10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 -------------- 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 May 5, 2001: Class Number of Shares Outstanding ----- ---------------------------- Common Stock 5,253,275 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 ___ --- 1 CIVIC BANCORP AND SUBSIDIARY

2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- Unaudited (In thousands except shares)

See accompanying notes to unaudited consolidated financial statements 3 CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited (Dollars in thousands except shares and per share amounts)

See accompanying notes to unaudited consolidated financial statements 4 CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited (In thousands)

See accompanying notes to unaudited consolidated financials statements 5 CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ----------------------------------------------- Unaudited (In thousands)

See notes to unaudited consolidated financial statements 6 CIVIC BANCORP AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The unaudited consolidated financial statements of Civic BanCorp, (the Company), and its subsidiary bank, CivicBank of Commerce, have been prepared in accordance with generally accepted accounting principles and according to 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, cash flows and comprehensive income 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, 2000. The results of operations and cash flows are not necessarily indicative of those expected for the complete fiscal year. 2. NEW PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement Number 133." Statement number 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 fiscal quarters of 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 hybrid instruments entered into before January 1, 1998 and not modified substantially thereafter. Consistent with the deferral of the effective date for one year, Statement No. 137 provides an entity with 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 adopted this statement on January 1, 2001. The Company does not have any derivatives, therefore there was no impact from the adoption of the pronouncement and no transition adjustment was necessary. 3. ACQUISITION OF EAST COUNTY BANK 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 business and individuals in Contra Costa County. Unaudited total assets of East County Bank on February 29, 2000 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 March 31 are included in the income statement of Civic BanCorp for the first three months of the fiscal year 2000. 4. SUBSEQUENT EVENT On April 18, 2001, at a regularly scheduled meeting of the Board of Directors of Civic BanCorp, the Directors of Civic BanCorp declared a 5.00% stock dividend to shareholders of record as of May 2, 2001, to be payable on May 16, 2001. Fractional shares are to be paid in cash. All share and per share information in this filing have been restated to give effect to the stock dividend. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the Three Months Ended March 31, 2001 and 2000 7 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 bankruptcies of individual or commercial customers. See the Company's Annual Report of Form 10K for further information on these risks. OVERVIEW For the three months ended March 31, 2001, the Company reported net income of $1,525,000, or $0.28 per diluted share compared to net income of $1,505,000 or $0.28 per diluted share for the same period of the prior year. Earnings per share have been restated to give effect to the 5.00% stock dividend declared on April 18, 2001. The annualized return on average assets was 1.21% for the three months ended March 31, 2001 compared to 1.43% for the same period of the prior year. The annualized return on average shareholders' equity for the three months ended March 31, 2001 and 2000 was 11.09% and 12.76%, respectively. RESULTS OF OPERATIONS Net interest income for the three months ended March 31, 2001 was $7.2 million, increasing $.8 million or 12.0% from net interest income of $6.4 million for the same period in 2000. The increase in net interest income was primarily attributed to an increase in the volume of earning assets, which was partially offset by an increase in the average rate paid on interest bearing liabilities. Total interest income for the first three months of 2001 was $10.1 million, an increase of $1.4 million, or 15.4% over the same period of the prior year. The increase in total interest income results primarily from an increase in the volume of earning assets. Average earning assets increased $68.3 million or 17.3% to $462.7 million in the first quarter of 2001 compared to $394.5 million for the same period in 2000. Approximately $40 million of the increase in earning assets was attributed to the acquisition of East County Bank on February 29, 2000. Total interest expense for the first three months of 2001 was $2.9 million, an increase of $0.5 million over the same period of the prior year. The increase in total interest expense reflects increases in both the volume and average rate paid on interest bearing deposits. Average interest bearing deposits increased $45.7 million or 17.2% to $311.3 million in the first quarter of 2001 compared to $265.6 million for the same period ended 2000. The average rate paid on interest bearing liabilities increased 27 basis points. Approximately $33 million of the increase in interest bearing liabilities was attributed to the merger with East County Bank. 8 The following table presents an analysis of the components of net interest income for the first quarter of 2001 and 2000.

(1) The tax-equivalent income adjustment on municipal securities is computed using a Federal income tax rate of 34%. Interest on municipal securities was $259,000 and $247,000 for March 31, 2001 and 2000, 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 $126,000 and $96,000 for March 31, 2001 and 2000, respectively; fees on real estate loans of $68,000 and $151,000 for March 31, 2001 and 2000, respectively; and fees on installment and other loans of $11,000 and $8,000 for March 31, 2001 and 2000, respectively. 9 The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest- bearing liabilities, and the amount of change attributable to volume and rate changes for the three-month period ended March 31, 2001.

