ITEM 1 - BUSINESS
General Civic BanCorp (the "Company") is a California corporation incorporated in 1984 and is registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956, as amended. CivicBank of Commerce (the "Bank") is a wholly-owned subsidiary of the Company, organized as a California banking corporation in 1984. At present, the Company does not engage in any material business activities other than the ownership of the Bank.
CivicBank of Commerce The Bank is a state chartered bank and is a member of the Federal Reserve System. Deposits in the Bank are insured to $100,000 by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a full service commercial bank dedicated to providing personalized services to independent businesses and professional firms with annual sales of $500,000 to $30 million in Alameda, San Francisco, Santa Clara and Contra Costa counties. The Bank also provides banking services to individuals who are owners, partners or principals of these businesses or professional practices, and other corporate executives and professionals. The Bank offers its clients certain customary banking services, such as checking, savings and interest-bearing demand, money market and time deposit accounts; commercial, installment and real estate loans; safe deposit boxes; automated cash management services; collection services; wire and telephone transfer services; courier services; lockbox services; and account reconciliation. The Bank has one operating subsidiary, Pasco Services, Inc., which acts as trustee to perform loan servicing and reconveyance services under deeds of trust held by the Bank and other lenders.
The principal office of the Company and Bank is located at 2101 Webster Street, Oakland, California, 94612. Their telephone number is (510) 836-6500. The Bank has three banking offices in Walnut Creek and additional offices in Fremont, Palo Alto, Concord, Antioch, and San Leandro. The Bank has a loan production office in San Francisco.
On February 29, 2000, Civic BanCorp acquired the outstanding shares of East County Bank for approximately $14.6 million in cash. Under the Agreement, East County Bank was merged with and into CivicBank of Commerce. In addition to its main office in Antioch, East County Bank had branches in Concord and Walnut Creek. As of February 29, 2000, East County Bank had total assets of approximately $79 million, loans of $48 million, deposits of $72 million and shareholders' equity of $6 million.
Savings and Deposit Activities The Bank offers customary banking services such as personal and business checking, savings accounts, time certificates of deposit and IRA accounts. Most of the Bank's deposits are obtained from commercial businesses, professionals and individuals with high income or high net worth. At December 31, 2000, the Bank had a total of 10,124 accounts, consisting of demand deposit accounts with an average balance of approximately $45,000; savings, NOW and market rate accounts with an average balance of approximately $29,000; time certificates of $100,000 or more with an average balance of approximately $285,000; and other time deposits with an average balance of approximately $23,000. The Bank has not obtained any deposits through deposit brokers and has no present intention of using brokered deposits as a source of funding. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Deposits".
Lending Activities The Bank concentrates its lending activities in commercial loans, real estate construction loans and other forms of real estate loans made primarily to businesses and individuals; it has no foreign loans.
The net loan portfolio as of December 31, 2000, totaled $371.5 million, which represented 86.6% of total deposits and 74.6% of total assets. The following table shows the mix of the loan portfolio as of December 31, 2000, 1999 and 1998.
Commercial Loans - As of December 31, 2000, the Bank had outstanding commercial loans totaling $235.5 million, representing 62.3% of the Bank's total loan portfolio. The Bank lends primarily to businesses with annual gross revenues of $500,000 to $30 million and to professionals and other individuals located in Alameda, San Francisco, Santa Clara and Contra Costa counties. The Bank offers a variety of commercial lending services, including revolving lines of credit, working capital loans, equipment financing, letters of credit and inventory financing. Typically, commercial loans are floating rate obligations and are priced based on the Bank's reference rate.
The Bank's commercial loans are made on a short-term basis with the majority of such loans maturing within one year. Commercial loans are typically secured by several types of collateral, including qualifying accounts receivable, equipment, inventory, and real estate. No single commercial account customer accounted for more than 3.1% of total outstanding loans at December 31, 2000.
Real Estate Loans - As of December 31, 2000, the Bank had outstanding real estate construction loans totaling $4.4 million representing 1.2% of the Bank's loan portfolio. The Bank makes loans to finance the construction of residential, commercial and industrial properties and to finance land development.
Other real estate loans, consisting of loans for land development and "mini-perm" loans totaled $115.7 million at December 31, 2000, of which $101.7 million were mini-perms. Mini-perm loans are available for completed commercial and retail projects with terms of three to five years and principal and interest payments based on a 15 to 25 year amortization schedule with a balloon payment due at the end of the term.
Neither the Bank nor the Company has taken an equity participation in connection with any real estate acquisition, development and construction loan held by the Bank.
Installment Loans - Installment loans include loans to individual and business customers and include home equity loans, automobile loans and other personal loans.
Banking Services To retain existing customers and attract new customers, the Bank offers a broad range of services, including automated teller machines, automated accounting services, daily courier services and account reconciliation. In addition, the Bank maintains close relationships with its customers by providing direct access to senior
management, rapid response to customer requests and specialized market area knowledge of Alameda and Contra Costa counties.
Human Resources At December 31, 2000, the Bank employed a total of 167 persons, consisting of 144 full time employees and 23 part time employees. There were 158 full time equivalent employees.
Competition The Bank actively competes for all types of deposits and loans with other banks and financial institutions located in its service area, and increased deregulation of financial institutions has increased competition. Many of the Bank's competitors have greater financial resources and facilities than the Bank and may offer certain services, such as trust services, that the Bank does not presently offer. In addition, California and federal law permit various forms of nationwide interstate banking with few restrictions. See "Regulation and Supervision - Interstate Banking". The Company believes that this will further increase competition as out-of-state financial institutions enter the California market.
The Bank's strategy for meeting competition has been to maintain a sound capital base and liquidity position, employ experienced management, and concentrate on particular segments of the market, particularly businesses with annual revenues of $500,000 to $30 million and professionals, by offering customers a degree of personal attention that, in the opinion of management, is not generally available through the Bank's larger competitors.
See also the discussion below under "Regulation and Supervision - The Company - Financial Services Modernization Legislation."
Regulation and Supervision The Company The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered as such with the Federal Reserve Board ("FRB"). A bank holding company is required to file with the FRB annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the FRB and is required to obtain FRB approval before acquiring, directly or indirectly, ownership or control of any voting shares of any bank, if after such acquisition it would directly or indirectly own or control more than 5% of the voting stock of that bank, unless it already owns a majority of the voting stock of that bank. The BHC Act further provides that the FRB shall not approve any such acquisition that would result in or further the creation of a monopoly, or the effect of which may be substantially to lessen competition, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the probable effect in meeting the convenience and needs of the community to be served.
Furthermore, under the BHC Act, a bank holding company is, with limited exceptions, prohibited from (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or (ii) engaging in any activity other than managing or controlling banks. With prior notice to the FRB (in the case of "well-capitalized" and "well-managed" organizations) or with prior approval of the FRB in the case of other organizations, however, a bank holding company may own shares of a company engaged in activities which the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The FRB has by regulation determined that certain activities are so closely related to banking as to be a proper incident thereto within the meaning of the BHC Act. These activities include, but are not limited to: operating an industrial loan company, industrial bank, Morris Plan Bank, savings association, mortgage company,
finance company, credit card company or factoring company; performing certain data processing operations; providing investment and financial advice; operating a trust company in certain instances, selling traveler's checks, United States savings bonds and certain money orders; providing certain courier services; providing management consulting advice to nonaffiliated depository institutions in some instances; providing securities brokerage services and certain private placement agent services; providing career counseling in financial services; community development financing and investment; acting as insurance agent for certain types of credit-related insurance; leasing property or acting as agent, broker or advisor for leasing property on a "full pay-out basis"; acting as a consumer financial counselor, including tax planning and return preparation; performing futures and options advisory services, check guarantee services and discount brokerage activities; operating a collection or credit bureau; or performing real and personal property appraisals. The Company has no present intention to engage in any of such permitted activities except as an incident to its normal banking operations.
The FRB has also determined that certain activities are not so closely related to banking to be a proper incident thereto within the meaning of the BHC Act. Such activities include real estate brokerage and syndication; land development; property management; underwriting of life insurance not related to credit transactions; and with certain exceptions, securities underwriting and equity funding. In the future, the FRB may add to or delete from the list of activities permissible for bank holding companies.
Historically, the BHC Act has prohibited bank holding companies and their bank subsidiaries from owning banks or branches in more than one state unless the laws of each state expressly permit or in case of certain emergencies arising from a bank failure or prospective failure. California and federal law now permit various forms of nationwide interstate banking with few restrictions. See "Regulation and Supervision - Legislation and Proposed Regulatory Changes - Interstate Banking".
Regulations and policies of the FRB require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the FRB's policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to a subsidiary bank during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting a subsidiary bank. Under certain conditions, the FRB may conclude that certain actions of a bank holding company, such as payment of cash dividends, would constitute an unsafe and unsound practice because they violate the FRB's "source of strength" doctrine.
A bank holding company and its subsidiaries are prohibited from certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries, or on a promise by its customer not to obtain other services from a competitor. In addition, federal law imposes certain restrictions on transactions between the Company and its subsidiaries, including the Bank. As an affiliate of the Bank, the Company is subject, with certain exceptions, to provisions of federal law imposing limitations on, and requiring collateral for, extensions of credit by the Bank to its affiliates.
