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, 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 - - 3,703,416 shares as of July 30, 1999.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-June 30, 1999 and December
31, 1998
Condensed consolidated statements of income-- Six months ended June
30, 1999 and 1998;
Condensed consolidated statements of income-- Three months ended
June 30, 1999 and 1998;
Condensed consolidated statement of cash flows-- Six months ended
June 30, 1999 and 1998;
Notes to condensed consolidated financial statements-- June 30,
1999 and December 31, 1998 and the Six Months Ended June 30, 1999
and 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8K
SIGNATURES
PART I. FINANCIAL INFORMATION
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share amounts) JUNE 30 DECEMBER 31
1999 1998
ASSETS
Cash and cash equivalents:
Cash and due from banks $11,288 $ 7,052
Federal funds sold 15,400 18,300
Total cash and cash equivalents 26,688 25,352
Cash held in trust 302 873
Securities:
Available for sale, at fair value 18,524 22,842
Held to maturity, at amortized cost 32,398 33,914
Loans receivable, net of allowance for loan losses
of$1,932 and $1,902 and deferred loan fees of
$272 and $449 at June 30, 1999 and
December 31, 1998 201,098 197,434
Premises and equipment, net of accumulated
depreciation and amortization 4,996 5,028
Other real estate owned 1,749 575
FHLB stock 888 841
Accrued interest receivable 1,858 1,770
Other assets 8,609 7,733
TOTAL ASSETS $297,110 $296,362
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 38,528 $ 37,372
Interest-bearing:
Savings 93,186 95,617
Time certificates 117,980 118,594
Demand accounts 10,176 8,298
Total deposits 259,870 259,881
Accrued interest and other liabilities 5,727 6,301
TOTAL LIABILITIES 265,597 266,182
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 3,702,916 and 3,690,220
at June 30, 1999 and December 31, 1998 10,319 10,237
Retained earnings 21,248 19,890
Accumulated other comprehensive income, net of tax (54) 53
Total stockholders' equity 31,513 30,180
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $297,110 $296,362
=======================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share amounts) Six Months Ended
June 30
INTEREST INCOME: 1999 1998
Loans including fees $ 8,428 $ 7,707
Securities:
Taxable 566 774
Exempt from federal taxes 1,008 1,124
Interest on federal funds sold 431 488
Total interest income 10,433 10,093
INTEREST EXPENSE - DEPOSITS 4,001 4,302
NET INTEREST INCOME 6,432 5,791
PROVISION FOR LOAN LOSSES 555 360
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,877 5,431
NONINTEREST INCOME:
Service charges on deposit accounts 1,023 795
Other fees and charges 431 433
(Loss) gain on sale of loans (87) 105
Gain on sale of available for sale securities 16 459
Other 352 156
Total noninterest income 1,735 1,948
NONINTEREST EXPENSES:
Salaries & employee benefits 2,293 2,225
Occupancy expense 315 270
Furniture & equipment expense 352 310
Other 1,765 1,475
Total noninterest expenses 4,725 4,280
INCOME BEFORE PROVISION FOR INCOME TAXES 2,887 3,099
PROVISION FOR INCOME TAXES 824 866
NET INCOME $ 2,063 $ 2,233
EARNINGS PER SHARE:
Basic $ .56 $ .61
Diluted $ .55 $ .60
=======================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share amounts) Three Months Ended
June 30
1999 1998
INTEREST INCOME:
Loans including fees $4,261 $3,892
Securities:
Taxable 279 388
Exempt from federal taxes 498 555
Interest on federal funds sold 186 246
Total interest income 5,224 5,081
INTEREST EXPENSE - DEPOSITS 1,989 2,165
NET INTEREST INCOME 3,235 2,916
PROVISION FOR LOAN LOSSES 300 180
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,935 2,736
NONINTEREST INCOME:
Service charges on deposit accounts 536 445
Other fees and charges 216 216
(Loss) gain on sale of loans (50) 97
Gain on sale of available for sale securities -- 267
Other 121 86
Total noninterest income 823 1,111
NONINTEREST EXPENSES:
Salaries & employee benefits 1,154 1,149
Occupancy expense 155 135
Furniture & equipment expense 166 155
Other 962 807
Total noninterest expenses 2,437 2,246
INCOME BEFORE PROVISION FOR INCOME TAXES 1,321 1,601
PROVISION FOR INCOME TAXES 375 476
NET INCOME $ 946 $ 1,125
EARNINGS PER SHARE:
Basic $ .26 $ .31
Diluted $ .25 $ .30
=======================================================================
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
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,063 $ 2,233
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 286 253
