United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period Ended September 30, 1998 .
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
Commission file number 0-10652
NORTH VALLEY BANCORP
(Exact name of registrant as specified in its charter)
California 94-2751350
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
880 E. Cypress Ave.
Redding, CA 96002
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 221-8400
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date.
Common Stock - - 3,689,220 shares as of September 30, 1998 as restated to give
effect for the 2-for-1 stock split.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-- September 30, 1998 and
December 31, 1997
Condensed consolidated statements of income-- Nine months ended
September 30, 1998 and 1997;
Condensed consolidated statements of income-- Three months ended
September 30, 1998 and 1997;
Condensed consolidated statement of cash flows-- Nine months ended
September 30, 1998 and 1997
Notes to condensed consolidated financial statements--
September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8K
SIGNATURES PART I. FINANCIAL INFORMATION
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS September 30 December 31
(In thousands except share amounts) 1998 1997
ASSETS (Unaudited) (Note)
Cash and cash equivalents:
Cash and due from banks $ 9,635 $ 8,842
Federal funds sold 22,800 13,100
Total cash and cash equivalents 32,435 21,942
Cash held in trust 1,083 1,670
Securities:
Available for sale, at fair value 19,564 26,613
Held to maturity, at amortized cost
(fair value of $36,357 and $41,231
at September 30, 1998
and December 31, 1997, respectively) 34,317 39,219
Loans receivable, net of allowance for
loan losses and deferred loan fees 179,222 167,507
Premises and equipment, net of
accumulated depreciation and amortization 5,042 4,647
Other real estate owned 350 212
FHLB stock 829 790
Accrued interest receivable 1,697 1,923
Other assets 7,252 6,234
TOTAL ASSETS $281,791 $270,757
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 32,612 $ 32,253
Interest-bearing:
Savings 51,391 46,431
Time certificates 117,092 118,159
NOW accounts 46,288 41,679
Total deposits 247,383 238,522
Accrued interest and other liabilities 4,517 4,169
TOTAL LIABILITIES 251,900 242,691
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized
5,000,000 shares; none outstanding
Common stock, no par value: authorized
20,000,000 shares; outstanding
3,689,220 and 3,678,184 at September 30,
1998 and December 31, 1997, respectively 10,191 10,161
Retained earnings 19,478 17,205
Accumulated Other Comprehensive Income:
Unrealized gain on securities available
for sale (net of tax effect) 222 700
Total stockholders' equity 29,891 28,066
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $281,791 $270,757
==========================================================================
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date.
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except share and per share amounts)
Nine Months Ended
September 30
INTEREST INCOME: 1998 1997
Loans including fees $ 11,625 $ 11,454
Securities:
Taxable 1,105 674
Exempt from federal taxes 1,654 1,797
Interest on federal funds sold 768 828
Total interest income 15,152 14,753
INTEREST EXPENSE - DEPOSITS 6,475 6,428
NET INTEREST INCOME 8,677 8,325
PROVISION FOR LOAN LOSSES 1,160 500
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,517 7,825
NONINTEREST INCOME:
Service charges on deposit accounts 1,288 1,047
Other fees and charges 635 591
Gain on sale of loans 106 118
Gain on sale of available
for sale securities 728 211
Proceeds from life insurance 0 1,148
Other 252 242
Total noninterest income 3,009 3,357
NONINTEREST EXPENSES:
Salaries & employee benefits 3,335 3,262
Occupancy expense 417 365
Furniture & equipment expense 487 404
Other 2,234 1,786
Total noninterest expenses 6,473 5,817
INCOME BEFORE PROVISION FOR INCOME TAXES 4,053 5,365
PROVISION FOR INCOME TAXES 1,135 1,199
NET INCOME $ 2,918 $ 4,166
EARNINGS PER SHARE:
Basic $ .79 $ 1.14
Diluted $ .78 $ 1.12
===========================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except share and per share amounts) Three Months Ended
September 30
1998 1997
INTEREST INCOME:
Loans including fees $ 3,918 $ 3,851
Securities:
Taxable 331 299
Exempt from federal taxes 530 584
Interest on federal funds sold 280 276
Total interest income 5,059 5,010
INTEREST EXPENSE - DEPOSITS 2,173 2,172
NET INTEREST INCOME 2,886 2,838
PROVISION FOR LOAN LOSSES 800 140
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,086 2,698
NONINTEREST INCOME:
Service charges on deposit accounts 493 350
Other fees and charges 202 206
Gain on sale of loans 1 15
Gain on sale of available
for sale securities 269 71
Proceeds from life insurance 0 1,148
Other 96 97
Total noninterest income 1,061 1,887
NONINTEREST EXPENSES:
Salaries & employee benefits 1,110 1,264
Occupancy expense 147 133