Directors of the Company, and the companies with which they are associated, have had and will continue to have banking transactions with the Bank in the ordinary course of the Bank's business. It is the firm intention of the Company that any loans and commitments to loan included in such transactions be made in accordance with applicable law, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar creditworthiness, and on terms not involving more than the normal risk of collectibility or presenting other unfavorable features. At December 31,
2000, loans to directors totaled $4,681,000 or 8.7% of the Company's shareholders' equity. Company policy precludes loans to officers and employees of the Company or of the Bank.
The Gramm-Leach-Bliley Act of 1999 (the "Modernization Act") became effective March 11, 2000. The Modernization Act repeals the two provisions of the Glass-Stegall Act: Section 20, which restricted the affiliation of the Federal Reserve member banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, directors or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Modernization Act also expressly preempts any state law restricting the establishment of financial affiliations, primarily related to insurance. The law establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial Activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
In order for the Company to take advantage of the ability provided by the Modernization Act to affiliate with other financial service providers, it must become a "Financial Holding Company." To do so, the Company would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding companies and certifying that it is eligible to do so because its insured depository institution subsidiary (the Bank) is well-capitalized and well-managed. In addition, the Federal Reserve must also determine that an insured depository institution subsidiary has at least a "satisfactory" rating under the Community Reinvestment Act. The Company will continue to monitor its strategic business plan to determine whether, based on market conditions and other factors, the Company wishes to utilize any of its expanded powers provided by the Modernization Act.
The Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Modernization Act to the same extent as a national bank. In order to form a financial subsidiary, the Bank must be well-capitalized, and the Bank would be subject to the same capital deduction, risk management, and affiliate transaction rules as applicable to national banks.
Under the Modernization Act, securities firms and insurance companies that elect to become Financial Holding Companies may acquire banks and other financial institutions. The Company does not believe that the Modernization Act will have a material adverse effect on its operations in the near-term. However to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources that the Company or the Bank.
The Bank The Bank is a member of the FDIC which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, the Bank pays a semi-annual assessment and is subject to the rules and regulations of the FDIC pertaining to deposit insurance and other matters.
The Bank is subject to regulation, supervision and regular examination by the California Department of Financial Institutions, formerly known as the State Banking Department (the "Department"). In addition, because the Bank is a member of the Federal Reserve System, it is subject to regulation, supervision and examination by the FRB. The regulations of these agencies govern most aspects of the Bank's business, including the making of periodic reports by the Bank and the Bank's activities relating to investments, loans, borrowings, certain check-clearing activities, branching, mergers and acquisitions, reserves against deposits and numerous other areas.
Subject to the regulations of the California Superintendent of Financial Institutions (the "Superintendent"), the Bank may invest in capital stock, obligations or other securities of other corporations, provided such corporations are not insurance companies, agents or brokers. In addition, the Bank may acquire any or all of the securities of a company that engages in activities that the Bank may engage in directly under California law without the prior approval of the FRB. California state-chartered banks are also specifically authorized to provide real estate appraisal services, management consulting and advisory services and electronic data processing services. However, FRB and FDIC regulations restrict the ability of the Bank to engage in real estate development and investment activities and to engage, as principal, in other activities not permitted to national banks.
The Company's primary potential source of income (other than interest earned on Company capital) is the receipt of dividends and management fees from the Bank. The ability of the Bank to pay management fees and dividends to the Company and its affiliates is subject to restrictions set forth in the California Financial Code and is subject to approval of the Department.
The board of directors of a state-chartered bank may declare a dividend out of so much of net profits as such board deems appropriate, subject to California law which restricts the amount available for cash dividends to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event that a bank has no retained earnings or net income for the prior three fiscal years, cash dividends may be paid out of net income for such bank's last preceding fiscal year or current fiscal year upon the prior approval of the Department. Although there are no specific regulations restricting dividend payments by bank holding companies other than state corporation law, supervisory concern focuses on the holding company's capital position, its ability to meet its financial obligations as they come due and the capacity to act as a source of financial strength to its subsidiary banks.
The FRB and the Superintendent have authority to prohibit a bank from engaging in business practices which are considered to be unsafe or unsound. Depending upon the financial condition of the Bank and upon other factors, the FRB or Superintendent could assert that the payments of dividends or other payments by the Bank to the Company might be such an unsafe or unsound practice. Also, if the Bank were to experience either significant loan losses or rapid growth in loans or deposits, or some other event resulting in a depletion or deterioration of the Bank's capital account were to occur, the Company might be compelled by federal banking authorities to invest additional capital in the Bank necessary to return the capital account to a satisfactory level.
FRB regulations require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally require that reserves of 3.0% must be maintained against net transaction accounts of $42.8 million or less, plus 10% against
that portion of total transaction accounts in excess of $42.8 million. Up to $5.5 million of otherwise reservable balances (subject to adjustment by the FRB) are exempted from the reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the FRB, the effect of reserve requirements is to reduce interest-earning assets.
Insurance Premiums and Assessments The FDIC has authority to impose a special assessment on members of the Bank Insurance Fund ("BIF") to insure there will be sufficient assessment income for repayment of BIF obligations and for any other purpose which it deems necessary. The FDIC is authorized to set semi-annual assessment rates for BIF members at levels sufficient to increase the BIF's reserve ratio to a designated level of 1.25% of insured deposits. The BIF achieved this level in mid-1995. Congress is considering various proposals to merge the BIF with the Savings Association Insurance Fund or otherwise to require banks to contribute to the insurance funds for savings associations. Adoption of any of these proposals might increase the cost of deposit insurance for all banks, including the Bank.
Pursuant to FDICIA, the FDIC has developed a risk-based assessment system, under which the assessment rate for an insured depository institution will vary according to the level of risk incurred in its activities. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also to be assigned to one of the following "supervisory subgroups", subgroup A, B, or C. Subgroup A institutions are financially sound institutions with few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in a significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. The FDIC assigns each BIF member institution an annual FDIC assessment rate which, as of the date of this document, varies between 0.00% per annum with a $2,000 minimum (for well capitalized Subgroup A institutions) and 0.27% per annum (for undercapitalized Subgroup C institutions). The assessment rate may increase in the future. At December 31, 1998, the Bank's annual BIF FDIC assessment rate was 0.00%. At December 31, 2000 the Bank's annual BIF FICO rate was 0.02%.
In February 2000, the FDIC announced that it was refining the system by which it assesses the risks that are presented to the deposit insurance funds by certain financial institutions. The refinements are intended to identify institutions with atypical high-risk profiles from among those institutions in the best-rated premium category, and to determine whether there are unresolved supervisory concerns regarding the risk management practices of those institutions. High-risk profiles include characteristics such as rapid asset growth, (especially concentrated in risky, high yielding lending areas), significant concentrations in high-risk assets, and recent changes in business mix. The FDIC has noted that although such institutions may be well capitalized and record good earnings when the economy is strong, they often experience deteriorating financial conditions when economic conditions are less favorable. As a result, institutions with practices determined to be risky traits under the refined risk assessment system will be assessed higher insurance premiums. The Bank does not expect this change to have an adverse effect on it.
The FDIC has "prompt corrective action" authority to (1) request the appropriate regulatory agency to take any enforcement action against an institution, based upon an examination by the FDIC or the agency, (2) if no action is taken within 60 days and the FDIC determines the institution is in an unsafe and unsound condition or failure to take the action will result in continuance of unsafe or unsound practices, order the action against the institution, and (3) exercise this enforcement authority under "exigent circumstances" merely upon notification to the institution's appropriate regulatory agency. The FDIC has the same enforcement powers with respect to any institution and its subsidiaries as the appropriate agency has with respect to those entities.
Federal banking agencies are required to take corrective action with respect to depository institutions that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC.
Federal banking agencies have established capital measures (including both a leverage measure and a risk-based capital measure) and specified for each capital measure the levels at which depository institutions will be considered "well-capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". The appropriate federal banking agency, after notice and an opportunity for a hearing, may treat a well capitalized, adequately capitalized or undercapitalized depository institution as if it has a lower capital-based classification if it is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Thus, an adequately capitalized institution can be subjected to the restrictions on undercapitalized institutions (provided that a capital restoration plan cannot be required of the institution) described below and an undercapitalized institution can be subject to the restrictions applicable to significantly undercapitalized institutions described below. As of December 31, 2000, the Bank met the capital ratio requirements for a "well capitalized" bank.
The appropriate federal regulatory agency must require an insured depository institution that (i) is significantly undercapitalized or (ii) is undercapitalized and either fails to submit an acceptable capital restoration plan within the time period allowed by regulation or fails in any material respect to implement a capital restoration plan accepted by the appropriate federal banking agency to take one or more of the following actions: (i) sell enough shares, including voting shares to become adequately capitalized; (ii) merge with (or be sold to) another institution (or holding company), but only if grounds exist for appointing a conservator or receiver; (iii) restrict certain transactions with banking affiliates as if the "sister bank" exception to the requirements of Section 23A of the Federal Reserve Act did not exist; (iv) otherwise restrict transactions with bank or nonbank affiliates; (v) restrict interest rates that the institution pays on deposits to "prevailing rates" in the institution's "region"; (vi) restrict asset growth or reduce total assets; (vii) alter, reduce or terminate activities; (viii) hold a new election of directors; (ix) dismiss any director or senior executive officer who held office for more than 180 days before the institution became undercapitalized; provided that in requiring dismissal of a director or senior executive officer, the agency must comply with certain procedural requirements, including the opportunity for an appeal in which the director or officer will have the burden of proving his or her value to the institution; (x) employ "qualified" senior executive officers; (xi) cease accepting deposits from correspondent depository institutions; (xii) divest certain nondepository affiliates which pose a danger to the institution; (xiii) be divested by a parent holding company; and (xiv) take any other action which the agency determines would better carry out the purposes of the prompt corrective action provisions.