Accretion/Amortization of premium on securities ( 28) 17
Provision for loan losses 555 360
Loss on sale/write down of other real estate owned 289 5
Gain on sale of available for sale securities ( 16) ( 459)
Loss/(gain) on sale of loans 87 ( 105)
Benefit for deferred taxes ( 32) ( 1)
Effect of changes in:
Cash held in trust 571 (1,276)
Accrued interest receivable ( 88) 41
Other assets ( 815) (1,033)
Accrued interest and other liabilities ( 206) 520
Net cash provided by operating activities 2,666 555
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock ( 47) ( 27)
Proceeds from sale of other real estate owned 3,113 207
Purchase of available for sale securities (13,000) ( 7,582)
Proceeds from sales of available for sale securities 92 2,155
Proceeds from maturities of available for sale
securities 17,175 7,000
Proceeds from maturities or calls of held to
maturity securities 1,510 2,340
Proceeds from sale of loans 24,275 4,731
Net increase in loans (33,157) (10,948)
Purchases of premises and equipment ( 254) ( 522)
Net cash used in investing activities ( 293) ( 2,646)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in noninterest and interest bearing
demand deposits and savings accounts 603 2,706
Net increase in time certificates ( 614) ( 374)
Cash dividends paid ( 1,108) ( 645)
Cash received for stock options exercised 82 30
Net cash provided by financing activities ( 1,037) 1,717
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,336 ( 374)
CASH AND CASH EQUIVALENTS:
Beginning of period 25,352 23,612
End of period $26,688 $23,238
ADDITIONAL INFORMATION:
Transfer of foreclosed loans from loans
receivable to other real estate owned $ 4,576 $ 376
Cash Payments:
Income tax payments $ 833 $ 470
Interest payments $ 4,032 $ 4,325
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999 and December 31, 1998 and the Six Months Ended June 30,
1999 and 1998.
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of North Valley Bancorp and subsidiaries (the "Company") have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the results for the
interim periods presented have been included. They do not, however,
include all the information and footnotes required by generally accepted
accounting principles for annual financial statements. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1998. Operating results for the six
months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999.
The condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Significant
intercompany items and transactions have been eliminated in consolidation.
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:
Six Months Ended June 30
1999 1998
(In thousands)
Net income $ 2,063 $ 2,233
Other comprehensive loss:
Holding (loss) gain arising during
period, net of tax (104) 190
Reclassification adjustment, net of tax 11 ( 330)
Net loss recognized in other
comprehensive income or loss ( 93) ( 140)
Total comprehensive income $ 1,970 $ 2,093
Three Months Ended June 30
1999 1998
(In thousands)
Net income $ 946 $ 1,125
Other comprehensive loss:
Holding (loss) gain arising during
period, net of tax ( 68) 35
Reclassification adjustment, net of tax -- ( 192)
Net loss recognized in other
comprehensive income or loss ( 68) ( 157)
Total comprehensive income $ 878 $ 968
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 the six and three month periods ended
June 30, 1999 and 1998 is reconciled as follows:
(In thousands except per share amounts)
Six Months Ended June 30
Calculation of Basic Earnings Per Share 1999 1998
Numerator - net income $ 2,063 $ 2,233
Denominator - weighted average common
shares outstanding 3,698 3,682
Basic Earnings Per Share $ .56 $ .61
Calculation of Diluted Earnings Per Share
Numerator - net income $ 2,063 $ 2,233
Denominator:
Weighted average common shares outstanding 3,698 3,682
Dilutive effect of outstanding options 38 40
3,736 3,722
Diluted Earnings Per Share $ .55 $ .60
Three Months Ended June 30
Calculation of Basic Earnings Per Share 1999 1998
Numerator - net income $ 946 $ 1,125
Denominator - weighted average common
shares outstanding 3,702 3,678
Basic Earnings Per Share $ .26 $ .31
Calculation of Diluted Earnings Per Share
Numerator - net income $ 946 $ 1,125
Denominator:
Weighted average common shares outstanding 3,702 3,678
Dilutive effect of outstanding options 37 42
3,739 3,720
Diluted Earnings Per Share $ .25 $ .30
NOTE D - NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133. This statement defers the
effective date of FASB Statement No. 133 which shall now be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000.