Furniture & equipment expense 177 133
Other 759 672
Total noninterest expenses 2,193 2,202
INCOME BEFORE PROVISION FOR INCOME TAXES 954 2,383
PROVISION FOR INCOME TAXES 269 400
NET INCOME $ 685 $ 1,983
EARNINGS PER SHARE:
Basic $ .19 $ .54
Diluted $ .18 $ .54
===========================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES CONDENSED Nine Months Ended
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) September 30
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,918 $ 4,166
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 387 324
Amortization (accretion) of premium on securities 22 ( 1)
Provision for loan losses 1,160 500
Loss on sale/write down of other real estate owned 5 35
Gain on sale of available for sale securities ( 728) ( 211)
Gain on sale of loans ( 106) ( 118)
Provision for deferred taxes 18 ( 73)
Effect of changes in:
Accrued interest receivable 226 ( 138)
Other assets (1,417) (3,094)
Accrued interest and other liabilities 553 434
Net cash provided by operating activities 3,038 1,824
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock ( 39) ( 43)
Proceeds from sale of other real estate owned 243 1,199
Purchase of available for sale securities (13,582) ( 15,419)
Proceeds from sales of available for sale securities 3,677 4,387
Proceeds from maturities of available for sale
securities 16,999 260
Purchase of held to maturity securities 0 ( 2,082)
Proceeds from maturities or calls of held to
maturity securities 4,875 2,475
Proceeds from sale of loans 8,562 7,085
Net increase in loans (21,331) ( 9,350)
Purchases of premises and equipment ( 782) ( 806)
Net cash used in investing activities ( 1,378) (12,294)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, NOW accounts,
and savings accounts 9,928 6,229
Net increase in time certificates ( 1,067) ( 248)
Cash dividends paid ( 645) ( 1,280)
Cash received for stock options exercised 30 60
Net cash provided by financing activities 8,246 4,761
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,906 ( 5,709)
CASH AND CASH EQUIVALENTS:
Beginning of period 23,612 28,507
End of period $ 33,518 $ 22,798
ADDITIONAL INFORMATION:
Transfer of foreclosed loans from loans
receivable to other real estate owned $ 376 $ 1,772
Cash Payments:
Income tax payments $ 775 $ 1,224
Interest payments $ 6,532 $ 6,789
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Period ended September 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
North Valley Bancorp and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for the interim periods presented have been included. They do not,
however, include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 1997. Operating results for the nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Significant intercompany items
and transactions have been eliminated in consolidation for the three and nine
month periods included.
Certain 1997 amounts have been reclassified to conform to the presentation
for the three month and nine month periods ended September 30, 1998.
NOTE B - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income. This Statement
requires that all items recognized under accounting standards as components
of comprehensive earnings be reported in an annual financial statement that
is displayed with the same prominence as other annual financial statements.
This Statement also requires that an entity classify items of other
comprehensive earnings by their nature in an annual financial statement.
For example, other comprehensive earnings may include minimum pension liability
adjustments, and unrealized gains and losses on marketable securities
classified as available-for-sale. Annual financial statements for prior
periods will be reclassified, as required. The Company's total comprehensive
earnings were as follows:
Nine Months Ended September 30
1998 1997
(In thousands)
Net income $ 2,918 $ 4,166
Other non-owner changes in equity:
Unrealized holding (loss) gain
on available for sale securities
arising during period, net of tax 46 320
Reclassification adjustment, net of tax ( 524) ( 152)
Net (loss) gain recognized in non-owner
changes in equity ( 478) 168
Net non-owner changes in equity $ 2,440 $ 4,334
Three Months Ended September 30
1998 1997
(In thousands)
Net income $ 685 $ 1,983
Other non-owner changes in equity:
Unrealized holding (loss) gain
on available for sale securities
arising during period, net of tax ( 144) 186
Reclassification adjustment, net of tax ( 194) ( 56)
Net (loss) gain recognized in non-owner
changes in equity ( 338) 130
Net comprehensive income $ 347 $ 1,853
NOTE C - COMMON STOCK SPLIT
On September 21, 1998, the Company's Board of Directors authorized a
two-for-one stock split distributed on October 30, 1998 to stockholders of
record as of October 15, 1998. This resulted in the issuance of 1,844,610
additional shares of common stock. All share and per share amounts have been
restated to reflect this stock split.
