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 June 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 (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 - - 1,842,510 shares as of June 30, 1998.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-- June 30, 1998 and December 31,1997
Condensed consolidated statements of income-- Six months ended June 30,
1998 and 1997;
Condensed consolidated statements of income-- Three months ended June 30,
1998 and 1997;
Condensed consolidated statement of cash flows-- Six months ended June 30,
1998 and 1997
Notes to condensed consolidated financial statements--
June 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 June 30 December 31
(In thousands except share amounts) 1998 1997
ASSETS (Unaudited) (Note)
Cash and cash equivalents:
Cash and due from banks $10,938 $ 8,842
Federal funds sold 12,300 13,100
Total cash and cash equivalents 23,238 21,942
Cash held in trust 1,276 1,670
Securities:
Available for sale, at fair value 25,275 26,613
Held to maturity, at amortized cost
(fair value of $38,730 and $41,231
at June 30, 1998 and December 31, 1997,
respectively) 36,867 39,219
Loans receivable, net of allowance for loan
losses and deferred loan fees 173,469 167,507
Premises and equipment, net of accumulated
depreciation and amortization 4,916 4,647
Other real estate owned 376 212
FHLB stock 817 790
Accrued interest receivable 1,882 1,923
Other assets 6,907 6,234
TOTAL ASSETS $275,023 $270,757
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 30,113 $ 32,253
Interest-bearing:
Savings 48,171 46,431
Time certificates 117,784 118,159
NOW accounts 44,786 41,679
Total deposits 240,854 238,522
Accrued interest and other liabilities 4,625 4,169
TOTAL LIABILITIES 245,479 242,691
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
1,842,510 and 1,839,092 at June 30, 1998 and December 31, 1997,
respectively 10,191 10,161
Retained earnings 18,793 17,205
Accumulated Other Comprehensive Income:
Unrealized gain on securities available for
sale (net of tax effect) 560 700
Total stockholders' equity 29,544 28,066
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $275,023 $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)
Six Months Ended
June 30
1998 1997
INTEREST INCOME:
Loans including fees $ 7,707 $ 7,603
Securities:
Taxable 774 375
Exempt from federal taxes 1,124 1,213
Interest on federal funds sold 488 552
Total interest income 10,093 9,743
INTEREST EXPENSE - DEPOSITS 4,302 4,256
NET INTEREST INCOME 5,791 5,487
PROVISION FOR LOAN LOSSES 360 360
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,431 5,127
NONINTEREST INCOME:
Service charges on deposit accounts 795 697
Other fees and charges 433 385
Gain on sale of loans 105 103
Gain on sale of available
for sale securities 459 140
Other 156 145
Total noninterest income 1,948 1,470
NONINTEREST EXPENSES:
Salaries & employee benefits 2,225 1,998
Occupancy expense 270 232
Furniture & equipment expense 310 271
Other 1,475 1,114
Total noninterest expenses 4,280 3,615
INCOME BEFORE PROVISION FOR INCOME TAXES 3,099 2,982
PROVISION FOR INCOME TAXES 866 799
NET INCOME $ 2,233 $ 2,183
EARNINGS PER SHARE:
Basic $ 1.21 $ 1.20
Diluted $ 1.20 $ 1.18
===========================================================================
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
June 30
1998 1997
INTEREST INCOME:
Loans including fees $ 3,892 $ 3,847
Securities:
Taxable 388 225
Exempt from federal taxes 555 603
Interest on federal funds sold 246 277
Total interest income 5,081 4,952
INTEREST EXPENSE - DEPOSITS 2,165 2,154
NET INTEREST INCOME 2,916 2,798
PROVISION FOR LOAN LOSSES 180 180
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,736 2,618
NONINTEREST INCOME:
Service charges on deposit accounts 445 360
Other fees and charges 216 189
Gain on sale of loans 97 68
Gain on sale of available
for sale securities 267 51
Other 86 69
Total noninterest income 1,111 737
NONINTEREST EXPENSES:
Salaries & employee benefits 1,149 1,002
Occupancy expense 135 119
Furniture & equipment expense 155 138
Other 807 591
Total noninterest expenses 2,246 1,850
INCOME BEFORE PROVISION FOR INCOME TAXES 1,601 1,505
PROVISION FOR INCOME TAXES 476 419
NET INCOME $ 1,125 $ 1,086
EARNINGS PER SHARE:
Basic $ .61 $ .60
Diluted $ .60 $ .59
===========================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES CONDENSED Six Months Ended