In addition to the foregoing sanctions, without the prior approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to any senior executive officer or increase the rate of compensation for such an officer without regulatory approval. Furthermore, in the case of an undercapitalized institution that has failed to submit or implement an acceptable capital restoration plan, the appropriate federal banking agency cannot approve any such bonuses.
Not later than 90 days after an institution becomes critically undercapitalized, the appropriate federal banking agency for the institution must appoint a receiver or, with the concurrence of the FDIC, a conservator, unless the agency, with the concurrence of the FDIC, determines that the purposes of the prompt corrective action provisions would be better served by another course of action. Any alternative determination must be "documented" and reassessed on a periodic basis. Notwithstanding the foregoing, a receiver must be appointed after 270 days unless the FDIC determines that the institution has positive net worth, is in compliance with a
capital plan, is profitable or has a sustainable upward trend in earnings and is reducing its ratio of non-performing loans to total loans and the head of the appropriate federal banking agency and the chairperson of the FDIC certify that the institution is viable and not expected to fail.
The FDIC is required, by regulation or order, to "restrict the activities" of such critically undercapitalized institutions. The restrictions must include prohibition on the institution's doing any of the following without prior FDIC approval: entering into material transactions not in the usual course of business; extending credit for highly leveraged transactions; engaging in any "covered transactions" (as defined in Section 23A of the Federal Reserve Act) with an affiliate, paying "excessive compensation or bonuses"; and paying interest on "new or renewed liabilities" that would increase the institution's average cost of funds to a level significantly exceeding prevailing rates in the market.
A bank cannot accept brokered deposits (which term is defined to include payment of an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank is defined to be well capitalized for purposes of this restriction if it maintains a Tier 1 leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of 6.0% and a total risk-based capital ratio of at least 10.0% and is not otherwise in a "troubled condition" as specified by its appropriate federal regulatory agency. A bank is defined to be adequately capitalized if it meets all of its minimum capital requirements. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. In addition, a bank that is "adequately capitalized" may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates. There are no such restrictions on a bank that is "well capitalized."
A Federal Reserve Bank may not make advances to an undercapitalized institution (including institutions with the lowest regulatory rating) for more than 60 days in any 120-day period without a viability certification by a federal banking agency or by the Chairman of the FRB (after an examination by the FRB). If an institution is deemed critically undercapitalized, an extension of Federal Reserve Bank credit cannot continue for five days without demand for payment unless the FRB is willing to accept responsibility for any resulting loss to the FDIC. As a practical matter, this provision is likely to mean that Federal Reserve Bank credit will not be extended beyond the limitations in this provision.
Capital Adequacy Guidelines The FRB has adopted risk-based capital requirements for member banks and bank holding companies. See "Management's Discussion and Analysis - Liquidity and Capital Resources".
Interstate Banking The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") authorized interstate banking and interstate branching, subject to certain state options.
Interstate acquisition of banks became permitted in all states in 1995; state law cannot vary this rule. However, states may continue to prohibit acquisition of banks that have been in existence less than five years and interstate chartering of new banks.
Interstate mergers of affiliated or unaffiliated banks became permitted June 1, 1997, unless a state adopted legislation before June 1, 1997 to "opt out" of interstate merger authority, provided any limitations do not discriminate against out-of-state banks. Individual states may enact legislation to permit interstate mergers earlier than that date.
Interstate acquisition of branches is permitted to a bank only if the law of the state where the branch is located expressly permits interstate acquisition of a branch without acquiring the entire bank.
Interstate de novo branching is permitted to a bank only if a state adopts legislation to "opt in" to interstate de novo branching authority.
Limitations on Concentrations. An interstate banking application may not be approved if the applicant and its depository institution affiliates would control more than 10% of insured deposits nationwide or more than 30% of insured deposits in the state in which the bank to be acquired is located. These limits do not apply to mergers solely between affiliates. States may waive the 30% cap on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market share of a depository institution and its affiliates are not affected.
Agency Authority. A bank subsidiary of a bank holding company is authorized to receive deposits, renew time deposits, close loans, service loans and receive payments on loans as an agent for a depository institution affiliate without being deemed a branch of the affiliate. A bank is not be permitted to engage, as an agent for an affiliate, in any activity as agent that it could not conduct as a principal, or to have an affiliate, as its agent, conduct any activity that it could not conduct directly, under federal or state law.
Host State and Home State Regulation. The Riegle-Neal Amendments Act of 1997 amended Federal law to provide that branches of state banks that operate in other states will be governed in most cases by the laws of the home state, rather than the laws of the host state. Exceptions are that a host state may apply its own laws of community reinvestment, consumer protection, fair lending and interstate branching. Host states cannot supplement or restrict powers granted by a bank's home state. The amendment will assure state chartered banks with interstate branches uniform treatment in most areas of their operation.
Community Reinvestment Act. Community Reinvestment Act ("CRA") evaluations are required for each state in which an interstate bank has a branch. Interstate banks are prohibited from using out-of-state branches "primarily for the purpose of deposit production". Federal banking agencies adopted regulations in 1997, to ensure that interstate branches are being operated with a view to the needs of the host communities.
Foreign Banks. Foreign banks are able to branch to the same extent as U.S. domestic banks. Interstate branches acquired by foreign banks are subject to the CRA to the extent the acquired branch was subject to CRA before the acquisition.
California Law. In September 1995, California enacted state legislation in accordance with the authority under the Riegle-Neal Act. State law permits banks headquartered outside California to acquire or merge with California banks that have been in existence for at least five years, and thereby establish one or more California branch offices. An out-of-state bank may not enter California by acquiring one or more branches of a California bank or other operations constituting less than the whole bank. The law authorizes waiver of the 30% limit on statewide market share for deposits as permitted by the Riegle-Neal Act. This law also authorizes California state-licensed banks to conduct certain banking activities (including receipt of deposits and loan payments and conducting loan closings) on an agency basis on behalf of out-of-state banks and to have out-of-state banks conduct similar agency activities on their behalf.
Self-Test Privilege Under ECOA In January 1998, the FRB revised its regulations under the Equal Credit Opportunity Act ("ECOA") to create legal privilege for information developed by creditors as a result of "self-tests" they voluntarily conduct to determine the level of their compliance with ECOA. The privilege protects against use of such information by a
government agency for examination purposes or by private litigants in any proceeding alleging a violation of ECOA. The privilege applies only if the institution takes appropriate corrective action to address possible violations that are discovered in the test.
Exposure to and Management of Risk Federal banking agencies have announced proposals to examine bank holding companies and national banks with respect to their exposure to and management of different categories of risk. Categories of risk identified by the FRB include legal risk, operational risk, market risk, credit risk, liquidity risk and reputation risk. If adopted, this approach would cause bank regulators to focus on risk management procedures, rather than simply examining every asset and transaction. This approach, if adopted, would supplement rather than replace existing rating systems based on evaluation of an institution's capital, assets, management, earnings and liquidity.
Proposed Legislation From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory agencies. Typically, the intent of such legislation is to strengthen the banking industry, even if it may on occasion prove to be a burden on management's plans. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Bank.
In May 1997 the Department of Treasury recommended in a report to Congress that the separate charters for thrifts and banks be abolished. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter, conform holding company regulation, and abolish the Office of Thrift Supervision ("OTS") have been introduced from time to time in Congress.
There can be no assurance as to whether the legislation described above or any other such legislation will be enacted, what the provisions of any such legislation may be, or the extent to which the legislation would restrict, disrupt or otherwise have a material effect on the Bank's operations.
Impact of Economic Conditions and Monetary Policies The earnings and growth of the Company are and will be affected by general economic conditions, both domestic and international, and by the monetary and fiscal policies of the United States Government and its agencies, particularly the FRB. One function of the FRB is to regulate the national supply of bank credit in order to mitigate recessionary and inflationary pressures. Among the instruments of monetary policy used to implement those objectives are open market transactions in United States Government securities, changes in the discount rate on borrowings and changes in reserve requirements held by depository institutions. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. However, the effect, if any, of such policies on the future business and earnings of the Company cannot be accurately predicted.
Recent Accounting Pronouncements In June 1999, the Financial Accounting Standards Board (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 Financial Instruments and Hedging Activities" for one year. Statement No. 133 is now effective for fiscal quarters beginning after June 15, 2000. This statement requires an
entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For instruments existing as of 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 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.
Year 2000 The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Time sensitive programs could interpret a date using "00" as 1900 rather than the Year 2000 resulting in major miscalculations or system failure.
The Company did not experience any failures of its computerized systems resulting from Year 2000 issues, nor does it have any information that indicates any of its customers or service providers were negatively impacted by Year 2000 issues.
ITEM 2
ITEM 2 - PROPERTIES
The Bank's corporate headquarters and headquarter banking office are located in a multi-story office building at 2101 Webster Street, Oakland, California. The Bank occupies approximately 12,500 rentable square feet of space on the 14th floor under a lease with a term of ten years, commencing December 9, 1996 and ending on December 9, 2006. The headquarter banking office is located on the ground floor of that building. The lease with respect to this space also provides for a term of ten years ending December 9, 2006. The Bank occupies its other offices under leases expiring at various dates through 2006. Rental expense for all leases of premises was approximately $1.4 million for the year ended December 31, 2000. Rental expense for leases of premises for 2001 is estimated to be approximately $1.5 million.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
From time to time the Company is party to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel to the Company as to the current status of various claims and proceedings to which the Company is a party, management is of the opinion that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matters were submitted to a vote of security holders of the Company through solicitation of proxies or otherwise.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq National Market quotation service under the symbol "CIVC". The following table sets forth the high and low bid quotations for the Company's Common Stock
based on information obtained from Nasdaq. Such over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
As of March 2, 2001, the shares of the Company were held by approximately 1,500 shareholders.
