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, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) ofthe 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 (IRS Employer ID Number)
of incorporation or organization)
880 E. Cypress Avenue, 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 - -3,708,418 shares as of October 31, 1999.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-September 30, 1999 and
December 31, 1998
Condensed consolidated statements of income-For the three
and nine months ended September 30, 1999 and 1998:
Condensed consolidated statement of cash flows-For the nine
months ended September 30, 1999 and 1998;
Notes to condensed consolidated financial statements--
September 30, 1999 and December 31, 1998 and the Nine months
ended September 30, 1999 and 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
Item 1. Financial Statements
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share amounts)
September 30 December 31,
ASSETS 1999 1998
Cash and cash equivalents:
Cash and due from banks 10,705 7,052
Federal funds sold 20,200 18,300
Total cash and cash equivalents 30,905 25,352
Cash held in trust 499 873
Securities:
Available for sale, at
fair value 15,047 22,842
Held to maturity, at amortized cost
with fair values of:
$31,827 at September 30, 1999
$35,939 at December 31,1998 30,745 33,914
Loans, net of allowance for
loan losses and deferred fees of:
$2,120 and $223 at September 30, 1999
$1,902 and $449 at
December 31, 1998 209,519 197,434
Premises and equipment, net
of accumulated depreciation
and Amortization 4,943 5,028
Other real estate owned 1,326 575
FHLB stock 899 841
Accrued interest receivable 1,770 1,770
Other assets 8,702 7,733
TOTAL ASSETS $304,355 $296,362
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 37,167 $ 37,372
Interest-bearing deposits 229,204 222,509
Total deposits 266,371 259,881
Accrued expenses and other
liabilities 5,558 6,301
Total liabilities 271,929 266,182
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 3,707,816 at September 30,
1999 and 3,690,220 at December 31,1998 10,325 10,237
Retained Earnings 22,169 19,890
Accumulated other comprehensive income,
net of tax (68) 53
Total stockholders' equity 32,426 30,180
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $304,355 $296,362
=======================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands except per share amounts)
For the three months ended For the nine months ended
September 30, September 30,
1999 1998 1999 1998
INTEREST INCOME:
Loans including fees $ 4,412 $ 3,918 $ 12,840 $ 11,625
Securities
Taxable 234 331 800 1,105
Exempt from federal taxes 473 530 1,481 1,654
Federal funds sold 274 280 705 768
Total interest income 5,393 5,059 15,826 15,152
INTEREST EXPENSE - DEPOSITS 2,055 2,173 6,056 6,475
NET INTEREST INCOME 3,338 2,886 9,770 8,677
PROVISION FOR LOANS LOSSES 280 800 835 1,160
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS 3,058 2,086 8,935 7,517
NONINTEREST INCOME:
Service charges on deposit
accounts 558 493 1,581 1,288
Other fees and charges 371 202 802 635
Gain (loss) on sale of loans (1) 1 (88) 106
Gain on sale of available
for sale securities 9 269 25 728
Other 194 96 546 252
Total noninterest income 1,131 1,061 2,866 3,009
NONINTEREST EXPENSES:
Salaries and employee benefits 1,213 1,110 3,506 3,335
Occupancy 167 147 482 417
Furniture and equipment expense 163 177 515 487
Other 952 759 2,717 2,234
Total noninterest expenses 2,495 2,193 7,220 6,473
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,694 954 4,581 4,053
PROVISION FOR INCOME TAXES 402 269 1,226 1,135
NET INCOME $ 1,292 $ 685 $ 3,355 $ 2,918
EARNINGS PER SHARE:
Basic $ 0.35 $ 0.19 $ 0.91 $ 0.79
Diluted $ 0.35 $ 0.18 $ 0.90 $ 0.78
=======================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in thousands)
At September 30,
CASH FLOWS FROM OPERATING 1999 1998