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) June 30
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,233 $ 2,183
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 253 220
Amortization of premium on securities 17 ( 3)
Provision for loan losses 360 360
Loss on sale/write down of other real estate owned 5 97
Gain on sale of available for sale securities ( 459) ( 140)
Gain on sale of loans ( 105) ( 103)
Provision for deferred taxes ( 1) ( 31)
Effect of changes in:
Accrued interest receivable 41 ( 40)
Other assets (1,033) ( 2,147)
Accrued interest and other liabilities 520 527
Net cash provided by operating activities 1,831 923
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock ( 27) ( 32)
Proceeds from sale of other real estate owned 207 0
Purchase of available for sale securities ( 7,582) ( 8,187)
Proceeds from sales of available for sale securities 2,155 2,253
Proceeds from maturities of available for sale securities 7,000 0
Purchase of held to maturity securities 0 ( 1,565)
Proceeds from maturities or calls of held to maturity
securities 2,340 1,385
Proceeds from sale of loans 4,731 6,302
Net increase in loans (10,948) ( 4,168)
Purchases of premises and equipment ( 522) ( 393)
Net cash used in investing activities ( 2,646) ( 4,405)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, NOW accounts,
and savings accounts 2,706 7,428
Net increase in time certificates ( 374) 2,021
Cash dividends paid ( 645) (1,280)
Cash received for stock options exercised 30 60
Net cash provided by financing activities 1,717 8,229
NET INCREASE IN CASH AND CASH EQUIVALENTS 902 4,747
CASH AND CASH EQUIVALENTS:
Beginning of period 23,612 28,507
End of period $24,514 $33,254
ADDITIONAL INFORMATION:
Transfer of foreclosed loans from loans receivable to
other real estate owned $ 376 $ 1,664
Cash Payments:
Income tax payments $ 470 $ 529
Interest payments $ 4,325 $ 4,256
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 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 six months ended June 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.
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:
Six Months Ended June 30
1998 1997
(In thousands)
Net income $ 2,233 $ 2,183
Other comprehensive income:
Holding (loss) gain arising during period,
net of tax 190 139
Reclassification adjustment, net of tax ( 330) ( 101)
Net (loss) gain recognized in other
comprehensive income ( 140) 38
Net comprehensive income $ 2,093 $ 2,221
Three Months Ended June 30
1998 1997
(In thousands)
Net income $ 1,125 $ 1,086
Other comprehensive income:
Holding (loss) gain arising during period,
net of tax 35 160
Reclassification adjustment, net of tax ( 192) ( 37)
Net (loss) gain recognized in other
comprehensive income ( 157) 123
Net comprehensive income $ 968 $ 1,209
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 June 30, 1998 and
1997 is reconciled as follows:
(Dollars in thousands except per share data) Six Six
Months Months
Ended Ended
Calculation of Basic Earnings Per Share 6/30/98 6/30/97
Numerator - net income $ 2,233 $ 2,183
Denominator - weighted average common
shares outstanding 1,841 1,826
Basic Earnings Per Share $ 1.21 $ 1.20
Calculation of Diluted Earnings Per Share
Numerator - net income $ 2,233 $ 2,183
Denominator:
Weighted average common shares
outstanding 1,841 1,826
Dilutive effect of outstanding options 20 24
1,861 1,850
Diluted Earnings Per Share $ 1.20 $ 1.18
Three Three
Months Months
Ended Ended
Calculation of Basic Earnings Per Share 6/30/98 6/30/97
Numerator - net income $ 1,125 $ 1,086
Denominator - weighted average common
shares outstanding 1,839 1,824
Basic Earnings Per Share $ .61 $ .60
Calculation of Diluted Earnings Per Share
Numerator - net income $ 1,125 $ 1,086
Denominator:
Weighted average common shares
outstanding 1,839 1,824
Dilutive effect of outstanding options 21 24
1,860 1,848
Diluted Earnings Per Share $ .60 $ .59
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 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 eight 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 June 30, 1998, the Company achieved earnings of
$2,233,000 as compared to $2,183,000 for the period ending June 30, 1997. On a
per share basis, net income on a diluted basis was $1.20 for the six months
ended June 30, 1998, and $1.18 for the same period ending June 30, 1997.