On March 15, 2000 the Company declared a 5% stock dividend to shareholders of record on March 29, 2000, payable on April 12, 2000. On April 21, 1999 the Company declared a 5% stock dividend to shareholders of record on April 30, 1999, payable on May 14, 1999. On October 15, 1997, the Company declared a 5% stock dividend to shareholders of record on October 29,1997, payable on November 12, 1997. Fractional shares were paid in cash. Sales prices above have been adjusted to reflect this stock dividend. There were no stock dividends declared in 1998.
As a bank holding company without significant assets other than its equity interest in the Bank, the Company's ability to pay cash dividends to its shareholders primarily depends upon dividends and management fees it receives from the Bank. Such dividends are subject to certain limitations. See "Regulation and Supervision-The Bank".
Shareholders' Rights Plan On October 16, 1996, the Board of Directors of the Company declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value (the "Preferred Shares"), of the Company at a price of $35.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment.
Initially, the Rights will be attached to all certificates representing common shares then outstanding or later issued. The Rights will separate from the common shares and a Distribution Date will occur upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 10% or more of the outstanding common shares (other than a person or such a group that beneficially owned 10% or more of the outstanding common shares at the time the plan was adopted or who obtains the prior written approval of the Board of Directors) (an "Acquiring Person"), or (ii) 10 business days (or later as determined by the Board of Directors) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 10% or more of such outstanding common shares (unless the Company's Board of Directors has approved the offer).
Until the Distribution Date, the Rights will be transferred with and only with the common shares. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the common shares. The Rights are not exercisable until the Distribution Date. The Rights will expire on October 31, 2006 (the "Final Expiration Date"), unless the Rights are earlier redeemed or exchanged by the Company, in each case as described below. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time under certain circumstances to prevent dilution. Because of the nature of the Preferred Shares' dividend, liquidation and voting rights, the value of the one one-hundredth interest in a Preferred Share purchasable upon exercise of each Right should approximate the value of one common share.
Following a Distribution Date, each holder of a Right, other than Rights beneficially owned by an Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of common shares (or, in the event that there are insufficient authorized common shares, substitute consideration such as cash, property, or other securities of the Company, such as Preferred Stock) having a market value of two times the exercise price of the Right. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, each holder of a Right will have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right.
At any time the acquisition by a person or group of affiliated or associated persons of beneficial ownership 10% or more of the outstanding common shares and prior to the acquisition by such person or group of 50% or more of the outstanding common shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one common share, or one one-hundredth of a Preferred Share (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).
At any time before a person becomes an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (the "Redemption Price"). After the redemption period has expired, the Company's rights of redemption may be reinstated if, prior to completion of certain recapitalizations, mergers or other business combinations, an Acquiring Person reduces its beneficial ownership to less than 10% of the outstanding common shares in a transaction or series of transactions not involving the Company. The terms of Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that from and after such time as any person becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data of the Company for each year of the five-year period ended December 31, 2000 and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and with the consolidated financial statements presented herein.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains certain forward-looking statements that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future results and performance of the Company. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "expects", "anticipates", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward looking statements.
Readers of the Company's Form 10-K should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report. These statements are representative only on the date hereof, and the Company undertakes no obligation to update any forward looking statements made. The possible events or factors include the following: the Company's loan growth is dependent on economic
conditions, as well as various discretionary factors, such as decisions to sell or purchase certain loans. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products, and geographic locations, the mix of the loan portfolio and management's judgements regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital needs of the Company and the mix of funding sources. Decisions to purchase, hold or sell securities are also dependent on liquidity requirements and market volatility, as well as on- and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, and yields or rates of assets and liabilities.
The Company is also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans and deposits. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the California Department of Financial Institutions, whose policies and regulations could affect the Company's results.
Other factors which could cause actual results to differ from the forward- looking statements include the following: competition with other local and regional banks, savings and loan associations, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, mutual funds and insurance companies, as well as other entities which offer financial services; interest rate, market and monetary fluctuations, inflation, market volatility, general economic conditions and economic conditions in the geographic region and industries in which the Company operates, introduction of new banking-related products, services and enhancements, fee pricing strategies, mergers and acquisitions, and management's ability to manage these and other risks.
Overview The Company reported net income of $6.76 million or $1.33 per diluted share for the year ended December 31, 2000, compared to $5.85 million or $1.15 per diluted share for the year ended December 31, 1999. The increase in net income is attributed to the growth in net interest income which was partially offset by the growth in noninterest expenses.
The Company reported net income of $5.85 million or $1.15 per diluted share for the year ended December 31, 1999, compared to net income of $5.51 million or $1.04 per diluted share for the year ended December 31, 1998. The increase in net income resulted primarily from an increase in net interest income.
Results of Operations Net Interest Income. Net interest income is the Company's primary source of income and represents the excess of interest income and loan fees earned by the Company on its earning assets over the interest expense paid on its interest-bearing liabilities and other borrowed money. Net interest income as a percentage of average earning assets is referred to as net interest margin.
Net interest income for the year 2000 totaled $29.4 million compared to $21.9 million for 1999, an increase of $7.5 million or 34.3%. The increase in net interest income was due to the growth in interest income which was partially offset by the increase in interest expense. The growth in net interest income was due to increases in both the volume and the rate of earning assets. Average earning assets increased by $71.7 million or 19.5%, to $438.7 million for 2000 over earning assets of $260.6 million for 1999. The merger of East County Bank on February 29, 2000 added approximately $50 million of average earning assets for the year 2000. Further, there was a more favorable mix of earning assets in the year 2000 as total loans represented 80.8% of earning assets
relative to 71.0% for the year 1999. Loans have a higher yield relative to other earning assets and therefore a higher contribution to net interest income. The weighted average yield on average earning assets increased to 9.47% for the year 2000 from 8.33% for the prior year. The increase in the yield on earning assets is attributed to the aforementioned shift in the mix of earning assets and a higher interest rate environment during the year 2000. The Bank's average reference rate increased to 9.23% in the year 2000 from 8.00% in 1999.
Interest expense increased 40.9% or $3.4 million to $11.6 million for the year 2000 from $8.2 million for the year 1999. Average interest bearing liabilities increased $55 million or 22.4% to $299.9 million for the year 2000 compared to $244.9 million for the year 1999. The merger with East County Bank on February 29, 2000 added approximately $44 million of average interest bearing liabilities to the total for the year 2000. The weighted average rate paid on interest bearing liabilities increased 50 basis points to 3.86% for the year 2000 from 3.36% for the year 1999. The increase in the average rate paid was due to the higher interest rate environment.
Net interest income for 1999 totaled $21.9 million compared to $20.0 million for 1998, an increase of $1.9 million or 9.4%. The increase in net interest income can be attributed to an increase in the volume and an improvement in the mix of earning assets, the benefits of which were partially offset by a reduction in the weighted average yield earned on those earning assets. Average earning assets increased $30.6 million or 9.1% to $367.0 million in 1999 compared to $336.4 million in 1998. Further, the mix of earning assets improved by virtue of the shift in balances from Federal fund investments to higher yielding loans. Average Federal funds sold declined $26.7 million to represent 7.6% of total average earning assets in 1999 relative to 16.2% for the prior year. Conversely, average loans increased $38.8 million to represent 71% of average earning assets in 1999 from 66% for the prior year. Loans have the highest yields while Federal funds investments have the lowest yields. However, the average yield earned on earning assets declined 34 basis points, and moreover, the weighted average yield on loans declined 74 basis points in 1999 relative to 1998. Management attributed the decline to a lower interest rate environment and the Company's efforts to transact loans with lower risk. Terms, which would reduce the level of risk on a loan, include stronger sources of repayment, higher levels of collateralization and other terms that are considered more favorable to the Bank. Higher quality loans generally have a lower risk premium over the Bank's reference rate. The average reference rate declined to 8.00% in 1999 as compared to 8.36% in 1998 which also reduced the yield on loans as the majority of the Bank's loans have floating interest rates tied to the Bank's reference rate.
Total interest expense decreased $.6 million to $8.2 million in 1999 from $8.8 million in 1998 due to a decline in the average rate paid on interest bearing liabilities which was partially offset by an increase in the volume of interest bearing liabilities. The average rate paid on interest bearing deposits declined 50 basis points to 3.36% from 3.86% due to a lower interest rate environment. Average interest bearing liabilities increased by $17.6 million, or 7.7%.
The net interest margin increased 74 basis points in the year 2000 to 6.83% compared to 6.09% for the year 1999. The weighted average yield on earning assets increased 114 basis points while the weighted average yield on interest bearing liabilities increased 50 basis points. The Bank's average reference rate applied to loans increased 123 basis points in the year 2000 relative the prior year and as most of the Bank's loans have floating rate terms, they reprice as changes in the reference rate occur. Interest rates on deposits however tend to reprice slower and to a lessor amount relative to loan rates.
The net interest margin increased 2 basis points to 6.09% for 1999 from 6.07% for 1998. The decline in the weighted average yield on earning assets of 34 basis points was offset by a decline of 50 basis points on the average rate paid on interest bearing liabilities due to changes in the mix.