The Company is in the process of determining the impact of SFAS No. 133 on
the Company's financial position and results of operations.
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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999, AS COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 1998.
Earnings Summary
For the six month period ended June 30, 1999, the Company achieved
net income of $2,063,000 as compared to $2,233,000 for the same period
in 1998. On a per share basis, diluted earnings per share was $.55 for
the six months ended June 30, 1999 compared to $.60 for the same period
in 1998. The Company's return on average total assets and average
shareholders' equity were 1.40% and 13.30% for the six months ended June
30, 1999, compared with 1.63% and 15.34% for the same period in 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 (FTE) has been adjusted to a fully taxable
equivalent basis for tax-exempt investments included in earning
assets. Net interest income (FTE) was $6,961,000 for the six months
ended June 30, 1999, as compared to $6,321,000 for the same period in
1998. The increase in net interest income for the six months ended June
30, 1999 resulted primarily from the increase in loans which generally
carry higher interest rates than other earning assets and a decrease in
rates paid on interest earning deposits.
Total interest income (FTE) increased to $10,962,000 for the six
months ended June 30, 1999 compared to $10,623,000 for the same period
in 1998, representing a 3.19% increase. Average loans increased to
$197,358,000 for the six months ended June 30, 1999, or 17.00% over the
same period in 1998.
Total interest expense for the six months ended June 30, 1999
decreased to $4,001,000 as compared to $4,302,000 for the same period in
1998, representing a 7.00% decrease. Average interest-bearing deposits
for the six months ended June 30, 1999 totaled $222,836,000, as compared
to $210,080,000 for the same period in 1998, or a 6.07% increase.
Net interest margin (determined by dividing net interest income
(FTE) by total average interest-earning assets) was 5.18% for the six
months ended June 30, 1999, as compared to 5.11% for the same period in
1998. The increase for the six months ended June 30, 1999 in the net
interest margin was attributed to the increases in loans and deposits,
and the increase in the net spread (the difference between rates earned
on interest earning assets and rates paid on deposits), affected
primarily by a stable to slightly increasing interest rate environment
and the change in the mix between loans and investment securities for
the period ended June 30, 1999. Average earning assets yielded 8.16%
for the six months ended June 30, 1999 compared to 8.58% for the same
period in 1998. The cost of funding these earning assets decreased
during the first six months of 1999 as the yield on earning assets
declined. Rates paid decreased to 3.62% for the first six months of
1999 as compared to 4.13% for the same period in 1998. The interest
spread was 4.54% for the six months ended June 30, 1999 compared to
4.45% for the six months ended June 30, 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,
decreased to $1,735,000 for the six months ended June 30, 1999 as
compared to $1,948,000 for the same six months ended June 30, 1998, a
$213,000 decrease. This decrease is primarily the result of a decrease
in gain on sale of securities of $410,000 offset by an increase of
$228,000 in service charge income.
Non-Interest Expense
Non-interest expense totaled $4,725,000 for the six month
period ended June 30, 1999, compared to $4,280,000 for the same period
in 1998. The increase is primarily the result of costs associated with
the addition of new branches, facilities and products and the Company's
substantial investment in technology reviews and updates.