ACTIVITIES:
Net income $ 3,355 $ 2,918
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 489 387
Accretion/Amortization of discount/premium
on securities (19) 22
Provision for loan losses 835 1,160
Loss (gain) on sale/write down of other
real estate owned 635 5
Gain on sale of available for sale securities (25) (728)
Loss/(gain) on sale of loans 88 (106)
Provision (benefit) for deferred taxes (8) 18
Effect of changes in:
Cash held in trust 374
Accrued interest receivable - 226
Other assets (924) (1,417)
Accrued interest and other liabilities (376) 553
Net cash provided by operating activities 4,424 3,038
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of FHLB stock (58) (39)
Proceeds from sale of other real estate owned 3,190 243
Purchase of available for sale securities (13,000) (13,582)
Proceeds from sales of
available for sale Securities 100 3,677
Proceeds from maturities of
available for sale Securities 20,625 16,999
Proceeds from maturities or
calls of held to maturity securities 3,160 4,875
Proceeds from sale of loans 26,993 8,562
Net increase in loans (44,577) (21,331)
Purchases of premises and equipment (404) (782)
Net cash used in investing activities (3,971) (1,378)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 6,490 8,861
Cash dividends paid (1,478) (645)
Cash received for stock options exercised 88 30
Net cash provided by financing activities 5,100 8,246
NET INCREASE IN CASH AND CASH
EQUIVALENTS 5,553 9,906
CASH AND CASH EQUIVALENTS:
Beginning of period 25,352 23,612
End of period $ 30,905 $ 33,518
ADDITIONAL INFORMATION:
Transfer of foreclosed loans from loans
receivable to other real estate owned $ 4,576 $ 376
Cash Payments:
Income tax payments $ 1,248 $ 775
Interest payments $ 6,068 $ 6,532
See notes to condensed consolidated
financial statements (unaudited)
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999 and December 31, 1998 and the Nine months ended
September 30, 1999 and 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 annual 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, 1998. Operating results for the
nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
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. Certain reclassifi-
cations have been made to prior year amounts to conform to the current year
presentation.
NOTE B - COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income.
The Company's only source of other comprehensive income is derived from
unrealized gains and losses on investment securities available-for-sale and
adjustments to the minimum pension liability. Reclassification adjustments
resulting from gains or losses on investment securities that were
realized and included in net income of the current period that also had been
included in other comprehensive income as unrealized holding gains or losses
in the period in which they arose are excluded from comprehensive income of
the current period. The Company's total comprehensive income was as follows:
For the nine months ended September 30,
(In thousands) 1999 1998
Net income $ 3,355 $ 2,918
Other comprehensive loss:
Holding (loss)gain arising
during period, net of tax (104) 46
Reclassification adustment, net of tax 18 (524)
Total other comprehensive income (86) (478)
Total comprehensive income $ 3,269 $ 2,440
For the three months ended September 30,
1999 1998
Net income $ 1,292 $ 685
Other comprehensive loss:
Holding (loss)gain arising
during period, net of tax 0 (144)
Reclassification adjustment, net of tax 7 (194)
Total other comprehensive income 7 (338)
Total comprehensive income $ 1,299 $ 347
NOTE C - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income
by the weighted average common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution that
could occur if options or other contracts to issue common stock
were exercised and converted into common stock.