The Company paid a $.35 dividend to shareholders of record as of June 9, 1998,
of $645,000. Net income increased primarily due to the increase in net
interest income and an increase in gains on sale of securities. The Company's
return on average total assets and average shareholders'equity were 1.63% and
15.34% for the six months ended June 30, 1998, compared with 1.66% and 17.54%
for the six months ended June 30, 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 $6,321,000 for the six months ended June 30, 1998, as compared
to $6,030,000 for the six months ended June 30, 1997. The increase in net
interest income for the period ending June 30, 1998 resulted primarily from the
increase in investment securities and interest earned on loans.
Total interest income (FTE) increased to $10,623,000 in 1998 compared to
$10,286,000 in 1997, representing a 3.28% increase. Average loans increased to
$168,684,000 for the six months ended June 30, 1998, or 1.05% over the same
period in 1997, with an increase in average available for sale securities of
108.89% and a decrease in average held to maturity securities of 5.32%.
Total interest expense increased slightly to $4,302,000 as compared to
$4,256,000 for the same period ending June 30, 1997. Average interest-bearing
deposits for the period ending June 30, 1998 totaled $210,080,000, as compared
to $204,544,000 for the same period in 1997, or a 2.71% increase.
Net interest margin (determined by dividing net interest income by total
average interest-earning assets) was 5.11% for the period ending June 30, 1998,
as compared to 5.06% for the same period ending June 30, 1997. The increase
for the six months ended June 30, 1998 in the net interest margin was
attributed to the increases in loans, investments, deposits, and a slight
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
declining interest rate environment and the change in the mix between
loans and investment securities for the period ended June 30, 1998. Average
earning assets yielded 8.58% for the period ending June 30, 1998 compared to
8.63% for the same period ending June 30, 1997. The cost of funding these
earning assets decreased slightly during the first six months of 1998. Rates
paid declined to 4.13% for the first six months of 1998 as compared to 4.20%
for the same period in 1997. The interest spread was 4.45% for the period
ending June 30, 1998 compared to 4.43% for the period ending June 30, 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 $1,948,000 for the period ending June 30,
1998 as compared to $1,470,000 for the same period ending June 30, 1997.
The increase of $478,000 in non-interest income is a result of a $319,000
increase in gains on sale of available for sale securities and a $159,000
increase in other operating income, principally service charge and fee income.
Non-Interest Expense
Non-interest expense totaled $4,280,000 for the period ended June 30, 1998,
compared to $3,615,000 for the same period in 1997. Non-interest expenses for
the first six months of 1998 increased $665,000 over the same period in 1997.
The increase in costs was attributed to the opening of the Cottonwood branch,
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 55.31 at June 30, 1998 compared to 51.97% at June 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 six months ended June 30,
1998 and 1997, is presented below:
Non-Interest Expense June 30
(in thousands) 1998 1997
Salaries & employee benefits $ 2,225 $ 1,998
Occupancy expense 270 232
Furniture & equipment expense 310 271
Professional services 209 77
Data processing expenses 215 173
Printing & supplies 135 111
Postage 97 92
Messenger expense 87 69
ATM expense 136 112
Other 596 480
Total Non-interest expense $ 4,280 $ 3,615
Income Taxes
The provision for income taxes for the second quarter 1998 was
$866,000 as compared to $799,000 for the same period in 1997.
Impaired, Nonaccrual, Past Due and Restructured Loans and Other Real Estate
Owned
At June 30, 1998 the recorded investment in loans for which impairment
has been recognized was approximately $3,946,000. Of that balance approximately
$1,514,000 has a related valuation allowance of $116,000. For the six months
ended June 30, 1998, the average recorded investment in loans for which
impairment has been recognized was approximately $3,941,000. During the
portion of the six month period ended June 30, 1998 that the loans were
impaired the Company recognized approximately $179,000 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 June 30,
1998 to $687,000 as compared to $536,000 at December 31, 1997.
