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 September 30, 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 November 6, 2001. Class Number of Shares Outstanding ----- ---------------------------- Common Stock 5,266,387 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 --- CIVIC BANCORP AND SUBSIDIARY

2 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CIVIC BANCORP AND SUBSIDIARY ---------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (unaudited)

See accompanying notes to unaudited consolidated financial statements 3 CIVIC BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (unaudited)

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

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

See accompanying 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 and subsidiary (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2000. The results of operations and cash flows are not necessarily indicative of those expected for the complete fiscal year. The weighted average shares outstanding and per share amounts for all periods presented have been adjusted to give effect for a 5% stock dividend paid in May 2001. 2. NEW PRONOUNCEMENTS In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, and Statement 142 is effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill [and equity-method goodwill] is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those 7 reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. And finally, any unamortized negative goodwill [and negative equity-method goodwill] existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $11.1 million, unamortized identifiable intangible assets in the amount of $74,000, and no unamortized negative goodwill, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $689,000 and $681,000 for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 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 2000 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. BUSINESS COMBINATION On February 29, 2000, CivicBank of Commerce acquired East County Bank for approximately $14.6 million in cash. East County Bank was 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, 2000 are included in the income statement of Civic BanCorp for the first nine months of fiscal 2000. 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 8 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, adverse economic conditions in California resulting from increases in energy costs, legislative or regulatory changes and increases in personal or commercial customers' bankruptcies. OVERVIEW For the nine months ended September 30, 2001, the Company reported net income of $3,785,000, or $.70 earnings per diluted share compared to a net income of $4,810,000 or $.90 earnings per diluted share for the same period of the prior year as adjusted for the impact of the 5% stock dividend paid in May 2001. The annualized return on average assets was .99% for the nine months ended September 30, 2001 compared to 1.37% for the same period of the prior year. The annualized return on average shareholders' equity for the nine months ended September 30, 2001 and 2000 was 8.94% and 13.12%, respectively. RESULTS OF OPERATIONS Net interest income for the nine months ended September 30, 2001, was $19.7 million, decreasing $1.8 million or 8.4% from net interest income of $21.5 million for the same period in 2000. The decrease in net interest income was primarily due to the declining interest rate environment. Total interest income for the first nine months of 2001 equaled $27.7 million, a decrease of $2.3 million or 7.7% compared to $30.0 for the same period in 2000 as the increase in interest income generated by an increase in average earning assets was offset by a falling interest rate environment. Total average earning assets increased $34.0 million or 7.9% to $467.0 million for the first nine months of 2001 compared to $433.0 million for the same period in 2000. The weighted average yield on those earning assets decreased to 8.03% for the first nine months of 2001 relative to 9.39% for the same period of the prior year. The decrease in the yield was attributed to the declining interest rate environment of 2001. The average Prime or Reference rate decreased to 7.52% for the first nine months of 2001 from 9.14% for the comparative period of the prior year. Total interest expense for the first nine months of 2001 was $8.0 million, a decrease of $.5 million or 5.9% relative to $8.5 million for the first nine months of 2000. The decrease in interest expense reflects a decrease in average rate paid on those interest-bearing liabilities that was partially offset by an increase in the volume of interest bearing liabilities. Average interest bearing liabilities increased to $316.8 million for the first nine months of 2001 as compared to $297.8 million for the same period of the prior year, an increase of $19.0 million or 6.4%. The weighted average rate paid on these liabilities decreased 45 basis points to 3.37% for the first nine months of 2001 from 3.82% for the same period of 2000. The decrease in the average rate is attributed to a falling interest rate environment for deposits. Net Interest Margin Net interest margin decreased 101 basis points to 5.75% for the nine months ended September 30, 2001, from 6.76% for the same period of the prior year. The decrease in the margin is attributed to an asset sensitive balance sheet resulting in a greater decrease in the average rate earned on earning assets of 136 basis points relative to the decrease in the average rate paid on interest bearing deposits of 45 basis points. Following actions by the Federal Reserve, the Company has reduced its Prime or Reference rate eight times during the first nine months of 2001 for a total of 350 basis points. The majority of the Banks' loans are made with terms which include floating interest rates tied to the Bank's reference rate and accordingly, the rates on these loans have followed these reductions in a timely fashion. Conversely, most of the interest bearing deposits have not repriced to the same extent or at the same rate due to competitive pressures or, in the case of time deposits, interest rates that do not adjust until the term of the deposit contract expires. This set of circumstances will result in a declining net interest margin until such time as the liabilities have repriced to the current interest rate environment. 9 The following table presents an analysis of the components of net interest income for the first nine months ended September 30, 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 $764,000 and $764,000 for September 30, 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 $346,000 and $311,000 for September 30, 2001 and 2000, respectively; fees on real estate loans of $227,000 and $366,000 for September 30, 2001 and 2000, respectively; and fees on installment and other loans of $32,000 and $23,000 for September 30, 2001 and 2000, respectively. 10 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, 2001 and 2000.

