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 March 31, 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 (916) 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 - - 1,839,092 shares as of March 31, 1998.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-- March 31, 1998 and December 31,
1997
Condensed consolidated statements of income-- Three months ended March 31,
1998 and 1997;
Condensed consolidated statement of cash flows-- Three months ended March
31, 1998 and 1997
Notes to condensed consolidated financial statements--
March 31, 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 March 31 December 31
(In thousands except share amounts) 1998 1997
ASSETS (Unaudited) (Note)
Cash and cash equivalents:
Cash and due from banks $13,946 $ 8,842
Federal funds sold 24,200 13,100
Total cash and cash equivalents 38,146 21,942
Cash held in trust 1,694 1,670
Securities:
Available for sale, at fair value 24,646 26,613
Held to maturity, at amortized cost
(fair value of $40,079 and $41,231 at
March 31, 1998 and December 31, 1997,
respectively) 38,208 39,219
Loans receivable, net of allowance for
loan losses and deferred loan fees 166,190 167,507
Premises and equipment, net of accumulated
depreciation and amortization 4,736 4,647
Other real estate owned 104 212
FHLB stock 801 790
Accrued interest receivable 1,841 1,923
Other assets 6,306 6,234
TOTAL ASSETS $282,672 $270,757
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 39,105 $ 32,253
Interest-bearing:
Savings 48,838 46,431
Time certificates 116,954 118,159
NOW accounts 44,170 41,679
Total deposits 249,067 238,522
Accrued interest and other liabilities 4,414 4,169
TOTAL LIABILITIES 253,481 242,691
STOCKHOLDERS' EQUITY:
Common stock, no par value: authorized
20,000,000 shares; outstanding 1,839,092
at March 31, 1998 and December 31, 1997 10,161 10,161
Retained earnings 18,313 17,205
Accumulated Other Comprehensive Income:
Unrealized gain on securities available
for sale (net of tax effect) 717 700
Total stockholders' equity 29,191 28,066
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $282,672 $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)
Three Months Ended
March 31
1998 1997
INTEREST INCOME:
Loans including fees $ 3,815 $ 3,756
Securities:
Taxable 386 150
Exempt from federal taxes 569 610
Interest on federal funds sold 242 275
Total interest income 5,012 4,791
INTEREST EXPENSE - DEPOSITS 2,137 2,102
NET INTEREST INCOME 2,875 2,689
PROVISION FOR LOAN LOSSES 180 180
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,695 2,509
NONINTEREST INCOME:
Service charges on deposit accounts 350 337
Other fees and charges 217 196
Gain on sale of loans 8 35
Gain on sale of available
for sale securities 192 89
Other 70 76
Total noninterest income 837 733
NONINTEREST EXPENSES:
Salaries & employee benefits 1,076 996
Occupancy expense 135 113
Furniture & equipment expense 155 133
Other 668 523
Total noninterest expenses 2,034 1,765
INCOME BEFORE PROVISION FOR INCOME TAXES 1,498 1,477
PROVISION FOR INCOME TAXES 390 380
NET INCOME $ 1,108 $ 1,097
EARNINGS PER SHARE:
Basic $ .60 $ .60
Diluted $ .60 $ .59
===========================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES CONDENSED Three Months Ended
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED March 31
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,108 $ 1,097
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 125 108
Amortization of premium on securities 7 0
Provision for loan losses 180 180
Loss on sale/write down of other real estate owned 4 0
Gain on sale of available for sale securities ( 192) ( 89)
Gain on sale of loans ( 8) ( 35)
Provision for deferred taxes 288 5
Effect of changes in:
Accrued interest receivable 82 1
Other assets ( 348) (1,522)
Accrued interest and other liabilities 245 401
Net cash provided by operating activities 1,491 146
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock ( 11) ( 11)
Proceeds from sale of other real estate owned 109 0
Purchase of available for sale securities ( 3,500) ( 110)
Proceeds from sales of available for sale
securities 1,658 125
Proceeds from maturities of available for
sale securities 4,000 0
Purchase of held to maturity securities 0 ( 560)
Proceeds from maturities or calls of held to
maturity securities 1,005 225
Proceeds from sale of loans 1,871 2,124
Net increase in loans ( 726) ( 918)
Purchases of premises and equipment ( 214) ( 276)
Net cash provided by investing activities 4,192 599
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, NOW accounts,
and savings accounts 11,750 3,638
Net increase in time certificates ( 1,205) 2,723
Cash dividends paid 0 ( 640)
Net cash provided by financing activities 10,545 5,721
NET INCREASE IN CASH AND CASH EQUIVALENTS 16,228 6,466
CASH AND CASH EQUIVALENTS:
Beginning of period 23,612 28,507
End of period $39,840 $34,973
ADDITIONAL INFORMATION:
Transfer of foreclosed loans from loans
receivable to other real estate owned 0 1,203
Cash Payments:
Income tax payments $ 50 $ 14
Interest payments $ 2,133 $ 2,094
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 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 three months ended March
31, 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.