There was no difference in the numerator, net income, used
in the calculation of basic earnings per share and diluted
earnings per share. The denominator used in the calculation of
basic earnings per share and diluted earnings per share for the
nine and three-month periods ended September 30, 1999 and 1998 is
reconciled as follows:
(In thousands except
per share amounts) For the nine months ended September 30,
1999 1998
Calculation of Basic Earnings Per Share
Numerator - net income $ 3,355 $ 2,918
Denominator - weighted average common
shares outstanding 3,701 3,680
Basic Earnings Per Share $ 0.91 $ 0.79
Calculation of Diluted Earnings Per Share
Numerator - net income $ 3,355 $ 2,918
Denominator - weighted average common
shares outstanding 3,701 3,680
Dilutive effect of outstanding options 19 39
3,720 3,719
Diluted Earnings Per Share $ 0.90 $ 0.78
For the three months ended September 30,
1999 1998
Calculation of Basic Earnings Per Share
Numerator - net income $ 1,292 685
Denominator - weighted average common
shares outstanding 3,705 3,687
Basic Earnings Per Share $ 0.35 $ 0.19
Calculation of Diluted Earnings Per Share
Numerator - net income $ 1,292 $ 685
Denominator - weighted average common
shares outstanding 3,705 3,687
Dilutive effect of outstanding options 20 39
3,725 3,726
Diluted Earnings Per Share $ 0.35 $ 0.18
NOTE D - SUBSEQUENT EVENT PROPOSED MERGER
On October 4, 1999, North Valley Bancorp (NVB) and Six
Rivers National Bank (SRNB) (headquartered in Eureka, California)
announced the signing of a proposed merger agreement and plan of
reorganization which, if approved by the stockholders of the two
organizations and by the regulatory authorities, will result in
the merger of SRNB into NVB, with SRNB to be operated as a wholly
owned subsidiary of North Valley Bancorp. The transaction is
expected to be completed by the end of the first quarter of the
year 2000 or early in the second quarter. The agreement provides
for the SRNB stockholders to receive shares of NVB in exchange
for SRNB stock based on a formula which is dependent on the
average closing price of North Valley Bancorp stock in a tax free
exchange to be accounted for as a pooling of interest.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Overview
North Valley Bancorp (the "Company") is the bank holding
company for North Valley Bank (the "Bank"), a state-nonmember
bank. The Bank operates out of its main office located at 880 E.
Cypress Avenue, Redding, CA 96002, with 12 branches, which
include two supermarket branches in Shasta and Trinity Counties
in Northern California. The Company operates as one business
segment providing banking services to the Company's clients in
Northern California. The Company's principal business consists
of attracting deposits from the general public and using the
funds to originate commercial, real estate and installment loans
to customers, who are predominately small and middle market
businesses and middle income individuals. The Company's primary
source of revenues is interest income from its loan and
investment securities portfolios. The Company is not dependent
on any single customer for more than ten percent of the Company's
revenues.
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 three months ended For the nine months ended
September 30, September 30,
(in thousands except 1999 1998 1999 1998
per share amounts)
Net interest income $ 3,338 $ 2,886 $ 9,770 $ 8,677
Provision for loan losses (280) (800) (835) (1,160)
Noninterest income 1,131 1,061 2,866 3,009
Noninterest expense (2,495) (2,193) (7,220) (6,473)
Provision for income taxes (402) (269) (1,226) (1,135)
Net income $ 1,292 $ 685 $ 3,355 $ 2,918
Earnings Per Share
Basic $ 0.35 $ 0.19 $ 0.91 $ 0.79
Diluted $ 0.35 $ 0.18 $ 0.90 $ 0.78
Return on Average Assets 1.68% 0.97% 1.50% 1.39%
Return on Average Equity 16.01% 9.09% 14.25% 13.05%
For the nine-month period ended September 30, 1999, the
Company achieved net income of $1,111,000 as compared to
$2,918,000 for the same period in 1998. On a per share basis,
diluted earnings per share was $.90 for the nine months ended
September 30, 1999 compared to $.78 for the same period in 1998.
For the nine months ended September 30, 1999, the Company
continued quarterly dividends totaling $1,111,000 for the year to
stockholders of the Company. The Company's return on average
total assets and average stockholders' equity were 1.50% and
14.25% for the nine months ended September 30, 1999, compared
with 1.39% and 13.05% for the same period in 1998.
For the nine months ended September 30, 1999, the increase
in net interest income was primarily due to the increase in
average loans outstanding, coupled with a decrease in rates paid
on average interest bearing deposits and offset by a decrease in
rates earned on average earning assets. The Company's loan loss
provision decreased $325,000. For the nine months ended
September 30, 1999, noninterest income was impacted by a
reduction in gain on available for sale securities of $703,000
offset by increased service charge and other fee income from the
expanded customer base. The increase in noninterest expense in
the same period is primarily the result of costs associated with
the addition of two super-market branches, the Business Banking
Center as well as an expanded Investment Services Department.
