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 Quarterly Period Ended March 31, 1999 .
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From
to
Commission file number 0-10652
NORTH VALLEY BANCORP
(Exact name of registrant as specified in its charter)
California 94-2751350
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
880 E. Cypress Ave.
Redding, CA 96002
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 221-8400
Not applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange
Act of 1934 during the preceding 12 months (or for such shorter
periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practical date.
Common Stock - - 3,702,716 shares as of May 4, 1999.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-- March 31, 1999 and
December 31, 1998
Condensed consolidated statements of income-- Three months ended
March 31, 1999 and 1998
Condensed consolidated statement of cash flows-- Three months
ended March 31, 1999 and 1998
Notes to condensed consolidated financial statements-- March 31,
1999
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 and Use of Proceeds
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) 1999 1998
ASSETS (Unaudited) (Audited)
Cash and cash equivalents:
Cash and due from banks $10,054 $ 7,052
Federal funds sold 19,500 18,300
Total cash and cash equivalents 29,554 25,352
Cash held in trust 294 873
Securities:
Available for sale, at fair value 18,849 22,842
Held to maturity, at amortized cost 32,801 33,914
Loans receivable, net of allowance for loan
losses of $1,838 and $1,902 and deferred
loan fees $349 and $449 at March 31, 1999
and December 31, 1998 198,115 197,434
Premises and equipment, net of accumulated
depreciation and amortization 5,009 5,028
Other real estate owned 1,766 575
FHLB stock 852 841
Accrued interest receivable 1,802 1,770
Other assets 8,498 7,733
TOTAL ASSETS $297,540 $296,362
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 37,276 $ 37,372
Interest-bearing:
Savings 95,944 95,617
Time certificates 119,039 118,594
Demand accounts 8,412 8,298
Total deposits 260,671 259,881
Accrued interest payable and other
liabilities 5,913 6,301
Total Liabilities 266,584 266,182
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 3,699,556
and 3,690,220 at March 31, 1999 and
December 31, 1998 10,290 10,237
Retained earnings 20,672 19,890
Accumulated other comprehensive income,
net of tax ( 6) 53
Total stockholders' equity 30,956 30,180
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $297,540 $296,362
=====================================================================
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
INTEREST INCOME: 1999 1998
Loans including fees $ 4,167 $ 3,815
Securities:
Taxable 287 386
Exempt from federal taxes 510 569
Interest on federal funds sold 245 242
Total interest income 5,209 5,012
INTEREST EXPENSE - DEPOSITS 2,012 2,137
NET INTEREST INCOME 3,197 2,875
PROVISION FOR LOAN LOSSES 255 180
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,942 2,695
NONINTEREST INCOME:
Service charges on deposit accounts 487 350
Other fees and charges 215 217
Gain (loss) on sale of loans ( 37) 8
Gain on sale of available for sale securities 16 192
Other 231 70
Total noninterest income 912 837
NONINTEREST EXPENSES:
Salaries and employee benefits 1,139 1,076
Occupancy expense 160 135
Furniture and equipment expense 186 155
Other 803 668
Total noninterest expenses 2,288 2,034
INCOME BEFORE PROVISION FOR INCOME TAXES 1,566 1,498
PROVISION FOR INCOME TAXES 449 390
NET INCOME $ 1,117 $ 1,108
EARNINGS PER SHARE:
Basic $ .30 $ .30
Diluted $ .30 $ .30
=========================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES Three Months Ended
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS March 31
(UNAUDITED) 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,117 $ 1,108
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 143 125
Amortization of premium on securities ( 36) 7
Provision for loan losses 255 180
Loss on sale/write down of other real estate owned 208 4
Gain on sale of available for sale securities ( 16) ( 192)
Loss(gain) on sale of loans 37 ( 8)
Provision (benefit) for deferred taxes ( 11) 288
Effect of changes in:
Cash held in trust 579
Accrued interest receivable ( 32) 82
Other assets ( 755) ( 348)
Accrued interest payable and other liabilities ( 11) 245
Net cash provided by operating activities 1,478 1,491
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock ( 11) ( 11)
Proceeds from sale of other real estate owned 3,028 109
Purchase of available for sale securities ( 11,000) ( 3,500)
Proceeds from sales of available for sale securities 0 1,658
Proceeds from maturities of available for sale
securities 15,016 4,000
Purchase of held to maturity securities 0 0
Proceeds from maturities or calls of held to
maturity securities 1,110 1,005
Proceeds from sale of loans 12,075 1,871
Net increase in loans ( 17,475) ( 726)
Purchases of premises and equipment ( 124) ( 214)
Net cash provided by investing activities 2,619 4,192
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in noninterest and interest bearing
deposit and saving accounts 345 11,750
Net increase in time certificates 445 ( 1,205)
Cash dividends paid ( 738)
Cash received for stock options exercised 53
Net cash provided by financing activities 105 10,545
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,202 16,228
CASH AND CASH EQUIVALENTS:
Beginning of period 25,352 23,612
End of period $29,554 $39,840
ADDITIONAL INFORMATION:
Cash Payments:
Income tax payments $ 208 $ 50
Interest payments $ 2,324 $ 2,133
Non Cash Investing Activities:
Transfer of foreclosed loans from loans
receivable to other real estate owned $ 4,427 $ 0
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999 and December 31, 1998 and the Three Months Ended March
31, 1999 and 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 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 three months ended
March 31, 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.
