 31, 1999 June 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 14 480 84
Real estate - construction - - -
Real estate - other 87 351 217
Installment and other 39 84 69
------------ ------------ ------------
Total recoveries 140 915 369
------------ ------------ ------------
Net charge-offs 116 (111) 131
Provision acquired through merger 1,108 - -
Provision charged to operations 375 315 90
------------ ------------ ------------
Balance, at end of period $ 6,217 $ 4,850 $ 4,383
============ ============ ============
Ratio of net charge-offs to average loans
(annualized) 0.07% -0.04% 0.11%
============ ============ ============
Allowance at period end to total loans outstanding 1.64% 1.70% 1.68%
============ ============ ============
</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>
June 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 $ 987 $ 987 $ - $ -
U.S. government agencies and
corporation 24,209 23,726 24,277 23,773
Municipal securities 21,499 21,148 19,105 18,660
Collateralized mortgage obligations 27 28 34 35
-------------- --------------- --------------- ---------------
TOTAL $ 46,722 $ 45,889 $ 43,416 $ 42,468
============== =============== =============== ===============
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ - $ - $ 8,003 $ 8,015
U.S. government agencies and corporation 33,259 32,894 24,075 23,650
-------------- --------------- --------------- ---------------
TOTAL $ 33,259 $ 32,894 $ 32,078 $ 31,665
============== =============== =============== ===============
</TABLE>
15
<PAGE>
Deposits
Total deposits increased $100.7 million or 30.1% to $435.4 million as of June
30, 2000, from $334.7 million as of December 31, 1999. The increase includes the
addition of East County Bank deposits. On an unaudited basis, East County Bank
had deposits of approximately $72 million on February 29, 2000.
For the six months ended June 30, 2000, average deposits totaled $394.7 million,
an increase of $51.4 million or 15.0% from $334.7 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 six months ended June 30, 2000
and 1999.
<TABLE>
<CAPTION>
Average Deposits
-----------------------------------------------------------------------------
Six Months Ended June 30,
-----------------------------------------------------------------------------
(dollars in thousands) 2000 1999
------------------------------------ ------------------------------------
Amount Percentage Amount Percentage
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Demand accounts $ 112,376 28.4% $ 94,930 27.7%
Interest-bearing checking 34,542 8.8% 30,572 8.9%
Money market 119,620 30.3% 102,453 29.8%
Savings and time 128,193 32.5% 115,375 33.6%
-------------- ----------- -------------- -----------
Total $ 394,731 100.0% $ 343,330 100.0%
============== =========== ============== ===========
</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 June 30, 2000, had the following
schedule of maturities:
(dollars in thousands) Total Maturing
-------------------
Three months or less $ 57,639
After three months through six months 24,485
After six months through twelve months 4,851
After twelve months 1,783
-------------------
Total $ 88,758
===================
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, 2000,
16
<PAGE>
the Bank had no outstanding borrowings against these arrangements. Additionally,
at June 30, 2000, unpledged government securities that are available to secure
additional borrowing in the form of reverse repurchase agreements totaled
approximately $49.3 million. At June 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 $119.1 million were
provided by the increase in deposits and the proceeds of short-term investing.
Cash and cash equivalents of $6.0 million and $98.9 million were consumed by
operating and investing, respectively, 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 June
30, 2000 was 21.3%, 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
approval.
Capital Resources
Total shareholders' equity increased to $49.4 million at June 30, 2000, from
$46.2 million at December 31, 1999, reflecting retained income of $2,925,000 for
the first half of 2000 and proceeds from the exercise of stock options of
$279,000.
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 June 30, 2000, the Company's total risk-based capital ratio was 10.52%. The
following table presents the Company's risk-based capital and leverage ratios as
of June 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 June 30, 2000:
Total Capital
(to Risk Weighted Assets) $46,028 10.52% $35,012 8.00% $43,765 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 40,548 9.26% 17,506 4.00% 26,259 6.00%
Tier 1 Capital
(to Average Assets) 40,548 9.11% 17,809 4.00% 22,261 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 June 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 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
(a) The annual meeting of shareholders of Civic BanCorp was held on
May 4, 2000.
(b) With respect to the election of directors at the annual meeting
of shareholders on May 4, 2000, (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 2000 Employee Stock
Option Plan as described in the proxy statement. The Plan was
approved by 2,816,035 votes in favor, 565,459 votes against and
7,531 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 4,234,522 votes in favor, 11,716 votes
against and 9,814 votes abstaining.
The total number of shares of the Company's common stock
outstanding as of March 7, 2000, the record date of the annual
meeting was 4,682,889.
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: August 8, 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