The following table presents an analysis of the components of net interest income for 2000, 1999 and 1998.
- -------------------------------------------------------------------------------- (1) Tax-exempt interest income on municipal securities is computed using a Federal income tax rate of 34%. Interest on municipal securities was $1,015,000, $843,000, and $682,000 for 2000, 1999, and 1998, respectively. (2) Non- performing loans have been included in the average loan balances. Interest income is included on non-accrual loans only to the extent cash payments have been received. (3) Interest income includes amortized loan fees on commercial loans of $425,000, $493,000, and $514,000 for 2000, 1999 and 1998, respectively; fees on real estate loans of $452,000, $343,000, and $348,000 for 2000, 1999 and 1998, respectively; and fees on installment and other loans of $20,000, $16,000, and $18,000 for 2000, 1999 and 1998, respectively. - --------------------------------------------------------------------------------
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 years ended December 31, 2000, 1999 and 1998.
- -------------------------------------------------------------------------------- (1) Changes not solely attributed to rate or volume have been allocated to volume. (2) Loan fees are reflected in rate variances. - --------------------------------------------------------------------------------
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 loss in the year 2000 was $825,000 compared to $315,000 in 1999 and $150,000 in 1998. The provision was increased in 2000 and 1999 due to the growth in average loans outstanding. See "Allowance for Loan Losses".
Non-Interest Income. Non-interest income for 2000 was $2.0 million compared to $1.5 million and $1.8 million for 1999 and 1998 respectively. Customer service fees were $1,530,000 for the year 2000 compared to
$971,000 for 1999 and $764,000 for 1998. The increase in deposit service fees in the year 2000 is attributed to the merger with East County Bank with a higher proportion of retail customer depositors which generally pay higher service fees per account. The increase in deposit service fees in 1999 is attributed to an increase in the number of deposit accounts. Other non-interest income for 2000 was $456,000 compared to $156,000 and $103,000 for 1999 and 1998, respectively. In the year 2000, the Company added two sources of non-interest income, SBA servicing fees of $132,000 and earnings on the cash surrender value of bank owned life insurance with income of $136,000. In 1999 the Company realized gains on the disposal of stock warrants of $333,000. Non-recurring income in 1998 included gains on the disposal of foreclosed assets of $552,000 and gains on the disposal of other assets held for sale of $363,000 during the third quarter of 1998.
Non-Interest Expense. Non-interest expense for 2000 increased $6.0 million to $19.7 million from $13.7 million in 1999. The increase in 2000 non-interest expenses is primarily related to the merger with East County Bank on February 29, 2000. Salaries and employee benefits in the year 2000 increased $3.8 million or 45.7% to $12.1 million from $8.3 million for 1999. There were 158 FTE employees at December 31, 2000 relative to 118 at December 31, 1999. The increases in occupancy and equipment are related to the three East County banking offices added to the year 2000 operations and $546,000 of East County Bank goodwill was amortized in the year 2000. Included in consulting fees were programming expenses of approximately $220,000 generated in the data processing integration of East County Bank's computer data.
Non-interest expense for 1999 increased $1.2 million or 9.2% to $13.7 million from $12.5 million in 1998. Salaries and employee benefits in 1999 increased $780,000 or 10.3% from 1998 due to increases in staffing levels and enhanced employee benefits. Full time equivalent employees were 118 on December 31, 1999 as compared to 111 on December 31, 1998. Equipment expenses increased $178,000 or 21% for 1999 and included incremental Y2K remediation expenses.
The following table summarizes the significant components of non-interest expense for 2000, 1999, and 1998.
Provision for Income Taxes - The provision for income taxes in 2000 was $4.17 million compared to $3.62 million in 1999 and $3.65 million in 1998. These provisions represent effective tax rates of 38.1%, 38.2%, and 39.8%, respectively. The differences in the effective rates reflect changes in the amounts and impact of items having favorable tax treatment such as tax exempt municipal securities.
Financial Condition Loans. The Bank's primary lending focus is commercial loans to small businesses and professionals. The Bank's commercial loans are generally made on a short-term basis and are typically secured by accounts receivable, inventory or real estate. The strong regional economy stimulated the demand for commercial loans, however the competition for quality loans has been strong. Commercial loans totaled $235.5 million at December 31, 2000, an increase of $62.4 million or 36.0% from December 31, 1999. Approximately $24 million of commercial loans were acquired in the merger with East County Bank on February 29, 2000.
Other real estate loans, consisting of loans for land development and "mini-perm" loans, totaled $115.7 million at December 31, 2000 compared to $85.5 million at December 31, 1999. Approximately $17 million of real estate loans were acquired in the acquisition of East County Bank on February 29, 2000. Mini-perm loans are available for completed commercial and retail projects that are primarily owner occupied and are generally granted based on the rental or lease income which is the primary source of repayment to service the loan. Mini-perm loans typically have a term of three to five years and provide for principal and interest payments based on a 15 to 25 year amortization schedule with a balloon payment due at the end of the term. The major risks associated with the origination of mini-perm loans are the ability of the tenant or tenants to maintain the rental or lease payments over the life of the loan and the ability of the borrower to obtain other financing for the balloon payment at maturity.
Real estate construction loans as a percentage of total loans outstanding were 1.2% at December 31, 2000 compared to 3.5% at December 31, 1999. Risks associated with real estate construction lending are generally considered to be higher than risks associated with other forms of lending and accordingly, the Company continues to fund real estate construction commitments on a limited basis with stringent underwriting criteria.
Installment loans include loans to individuals and business customers, home equity loans, automobile loans and other personal loans.
The following table summarizes the year end loan balances for the dates shown.
The following table shows the amount of total loans outstanding as of December 31, 2000, both by category of loan, as well as fixed versus floating interest rate which, based upon remaining scheduled repayments of principal, are due within the periods indicated.
The amounts presented in the table represent the contractual maturities of the related loans and do not consider rollovers (renewals) of loans. Demand loans, loans with no stated schedule of repayments and no stated maturity, and overdrafts are reported as maturing within one year. The Company does not have a policy to automatically renew loans, rather it considers the request for a renewal in substantially the same manner in which it considers the request for an initial extension of credit.
Non-Performing Assets The Company's policy is to recognize interest income on an accrual basis unless the loan becomes impaired. A loan is considered to be impaired when it becomes probable that the Company will not recognize all amounts due from the borrower 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 received are applied against principal until the principal is fully recovered with subsequent collections recognized as interest income as they are received.
The following table provides information with respect to all non-performing assets.
At December 31, 2000, the recorded investment in loans considered to be impaired was $1,223,000, all of which were on a non-accrual basis. Included in this amount were $321,000 of impaired loans with an associated allowance of $61,000 and $902,000 of impaired loans with supporting collateral with fair values which approximate the amount of the loans and accordingly do not have an associated allowance for loan loss. For the year ended December 31, 2000, the average recorded investment in impaired loans was $920,000 and no interest was recognized on impaired loans. If interest income on those loans had been recognized, such income would have approximated $103,000.
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," or "loss" categories. Substandard loans are characterized as having one or more deficiencies and 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 increase the probability of a principal loss. A loan classified as a loss is considered uncollectable and is discharged against the allowance.
The following table sets forth the classified assets as of the dates indicated.
Classified loans at December 31, 2000 consist primarily of five credits totaling $5.0 million. These loans are supported by assets and personal or other third party guarantees and the bank is working to remedy the loans respective credit weaknesses. Management has reviewed the reserves specific for these loans and believes they are adequate as of December 31, 2000.
Foreclosed Assets. There were no foreclosed assets at December 31, 2000 or 1999. The Company acquired one foreclosed asset in the merger with East County Bank on February 29, 2000 and disposed of that property in the current fiscal year.
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 a provision charged against earnings and reduced by net loan charge-offs. Loans are charged off when they are judged to be uncollectable. Recoveries of previously charged off loans are recorded only when cash is received.
The policy of the Company is to review loans in the portfolio to identify potential problem loans 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. In general, management believes a higher reserve ratio is warranted relative to other institutions of a similar size because the Bank makes more business and commercial loans which are generally larger than the retail loans originated by other institutions of a similar size and a potential problem credit would have more impact on the allowance for loan loss.
Although management believes that the allowance for loan losses is adequate for both potential losses on identified credits and estimated losses inherent in the portfolio, future provisions will be subject to continuing evaluations of the portfolio. If the economy declines or the quality of the portfolio deteriorates, additional provisions may be required.
The following table summarizes the changes in the allowance for loan losses for the periods shown.
The table below sets forth the allocations of the allowance for loan loss as of the dates indicated by loan category and the percentage of loans in each loan category relative to total loans.
Investment Portfolio. The Bank invests excess funds in a variety of instruments in order to manage liquidity and enhance profitability. A portion of available funds is invested in liquid investments such as overnight federal funds with the balance invested in investment securities such as U.S. Treasury and Agency securities, as well as tax-exempt municipal bonds. The Company has increased its investment in municipal securities to benefit from the higher after-tax yields on bank qualified municipal securities.
The composition of the Company's portfolio of securities available for sale, securities held to maturity and other securities are shown in the tables below at carrying value.
The following tables summarize the maturities and yields of the Company's investment securities at December 31, 2000. Yields have been computed by dividing annual interest income, adjusted for amortization of premium and accretion of discount, by the average carrying value of the securities. The weighted average yields on the tax-exempt securities have not been adjusted to a fully tax equivalent basis.
As of December 31, 2000 no securities of a single issuer in the investment portfolio exceeded ten percent of the Company's shareholders' equity.