A summary of non-performing assets at June 30, 1998 and December 31,
1997, is as follows:
Non-Performing Assets (in thousands) June 30 December 31
1998 1997
Nonaccrual loans $ 687 $ 536
Accruing loans past due 90 days
or more 106 244
Restructured loans -- --
Other real estate owned 376 212
Total $ 1,169 $ 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 June 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 June 30, 1998, the allowance for possible loan losses was
$1,783,000 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 $279,000 for the period
ending June 30, 1998. Additions to the allowance for loan losses are charged
against income. A provision for loan losses of $360,000 was charged to income
for the six months ended June 30, 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 June 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 $5,024,000 secured by first deeds of trust on
eligible 1-4 unit residential loans. The Company had not borrowed from the
FHLB as of June 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 $85,380,000 and
$87,774,000 (or 31.04% and 32.42% of total assets) at June 30, 1998 and
December 31, 1997, respectively. Total liquid assets for June 30, 1998 and
December 31, 1997 include investment securities of $36,867,000 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 $223,303,000 and $220,608,000 at June 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:
June 30, 1998 Within 3 3 months 1-5 5+
(in thousands) months to 1 Year Years Years TOTAL
EARNING ASSETS:
Held to maturity securities $ 1,298 $ 725 $13,857 $20,987 $ 36,867
Available for sale
securities 1,426 9,195 12,489 0 23,110
Fed Funds Sold 12,300 0 0 0 12,300
Loans 44,509 9,757 58,501 62,485 175,252
Total earning assets $59,533 $19,677 $84,847 $83,472 $247,529
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ 0 $ 44,786 $ 0 $ 0 $ 44,786
Savings deposits 0 48,171 0 0 48,171
Time deposits 55,370 56,372 6,042 0 117,784
Total interest bearing
liabilities $ 55,370 $149,329 $ 6,042 $ 0 $210,741
INTEREST SENSITIVITY
GAP $ 4,163 $(129,652) $ 78,805 $83,472
CUMULATIVE INTEREST
RATE SENSITIVITY GAP $ 4,163 $(125,489) $(46,684) $36,788
At June 30, 1998, 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 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 six month period as of
June 30, 1998 the asset liability simulation model showed the Bank was slightly
asset sensitive in the second 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 June 30, 1998, were $275,023,000, representing an increase
of 1.58% over December 31, 1997 assets of $270,757,000. Increased deposits
were used to fund a 3.89% increase in average earning assets in the second
quarter of 1998.
Investment securities and federal funds sold totaled $74,442,000 at June
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 $817,000 in FHLB
stock.
During the first six months of 1998, net loans increased to $173,469,000
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
69.93%.
Funding for increased investments came from increases in deposits. Total
deposits increased $2,332,000 for the six months ended June 30, 1998 to
$240,854,000, 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 $29,544,000 as of June 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 June 30,
1998 was 16.28% and its Tier 1 Risk Based Capital (RBC) ratio was 15.33%,
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 10.46% and 9.94% at June 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
15.16%, a Tier 1 RBC ratio of 14.21% and a leverage ratio of 9.67% at June 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% June
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 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998, AS
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997.
Net Income
The Company's net income for the three months ended June 30, 1998, was
$1,125,000, as compared to a net income of $1,086,000 for the same period in
1997. The net income for the three month period ended June 30, 1998, resulted
in net income per share of sixty cents ($.60), fully diluted.
Net Interest Income
Net interest income on a fully tax-equivalent basis (FTE) increased
$90,000, or 2.93%, to $3,160,000 for the three months ended June 30, 1998, as
compared to $3,070,000 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 on 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 5.05% and 5.09% for the three months
ending June 30, 1998 and 1997, respectively.
Non Interest Income
Total non interest income increased to $1,111,000, compared to $737,000
for the three months ended June 30, 1998 and 1997, respectively. This
increase was primarily the result of increases in gain on sale of loans and
securities of $245,000 and service charges and other fees of $112,000.