The Company has made a substantial investment in technology
updates that have resulted in the addition of new products and
services to provide for future expansion.
For the three months ended September 30, 1999, net income
was $1,292,000 compared to $685,000. The increase of $607,000 was
a result of an increase in net interest income, lower provision
for loan loss, an increase in service charges and other fees
offset by decreases in gains on sale of securities, and an
increase in noninterest expenses.
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.
The following table is a summary of the Company's net
interest income presented on a fully taxable equivalent (FTE)
basis for the periods indicated:
For the three months ended For the nine months ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
Interest income $ 5,393 $ 5,059 $ 15,826 $ 15,152
Interest expense (2,055) (2,173) (6,056) (6,475)
FTE adjustment 256 306 785 835
Net interest income (FTE) $ 3,594 $ 3,192 $ 10,555 $ 9,512
Net interest income has been adjusted to a fully taxable
equivalent basis (FTE) for tax-exempt investments included in
earning assets. The increase in net interest income (FTE) for
the nine month period ended September 30, 1999 resulted primarily
from the increase in the volume of loans, which generally carry
higher interest rates than other earning assets, offset by a
decrease in the rates earned on loans combined with a decrease in
rates, paid on interest earning deposits. Average loans
increased to $200,656,000 for the nine months ended September 30,
1999, as compared to $171,375,000 over the same period in 1998,
or a 17.1% increase. Average interest-bearing deposits for the
nine months ended September 30, 1999 totaled $224,632,000; as
compared to $211,171,000 for the same period in 1998, or a 6.37%
increase.
The increase in net interest income (FTE) for the three
month period ended September 30, 1999 resulted primarily from the
increase in the volume of loans, which generally carry higher
interest rates than other earning assets, offset by a decrease in
the rates earned on loans combined with a decrease in rates, paid
on interest earning deposits. Average loans increased to
$207,144,000 for the three months ended September 30, 1999, as
compared to $176,663,000 over the same period in 1998, or a 17.3%
increase. Average interest-bearing deposits for the three
months ended September 30, 1999 totaled $228,167,000; as compared
to $213,334,000 for the same period in 1998, or a 7% increase.
The following table is a summary of the Company's net
interest margin (FTE) for the periods indicated:
For the three months ended For the nine months ended
September 30, September 30,
1999 1998 1999 1998
Yield on earning assets 8.02% 8.32% 8.11% 8.51%
Rate paid on interest-
bearing deposits 3.57% 4.04% 3.60% 4.10%
Net interest spread 4.45% 4.28% 4.51% 4.41%
Net interest margin 5.11% 4.95% 5.16% 5.06%
The increase for the nine months ended September 30, 1999 in
the net interest margin of 5.16% compared to 5.06% for the same
period in 1998 was attributed to the increases in loans and
deposits, and the increase in the net spread (the difference
between rates earned on interest earning assets and rates paid on
deposits), affected primarily by a stable to slightly increasing
interest rate environment and the change in the mix between loans
and investment securities for the period ended September 30,
1999. The increase for the nine months ended September 30, 1999
in the net interest spread of 4.51% compared to 4.41% for the
same period in 1998 was a result of a 40 basis point reduction in
rates earned on interest earning assets partially offset by a 50
basis point reduction in interest paid on interest bearing
deposits.
For the three months ended September 30, 1999 the net
interest margin was 5.11% compared to 4.95% for the same period
in 1998. The increase in the net interest margin was attributed
to a 30 basis point decline on rates earned for assets offset by
a 47 basis point decline in rates paid on deposits.
Noninterest Income
The following table is a summary of the Company's noninterest
income for the periods indicated:
For the three months ended For the nine months ended
Noninterest Income September 30, September 30,
(in thousands) 1999 1998 1999 1998
Service charges on deposit
accounts $ 558 $ 493 $ 1,581 $ 1,288
Other fees and charges 371 202 802 635
Gain (loss) on sale of loans (1) 1 (88) 106
Gain on sale of available for
sale securities 9 269 25 728
Other 194 96 546 252
Total noninterest income $ 1,131 $ 1,061 $ 2,866 $ 3,009
Noninterest income decreased to $2,866,000 for the nine
months ended September 30, 1999 as compared to $3,009,000 for the
same nine months ended September 30, 1998, a $143,000 decrease.