Deposits. The table below presents information regarding trends in the Bank's average deposits for 2000, 1999, and 1998.
Average deposits increased $75.3 million or 22.2% in 2000 to $413.8 million from $338.5 million in 1999. The increase in 1999 was $25.2 million or 8.0% from 1998 of $313.4 million. The increase in deposits in 2000 was primarily attributed to the merger of East County Bank on February 29, 2000. The increase in deposits in 1999 was attributed to an increase in average deposits maintained by various loan customers.
Average time certificates of deposit over $100,000 constituted 19.1%, 21.6%, and 31.9% of total average deposits for 2000, 1999, and 1998, respectively. Average public time deposits constituted .9%, 1.0%, and 1.0% of average total deposits for 2000, 1999, and 1998, respectively. All public time certificates of deposit were from local government agencies located in Alameda and Contra Costa counties.
At December 31, 2000, certificates of deposit over $100,000 totaling $76.2 million or 17.8% of total deposits were scheduled to mature within a year. At December 31, 1999, certificates of deposit over $100,000 totaling $72.1 million or 21.5% of total deposits were scheduled to mature within a year. 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. Management believes that the presumed volatility of such deposits presents acceptable risk and payment of such certificates of deposit would not have a material impact on the liquidity position of the Company. The Company has no brokered deposits and does not intend to solicit such deposits.
Time certificates of deposit over $100,000 or more at December 31, 2000 had the following schedule of maturities.
Liquidity and Capital Resources
Liquidity. Liquidity management refers to the Bank's ability to acquire funds to meet loan demand, fund deposit withdrawals and service other liabilities as they come due. To augment liquidity, the Bank has informal Federal funds borrowing arrangements with correspondent banks totaling $40.0 million, maintains a credit arrangement with the Federal Reserve Bank of San Francisco for open window borrowing and is a member of the Federal Home Loan Bank of San Francisco and through such membership has the ability to pledge qualifying collateral for short term (up to six months) and long term (up to five years) borrowing. At December 31, 2000, the Bank had advanced $6.1 million in Federal funds. Additionally, at December 31, 2000, unpledged U.S. Government Securities that
were available to secure additional borrowing in the form of reverse repurchase agreements totaled approximately $42.5 million. At December 31, 2000 and 1999, the Bank had no outstanding borrowings under such arrangements.
The liquidity position of the Company as of December 31, 2000 increased from the prior year as cash and cash equivalents provided by operating and financing activities exceeded those used by investing activities. The Consolidated Statement of Cash Flows indicates that cash and cash equivalents provided by operating and financing activities were $6.3 million and $93.2 million, respectively.
The liquidity position of the Company may be expressed as the ratio of (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 December 31, 2000, the Company had a liquidity ratio of 19.0% compared to 23.6% at December 31, 1999. The decrease in the liquidity ratio at December 31, 2000 reflects the decline in the volume of Federal funds sales to zero on December 31, 2000 as compared to $7.5 million at December 31, 1999.
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 client 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 restrictions.
Capital Resources. Shareholders' equity was $53.8 million at December 31, 2000, an increase of $7.6 million or 16.4% from $46.2 million at December 31, 1999. The principal increase in capital was the $6.76 million of net income for 2000.
The Company and the Bank are subject to capital adequacy guidelines issued by the Federal Reserve Board of Governors which require a minimum risk-based capital ratio of 8%. At least 4% must be in the form of "Tier 1" capital which consists of common equity, non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries. "Tier 2" capital consists of cumulative and limited-life preferred stock, mandatory convertible securities, subordinated debt and, subject to certain limitations, the allowance for loan losses. General loan loss reserves included in Tier 2 capital cannot exceed 1.25% of risk-weighted assets.
At December 31, 2000, the Company's total risk-based capital ratio was 10.34%. The following table sets forth the Company's regulatory capital position as of December 31, 2000.
The leverage ratio guidelines effectively require maintenance of a minimum ratio of 4% Tier 1 capital to total assets for the most highly-rated bank holding company organizations. The leverage guidelines operate in tandem with and are in addition to the risk-based ratio requirements. At December 31, 2000, the Company's leverage ratio was 8.59%. The Company has not been advised by any regulatory agency that it is deficient with respect to its capital ratios. Management is unaware of any current recommendations by regulatory authorities which, if implemented, would have a material adverse impact on future operating results, liquidity or capital resources.
Quarterly Data
The following table sets forth unaudited data regarding the Company's operations for each quarter of 2000 and 1999. This information, in the opinion of management, includes all adjustments necessary to present fairly the Company's results of operations for such periods, consisting only of normal recurring adjustments for the periods indicated. The operating results for any quarter are not necessarily indicative of results for any future period.
Effects of Inflation
Assets and liabilities of financial institutions are principally monetary in nature. Accordingly, interest rates, which generally move with the rate of inflation, have a potentially significant effect on the Company's net interest income. The Company attempts to limit inflation's impact on rates and net income margins through continuing asset/liability management programs.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial performance is impacted by market risk, among other factors. Market Risk is the risk to the financial condition or earnings of an institution resulting from adverse movements in interest rates, foreign exchange rates, equity prices or commodity prices. Interest rate risk is the most significant market risk
affecting the Company as foreign currency exchange rates, equity prices and commodity price risk do not arise in the normal course of the Company's business activities.
The Company's exposure to interest rate risk is reviewed monthly by the Risk Management Committee composed of members of management and the Board of Directors. Management realizes that certain risks are inherent in the financial environment and the objective of the risk management process is to identify, measure, and where possible minimize interest rate risk. Financial tools used in this process include the standard gap report and an interest rate shock simulation model. The condensed gap report as of December 31, 2000 summarizing the Company's interest rate sensitivity follows.
The gap report indicates the Company is asset sensitive having a higher volume of assets reprice relative to liabilities in the immediate time-band due to the high percentage of floating rate loans. The cumulative gap is largest in the immediately repriceable time band and decreases over time through one year. Such a scenario would suggest an immediate negative impact on the Company's net interest margin from decreases in interest rates the magnitude of which declines over time. Using the one-year cumulative gap, the projected impact on net interest margin of a 1% rate shock is $151,660 or .05% of the net interest margin reported for 2000 which is considered an acceptable level of risk. However, the computation of forecasted effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of market interest rates, loan prepayments or refinancings, deposit decay and other factors and therefore should not be relied upon as a forecast of future results. Further, such computations do not include the impact of any actions that might be undertaken by the Company in response to changes in interest rates.
Derivative financial instruments such as futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics may also be used to manage elements of interest rate risk. The Company does not engage in trading activities or use derivative instruments to control interest rate risk. However, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers which include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Company. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Financial Statements and Schedules included on page 33 of this report.
PART III
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the Company is incorporated by reference from the section entitled "Election of Directors" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from the section entitled "Election of Directors - Executive Compensation" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the section entitled "Election of Directors - Security Ownership of Management" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is incorporated by reference from the section entitled "Election of Directors - Transactions with Directors and Officers" of the Company's definitive Proxy Statement to be filed within 120 days after the end of the last fiscal year.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statement Schedule
The following is an index of the financial statements filed in this report:
Consolidated Financial Statements
Page ----
Independent Auditors' Report - KPMG LLP................................... 37 Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999................................................. 38 Consolidated Statements of Income for the years ended December 31, 2000, December 31, 1999 and December 31, 1998............ 39 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, December 31, 1999 and December 31, 1998............ 40 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, December 31, 1999 and December 31, 1998..................................................... 41 Consolidated Statements of Cash Flow for the years ended December 31, 2000, December 31, 1999 and December 31, 1998............ 42 Notes to Consolidated Financial Statements................................ 43
Information required in the schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission either is not applicable or is shown in the Consolidated Financial Statements or Notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended December 31, 2000.
(c) Exhibits
The exhibits listed below are filed or incorporated by reference, as part of this report pursuant to Item 601 of Regulation S-K.
* Management contract, compensation plan or arrangement
- --------------------------------------------------------------------------------
(1) Incorporated by reference from the exhibits included with the Form S-1 Registration Statement (Registration Number 2-91493) previously filed with the Commission.
(2) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 31, 1985, previously filed with the Commission.
(3) Incorporated by reference from the exhibits included with the Company's Form S-8 Registration Statement (Registration Number 33-15783) filed with the Commission on July 13, 1988.
(4) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 31, 1986, previously filed with the Commission.
(5) Incorporated by reference from the exhibits included with the Company's S-2 Registration Statement (Registration Number 33-31355) filed with the Commission on October 3, 1989.
(6) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 30, 1989, previously filed with the Commission.
(7) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 31, 1990, previously filed with the Commission.
(8) Incorporated by reference from the exhibits included with the Annual Report on Form 10-K for the year ended December 31, 1992, previously filed with the Commission.
(9) Incorporated by reference from the exhibits included with the Form S-8 Registration Statement (Registration Number 33- 82460) previously filed with the Commission.
(10) Incorporated by reference from the exhibits included with the Form 8-K Current Report dated September 30, 1994.
(11) Incorporated by reference from the exhibits included with the Form 8-K Current Report dated April 28, 1994.
(12) Incorporated by reference from the exhibits included with the Form S-8 Registration Statement (Registration Number 33- 94566) previously filed with the commission.
(13) Incorporated by reference from the exhibits included with the Form S-8 Registration Statement (Registration Number 33- 65309) previously filed with the commission.
(14) Incorporated by reference from the exhibits included with the Form 8-A Rights Agreement (Registration Number 0-13287).