(1) Changes not solely due to volume have been allocated to volume (2) Loan fees are reflected in rate variances. Net Interest Margin The net interest margin decreased 24 basis points to 6.40% for the first quarter of 2001 from 6.64% for the same period in 2000 due to a falling interest rate environment. The Federal Reserve has reduced the Federal funds rate by 150 basis points during the first quarter of 2001. The interest rates on deposits have reacted to the falling interest rate environment more slowly than have earning assets with time deposits continuing to accrue interest at higher interest rates until such time as the term of the deposit expires. 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, management's assessment of the overall quality of the portfolio, the value of the collateral on problem loans, recommendations by 10 regulatory authorities and general economic conditions among others. The provisions for loan losses for the three months ended March 31, 2001 and 2000 were $225,000 and $150,000, respectively. The increase in the provision in the first quarter of the current year was based on the slowing economy and increases in non-performing and classified loans. Noninterest Income Noninterest income for the three months ended March 31, 2001 was $569,000, an increase of $217,000, or 61.6%, from the three months ended March 31, 2000. The increase in depositor service fees is primarily attributable to an increase in the number of deposit accounts and in the volume of services provided. The increase in other noninterest income is due to servicing income on SBA loans and income earned on Bank owned life insurance. Noninterest Expense Noninterest expense totaled $5.0 million for the three months ended March 31, 2001, an increase of $892,000 or 21.5% from $4.1 million for the same period of the prior year. The increase in noninterest expenses is attributed to the merger with East County Bank on February 29, 2000 and reflects the increased staffing and operating expenses of the added operations for the full quarter in 2001. The following table summarizes the significant components of noninterest expense for the dates indicated.

Provision for Income Taxes The provision for income taxes for the first quarter of 2001 was $931,000 as compared to $936,000 for the same quarter of the prior year. These provisions represent effective tax rates of 38%. FINANCIAL CONDITION Loans Average loans for the first quarter of 2001 increased $51.9 million or 16.8% to $361.2 million compared to $309.3 million for the same quarter of 2000. Loans outstanding at March 31, 2001 decreased $23.3 million to $354.8 million from $378.1 million at 11 December 31, 2000. The decrease in loans outstanding during the first quarter of 2001 was primarily due to a slowing regional economy and the acquisition of one of the Bank's larger borrowers. Real estate construction loans as a percentage of total loans outstanding were 1.3% at March 31, 2001 compared to 3.9% at March 31, 2000. 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 than risks associated with other forms of lending. However, the Bank continues to fund real estate construction commitments on a limited basis with stringent underwriting criteria. Other real estate loans consist of mini-perm loans and land acquisition loans, which are primarily owner-occupied and are generally granted based on the rental or lease income stream generated by the property. Other real estate loans totaled $116.2 million at March 31, 2001, an increase of $.5 million or from December 31, 2000. The following table sets forth the amount of loans outstanding in each category and the percentage of total loans outstanding for each category as of the date indicated.

Non-Performing Assets The following table provides information with respect to the Company's past due loans and components of non-performing assets at the dates indicated.

The increase in non-performing assets is attributable to one commercial loan with outstanding balance of approximately $947,000. At March 31, 2001, the recorded investment in SBA loans considered impaired and placed on a non-accrual basis totaled $688,000 of which $538,000 was guaranteed by the SBA with an associated allowance of $150,000 for the retained portion, which is not SBA guaranteed. Included in non-accrual loans totaling $1,521,000 are $354,000 of loans with an associated allowance of $65,000, and $1,167,000 of loans 12 with adequate supporting collateral which accordingly do not have an associated allowance. For the quarter ended March 31, 2001, the average recorded investment in impaired loans was $1,198,000. No interest income was recognized on impaired loans. If interest income on those loans had been recognized, such income would have approximated $89,000. The Company has an active credit administration function 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" and "loss" categories. Substandard loans are characterized as having one or more deficiencies, which 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 is discharged against the allowance. The following table sets forth the classified loans as of the dates indicated.