NOTE D - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if options or
other contracts to issue common stock were exercised and converted into common
stock.
The denominator used in the calculation of basic earnings per share and
diluted earnings per share for each of the quarters ended September 30, 1998
and 1997 is reconciled as follows:
(In thousands except per share data) Nine Nine
Months Months
Ended Ended
Calculation of Basic Earnings Per Share 9/30/98 9/30/97
Numerator - net income $ 2,918 $ 4,166
Denominator - weighted average common
shares outstanding 3,680 3,656
Basic Earnings Per Share $ .79 $ 1.14
Calculation of Diluted Earnings Per Share
Numerator - net income $ 2,918 $ 4,166
Denominator:
Weighted average common shares
outstanding 3,680 3,656
Dilutive effect of outstanding options 39 48
3,719 3,704
Diluted Earnings Per Share $ .78 $ 1.12
Three Three
Months Months
Ended Ended
Calculation of Basic Earnings Per Share 9/30/98 9/30/97
Numerator - net income $ 685 $ 1,983
Denominator - weighted average common
shares outstanding 3,687 3,658
Basic Earnings Per Share $ .19 $ .54
Calculation of Diluted Earnings Per Share
Numerator - net income $ 685 $ 1,983
Denominator:
Weighted average common shares
outstanding 3,687 3,658
Dilutive effect of outstanding options 39 48
3,726 3,706
Diluted Earnings Per Share $ .18 $ .54
NOTE E - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". The statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company has not determined the impact of
adopting SFAS No. 133 on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998.
Overview
North Valley Bancorp (the "Company") is a bank holding company for North
Valley Bank (the "Bank"), a state-nonmember bank. The Company's consolidated
net income, assets, and equity are derived primarily from its investment in
the Bank. The Bank operates out of its main office located at 880 E. Cypress
Avenue, Redding, California 96002 with ten additional branches located in
Shasta County and two branches in Trinity County. The Bank's consumer
financial services include residential real estate loans, retail deposit
services, mutual fund products and consumer finance. Financial services
for businesses include commercial loans, Small Business Administration (SBA)
loans, and deposit services.
Certain statements in this Form 10-Q (excluding statements of fact or
historical financial information) involve forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements.
Such risks and uncertainties include, but are not limited to, the following
factors: competitive pressure in the banking industry increases significantly;
changes in the interest rate environment reduce margins; general economic
conditions, either nationally or regionally, are less favorable than expected,
resulting in, among other things, a deterioration in credit quality and an
increase in the provision for possible loan losses; changes in the regulatory
environment; changes in business conditions, particularly in Shasta County;
volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
Earnings Summary
For the period ending September 30, 1998, the Company achieved earnings of
$2,918,000 as compared to $4,166,000 for the period ending September 30, 1997.
On a per share basis, net income on a diluted basis was $.78 for the nine
months ended September 30, 1998, and $1.12 for the same period in 1997.
The Company has reported significant non-interest income items in both 1997
and 1998, and a large provision for loan losses in the third quarter of 1998.
It is important to recognize the components of these items to gauge how the
Company is performing comparatively in its basic business operations.
During the nine month period ended September 30, 1998, the Company had $728,000
in gains on available for sale securities. In September, the Company made an
additional provision for loan losses of $560,000 to replenish loan loss
reserves after a single large charge off. During the same period in 1997, the
Company had $211,000 in gains on available for sale securities and $888,000 in
net insurance proceeds.
The Company paid a $.35 per share dividend to shareholders of record as of
June 9, 1998, totaling $645,000. The Company's return on average total assets
and average shareholders' equity were 1.39% and 13.05% for the nine months
ended September 30, 1998, compared with 2.08% and 21.22% for the same period
in 1997.
Net Interest Income
Net interest income is the principal source of the Company's operating
earnings. It represents the difference between interest earned on loans and
other investments and interest paid on deposits. The amount of interest income
and expense is affected by changes in volume and mix of earning assets
and interest-bearing deposits, along with changes in interest rates.
Net interest income has been adjusted to a fully taxable equivalent (FTE)
basis for tax-exempt investments included in earning assets. Net interest
income (FTE) was $9,512,000 for the nine months ended September 30, 1998, as
compared to $9,140,000 for the same period in 1997. The increase in
net interest income for the nine month period ending September 30, 1998
resulted primarily from the increase in investment securities and interest
earned on loans.