(15) Incorporated by reference from the exhibits included with the quarterly report on Form 10-Q for the quarter ended March 31, 2000 previously filed with the commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CIVIC BANCORP
By:/s/ Herbert C. Foster ------------------------------------- Herbert C. Foster President and Chief Executive Officer
Date: March 15, 2001 --------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Herbert C. Foster /s/ Gerald J. Brown - --------------------------- -------------------------------- Herbert C. Foster Gerald J. Brown President Chief Financial Officer and Chief Executive Officer and Principal Accounting Officer Director
/s/ C. Donald Carr /s/ David L. Cutter - --------------------------- -------------------------------- C. Donald Carr, Director David L. Cutter, Director
/s/ John W. Glenn /s/ John L Lindstedt - --------------------------- -------------------------------- John W. Glenn, Director John L. Lindstedt, Director
/s/ Paul C. Kepler /s/ James C. Johnson - --------------------------- -------------------------------- Paul C. Kepler, Director James C. Johnson, Director
/s/ Edward G. Mein /s/ Dale D. Reed - ---------------------------- -------------------------------- Edward G. Mein, Director Dale D. Reed, Director
/s/ Edward G. Roach /s/ Barclay Simpson - --------------------------- -------------------------------- Edward G. Roach, Director Barclay Simpson, Director
/s/ Gordon Gravelle /s/ Craig Andersen - --------------------------- -------------------------------- Gordon Gravelle, Director Craig Andersen, Director
/s/ Wayne Doiguchi -------------------------------- Date: March 15, 2001 Wayne Doiguchi, Director ---------------------
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CIVIC BANCORP AND SUBSIDIARY ----------------------------
Consolidated Financial Statements for the Three Years in the Period Ended December 31, 2000, with Independent Auditors' Report
- --------------------------------------------------------------------------------
CIVIC BANCORP AND SUBSIDIARY ----------------------------
-----------------
Page ----
Independent Auditors' Report 1
Consolidated Financial Statements: Balance Sheets as of December 31, 2000 and 1999 2 Statements of Income for the years ended December 31, 2000, 1999 and 1998 3 Statements of Comprehensive Income for the years ended December 31, 2000, 1999 and 1998 4 Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 5 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 6 Notes to Consolidated Financial Statements 7
INDEPENDENT AUDITORS' REPORT - ----------------------------
The Board of Directors Civic BanCorp:
We have audited the accompanying consolidated balance sheets of Civic BanCorp and subsidiary (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Civic BanCorp and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
San Francisco, California January 17, 2001
CIVIC BANCORP AND SUBSIDIARY - ----------------------------
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 (In Thousands Except Shares) - ----------------------------
See notes to consolidated financial statements.
CIVIC BANCORP AND SUBSIDIARY - ----------------------------
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (In Thousands Except Shares and Per Share Amounts) - --------------------------------------------------
See notes to consolidated financial statements.
CIVIC BANCORP AND SUBSIDIARY - ---------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (In thousands) - --------------
See notes to consolidated financial statements - --------------------------------------------------------------------------------
CIVIC BANCORP AND SUBSIDIARY - ----------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (In Thousands Except Shares) - --------------------------------------------------------------------------------
See notes to consolidated financial statements
CIVIC BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (In Thousands)
See notes to consolidated financial statements.
CIVIC BANCORP AND SUBSIDIARY - ----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Civic BanCorp (BanCorp) is a registered bank holding company headquartered in Oakland, California. BanCorp's principal line of business is serving as a holding company for CivicBank of Commerce (Bank), a commercial bank. BanCorp is tailored to providing personalized services to independent businesses and professional firms in Alameda, San Francisco, Santa Clara and Contra Costa counties.
The consolidated financial statements of BanCorp and Bank (collectively the Company) are prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.
Business Combination - On February 29, 2000, Civic BanCorp acquired -------------------- East County Bank for approximately $14.6 million in cash. Unaudited total assets of East County Bank were approximately $79 million. The transaction was treated as a purchase for accounting purposes with the resulting goodwill amortized on a straight-line basis over 15 years. The results of operations of the acquired enterprise from March 1, 2000 through December 31, 2000 are included in the consolidated 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 on January 1, 1999, after giving 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.
Pro-forma results of operations: (dollars in thousands except per share) Unaudited Year Ended December 31, ------------------------- 2000 1999 --------- --------- Net Interest Income $ 30,198 $ 26,320 Net Income $ 6,804 $ 6,345 Dilued Earnings per Share $ 1.34 $ 1.25
Principles Of Consolidation - The consolidated financial statements --------------------------- include the accounts of BanCorp and Bank. All material intercompany transactions and accounts have been eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents include cash on ------------------------- hand, amounts due from banks and federal funds sold with original maturities less than 90 days.
Investment Securities - Securities available for sale are held for indefinite - --------------------- periods of time. Management intends to use these securities as part of its asset/liability management, and may sell these securities in response to changes in interest rates and other factors. These securities are carried at market value, with unrealized gains and losses, after applicable income taxes, recorded as a separate component of shareholders' equity. Gains on the sale of securities available for sale, determined on the specific cost identification basis, are recorded in other income at the time of sale. Specific cost is determined by using historical cost adjusted for any previously recorded unrealized losses.
Held to maturity securities are those securities which management has the ability and intent to hold to maturity. These securities are stated at cost, adjusted for amortization of premiums to call date and accretions of discount to maturity using methods approximating the interest method.
Other securities include stock in the Federal Reserve Bank, Federal Home Loan Bank, Pacific Coast Bankers Bank and CRA Fund Advisors and are carried at cost which approximates market.
The Company does not engage in trading activities.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. A decline in the market value of a security deemed other than temporary would result in a charge to earnings and the establishment of a new cost basis for the security.
Loans - Loans are stated at the principal amount outstanding, reduced by the - ----- allowance for loan losses and unamortized loan origination and commitment fees, net of loan origination costs. Interest on loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.
Loans are placed on nonaccrual status when the loan is considered to be impaired. An impaired loan is one for which, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When a loan is placed on nonaccrual status, interest accruals are discontinued and any interest income previously accrued but not collected is reversed. Any payments received on nonaccrual loans are applied against principal until the principal is fully recovered with subsequent collections recognized as interest income as they are received. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. The Company measures certain impaired loans based on the present value of future cash flows discounted at the loan's effective interest rate, or at the loans' market value or the fair value of the collateral if the loan is secured. If the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting the existing allocation of the allowance for loan losses.
All nonrefundable loan origination fees and commitment fees, net of related costs, are deferred and amortized over the term of the loan, or until the loan is sold, as an adjustment to the yield of the related loan. At December 31, 2000 and 1999, the amount of unamortized loan fees was approximately $773,000 and $957,000, respectively.
Allowance for Loan Losses - The allowance for loan losses is established through - ------------------------- a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. While management uses available information to determine the allowance for possible losses on loans, future additions to the allowance may be necessary based on changes in economic conditions or for other reasons. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance for loan losses based on their judgments of information available to them at the time of their examination.
Leasehold Improvements and Equipment - Leasehold improvements and equipment are - ------------------------------------ stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease terms (generally 2-5 years). Costs of improvements are capitalized, and maintenance, repairs and minor improvements are expensed as incurred.
Intangibles - Goodwill is amortized on a straight-line basis over fifteen years. - ----------- The portion of the acquisition cost allocated to values associated with acquired deposits is being amortized on an accelerated method over ten years. Management assesses the value of its intangibles for other than temporary impairment. If impaired, recoverability of the asset is assessed based on expected undiscounted cash flows. Amortization expense relative to intangible assets was $689,000, $168,000 and $193,000 for the years ended December 31, 2000, 1999, and 1998.
Foreclosed Assets - Foreclosed assets are stated at the lower of the recorded - ----------------- investment in the property or its fair value minus estimated costs to sell. Immediately upon foreclosure, the value of the underlying loan is written down to the fair value of the real estate acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties are included in non-interest expenses, while any rental revenues are included in non-interest income. Gains and losses on their disposition are included in non-interest income and non-interest expenses, respectively.
Income Taxes - BanCorp and the Bank file consolidated federal income tax and - ------------ combined California franchise tax returns.
Provisions for federal and state income taxes are based on taxes currently payable and deferred taxes expected to be payable in the future. Deferred taxes are recognized by applying enacted tax rates applicable to future years to temporary differences between the tax bases of existing assets and liabilities and their respective carrying values for financial reporting purposes. Deferred tax assets are subject to a valuation allowance if it is more likely than not that some of the deferred tax asset will not be realized.
Stock Compensation Plans - Stock options issued under the Corporation's stock - ------------------------ option plan have no intrinsic value at the grant date, and under Accounting Principles Board Opinion No. 25 no compensation cost is recognized for them. The Corporation has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995.
Net Income Per Common Share - Basic earnings per share represents income - --------------------------- available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as an adjustment to income that would result from the assumed issuance. Additionally, weighted average shares outstanding and per share amounts for all periods presented have been adjusted to give effect for 5% stock dividends paid in May 1999, and April 2000. There were no stock dividends in 1998.
Quasi-reorganization - The Company, with the approval of the Board of Directors - -------------------- and its shareholders, adjusted its July 1, 1996 balance sheet to fair value and transferred the accumulated deficit of $5.5 million to common stock in accordance with quasi-reorganization accounting principles. The Company's deficit retained earnings were incurred primarily as a result of substantial writedowns of real estate loans and foreclosed assets in 1992 and 1993 and the conditions giving rise to those losses have substantially changed.