Potential Problem Loans At March 31, 2001 there were no loans classified as loss, doubtful, substandard or special mention that have not been disclosed in the discussion above that (i) represented or resulted from trends or uncertainties which management anticipated would have a material impact on future operating results, liquidity, capital resources or (ii) represented material credits about which management was aware of information that would cause serious doubt as to the ability of the borrower to comply with the loan repayment terms. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses, the amount of which is based on many factors. See "Provision for Loan Losses". The allowance is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged off when, based on current information and circumstances, it becomes probable that the Company will be unable to collect all amounts due according to the original terms and conditions 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 each loan in the portfolio to identify potential problem credits and to assess the credit quality of each loan in the portfolio. Specific allocations are made for loans where the probability of a loss can be defined and reasonably estimated and general allocations are based on the number and size of classified loans in the portfolio, delinquency trends, historical data, industry averages and general economic conditions in the Company's market area. 13 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:

Investment Portfolio The Company's investment portfolio is used primarily for liquidity purposes and secondarily for investment income. The portfolio is composed of U.S. Treasury, U.S. government agency instruments and investment grade municipal obligations. The table below summarizes the amortized cost and estimated market values of investment securities at the dates indicated. 14

Deposits As of March 31, 2001 total deposits were $454.5 million, an increase of $25.3 million or 5.9% relative to total deposits of $429.2 million at December 31, 2000. Average demand deposits as a percentage of total deposits increased to 29.6% for the first quarter of 2001 from 28.3% for the same period of the prior year. The following table sets forth information regarding the Bank's average deposits by amount and percentage of total deposits for the three months ended March 31, 2001 and 2000.

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 March 31, 2001 had the following schedule of maturities: (In thousands) -------------- Three months or less $ 38,183 After three months through six months 44,837 After six months through twelve months 19,980 After twelve months 3,098 ------------- Total $ 106,098 ============= LIQUIDITY AND CAPITAL RESOURCES 15 Liquidity Liquidity management refers to the Bank's ability to acquire funds to meet loan demand, fund deposit withdrawals and to service other liabilities. To augment liquidity, the Bank has informal Federal funds borrowing arrangements with correspondent banks totaling $40.0 million and 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 March 31, 2001 the Bank had no outstanding borrowings against these arrangements. Additionally, at March 31, 2001, unpledged government securities that are available to secure additional borrowing in the form of reverse repurchase agreements totaled approximately $55.4 million. At March 31, 2001 the Bank had no reverse repurchase agreements. The liquidity position of the Company improved during the first quarter of 2001. Loan paydowns and maturing securities provided $32.8 million of cash and cash equivalents during the quarter. Cash and cash equivalents of $19.7 million were provided by the increase in deposits and operating activities provided $2.2 million of cash and cash equivalents. The net increase in cash and cash equivalents for the quarters ended March 31, 2001 and 2000 was $54.7 million and $10.0 million, respectively. The liquidity position of the Company may be expressed as a ratio defined as (a) cash, Federal funds sold, other unpledged short term investments and marketable securities, including those maturing after one year, divided by (b) total assets less pledged securities. Using this definition at March 31, 2001, the Company had a liquidity ratio of 27.1% as compared to 19.1% at December 31, 2000. The increase in the liquidity ratio was due to the increase in the sale of Federal funds at March 31, 2001. 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 restrictions. Capital Resources Total shareholders' equity increased to $55.8 million at March 31, 2001 from $53.8 million at December 31, 2000 reflecting retained income of $1,525,000, common stock option exercises of $470,000, and $53,000 of Accumulated Comprehensive Income resulting from a favorable market adjustment of securities available for sale. The Company and the Bank are subject to capital adequacy guidelines issued by the Federal Reserve Board of Governors which requires 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 and goodwill is treated as a deduction from capital. At March 31, 2001 the Company's total capital ratio was 10.92% as compared to the total capital ratio at December 31, 2000 of 10.34%. The following table presents the Company's risk-based capital and leverage ratios as of March 31, 2001 and December 31, 2000. 16

Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The Company's primary market risk is interest rate risk. Interest rate risk occurs as a result of interest sensitive assets and liabilities not repricing at the same time or by the same amount and is quantified by estimating the potential gain or loss in the market value of assets and net interest income that can result from changes in interest rates. The Company's exposure to interest rate risk is monitored monthly by the Risk Management Committee which includes members of the Board of Directors and Senior Management. The Company attempts to manage its exposure to changes in interest rates; however, due to its size and the direct competition from major banks, the Company must offer products which are competitive in the market place, even if less than optimum with respect to interest rate exposure. The Company's balance sheet position at March 31, 2001 was liability sensitive due to the proportion of fixed rate loans and securities. Generally, if more liabilities reprice than assets 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, 2000. 17 Part II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds - 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: None. 18 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: May 7, 2001 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 19

CIVIC BANCORP 10-Q