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:
Three Months Ended March 31
1998 1997
(In thousands)
Net income $ 1,108 $ 1,097
Other comprehensive income:
Unrealized gain on securities available for
sale (net of tax effect) 717 700
Total comprehensive income $ 1,825 $ 1,797
NOTE C - 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 March 31, 1998 and
1997 is reconciled as follows:
Three Three
Months Months
Ended Ended
Calculation of Basic Earnings Per Share 3/31/98 3/31/97
Numerator - net income $ 1,108 $ 1,097
Denominator - weighted average common
shares outstanding $ 1,839 $ 1,824
Basic Earnings Per Share $ .60 $ .60
Calculation of Diluted Earnings Per Share
Numerator - net income $ 1,108 $ 1,097
Denominator:
Weighted average common shares
outstanding 1,839 1,824
Dilutive effect of outstanding options 23 24
1,862 1,848
Diluted Earnings Per Share $ .60 $ .59
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 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 seven 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 March 31, 1998, the Company achieved earnings of
$1,108,000 as compared to $1,097,000 for the period ending March 31, 1997.
On a per share basis, net income on a diluted basis was $.60 for the three
months ended March 31, 1998, and $.59 for the same period ending March 31,
1997. Net income increased primarily due to the increase in net interest
income. The Company's return on average total assets and average share-
holders' equity were 1.65% and 15.74% for the three months ended March 31,
1998, compared with 1.69% and 18.15% for the three months ended March 31,
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 $3,130,000 for the three months ended March 31, 1998, as
compared to $2,960,000 for the three months ended March 31, 1997. The
increase in net interest income for the period ending March 31, 1998 resulted
primarily from the increase in investment securities and interest earned on
loans.
Total interest income (FTE) increased to $5,267,000 in 1998 compared to
$5,062,000 in 1997, representing a 4.05% increase. Average loans increased
to $167,086,000 for the three months ended March 31, 1998, or .10% over the
same period in 1997, with an increase in average available for sale
securities of 166.9% and average held to maturity securities of 4.03%.
Total interest expense increased slightly $2,137,000 as compared to
$2,102,000 for the same period ending March 31, 1997. Average interest-
bearing deposits for the period ending March 31, 1998 totaled $207,988,000,
as compared to $203,555,000 for the same period in 1997, or a 2.18% increase.
Net interest margin (determined by dividing net interest income by total
average interest-earning assets) was 5.08% for the period ending March 31,
1998, as compared to 5.03% for the same period ending March 31, 1997. The
slight increase for the three months ended March 31, 1998 in the net interest
margin was attributed to the increases in loans, investments and deposits,
offset by a decrease in the net spread (the difference between rates earned
on interest earning assets and rates paid on deposits), affected primarily by
a stable to declining interest rate environment and the change in the
mix between loans and investment securities for the period ended March 31,
1998. Average earning assets yielded 8.55% for the period ending March 31,
1998 compared to 8.60% for the same period ending March 31, 1997. The cost
of funding these earning assets decreased slightly during the first
three months of 1998 as the yield on earning assets declined slightly. Rates
paid remained relatively stable at 4.17% for the first three months of 1998
as compared to 4.19% for the same period in 1997. The interest spread was
4.38% for the period ending March 31, 1998 compared to 4.41% for the period
ending March 31, 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, increased to $837,000 for the period ending
March 31, 1998 as compared to $733,000 for the same period ending March 31,
1997, a $104,000 increase.
Non-Interest Expense
Non-interest expense totaled $2,034,000 for the period ended March 31, 1998,
compared to $1,765,000 for the same period in 1997. Salaries and employee
benefits increased to $1,076,000 compared to $996,000, primarily due to
normal salary increases, employer taxes, and net pension cost for the
supplemental retirement plans for directors and key executives.
Occupancy and equipment expenses increased as a result of the relocation of
the Shasta Dam branch to our new building and the new super market branch in
Cottonwood.
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 54.8% at March 31, 1998 compared to 51.6% at March
31, 1997. The efficiency ratio is a measurement as to how efficiently the
Company allocates its resources.
A summary of non-interest expense for the three months ended March 31, 1998
and 1997, is presented below:
Non-Interest Expense March 31
(in thousands) 1998 1997
Salaries & employee benefits $ 1,076 $ 996
Occupancy expense 135 113
Furniture & equipment expense 155 133
Professional services 65 31
Data processing expenses 105 85
Printing & supplies 70 56
Postage 49 48
Messenger expense 43 33
ATM expense 67 55
Other 269 215
Total Non-interest expense $ 2,034 $ 1,765
Income Taxes
The provision for income taxes for the first quarter 1998 was $390,000 as
compared to $380,000 for the same period in 1997.