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:
Three Months Ended March 31
1999 1998
(In thousands)
Net income $ 1,117 $ 1,108
Other comprehensive income:
Unrealized holding loss on available for sale
securities arising during period, net of tax (36) (121)
Reclassification adjustment, net of tax 11 138
Net gain (loss) recognized in other comprehensive income (25) 17
Total comprehensive income $ 1,092 $ 1,125
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.
There was no difference in the numerator 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 each of the quarters ended March 31,
1999 and 1998 is reconciled as follows:
Three Months Ended March 31
Calculation of Basic Earnings Per Share 1999 1998
(In thousands, except per share amounts)
Numerator - net income $ 1,117 $ 1,108
Denominator - weighted average common
shares outstanding 3,694 3,678
Basic Earnings Per Share $ .30 $ .30
Calculation of Diluted Earnings Per Share
Numerator - net income $ 1,117 $ 1,108
Denominator:
Weighted average common shares
outstanding 3,694 3,678
Dilutive effect of outstanding options 0 23
3,694 3,701
Diluted Earnings Per Share $ .30 $ .30
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 March 31, 1999, the Company achieved
net income of $1,117,000 as compared to $1,108,000 for the three
months ended March 31, 1998. On a per share basis, diluted earnings
per share was $.30 for the three months ended March 31, 1999 and
1998. Net income increased primarily due to the increase in net
interest income, principally from loans. The Company's return on
average total assets and average shareholders' equity were 1.53% and
14.80% for the three months ended March 31, 1999, compared with 1.65%
and 15.74% for the three months ended March 31, 1998.
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 $3,425,000 for the three
months ended March 31, 1999, as compared to $3,130,000 for the three
months ended March 31, 1998. The increase in net interest income for
the three months ended March 31, 1999 resulted primarily from the
increase in loans which generally carry higher interest rates than
other earning assets.
Total interest income (FTE) increased to $5,437,000 in 1999
compared to $5,267,000 in 1998, representing a 3.23% increase.
Average loans increased to $193,187,000 for the three months ended
March 31, 1999, or 15.62% over the same period in 1998.
Total interest expense decreased slightly $2,012,000 as
compared to $2,137,000 for the same three months ended March 31,
1998. Average interest-bearing deposits for the three months ended
March 31, 1999 totaled $222,003,000, as compared to $207,988,000 for
the same period in 1998, or a 6.74% increase.
Net interest margin (determined by dividing net interest income
(FTE) by total average interest-earning assets) was 5.14% for the
three months ended March 31, 1999, as compared to 5.08% for the same
three months ended March 31, 1998. The increase for the three
months ended March 31, 1999 in the net interest margin was attributed
to the increases in loans 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, 1999.
Average earning assets yielded 8.16% for the three months ended March
31, 1999 compared to 8.55% for the same three months ended March 31,
1998. The cost of funding these earning assets decreased during the
first three months of 1999 as the yield on earning assets declined.
Rates paid decreased to 3.68% for the first three months of 1999 as
compared to 4.17% for the same period in 1998. The interest spread
was 4.48% for the three months ended March 31, 1999 compared to 4.38%
for the three months ended March 31, 1998.