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 57.9% at June 30, 1999 compared to
55.3% at June 30, 1998. 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, 1999 and 1998, is presented below:
Non-Interest Expense June 30
(in thousands) 1999 1998
Salaries & employee benefits $ 2,293 $ 2,225
Occupancy expense 315 270
Furniture & equipment expense 352 310
Professional services 208 209
Data processing expenses 200 215
Printing & supplies 135 135
Postage 107 97
Messenger expense 93 87
ATM expense 172 136
Other 850 596
Total Non-interest expense $ 4,725 $ 4,280
Income Taxes
The provision for income taxes for the second quarter 1999 was
$824,000 as compared to $866,000 for the same period in 1998. The
effective income tax rate for state and federal income taxes was 28.5%
for the six months ended June 30, 1999 compared to 27.9% for the same
period in 1998. The difference in the effective tax rate compared to the
statutory tax rate is primarily the result of the Bank's investment in
municipals.
Impaired, Nonaccrual, Past Due and Restructured Loans and Other Real
Estate Owned
At June 30, 1999 the recorded investment in loans for which
impairment has been recognized was approximately $1,804,000. Of that
balance approximately $1,375,000 has a related valuation allowance of
$225,000.
The remaining $429,000 did not require a valuation allowance.
For the six month period ended June 30, 1999, the average recorded
investment in loans for which impairment has been recognized was
approximated $1,780,000. During the portion of the year that the loans
were impaired the Company recognized interest income of approximately
$154,000 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 at June 30, 1999 has
decreased to $1,263,000 from $2,307,000 at December 31, 1998. For the
six months ended June 30, 1999, $4,576,000 was transferred to other real
estate owned from non accrual loans and loans receivable. Of that
total, $3,113,000 was sold.
A summary of non-performing assets at June 30, 1999 and December
31, 1998, is as follows:
Non-Performing Assets (in thousands) June 30 December 31
1999 1998
Nonaccrual loans $ 1,263 $ 2,307
Accruing loans past due 90 days
or more 217 364
Restructured loans -- --
Other real estate owned 1,749 575
Total $ 3,229 $ 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 probable loan losses is a general reserve
available against the total loan portfolio and off balance sheet credit
exposure. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for probable loan losses.
Such agencies may require the Company to provide additions to the
allowance based on their judgment of information available to them at
the time of their examination. At June 30, 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 June 30, 1999, the allowance for probable loan losses was
$1,932,000 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 $525,000 and $279,000 for the six months ended June 30, 1999 and
1998. Additions to the allowance for loan losses are charged against
income. A provision for loan losses of $555,000 and $360,000 was
charged to income for the six months ended June 30, 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 June 30, 1999, were available to provide liquidity. In
addition, the Bank is a member of the Federal Home Loan Bank ("FHLB")
System providing an additional line of credit of $2,321,000 secured by
first deeds of trust on eligible 1-4 unit residential loans. The
Company had not utilized the line of credit from the FHLB as of June 30, 1999.
The Company manages both assets and liabilities by monitoring
asset and liability mixes, volumes, maturities, yields and rates in
order to preserve liquidity and earnings stability. Total liquid assets
(cash and due from banks, federal funds sold, and investment securities)
totaled $77,610,000 and $82,108,000 (or 26.12% and 27.71% of total
assets) at June 30, 1999 and December 31, 1998, respectively. Total
liquid assets for June 30, 1999 and December 31, 1998 include investment
securities of $32,398,000 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 $239,365,000
and $241,412,000 at June 30, 1999 and December 31, 1998, respectively.
In assessing liquidity, historical information such as seasonal
loan demand, local economic cycles and the economy in general are
considered along with current ratios, management goals and unique
characteristics of the Company. Management believes the Company is in
compliance with its policies relating to liquidity.
Asset and liability management focuses on interest rate risk due
to asset and liability cash flows and market interest rate movement.