Impaired, Nonaccrual, Past Due and Restructured Loans and Other Real Estate
Owned
At March 31, 1998 the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, was approximately $4,832,000. Of that balance
approximately $98,000 has a related valuation allowance of $15,000. For the
quarter ended March 31, 1998, the average recorded investment in loans for
which impairment has been recognized was approximately $1,909,000. During
the portion of the three month period ended March 31, 1998 that the loans
were impaired the Company recognized approximately $122,000 of interest
income for cash payments received.
At December 31, 1997, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 was approxi-
mately $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 March 31, 1998
to $757,000 as compared to $536,000 at December 31, 1997.
A summary of non-performing assets at March 31, 1998 and December 31, 1997,
is as follows:
Non-Performing Assets (in thousands) March 31 December 31
1998 1997
Nonaccrual loans $ 757 $ 536
Accruing loans past due 90 days
or more 267 244
Restructured loans -- --
Other real estate owned 103 212
Total $ 1,127 $ 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 March 31, 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 March 31, 1998, the allowance for possible loan losses was $1,839,000
as compared to the December 31, 1997 amount of $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 $43,000 for the period
ending March 31, 1998. Additions to the allowance for loan losses are charged
against income. A provision for loan losses of $180,000 was charged to
income for the three months ended March 31, 1998.
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 March 31,1998, 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 $5,212,000 secured by first deeds of
trust on eligible 1-4 unit residential loans. The Company had not borrowed
from the FHLB as of March 31, 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 $101,000,000
and $87,774,000 (or 35.73% and 32.42% of total assets) at March 31, 1998 and
December 31, 1997, respectively. Total liquid assets for March 31, 1998 and
December 31, 1997 include investment securities of $38,208,000 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
$231,329,000 and $220,608,000 at March 31, 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:
March 31, 1998 Within 3 3 months 1-5 5+
(in thousands) months to 1 Year Years Years TOTAL
EARNING ASSETS:
Held to maturity securities $ 105 $ 1,746 $14,920 $21,437 $ 38,208
Available for sale
securities 1,999 4,424 15,713 0 22,136
Fed Funds Sold 24,200 0 0 0 24,200
Loans 43,795 8,627 53,714 61,894 168,030
Total earning assets $70,099 $14,797 $84,347 $83,331 $252,574
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ 0 $44,170 $ 0 $ 0 $ 44,170
Savings deposits 0 48,838 0 0 48,838
Time deposits 34,296 75,697 6,961 0 116,954
Total interest bearing
liabilities $ 34,296 $168,705 $ 6,961 $ 0 $209,962
INTEREST SENSITIVITY
GAP $ 35,803 $(153,908) $77,386 $83,331
CUMULATIVE INTEREST
RATE SENSITIVITY GAP $ 35,803 $(118,105) $(40,719) $42,612
At March 31, 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 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 three month period as of
March 31, 1998 the asset liability simulation model showed the Bank was
slightly asset sensitive in the first 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 March 31, 1998, were $282,672,000, representing an increase
of 4.40% over December 31, 1997 assets of $270,757,000. Increased deposits
were used to fund a 4.66% increase in average earning assets in the first
quarter of 1998.
Investment securities and federal funds sold totaled $87,054,000 at March 31,
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 $801,000 in FHLB stock.
During the first three months of 1998, net loans decreased to $166,190,000
from $167,507,000 for at December 31, 1997. Loans are the Company's major
component of earning assets. The Bank's average loan to deposit ratio was
69.68%.
Funding for increased investments came from increases in deposits. Total
deposits increased $10,545,000 in the first quarter of 1998 to $249,067,000, 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 $29,191,000 as of March 31, 1998, as compared to
$28,066,000 at December 31, 1997.
The Company's and the Bank's regulatory capital ratios remain above regula-
tory minimums. The Company's total risk based capital ratio at March 31, 1998
was 16.38% and its Tier 1 Risk Based Capital (RBC) ratio was 15.38%, 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 10.38% and 9.94% at March 31, 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
15.32%, a Tier 1 RBC ratio of 14.31% and a leverage ratio of 9.66% at March 31,
1998.
Impact of Inflation
Impact of inflation on a financial institution differs significantly from
that exerted on anindustrial 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 1.7% March
31, 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 believes it has identified all significant applications that will
require modification to ensure Year 2000 Compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
Compliance. The Company currently plans on completing the testing process of
all significant applications by December 31, 1998.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and
the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
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.
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 three months ended March 31, 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
No changes.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submission of Matters to a Vote of Security Holders
None
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 May 12, 1998 /s/ Sharon Benson
Sharon Benson
Senior Vice President &
Chief Financial Officer