Total interest income (FTE) for the nine month period ending September 30,
1998, increased to $15,987,000 compared to $15,568,000 for the same period in
1997, representing a 2.69% increase. Average loans increased to $171,375,000
for the nine months ended September 30, 1998, or 2.69% over the same period in
1997, with an increase in average available for sale securities of 71.65% and a
decrease in average held to maturity securities of 7.73%.
Total interest expense for the nine month period ending September 30, 1998
increased slightly to $6,475,000 as compared to $6,428,000 for the same period
in 1997. Average interest-bearing deposits for the nine month period ending
September 30, 1998 totaled $211,171,000, as compared to $205,262,000 for the
same period in 1997, or a 2.88% increase.
Net interest margin (determined by dividing net interest income by total
average interest-earning assets) was 5.06% for the nine month period ending
September 30, 1998, as compared to 5.04% for the same period in 1997. The
increase in the net interest margin resulted from the increases in loans,
investments, and deposits within a stable to declining interest rate
environment and the change in the mix between loans and investment securities
for the nine month period ended September 30, 1998. Average earning assets
yielded 8.51% for the nine month period ending September 30, 1998 compared to
8.58% for the same period in 1997. The cost of funding these earning assets
decreased slightly during the first nine months of 1998 to 4.10% compared to
4.17% for the same period in 1997. The interest spread (the difference between
rates earned on interest earning assets and rates paid on deposits) was 4.41%
for the nine month periods ending September 30, 1998 and 1997.
Non-Interest Income
Non-interest income, which includes income derived from service charges on
deposit accounts, loan servicing fees, other fees and charges, and gain (loss)
on sale of securities, decreased to $3,009,000 for the nine month period ending
September 30, 1998 as compared to $3,357,000 for the same period in 1997. The
decrease of $348,000 in non-interest income is a result of a $517,000
increase in gains on sale of available for sale securities and a $295,000
increase in other operating income, principally service charge and fee income
for the nine months ended September 30, 1998, offset by insurance proceeds of
$1,148,000 received in 1997.
Non-Interest Expense
Non-interest expense totaled $6,473,000 for the nine month period ended
September 30, 1998, compared to $5,817,000 for the same period in 1997, an
increase of $656,000. The increase in expenses was attributed to the opening
of two new in-store branches, the Business Banking Center, and the relocation
of our Shasta Lake branch to our new facility. There were additional expenses
for the period resulting from loan portfolio and technology reviews. The
Company attributes the increased salary expense to the additional personnel for
the new branches, along with some market driven adjustments to staff
compensation.
The Company's efficiency ratio (derived by dividing total non-interest
expenses by net interest income exclusive of provision for loan losses and non-
interest income) was 55.39% at September 30, 1998 compared to 49.79% at
September 30, 1997. The efficiency ratio is a measurement as to how
efficiently the Company allocates its resources.
A summary of non-interest expense for the nine months ended September 30,
1998 and 1997, is presented below:
Non-Interest Expense September 30
(in thousands) 1998 1997
Salaries & employee benefits $ 3,335 $ 3,262
Occupancy expense 417 365
Furniture & equipment expense 487 404
Professional services 292 140
Data processing expenses 311 267
Printing & supplies 210 172
Postage 141 136
Messenger expense 132 103
ATM expense 207 176
Other 941 792
Total Non-interest expense $ 6,473 $ 5,817
Income Taxes
The provision for income taxes for the nine months ended September 30, 1998
was $1,135,000 as compared to $1,199,000 for the same period in 1997. The
effective tax rate for the period ending September 30, 1998 and 1997 was 28%
and 22.35%, respectively.
Impaired, Nonaccrual, Past Due and Restructured Loans and Other Real Estate
Owned
At September 30, 1998 the recorded investment in loans for which impairment
has been recognized was approximately $3,562,000. Of that balance
approximately $836,000 has a related valuation allowance of $48,000. For the
nine months ended September 30, 1998, the average recorded investment in
loans for which impairment has been recognized was approximately $5,408,000.
During the portion of the nine month period ended September 30, 1998 that the
loans were impaired the Company recognized approximately $281,000 of interest
income for cash payments received.
At December 31, 1997, the recorded investment in loans for which impairment
has been recognized was approximately $4,353,000. No significant impaired
balances required a valuation allowance at December 31, 1997. For the year
ended December 31, 1997, the average recorded investment in loans for which
impairment has been recognized was approximately $3,454,000. During the
portion of the year that the loans were impaired the Company recognized
interest income of approximately $153,000 for cash payments received.