Non-Interest Income
Non-interest income, which includes income derived from service
charges on deposit accounts, other fees and charges, gain (loss) on
sale of loans and available for sale securities, and other operating
income, increased to $912,000 for the three months ended March 31,
1999 as compared to $837,000 for the same three months ended March
31, 1998, a $75,000 increase. The increase is primarily the result
of the net gain on sale of other real estate owned of $156,000 offset
by $176,000 reduction in gain on available for sale securities,
included in other operating income.
Non-Interest Expense
Non-interest expense totaled $2,288,000 for the period
ended March 31, 1999, compared to $2,034,000 for the same period in
1998. Salaries and employee benefits increased to $1,139,000
compared to $1,076,000, primarily due to additional personnel for the
new branches, along with increases in 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 55.7% at March 31, 1999
compared to 54.8% at March 31, 1998. 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, 1999 and 1998, is presented below:
Non-Interest Expense March 31
(in thousands) 1999 1998
Salaries & employee benefits $ 1,139 $ 1,076
Occupancy expense 160 135
Furniture & equipment expense 186 155
Professional services 104 65
Data processing expenses 104 105
Printing & supplies 67 70
Postage 54 49
Messenger expense 46 43
ATM expense 79 67
Other 349 269
Total Non-interest expense $ 2,288 $ 2,034
Income Taxes
The provision for income taxes for the first quarter 1999
was $449,000 as compared to $390,000 for the same period in 1998.
The effective income tax rate for state and federal income taxes was
28.7% for the three months ended March 31, 1998 compared to 26% for
the same period in 1998.
Impaired, Nonaccrual, Past Due and Restructured Loans and Other Real
Estate Owned
At March 31, 1999 the recorded investment in loans for
which impairment has been recognized was approximately $1,770,000. Of
that balance approximately $1,505,000 has a related valuation
allowance of $138,000.
The remaining $265,000 did not require a valuation
allowance. For the quarter ended March 31, 1999, the average
recorded investment in loans for which impairment has been recognized
was approximated $2,363,000. During the portion of the year that the
loans were impaired the Company recognized interest income of
approximately $46,000 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.
The amount of non accrual loans has decreased as of March
31, 1999 to $901,000 from $2,307,000 at December 31, 1998. For the
three months ended March 31, 1999, $4,427,000 was transferred to
other real estate owned from non accrual loans and loans receivable.
Of that total, $3,028,000 was sold.
A summary of non-performing assets at March 31, 1999 and
December 31, 1998, is as follows:
Non-Performing Assets (in thousands) March 31 December 31
1999 1998
Nonaccrual loans $ 901 $ 2,307
Accruing loans past due 90 days or more 358 364
Restructured loans -- --
Other real estate owned 1,766 575
Total $ 3,025 $ 3,246
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 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.
At March 31, 1999, 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, 1999, the allowance for possible loan losses was
$1,838,000 as compared to the December 31, 1998 amount of $1,902,000.
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 $319,000 and $43,000 for the three months ended March 31,
1999 and 1998. Additions to the allowance for loan losses are
charged against income. A provision for loan losses of $255,000 and
$180,000 was charged to income for the three months ended March 31,
1999 and 1998.
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.