The primary objective of managing interest rate risk is to ensure that
both assets and liabilities react to changes in interest rates to
minimize the effects of interest rate movements on net interest income.
An asset and liability management simulation model is used to quantify
the exposure and impact of changing interest rates on earnings. The
model projects changes by analyzing the mix and repricing
characteristics of interest rate sensitive assets and liabilities using
multipliers (how interest rates change when the Fed Funds rate changes
by 1%) and lags (time it takes for rates to change after the Fed Funds
rate changes). The model simulates the effects on net interest income
when the Fed Funds rate experiences a 1% increase or decrease compared
to current levels.
The following table shows the interest sensitive assets and
liabilities gap (other than equity securities with a fair value of
approximately $123,000), which is the measure of interest sensitive
assets over interest-bearing liabilities, for each individual repricing
period on a cumulative basis:
June 30, 1999 Within 3 3 months 1-5 5+
(in thousands) months to 1 Year Years Years TOTAL
EARNING ASSETS:
Held to maturity
securities $ 835 $ 2,043 $ 11,617 $17,913 $ 32,398
Available for sale
securities 3,454 9,997 4,950 -- 18,401
Fed Funds Sold 15,400 -- -- -- 15,400
Loans - net of
deferred loan fees 36,767 6,380 93,054 66,829 203,030
Total earning assets $56,446 $18,420 $109,621 $84,742 $269,229
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ -- $10,176 $ -- $ -- $ 10,176
Savings deposits -- 93,186 -- -- 93,186
Time deposits 44,000 68,329 5,651 -- 117,980
Total interest bearing
liabilities $44,000 $171,691 $ 5,651 $ -- $221,342
INTEREST SENSITIVITY
GAP $12,446 $(153,271) $103,970 $84,742
CUMULATIVE INTEREST
RATE SENSITIVITY GAP $12,446 $(140,825) $(36,855) $47,887
At June 30, 1999, the gap table indicates the Company as liability
sensitive in the twelve month period. The interest rate sensitivity gap
is defined as the difference between amount of interest-earning assets
anticipated to mature or reprice within a specific time period and the
amount of interest-bearing liabilities anticipated to mature or reprice
within that time period. The year end gap report is based on the
contractual interest repricing date. The gap method does not consider
the impact of different multipliers (how interest rates change when the
Fed Funds rate changes by 1%) and lags (time it takes for rates to
change after the Fed Funds rate changes). The interest rate
relationships between the repriceable assets and repriceable liabilities
are not necessarily constant and may be affected by many factors,
including the behavior of customers in response to changes in interest
rates and future impact of new business strategies. This table should,
therefore, be used only as a guide as to the possible effect changes in
interest rates might have on the net margins of the Company. The
Company's model analyzes the impact on earnings of future rate changes
by including factors for lags and multipliers for key bank rates. Both
methods of measuring interest rate sensitivity do not take into account
actions taken by management to modify the effect to net interest income
if interest rates were to rise or fall.
Even though the Company had a negative gap in the six month
period ended June 30, 1999, the asset liability simulation model showed
the Company was slightly asset sensitive at June 30, 1999. This means that
when interest rates increase, yields on earning assets would be expected
to increase faster than rates paid for deposits, causing the net
interest margin to increase. Due to a slightly increasing interest rate
environment in 1999, the Company's asset sensitive posture had a slightly
positive impact on net interest margins as predicted by the asset
liability simulation model. In a declining rate environment the
opposite impact would be expected; i.e., the net interest margin should
decline.
Financial Condition As Of June 30, 1999 As Compared to December 31, 1998
Total assets at June 30, 1999, were $297,110,000, compared
to December 31, 1998 assets of $296,362,000. Increases in average
deposits were used to fund a 8.52% increase in average earning assets
for the six months ended June 30, 1999.
Investment securities and federal funds sold totaled
$66,322,000 at June 30, 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 $888,000 in FHLB stock.
During the first six months of 1999, net loans increased to
$201,098,000 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 75.63%.