Nonaccrual loans consist of loans on which the accrual of interest has been
discontinued and other loans where management believes that borrowers'
financial condition is such that the collection of interest is doubtful, or
when a loan becomes contractually past due by 90 days or more with respect to
interest or principal (except that when management believes a loan is well
secured and in the process of collection, interest accruals are continued on
loans considered by management to be fully collectible). Loans are charged off
when management determines that the loan is considered uncollectible. Other
real estate owned consists of real property acquired through foreclosure on
the related collateral underlying defaulted loans.
The amount of non accrual loans increased for the period ending September
30, 1998 to $2,681,000 as compared to $536,000 at December 31, 1997. During
September 1998, the Company placed $1,891,000 in secured loans to a single
borrower on nonaccrual status and charged off the unsecured portion of the
note (see Allowance for Loan Losses).
A summary of non-performing assets at September 30, 1998 and December 31,
1997, is as follows:
Non-Performing Assets (in thousands) September 30 December 31
1998 1997
Nonaccrual loans $ 2,681 $ 536
Accruing loans past due 90 days
or more 187 244
Restructured loans -- --
Other real estate owned 350 212
Total $ 3,218 $ 992
Allowance for Loan Losses
Management's assessment of the adequacy of the allowance for loan loss and
the level of the related provision for possible loan losses is based on its
evaluation of current economic conditions, borrower's financial condition,
loan impairment, continuing evaluation of the performing loan portfolio,
continual evaluation of problem loans identified as having a higher degree of
risk, off balance sheet risks, assessments by regulators and other third
parties, and any other factors identified by management which may have an
effect on the quality of the portfolio. At September 30, 1998, based on known
information, management believed that the allowance for loan losses was
adequate to absorb losses inherent in existing loans and commitments to extend
credit, based on evaluations of the collectibility and prior loss experience of
loans and commitments to extend credit as of such date.
As of September 30, 1998 and December 31, 1997, the allowance for possible
loan losses was $1,702,000. When a loan is considered uncollectible by
management it is charged against the allowance for loan losses. Any
recoveries on previously charged off loans are credited back to the allowance.
Net charge-offs were $1,160,000 for the period ending September 30, 1998.
Additions to the allowance for loan losses are charged against income. A
provision for loan losses of $1,160,000 was charged to income for the nine
months ended September 30, 1998 compared to a provision of $500,000 for the
same period in 1997.
In September 1998, the Company charged $763,000 against reserves for loan
losses representing one unsecured loan. As a result of this charge off, an
additional provision to loan losses of $560,000 was made in September 1998.
The Company is updating collateral valuations to determine any remaining loss
exposure with this borrower and currently anticipates it to be significantly
less than the charge taken in September. This loan relationship was unique in
its large size and credit structure within the Company's loan portfolio.
The allowance for possible loan losses is a general reserve available
against the total loan portfolio and off balance sheet credit exposure. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
possible loan losses. Such agencies may require the company to provide
additions to the allowance based on their judgment of information available
to them at the time of their examination.
There is uncertainty concerning future economic trends. Accordingly, it
is not possible to predict the effect future economic trends may have on the
level of the provision for possible loan losses in future periods.
Liquidity and Interest Rate Sensitivity
The fundamental objective of the Company's management is to increase
shareholders' value while maintaining adequate liquidity, to manage interest
rate risk, and increase the economic value of its assets and liabilities.
Liquidity is the ability to provide funds to support asset growth and satisfy
cash flow requirements created by fluctuations in deposits and to meet
borrowers' credit needs. Effective liquidity management insures that
sufficient funds are available to satisfy demands from depositors, borrowers
and other commitments on a timely basis. Collection of principal and interest
on loans, the liquidations and maturities of investment securities, deposits
with other banks, deposit inflow and short term borrowing, when needed, are
primary sources of funds that contribute to liquidity. Unused lines of credit
from correspondent banks to provide federal funds in the amount of $6,000,000
as of September 30, 1998, were available to provide liquidity. In addition,
the Bank is a member of the Federal Home Loan Bank ("FHLB") System providing an
additional line of credit of $3,743,000 secured by first deeds of trust on
eligible 1-4 unit residential loans. The Company had not borrowed from the
FHLB as of September 30, 1998.
The Company manages both assets and liabilities by monitoring asset and
liability mixes, volumes, maturities, yields and rates in order to preserve
liquidity and earnings stability. Total liquid assets (cash and due from
banks, federal funds sold, and investment securities) totaled $86,316,000 and
$87,774,000 (or 30.63% and 32.42% of total assets) at September 30, 1998
and December 31, 1997, respectively. Total liquid assets for September 30,
1998 and December 31, 1997 include investment securities of $34,317,000 and
$39,219,000, respectively, classified as held to maturity based on the
Company's intent to hold such securities to maturity.