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 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, 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 $2,321,000 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, 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 $81,204,000 and $82,108,000 (or 27.29% and
27.71% of total assets) at March 31, 1999 and December 31, 1998,
respectively. Total liquid assets for March 31, 1999 and December
31, 1998 include investment securities of $32,801,000 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
$240,086,000 and $241,412,000 at March 31, 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 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 (other than equity securities with a fair value of
approximately $193,000), which is the measure of interest sensitive
assets over interest-bearing liabilities, for each individual
repricing period on a cumulative basis:
March 31, 1999 Within 3 3 months 1-5 5+
(in thousands) months to 1 Year Years Years TOTAL
EARNING ASSETS:
Held to maturity securities $ 0 $ 1,065 $12,082 $19,654 $ 32,801
Available for sale
securities 0 5,646 13,010 0 18,656
Fed Funds Sold 19,500 0 0 0 19,500
Loans, net of deferred loan
fees 36,904 11,740 87,080 64,229 199,953
Total earning assets $56,404 $18,451 $112,172 $83,883 $270,910
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ 0 $ 8,412 $ 0 $ 0 $ 8,412
Savings deposits 0 95,944 0 0 95,944
Time deposits 49,216 65,670 4,153 0 119,039
Total interest bearing
liabilities $49,216 $170,026 $ 4,153 $ 0 $223,395
INTEREST SENSITIVITY
GAP $ 7,188 $(151,575) $108,019 $83,883
CUMULATIVE INTEREST
RATE SENSITIVITY GAP $ 7,188 $(144,387) $(36,368) $47,515
At March 31, 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 three
month period ended March 31, 1999, the asset liability simulation
model showed the Bank was slightly asset sensitive in the first
quarter 1999. 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 1999, 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, 1999, were $297,540,000,
representing an increase of .40% over December 31, 1998 assets of
$296,362,000. Increases in average deposits were used to fund a
4.66% increase in average earning assets in the first quarter of
1999.
Investment securities and federal funds sold totaled
$71,150,000 at March 31, 1999, compared to $75,056,000 at December
31, 1998. The Company is a member of Federal Home Loan Bank of San
Francisco and holds $852,000 in FHLB stock.
During the first three months of 1999, net loans
increased to $198,115,000 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 74.24%.
Total deposits increased $790,000 in the first quarter of
1999 to $260,671,000, as 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. Shareholders' equity increased to $30,956,000 as
of March 31, 1999, as compared to $30,180,000 at December 31, 1998.
The Company's and the Bank's regulatory capital ratios
remain above regulatory minimums. The Company's total risk based
capital ratio at March 31, 1999 was 14.93% and its Tier 1 Risk Based
Capital (RBC) ratio was 14.08%, exceeding the minimum guidelines of
8% and 4%. The ratios at December 31, 1998 were 15.05% and 14.14%,
respectively.
The Company's leverage ratios were 10.32% and 10.18% at
March 31, 1999 and December 31, 1998, exceeding the minimum
guidelines of 4%.
Under current regulations adopted by federal regulatory
agencies, a "well-capitalized" institution must have a Tier 1 RBC
ratio of at least 6%, a total capital ratio of at least 10% and
leverage ratio of at least 5% and not be subject to a capital
directive order. The Bank had a total capital ratio of 14.15%, a
Tier 1 RBC ratio of 13.29% and a leverage ratio of 9.73% at March 31,
1999.
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 1.7% March 31, 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, 80% 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 March 31, 1999. The Implementation
Phase, 50% complete, certifies that systems are Year 2000 compliant
and will be accepted by the end users. The Implementation Phase is
scheduled to be substantially complete by June 30, 1999. The Company
has completed the development of test and validation methodologies
for its Information Technology (IT) systems. Testing of applications
was substantially complete as of the first quarter of 1999. In some
cases, the Company will rely on the service providers and software
vendors to facilitate proxy testing with a selected group of users.
The Company will review the test plans and validate the results of
the proxy testing to ensure the Year 2000 compliance of those
systems. The Company's business also utilizes non-IT products and
services, some of which have embedded technology which might not be
Year 2000 ready. Some non-IT products and services involve
infrastructure issues such as power, 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 by December 31,
1998.
The Company is making efforts to ensure that its customer base
is aware of the Year 2000 problem. Year 2000 correspondence has been
sent to both deposit and loan customers. The Bank has amended its
credit authorization documentation to include consideration regarding
the Year 2000 problem. Significant 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. 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 are developing contingency plans to
address the possibility that efforts to mitigate Year 2000 risk are
not successful either in whole or in part. These plans will include
remedial efforts up to and including complete manual processing of
information for critical IT systems in the event there is a failure
after December 31, 1999. The Company's contingency plan was
substantially complete on April 30, 1999, and implementation training
and testing are expected 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 three months
ended March 31, 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
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 - An 8-K was filed on January
4, 1999 for the resignation of Martin Sorensen as President
and Chief Executive Officer of the Company. An 8-K was
filed on February 25, 1999 to announce the appointment of
Michael Cushman as the President and Chief Executive
Officer of the Company.
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 14, 1999 /s/ Sharon Benson
Sharon Benson
Senior Vice President &
Chief Financial Officer