This decrease is primarily the result of a decrease in gain on
sale of securities of $703,000 offset by an increase of $293,000
in service charge income, $167,000 increase in other fees and
charges and an increase in other income of $294,000.
Noninterest income increased to $1,131,000 for the three
months ended September 30, 1999 as compared to $1,061,000 for the
same three months ended September 30, 1998, a $70,000 increase.
This increase is primarily the result of a decrease in gain on
sale of securities of $260,000 offset by an increase of $65,000
in service charge income, $169,000 increase in other fees and
charges and an increase in other income of $98,000.
Noninterest Expense
The following table is a summary of the Company's
noninterest expense for the periods indicated:
For the three months ended For the nine months ended
Noninterest Expense September 30, September 30,
(in thousands) 1999 1998 1999 1998
Salaries & employee benefits $ 1,213 $ 1,110 $ 3,506 $ 3,335
Occupancy expense 167 147 482 417
Furniture & equipment expense 163 177 515 487
Professional services 123 83 331 292
Data processing expenses 116 96 316 311
Printing & supplies 66 75 201 210
Postage 49 44 156 141
Messenger expense 48 45 141 132
ATM expense 89 71 261 207
Other 461 345 1,311 941
Total Noninterest expense $ 2,495 $ 2,193 $ 7,220 $ 6,473
Noninterest expense totaled $7,220,000 for the nine-month
period ended September 30, 1999, compared to $6,473,000 for the
same period in 1998. The increase in noninterest expense is
related to the expansion of the branch system to include two new
grocery store branches and the business banking center, which
were open for the entire nine month period in 1999 but for only a
portion of the corresponding 1998 period, increased lending
expenses such as credit reports and appraisal fees from the
growth in the loan portfolio, along with technology updates to
compete in today's environment.
For the three-month period ending September 30, 1999
noninterest expense increased $302,000. The increase in
noninterest expense is attributed to the growth of the Bank and
the proposed merger transaction.
Income Taxes
The provision for income taxes for the nine months ended
September 30, 1999 was $1,226,000 as compared to $1,135,000 for
the same period in 1998. The effective income tax rate for state
and federal income taxes was 26.8% for the nine months ended
September 30, 1999 compared to 28% for the same period in 1998.
The difference in the effective tax rate compared to the
statutory tax rate is primarily the result of the Bank's
investment in municipals securities.
Impaired, Nonaccrual, Past Due and Restructured Loans and Other
Real Estate Owned
At September 30, 1999 the recorded investment in loans for
which impairment has been recognized was approximately
$1,694,000. Of that balance approximately $1,346,000 has a
related valuation allowance of $225,000. The remaining $348,000
did not require a valuation allowance. For the nine month period
ended September 30, 1999, the average recorded investment in
loans for which impairment has been recognized was approximated
$1,784,000. During the portion of the year that the loans were
impaired the Company recognized interest income of approximately
$43,000 for cash payments received.
At December 31, 1998, the recorded investment in loans for
which impairment has been recognized was approximately
$2,871,000. Of the 1998 balance approximately $2,269,000 has a
related valuation allowance of $226,900. The remaining $602,000
did not require a valuation allowance. For the year ended
December 31, 1998, the average recorded investment in loans for
which impairment has been recognized was approximately
$3,201,000. During the portion of the year that the loans were
impaired the Company recognized interest income of approximately
$232,000 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.
A summary of non-performing assets at September 30, 1999,
and December 31, 1998, is as follows:
September 30 December 31,
(in thousands) 1999 1998
Total nonaccrual loans $ 1,328 $ 2,307
Troubled debt restructuring - -
Loans 90 days past due and
still accruing 224 364
Total nonperforming loans 1,552 2,671
Other real estate owned 1,326 575
Total nonperforming assets $ 2,878 $ 3,246
Nonaccrual loans to total gross loans 0.63% 1.16%
Nonperforming loans to total
gross loans 0.73% 1.34%
Total nonperforming assets to
total assets 0.95% 1.10%
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb
inherent losses in the loan portfolio. Management attributes
general reserves to different types of loans using percentages,
which are based upon perceived risk, associated with the
portfolio and underlying collateral. The allowance for probable
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 probable
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. At September
30, 1999, based on known information, management believes 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.