Core deposits, defined as demand deposits, NOW, regular savings, money
market deposit accounts and time deposits of less than $100,000, continue to
provide a relatively stable and low cost source of funds. Core deposits
totaled $229,934,000 and $220,608,000 at September 30, 1998 and December
31, 1997, respectively.
In assessing liquidity, historical information such as seasonal loan
demand, local economic cycles and the economy in general are considered along
with current ratios, management goals and unique characteristics of the Bank.
Management believes the Company is in compliance with its policies
relating to liquidity.
Asset and liability management focuses on interest rate risk due to asset
and liability cash flows and market interest rate movement. The primary
objective of managing interest rate risk is to ensure that both assets and
liabilities react to changes in interest rates to minimize the effects of
interest rate movements on net interest income. An asset and liability
management simulation model is used to quantify the exposure and impact of
changing interest rates on earnings. The model projects changes by
analyzing the mix and repricing characteristics of interest rate sensitive
assets and liabilities using multipliers (how interest rates change when the
Fed Funds rate changes by 1%) and lags (time it takes for rates to change
after the Fed Funds rate changes). The model simulates the effects on net
interest income when the Fed Funds rate experiences a 1% increase or decrease
compared to current levels.
The following table shows the interest sensitive assets and liabilities
gap, which is the measure of interest sensitive assets over interest-bearing
liabilities, for each individual repricing period on a cumulative basis:
September 30, 1998 Within 3 3 months 1-5 5+
(in thousands) months to 1 Year Years Years TOTAL
EARNING ASSETS:
Held to maturity
securities $ 155 $ 1,394 $ 12,641 $ 20,127 $ 34,317
Available for sale
securities 4,977 11,592 2,043 0 18,612
Fed Funds Sold 22,800 0 0 0 22,800
Loans, net of deferred
loan fees 45,617 10,011 62,744 62,552 180,924
Total earning assets $73,549 $22,997 $ 77,428 $ 82,679 $256,653
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ 0 $ 46,288 $ 0 $ 0 $ 46,288
Savings deposits 0 51,391 0 0 51,391
Time deposits 30,128 80,975 5,959 30 117,092
Total interest bearing
liabilities $30,128 $ 178,654 $ 5,959 $ 30 $214,771
INTEREST SENSITIVITY
GAP $42,421 $(155,657) $ 71,469 $ 82,649
CUMULATIVE INTEREST
RATE SENSITIVITY GAP $ 42,421 $(112,236) $(40,767) $41,882
At September 30, 1998, the gap table indicates the Company as
liability sensitive in the twelvemonth period. The interest rate sensitivity
gap is defined as the difference between amount of interest-earning assets
anticipated to mature or reprice within a specific time period and the amount
of interest-bearing liabilities anticipated to mature or reprice within that
time period. The gap report is based on the contractual interest repricing
date. The gap method does not consider the impact of different multipliers
(how interest rates change when the Fed Funds rate changes by 1%) and lags
(time it takes for rates to change after the Fed Funds rate changes). The
interest rate relationships between the repriceable assets and repriceable
liabilities are not necessarily constant and may be affected by many factors,
including the behavior of customers in response to changes in interest rates
and future impact of new business strategies. This table should, therefore, be
used only as a guide as to the possible effect changes in interest rates might
have on the net margins of the Company. The Company's model analyzes the
impact on earnings of future rate changes by including factors for lags and
multipliers for key bank rates. Both methods of measuring interest rate
sensitivity do not take into account actions taken by management to modify
the effect to net interest income if interest rates were to rise or fall.
Even though the Company had a negative gap in the nine month period as of
September 30, 1998 the asset liability simulation model showed the Bank was
slightly asset sensitive in the third quarter 1998. This means that when
interest rates decline, yields on earning assets would be expected to decline
faster than rates paid for deposits, causing the net interest margin to
decrease. Due to a slightly declining interest rate environment in 1998, the
Bank's asset sensitive posture had a slightly negative impact on net interest
margins as predicted by the asset liability simulation model. In a rising rate
environment the opposite impact would be expected; i.e., the net interest
margin should improve.
Financial Condition
Total assets at September 30, 1998, were $281,791,000, representing an
increase of 4.08% over December 31, 1997 assets of $270,757,000. Increased
deposits were used to fund a 3.91% increase in average earning assets in the
third quarter of 1998.