Total deposits at June 30, 1999 were consistent with the
total deposits 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 $31,513,000 as
of June 30, 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 June 30, 1999 was 14.99% and its Tier 1 Risk Based
Capital (RBC) ratio was 14.11%, 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 10.47% and 10.18% at June
30, 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 14.33%, a Tier 1 RBC ratio of 13.45%
and a leverage ratio of 10.00% at June 30, 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% June 30, 1999) reduces both the potential of
inflated earnings resulting from understated depreciation and the
potential understatement of absolute asset values.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing
a 2 digit year is commonly referred to as the Year 2000 Compliance
issue. As the year 2000 approaches, such systems may be unable to
accurately process certain date-based information.
The Company has a written plan to mitigate the risks associated
with the impact of the Year 2000. The plan directs the Company's Year
2000 activities under the framework of the Federal Financial
Institutions Examination Council (FFIEC) Five-Step Program. The FFIEC's
Five-Step Program includes the following phases: Awareness, Assessment,
Renovation, Validation and Implementation. The Awareness Phase, 100%
complete, defines the Year 2000 problem and gains executive level
support for the necessary resources to prepare the Company for Year 2000
compliance. The Assessment Phase, 100% complete, assesses the size and
complexity of the problem and details the magnitude of the effort
necessary to address the Year 2000 issues. Although the Awareness and
Assessment Phases are complete, the Company will continue to evaluate
any new issues as they arise. The Renovation Phase, 95% complete,
includes the incremental changes to hardware and software components.
The Validation Phase includes the testing of hardware and software
components and was substantially complete as of June 30, 1999. The
Implementation Phase certifies that systems are Year 2000 compliant and
will be accepted by the end users. The Implementation Phase is
substantially complete as of 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 June 30, 1999. In some cases, the Company will rely on
the service providers and software vendors to facilitate proxy testing
with a selected group of users. The Company will review the test plans
and validate the results of the proxy testing to ensure the Year 2000
compliance of those systems. The Company's business also utilizes non-
IT products and services, some of which have embedded technology which
might not be Year 2000 ready. Some non-IT products and services involve
infrastructure issues such as power, communication and water, as well as
elevators, ventilation and air conditioning equipment. The Company
classifies power and communications as non-IT products and services and
considers them to be of significant importance, giving them high
priority. Based on responses from vendors and software providers, the
Company does not anticipate incurring any material expenses due to
unpreparedness. The Company has identified material third party
relationships to minimize the potential loss from unpreparedness of these
parties. The Company continues to work closely with Jack Henry &
Associates, its data services and items processing provider, regarding
Year 2000 compliance. The testing and validation of this system was
substantially complete as of June 30, 1999.
The Company is making efforts to ensure that its customer base is
aware of the Year 2000 problem. Year 2000 correspondence has been sent
to both deposit and loan customers. The Bank has amended its credit
authorization documentation to include consideration regarding the Year
2000 problem. Significant customers relationships have been identified,
and such customers are being contacted by the Bank's employees to
determine whether they are aware of Year 2000 risks and whether they are
taking preparatory actions.
The total cost to the Company of these Year 2000 Compliance
activities was approximately $28,100 for 1998 and the Company has
budgeted approximately $100,000 for 1999 and incurred costs of $4,200
as of June 30, 1999. Costs associated with the modifications necessary
are being expensed by the Company during the period in which they are
incurred. These costs and the date on which the Company plans to
complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that the estimates of costs for 1999
will be accurate since actual results could differ from those plans.
The costs incurred in 1998 did not have a material effect on the
Company's net income for 1998 and the Company does not expect the costs
incurred for the same period in 1999 to have a material effect on net
income. It is anticipated that any disruption of services would be
partial and brief, and that there will not be a material impact on
revenues or earnings.
The Company and the Bank have developed contingency plans to
address the possibility that efforts to mitigate Year 2000 risk are not
successful either in whole or in part. These plans will include
remedial efforts up to and including complete manual processing of
information for critical IT systems in the event there is a failure after
December 31, 1999. The Company's contingency plan was substantially complete
on June 30, 1999, and implementation training and testing is being
implemented to take place in the next quarter.