(1) Changes not solely attributed to rate or volume have been allocated to volume. (2) Loan fees are reflected in rate volumes. Provision for Loan Losses The provision for loan losses is charged to operations and creates an allowance for future loan losses. The amount of the provision is dependent on many factors which include the amount of the allowance for loan losses, growth in the loan portfolio, net charges against the allowance, changes in the composition of the portfolio, the number and dollar amount of delinquent loans, assessment of the overall quality of the portfolio, value of the collateral on problem loans, recommendations by regulatory authorities and general economic conditions among others. The provision for loan losses for each of the nine-month periods ended September 30, 2001 and 2000 was $600,000. See "Allowance for Loan Losses" for further discussion. 11 Non-Interest Income Non-interest income for the nine months ended September 30, 2001, was $2,079,000, an increase of $654,000 or 45.9% from the nine months ended September 30, 2000. Customer service fees, the largest component of non-interest income, increased $464,000 due to a combination of factors which include an increase in the number of deposit accounts, a general increase in many of the Bank's service fees, and a lower earnings credit rate applied to compensating balances which offset transaction and service charges for the Bank's business customers. The increase in Other Noninterest Income is related to an increase in the number of non-customer transactions, an increase in earnings on the cash surrender value of bank owned life insurance and an increase in SBA servicing income. Non-Interest Expense Non-interest expense totaled $15.0 million and $14.6 million for the nine-month periods ended September 30, 2001 and 2000, respectively. Occupancy expense increased with the addition of three East County Bank offices on February 29, 2000. Increases in data processing and equipment are also related to the merger with East County Bank, as is the increase in goodwill. Conversely, the decrease in consulting relates to East County Bank data processing conversion efforts in the second quarter of 2000. The increase in legal fees is related to litigation in the ordinary course of business. The following table summarizes the significant components of noninterest expense for the dates indicated.

Provision for Income Taxes The provisions for income taxes for the first nine months of 2001 and 2000 were $2,376,000 and $2,987,000, respectively. These provisions represent effective tax rates of 38.6% and 38.3%, respectively. FINANCIAL CONDITION Loans Total loans at September 30, 2001 decreased $3.5 million or .9% from December 31, 2000 due to the loss of one of the Bank's larger loan customers with approximately $8.7 million in outstanding loan balances by virtue of a merger. 12 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 2.4% at September 30, 2001 and 1.2% at December 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 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.

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.

The increase in non-performing assets from December 31, 2000 to September 30, 2001 is primarily due to three commercial loans placed on non-accrual in calendar year 2001. Management does not anticipate a principal loss on these loans at the present time, however collection may be protracted. 13 At September 30, 2001, the recorded investment in loans considered to be impaired was $4,478,000, all of which were on a non-accrual basis. Of this total, $4,324,000 of non-performing loans has supporting collateral or government guarantees that equal or exceed the book value and accordingly they do not have an associated allowance for loan loss. Loans totaling $154,000 have an associated allowance for loan loss of $62,000. For the nine months ended September 30, 2001, the average recorded investment in impaired loans was $2,040,000 and no interest income was recognized on impaired loans. If interest income on those loans had been recognized, such income would have approximated $302,000. The Company has an active credit administrative function, which includes the regular use of an external loan review firm, that periodically reviews all loans to identify potential problem credits using quality standards and criteria similar to those of regulatory agencies. Loans receiving lesser grades are considered to be classified and fall into "substandard," "doubtful," 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.

The increase in the Substandard and Doubtful balances relate to circumstances unique to the borrowers and management does not believe these circumstances to be indicative of trends or circumstances that would be applicable to the portfolio as a whole. As of September 30, 2001, 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. The following table presents the 14 allocations for loan loss as of the dates indicated by loan category and the percentage of loans in each category relative to total loans.

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 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. Approximately $10.7 million of 15 Federal agency securities classified as available for sale were called by the issuing agencies during the first nine months of 2001. Approximately $1.7 million of callable securities remain in the portfolio. The table below summarizes the book value and estimated market values of investment securities at the dates indicated.

Deposits Total deposits increased $14.2 million or 3.3% to $443.4 million as of September 30, 2001, from $429.2 million as of December 31, 2000. For the nine months ended September 30, 2001, average deposits totaled $443.0 million, an increase of $36.0 million or 8.8% from $407.0 million for the same period in 2000. 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, 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 September 30, 2001, had the following schedule of maturities: 16

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 Risk Management Committee is responsible for monitoring the Bank's exposure to liquidity risk. The Committee meets on a monthly basis and 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 million. At September 30, 2001, the Bank had no outstanding borrowings against these arrangements. Additionally, at September 30, 2001, unpledged government securities that are available to secure additional borrowing in the form of reverse repurchase agreements totaled approximately $22 million. At September 30, 2001, the Bank had no reverse repurchase agreements. The liquidity position, as measured by the level of cash equivalents, increased by $40.7 million at September 30, 2001 from December 31, 2000. Cash equivalents, which include cash and Federal funds sold, of $25.7 million were provided by investing activities, principally by the maturity of securities. Operating activities provided cash equivalents of $6.3 million and financing activities, principally the increase in deposits, provided cash equivalents of $8.7 million. The liquidity position of the Company may be expressed as a ratio defined as (a) cash, Federal funds sold, other unpledged short term investments and marketable securities, including those maturing after one year, divided by (b) total assets less pledged securities. Using this definition, the liquidity position at September 30, 2001 was 22.1%, slightly improved from the ratio at December 31, 2000 of 19.8% due to increased levels of Federal funds. 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 $58.2 million at September 30, 2001, from $53.8 million at December 31, 2000, reflecting retained income of $3,785,000 for the first nine months of 2001 and proceeds from the exercise of stock options of $596,000. 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 that 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, 17 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, 2001, the Company's total risk-based capital ratio was 11.30%. The following table presents the Company's risk-based capital and leverage ratios as of September 30, 2001, and December 31, 2000.

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 The Company's balance sheet was asset sensitive at September 30, 2001, due to the amount of floating rate assets. Generally, if more assets than liabilities reprice at a given time in a falling rate environment, net interest income will deteriorate, and in a rising rate environment, net interest income would increase. Apart from the reduction in net interest income attributable to the declining interest rate environment, (see "Net Interest Margin"), 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, 2000. 19 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. 20 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 06, 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 21

CIVIC BANCORP 10-Q