Non Interest Expense
Non interest expense increased for the three months ended June 30, 1998
to $2,246,000 compared to $1,850,000 for the same period in 1997. The increase
in costs was attributed to the opening of the Cottonwood branch, 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
portoflio 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.
A summary of non interest expense for the three month period ended
June 30, 1998 and 1997, is presented below:
Non-Interest Expense June 30
(in thousands) 1998 1997
Salaries & employee benefits $ 1,149 $ 1,002
Occupancy expense 135 119
Furniture & equipment expense 155 138
Professional services 144 46
Data processing expenses 110 88
Printing & supplies 65 55
Postage 68 44
Messenger expense 44 36
ATM expense 69 57
Other 307 265
Total Non-interest expense $ 2,246 $ 1,850
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 six months ended June 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
No changes.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of North Valley Bancorp was held
on Tuesday, May 26,1998. Shareholders of North Valley Bancorp approved the
following proposals:
1. Election of directors.
2. An amendment of the Articles of Incorporation restricting shareholder
action by written consent.
3. An amendment of the Articles of Incorporation concerning elimination of
cumulative voting.
4. An amendment of the Articles of Incorporation to authorize the issuance of
Preferred Stock.
5. An amendment of the Articles of Incorporatiaon regarding indemnification
of agents.
6. Adoption of the North Valley Bancorp 1998 Employee Stock Incentive Plan.
7. An amendment of the North Valley Bancorp 1989 Director Stock Option Plan.
8. Ratification of Deloitte & Touche as independent public accountants for
the Corporation for 1998.
Results of the election are presented below:
ANNUAL MEETING OF SHAREHOLDERS
Tuesday, May 26, 1998
Total shares outstanding: 1,839,092
Total shares voted: 1,502,832 81.72%
By proxy vote: 1,314,777
In person vote: 188,055
Shares % Outstanding % of
Voted Shares Quorum
Proposal 1: For: 1,494,052 81.24% 99.42%
Election of Directors Against: 8,780 0.48% 0.58%
Abstain: 0 0.00% 0.00%
Proposal 2: For: 1,135,421 61.74% 75.55%
Amend Articles of Incorporation Against: 78,554 4.27% 5.23%
restricting shareholder action Abstain: 114,961 6.25% 7.65%
by written consent
Proposal 3: For: 1,133,505 61.63% 75.42%
Amend Articles of Incorporation Against: 84,148 4.58% 5.60%
concerning elimination of Abstain: 111,283 6.05% 7.40%
cumulative voting
Proposal 4: For: 1,061,018 57.69% 70.60%
Amend Articles of Incorporation Against: 235,166 12.79% 15.65%
to authorize issuance of Abstain: 32,752 1.78% 2.18%
preferred stock
Proposal 5: For: 1,305,776 71.00% 86.89%
Amend Articles of Incorporation Against: 75,489 4.10% 5.02%
regarding indemnification of Abstain: 121,567 6.61% 8.09%
agents
Proposal 6: For: 1,208,387 65.71% 80.41%
Adopt North Valley Bancorp 1998 Against: 91,777 4.99% 6.11%
Employee Stock Incentive Plan Abstain: 28,772 1.56% 1.91%
Proposal 7: For: 1,268,353 68.97% 84.40%
Amend North Valley Bancorp 1989 Against: 205,197 11.16% 13.65%
Director Stock Option Plan Abstain: 29,282 1.59% 1.95%
Proposal 8: For: 1,468,382 79.84% 97.71%
Ratify appointment of Deloitte & Against: 10,712 0.58% 0.71%
Touche as independent public Abstain: 23,738 1.29% 1.58%
accountants for 1998
Item 5. Other Information
N/A
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 3(i) Articles of Incorporation of the Registrant,
as amended and restated.
Exhibit 3(ii) By-laws of the Registrant, as amended and
restated.
Exhibit 10 Indemnification Agreement
(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 August 12, 1998 /s/ Sharon Benson
Sharon Benson
Senior Vice President &
Chief Financial Officer