In a quasi-reorganization, assets and liabilities are restated to fair value at the effective date. No adjustments were made to the assets and liabilities of the Company since, in the opinion of management, the book value of the Company's assets and liabilities approximated fair value at July 1, 1996. As part of the quasi-reorganization, retained earnings have been dated to reflect only the results of operations subsequent to the effective date of the quasi-reorganization. Recognition of future income tax benefits resulting from temporary differences, operating loss and tax credit carryforward items which arose prior to the effective date of the quasi-reorganization are reported as a direct adjustment to common stock as they are realized.
Shareholder Rights Plan - The Company has outstanding one preferred share - ----------------------- purchase right, (a "Right"), for each outstanding share of common stock. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of series A Junior Participating Preferred Stock, no par value, of the Company at a price of $35.00 per one one-hundredth of a Preferred Share, subject to the provisions of the Shareholder Rights Plan.
Segment Reporting - Management approaches the Company's principal subsidiary, - ----------------- the Bank, as one business enterprise which operates in a single economic environment, since the products and services, types of customers and regulatory environment all have similar economic characteristics.
Use of Estimates - The preparation of the financial statements in conformity - ---------------- with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual amounts could differ from those estimates.
Recent Accounting Pronouncements - In June 1999, the FASB issued 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 fiscal quarters of fiscal years beginning after June 15, 2000. This statement requires an entity to 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 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. As the Company does not have any derivatives, no transition adjustment was required.
2. SECURITIES
The amortized cost and estimated market values of securities available for sale, securities held to maturity and other securities as of December 31, 2000 and 1999 are summarized as follows (in thousands):
Total securities required and pledged under state regulations to secure certain deposits and for other purposes amounted to approximately $8,933,000 and $7,976,000 at December 31, 2000 and 1999, respectively.
The amortized cost and estimated market values of securities at December 31, 2000 by contractual maturity are shown below (in thousands). Expected maturities will differ from contractual maturities as certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
3. ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 is summarized as follows:
At December 31, 2000 and 1999, the recorded investment in loans considered to be impaired and placed on a non-accrual status is as follows:
For the years ended December 31, 2000, 1999 and 1998 the average recorded investment in impaired loans was $920,000, $528,000 and $1,796,000, respectively. There was no interest income recognized on impaired loans for those years, however, if interest income had been accrued under the original terms of the loans, such income would have approximated $103,000, $91,000 and $224,000 for 2000, 1999 and 1998, respectively.
4. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
A summary of leasehold improvements and equipment as of December 31, 2000 and 1999 is as follows:
Depreciation expense was $943,000, $628,000 and $515,000 for the years ended December 31, 2000, 1999 and 1998.
5. DEPOSITS
The aggregate amount of time certificates of deposit in denominations of $100,000 or more was $79,266,000 and $72,244,000 at December 31, 2000 and 1999. Interest expense incurred on certificates of deposit in denominations of $100,000 or more was approximately $4,080,000, $3,605,000 and $4,168,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Time deposits in denominations of $100,000 or more in excess of one year at December 31, 2000 are $3,024,000.
6. STOCK OPTIONS
BanCorp has a stock option plan which provides for incentive stock options (ISO) and nonqualified stock options. The plan was amended in 1998 and 2000 to increase the shares available for grant to 1,528,081. In 1995, the Company adopted the Non-Employee Director Stock Option Plan which reserved 115,500 shares of the 1994 Stock Option Plan for grants to eligible directors. The Non-Employee Director Plan was amended in 1999 to increase the shares reserved for directors to 173,775. Outstanding options for the purchase of common shares, which expire at various dates through 2009, have been granted under the plan at prices ranging from $4.86 to $17.01 per share (restated for stock dividends). These prices correspond to the market value of the stock on the dates the options were granted. The plan provides that the right to exercise options vests at the discretion of the plan committee on the date of grant which is generally 20% per year over 5 years. Options generally expire within ten years of the date of grant.
Option activity is summarized below:
The following table summarizes information about stock options outstanding at December 31, 2000:
The Company has elected to continue with the intrinsic value method and accordingly does not recognize compensation cost equal to the value of the stock options. If the Company had elected to recognize compensation cost based on the fair value of the options granted net income and earnings per share would have been reduced to the pro forma amounts in the following table:
The fair value of each option grant is estimated on the date of vesting using the Black-Scholes option-pricing model with the following assumptions:
7. REGULATORY MATTERS
BanCorp is subject to regulation under the Bank Holding Company Act of 1956 and to regulation by the Federal Reserve Board. The regulations require the maintenance of cash reserve balances at the Federal Reserve Bank for transaction accounts. The average reserve requirement for the Bank was $261,000 and $746,000 for the years ended December 31, 2000 and 1999, respectively.
BanCorp and the Bank are required by the Board of Governors of the Federal Reserve System to maintain minimum risk-based capital ratios. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000, that BanCorp and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the Federal Reserve Bank of San Francisco categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category.
The Company's actual capital amounts and ratios are also presented in the following table:
8. BENEFIT PLANS
The Bank has a discretionary defined contribution retirement plan (the Plan), which covers all employees with over one year of continuous service. The Plan consists of a 401(k) salary deferral component and a profit sharing component. Under the 401(k) salary deferral component, an employee may contribute up to 12% of pretax salary to the Plan. Employer contributions to the 401(k) salary deferral component are made at the discretion of the Board of Directors.
The profit sharing component provides for contributions of pretax profits of the Bank to all employees with one year of continuous service subject to certain eligibility requirements. The contributions to the profit sharing component are made the following year at the discretion of the Board of Directors.
The following is a summary of the related expenses for the years ended December 31, 2000, 1999 and 1998, which are included in salaries and employee benefits.
9. INCOME TAXES
Total income taxes for the years ended December 31, 2000, 1999 and 1998 were recorded as follows:
The provision for income taxes reflected in the consolidated statements of income for the years ended December 31, 2000, 1999 and 1998 is as follows:
The temporary differences which created deferred tax assets and liabilities are detailed below:
Management periodically reevaluates the realizability of the deferred tax assets and adjusts the valuation allowance so that the resulting level of net deferred tax assets will more likely than not be realized. As of December 31, 2000, management estimates that the Company will more likely than not realize the $2,512,000 net deferred tax asset. Accordingly, no valuation allowance has been provided for at December 31, 2000. In 1998, $978,000 of deferred tax benefits were recognized in shareholders' equity as a result of reductions in the valuation allowance in each of these years. These tax benefits originated prior to the quasi-reorganization that took place on July 1, 1996.
Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary from amounts shown on the tax return as filed. Accordingly, the variances from amounts reported for 1999 and 1998 are primarily the result of adjustments to conform to the 1999 and 1998 filed tax returns.
The effective tax rate differs from the federal statutory income tax rate for the years ended December 31, 2000, 1999 and 1998 as follows:
10. RELATED PARTY TRANSACTIONS
Certain directors and companies with which they are associated are customers of and have banking transactions with the Bank in the ordinary course of business. It is the Bank's policy that all loans and commitments extended to directors be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers.
The activity is summarized as follows for the years ended December 31, 2000 and 1999:
11. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
The Bank is involved in legal actions arising from normal business activities. Management, upon the advice of legal counsel handling such actions, believes that the ultimate resolution of these actions will not have a material adverse effect on the financial position of BanCorp.
In the normal course of business, to meet the financing needs of its customers and manage its own exposure to fluctuations in interest rates, the Bank is a party to financial instruments, including commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of these instruments, which are not included in the consolidated balance sheets, are an indicator of the extent of the Company's activities in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Bank controls the credit risk of these transactions through credit approvals, limits and monitoring procedures, and generally requires collateral or other security to support commitments to extend credit. The Bank's exposure to credit loss is usually limited to amounts funded or drawn. A summary of these financial instruments at December 31, 2000 and 1999 follows:
12. OPERATING LEASES
BanCorp and the Bank lease their banking and office facilities under noncancelable operating leases. These leases expire from August 2001 to December 2006. Certain leases contain options to extend. Rental expense for the years ended December 31, 2000, 1999 and 1998 was $1,412,000, $1,088,000, and $1,055,000, respectively.
Total future minimum rental payments under these operating leases at December 31, 2000 are as follows:
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The summary of these financial instruments and their related fair values at December 31, 2000 and 1999 are as follows:
The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practical to estimate that value:
Cash and cash equivalents - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Securities available for sale, held to maturity, and other securities - The fair value of securities is based on quoted market prices, dealer quotes and prices obtained from independent pricing services.
Loans - The fair value of performing loans is estimated by discounting the future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated fair value of certain nonperforming loans has been determined on an individual basis, taking into account management's plans regarding potential foreclosure and subsequent sale of collateral and the borrower's plan for the continuance of principal and interest payments.
Noninterest and interest bearing deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit - The fair value of commitments and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. Management estimates that the estimated fair value of commitments to extend credit and standby letters of credit is not significant. The Bank may structure variable rate loans to include embedded interest rate floors. Such floors are designed to mitigate interest rate risk to the Bank in a declining interest rate environment. As of December 31, 2000, the Bank had outstanding loans totaling approximately $22,000,000 that were subject to interest rate floors.
14. FINANCIAL STATEMENTS OF CIVIC BANCORP (parent company only) The condensed financial statements of Civic BanCorp (parent company only) are presented below (in thousands):
BALANCE SHEET As of December 31, 2000 and 1999
STATEMENTS OF INCOME For the Years Ended December 31, 2000, 1999 and 1998
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000, 1999 and 1998