Investment securities and federal funds sold totaled $76,681,000 at
September 30, 1998, compared to $78,932,000 at December 31, 1997. The Company
is a member of Federal Home Loan Bank of San Francisco and holds $829,000 in
FHLB stock.
During the first nine months of 1998, net loans increased to $179,222,000
from $167,507,000 at December 31, 1997. Loans are the Company's major
componentof earning assets. The Bank's average loan to deposit ratio was
70.64%.
Funding for increased loans came from increases in deposits and the slight
decrease in investments. Total deposits increased $8,861,000 for the nine
months ended September 30, 1998 to $247,383,000, as compared to $238,522,000 at
December 31, 1997.
The Company maintains capital to support capital needs, future growth and
dividend payouts while maintaining the confidence of depositors and investors
by increasing shareholders' value. The Company has provided the majority of
its capital requirements through the retention of earnings. Shareholders'
equity increased to $29,891,000 as of September 30, 1998, as compared to
$28,066,000 at December 31, 1997.
The Company's and the Bank's regulatory capital ratios remain above
regulatory minimums. The Company's total risk based capital ratio at September
30, 1998 was 16.07% and its Tier 1 Risk Based Capital (RBC) ratio was 15.20%,
exceeding the minimum guidelines of 8% and 4%. The ratios at December 31,
1997 were 15.73% and 14.80%, respectively.
The Company's leverage ratios were 10.52% and 9.94% at September 30, 1998
and December 31, 1997, exceeding the minimum guidelines of 4%.
Under current regulations adopted by federal regulatory agencies, a "well-
capitalized" institution must have a Tier 1 RBC ratio of at least 6%, a total
capital ratio of at least 10% and leverage ratio of at least 5% and not be
subject to a capital directive order. The Bank had a total capital ratio of
14.85%, a Tier 1 RBC ratio of 13.97% and a leverage ratio of 9.70% at September
30, 1998.
Impact of Inflation
Impact of inflation on a financial institution differs significantly from
that exerted on an industrial concern, primarily because a financial
institution's assets and liabilities consist largely of monetary items. The
relatively low proportion of the Bank's fixed assets (approximately 1.8%
September 30, 1998) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute
asset values.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As
the year 2000 approaches, such systems may be unable to accurately process
certain date-based information.
The Company has a written plan to mitigate the risks associated with the
impact of the Year 2000. The plan directs the Company's Year 2000 activities
under the framework of the Federal Financial Institutions Examination
Council (FFIEC) Five-Step Program. The FFIEC's Five-Step Program includes
the following phases: Awareness, Assessment, Renovation, Validation and
Implementation. The Awareness Phase, 100% complete, defines the Year 2000
problem and gains executive level support for the necessary resources to
prepare the Company for Year 2000 compliance. The Assessment Phase, 100%
complete, assesses the size and complexity of the problem and details the
magnitude of the effort necessary to address the Year 2000 issues. Although
the Awareness and Assessment Phases are complete, the Company will continue to
evaluate any new issues as they arise. The Renovation Phase, 75% complete,
includes the incremental changes to hardware and software components. The
Validation Phase includes the testing of hardware and software components and
is scheduled to be substantially complete by March 31, 1999. The
Implementation Phase, 15% complete, certifies that systems are Year 2000
compliant and will be accepted by the end users. The Implementation Phase
is scheduled to be substantially complete by June 30, 1999. The Company has
completed the development of test and validation methodologies for its
Information Technology (IT) systems. Testing of applications has begun and
is scheduled to be substantially complete during the first quarter of 1999.
In some cases, the Company will rely on the service providers and software
vendors to facilitate proxy testing with a selected group of users. The
Company will review the test plans and validate the results of the proxy
testing to ensure the Year 2000 compliance of those systems. The Company's
business also utilizes non-IT products and services, some of which have
embedded technology which might not be Year 2000 ready. Some non-IT products
and services involve infrastructure issues such as power, communications and
water, as well as elevators, ventilation and air conditioning equipment. The
Company classifies power and communications as non-IT products and services and
considers them to be of significant importance, giving them high priority.
Based on responses from vendors and software providers, the Company does not
anticipate incurring any material expenses due to unpreparedness. The Company
has identified material third party relationships to minimize the potential
loss from unpreparedness of these parties. The Company continues to work
closely with Jack Henry & Associates, its data services and items processing
provider, regarding Year 2000 compliance. The testing and validation of this
system is expected to be substantially complete by December 31, 1998.