A summary of the allowance for loan loss at September 30,
1999 and December 31, 1998, is as follows:
September 30, December 31,
(in thousands) 1999 1998
Balance beginning of year $ 1,902 $ 1,702
Provision for loan losses 835 1,430
Net charge offs (617) (1,230)
Balance end of period $ 2,120 $ 1,902
The evaluation process is designed to determine the adequacy
of the allowance for loan losses. This process attempts to
assess the risk of losses inherent in the loan portfolio by
segregating the allowance for loan losses into three components:
"Specific," "loss migration," and "general." The specific
component is established by allocating a portion of the allowance
for loan losses to individual classified credits on the basis of
specific circumstances and assessments. The loss migration
component is calculated as a function of the historical loss
migration experience of the internal loan credit risk rating
categories. The general component is an unallocated portion that
supplements the first two components and includes: management's
judgement of the current economic conditions, borrower's
financial condition, loan impairment, evaluation of the
performing loan portfolio, continual evaluation of problem loans
identified as having a higher degree of risk, off balance sheet
risks, net charge off trends, and other factors. Loan activity
increased in 1999 attributing to the increase in the allowance
for loan loss. The allowance for loan loss was 1.00% of total
loans as of September 30, 1999, compared to .95% on December 31, 1998.
There is uncertainty concerning future economic trends.
Accordingly, it is not possible to predict the effect future
economic trends may have on the levels of the allowance for loan
losses and the related provision for loan losses in future periods.
Liquidity and Interest Rate Sensitivity
The fundamental objective of the Company's management is to
increase stockholders' 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 $7,500,000 as of September 30, 1999 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 $2,083,000 secured by first deeds of
trust on eligible 1-4 unit residential loans. The Company had
not utilized the line of credit from the FHLB as of September 30, 1999.
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 $76,697,000 and $82,108,000
(or 25.20% and 27.71% of total assets) at September 30, 1999 and
December 31, 1998, respectively. Total liquid assets for
September 30, 1999 and December 31, 1998 include investment
securities of $30,745,000 and $33,914,000, respectively,
classified as held to maturity based on the Company's intent and
ability to hold such securities to maturity.
Core deposits, defined as demand deposits, interest bearing
demand deposits, 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 $245,067,000 and $241,412,000 at September 30, 1999 and
December 31, 1998, 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 Company. 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 (other than equity
securities with a fair value of approximately $113,000), which is
the measure of interest sensitive assets over interest-bearing
liabilities, for each individual repricing period on a cumulative basis:
September 30, 1999 Within Three One to Greater
(in thousands) Three Months to Five Than Five
Months One Year Years Years Total
Earning Assets
Held to maturity securities $ 1,631 $ 1,514 $ 10,977 $ 16,623 $ 30,745
Available for sale
securities 2,008 7,971 4,955 14,934
Fed funds sold 20,200 20,200
Loans-net of deferred loan
fees 37,821 11,311 100,711 61,796 211,639
Total earning assets $ 61,660 $ 20,796 $116,643 $ 78,419 $277,518
Interest Bearing Liabilities
Interest bearing demand
deposits $ 9,458 $ 9,458
Savings deposits 99,656 99,656
Time deposits $ 32,504 82,156 $ 5,430 $ 0 $120,090
Total interest bearing
Liabilities $ 32,504 $191,270 $ 5,430 $ - $229,204
Interest rate
sensitivity gap $ 29,156 $(170,474) $111,213 $ 78,419
Cumulative interest
rate sensitivity gap $ 29,156 $(141,313) $(30,105) $ 48,314
8) )
At September 30, 1999, the gap table indicates the Company
as liability sensitive in the twelve month 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 year end 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 ended September 30, 1999, the asset liability simulation
model showed the Company was slightly asset sensitive at
September 30, 1999. This means that when interest rates increase,
yields on earning assets would be expected to increase faster
than rates paid for deposits, causing the net interest margin to
increase. Due to a slightly increasing interest rate environment
in 1999, the Company's asset sensitive posture had a slightly
positive impact on net interest margins as predicted by the asset
liability simulation model. In a declining rate environment the
opposite impact would be expected; i.e., the net interest margin
should decline.
Financial Condition as of September 30, 1999 As Compared to December 31, 1998
Total assets at September 30, 1999, were $304,355,000,
compared to December 31, 1998 assets of $296,362,000. Increases
in average deposits of 6.37% were used to fund an 8.94% increase
in average earning assets for the nine months ended September 30, 1999.
Investment securities and federal funds sold totaled
$65,992,000 at September 30, 1999, compared to $75,056,000 at
December 31, 1998 as investment securities were used to fund loan
demand. The Company is a member of Federal Home Loan Bank of San
Francisco and holds $899,000 in FHLB stock.
During the first nine months of 1999, net loans increased to
$209,519,000 from $197,434,000 at December 31, 1998. Loans are
the Company's major component of earning assets. The Bank's
average loan to deposit ratio was 76.2%.
Total deposits increased to $266,371,000 at September 30,
1999 compared to $259,881,000 at December 31, 1998.
The Company maintains capital to support capital needs
future growth and dividend payouts while maintaining the
confidence of depositors and investors by increasing shareholder
value. The Company has provided the majority of its capital
requirements through the retention of earnings. Stockholders'
equity increased to $32,426,000 as of September 30, 1999, as
compared to $30,180,000 at December 31, 1998.
The Company and the Bank had levels of capital that exceeded
regulatory guidelines. The risk-based capital ratios are listed below.
Company September 30, December 31,
1999 1998 Minimum
Leverage Ratio 10.52% 10.18% 4.00%
Tier 1 risk-based capital ratio 13.97% 14.14% 4.00%
Total risk-based capital ratio 14.90% 15.05% 8.00%
Bank To Be Well
Capitalized
Leverage Ratio 10.20% 9.49% 5.00%
Tier 1 risk-based capital ratio 13.55% 13.17% 6.00%
Total risk-based capital ratio 14.47% 14.08% 10.00%
capital ratio
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 1.6%
September 30, 1999) 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, 95% complete, includes the incremental changes
to hardware and software components. The Validation Phase
includes the testing of hardware and software components and was
substantially complete as of September 30, 1999. The
Implementation Phase certifies that systems are Year 2000
compliant and will be accepted by the end users. The
Implementation Phase is substantially complete as of September
30, 1999. The Company has completed the development of test and
validation methodologies for its Information Technology (IT)
systems. Testing of applications was substantially complete as
of September 30, 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, communication 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 was
substantially complete as of September 30, 1999.
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
customers 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 was approximately $28,100 for 1998 and the Company has
budgeted approximately $100,000 for 1999 and incurred costs of
$81,000 as of September 30, 1999. 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 the estimates of costs for 1999 will be
accurate since actual results could differ from those plans. The
costs incurred in 1998 did not have a material effect on the
Company's net income for 1998 and the Company does not expect the
costs incurred for the same period in 1999 to have a material
effect on net income. 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 have developed 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 Company's
contingency plan was substantially complete on September 30,
1999, and implementation training and testing is being
implemented to take place in the next quarter.
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 to adequately remediate Year 2000 issues
or the inability of the Company to complete writing and/or
testing software changes on time schedules currently expected.
Nevertheless, the Company expects that its Year 2000 compliance
efforts will be successful without any adverse effects on its business.
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, 1999 compared to December 31, 1998.
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
No changes.
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
(a) Exhibits - none.
(b) Reports on Form 8-K - None
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 12, 1999
By:
/s/ Sharon Benson
Sharon Benson
Senior Vice President & Chief Financial Officer
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