The Company is making efforts to ensure that its customer base is aware of
the Year 2000 problem. Year 2000 correspondence has been sent to both deposit
and loan customers. The Bank has amended its credit authorization
documentation to include consideration regarding the Year 2000 problem.
Significant customer relationships have been identified, and such customers are
being contacted by the Bank's employees to determine whether they are aware of
Year 2000 risks and whether they are taking preparatory actions.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. Costs associated with the
modifications necessary are being expensed by the Company during the period in
which they are incurred. These costs and the date on which the Company plans
to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans. It is anticipated that any disruption of services would be
partial and brief, and that there will not be a material impact on revenues
or earnings.
The Company and the Bank are developing contingency plans to address the
possibility that efforts to mitigate Year 2000 risk are not successful either
in whole or in part. These plans will include remedial efforts up to and
including complete manual processing of information for critical IT systems in
the event there is a failure after December 31, 1999. The contingency plans
should be completed by March 31, 1999 after which time the appropriate
implementation training would take place.
The disclosure set forth above contains forward-looking statements.
Specifically, such statements are contained in sentences including the words
"expect" or "anticipate". Such forward-looking statements are subject to
inherent risks and uncertainties that may cause actual results to differ
materially from those contemplated by such forward-looking statements.
The factors that may cause actual results to differ materially from those
contemplated by the forward-looking statements include the failure by third
parties adequately to remediate Year 2000 issues or the inability of the
Company to complete writing and/or testing software changes on the time
schedules currently expected. Nevertheless, the Company expects that its Year
2000 compliance efforts will be successful without any adverse effects on its
business.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998, AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997.
Net Income
The Company's net income for the three months ended September 30, 1998,
was $685,000, as compared to a net income of $1,983,000 for the same period in
1997. The net income for the three month period ended September 30, 1998,
resulted in net income per share of $.18, fully diluted, compared to $.54 for
the same period in 1997.
Net Interest Income
Net interest income on a fully tax-equivalent basis (FTE) increased
$81,000, or 2.60%, to $3,192,000 for the three months ended September 30, 1998,
as compared to $3,111,000 for the same period in 1997.
Changes in net interest income are a result of changes in volume between
average earning assets and average interest bearing liabilities and in the
difference between interest yields from average earning assets and the cost
of average interest bearing liabilities. Net interest income increased over
1997 levels primarily due to an increase in volume of available for sale
securities and on average loans.
Net interest income on a fully taxable equivalent basis expressed as a
percentage of total average earning assets is referred to as the net interest
margin. The net interest margin (FTE) was 4.95% and 5.02% for the three
months ending September 30, 1998 and 1997, respectively.
Non-Interest Income
Total non-interest income decreased to $1,061,000, compared to $1,887,000
for the three months ended September 30, 1998 and 1997, respectively. The
increase in 1998 of $198,000 in sales of available for sale securities and
$124,000 in other operating income was offset by insurance proceeds of
$1,148,000 in 1997.
Non-Interest Expense
Non-interest expense decreased for the three months ended September 30,
1998 to $2,193,000 compared to $2,202,000 for the same period in 1997.
A summary of non-interest expense for the three month period ended
September 30, 1998 and 1997, is presented below:
Non-Interest Expense September 30
(in thousands) 1998 1997
Salaries & employee benefits $ 1,110 $ 1,264
Occupancy expense 147 133
Furniture & equipment expense 177 133
Professional services 83 63
Data processing expenses 96 94
Printing & supplies 75 61
Postage 44 44
Messenger expense 45 34
ATM expense 71 64
Other 345 312
Total Non-interest expense $ 2,193 $ 2,202
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In Management's opinion there has not been a material change in the
Company's market risk profile for the nine months ended September 30, 1998
compared to December 31, 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings pending against the Company or
against any of its property. The Bank, because of the nature of its business,
is generally subject to various legal actions, threatened or filed, which
involve ordinary, routine litigation incidental to its business. Some of the
pending cases seek punitive damages in addition to other relief. Although
the amount of the ultimate exposure, if any, cannot be determined at this time,
the Company does not expect that the final outcome of threatened or filed
suits will have a materially adverse effect on its consolidated financial
position.
Item 2. Changes in Securities
N/A.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submission of Matters to a Vote of Security Holders
N/A
Item 5. Other Information
N/A
Item 6. Exhibits and Reports on Form 8-K.
N/A
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
North Valley Bancorp
(Registrant)
Date November 13, 1998 /s/ Sharon Benson
Sharon Benson
Senior Vice President &
Chief Financial Officer
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