The disclosure set forth above contains forward-looking
statements. Specifically, such statements are contained in sentences
including the words "expect" or "anticipate". Such forward-looking
statements are subject to inherent risks and uncertainties that may
cause actual results to differ materially from those contemplated by
such forward-looking statements. The factors that may cause actual
results to differ materially from those contemplated by the forward-
looking statements include the failure by third parties to adequately
remediate Year 2000 issues or the inability of the Company to complete
writing and/or testing software changes on time schedules currently
expected. Nevertheless, the Company expects that its Year 2000
compliance efforts will be successful without any adverse effects on its
business.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999, AS
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998.
Earnings Summary
The Company's net income for the three months ended June 30,
1999, was $946,000, as compared to a net income of $1,125,000 for the
same period in 1998. The net income for the three month period
ended June 30, 1999, resulted in diluted earnings per share of twenty
five ($.25).
Net Interest Income
Net interest income on a fully tax-equivalent basis (FTE)
increased $371,000, or 11.7%, to $3,531,000 for the three months ended
June 30, 1999, as compared to $3,160,000 for the same period in 1998.
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 1998 levels primarily due to an
increase in the net spread from 4.41% in 1998 to 4.59% in 1999 resulting
from an increase in the volume of average loans and reductions in rates
paid on interest earning deposits.
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 5.22% and
5.05% for the three months ending June 30, 1999 and 1998, respectively.
Non Interest Income
Total non interest income decreased to $823,000, compared to
$1,111,000 for the three months ended June 30, 1999 and 1998,
respectively. This decrease was primarily the result of a decrease in
gain on sale of securities of $267,000 offset by an increase in service
charge and other fee income of $91,000 for the three months ended June
30, 1999.
Non Interest Expense
Non interest expense increased for the three months ended
June 30, 1999 to $2,437,000 compared to $2,246,000 for the same period
in 1998.
A summary of non interest expense for the three month period
ended June 30, 1999 and 1998, is presented below:
Non-Interest Expense June 30
(in thousands) 1999 1998
Salaries & employee benefits $ 1,154 $ 1,149
Occupancy expense 155 135
Furniture & equipment expense 166 155
Professional services 104 144
Data processing expenses 96 110
Printing & supplies 68 65
Postage 53 68
Messenger expense 47 44
ATM expense 93 69
Other 501 307
Total Non-interest expense $ 2,437 $ 2,246
Income Taxes
The provision for income tax for the three month period ended
June 30, 1999 was $375,000 compared to $476,000 for the same period in
1998. The effective income tax rate for state and federal income taxes
was 28.4% for the three months ended June 30, 1999 compared to 29.7% for
the same period in 1998.
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,
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
The Annual Meeting of Shareholders of North Valley Bancorp
was held on Monday, May 17, 1999. Shareholders of North Valley Bancorp
approved the following proposals:
1. Election of directors.
2. Adoption of the North Valley Bancorp 1999 Director Stock Option
Plan.
3. An amendment of the North Valley Bancorp 1998 Employee Stock
Incentive Plan.
4. Ratification of Deloitte & Touche as independent public accountants
for the Corporation for 1999.
Results of the election are presented below:
ANNUAL MEETING OF SHAREHOLDERS
Monday, May 17,1999
Total Shares 3,699,556
Outstanding:
Total Shares Voted: 2,486,971 67.22%
Shares % Outstanding % of
Voted Shares Quorum
Proposal For: 2,467,165 66.69% 99.20%
1:
Election of Directors Against: 19,806 0.54% 0.79%
Abstain: 0 0.00% 0.00%
For Withhold Individual
Rudy V. Balma 2,255,589 231,382
William W. Cox 2,455,307 31,664
Michael J. Cushman 2,455,307 31,664
Royce L. Friesen 2,455,307 31,664
Dan W. Ghidinelli 2,455,307 31,664
Thomas J. Ludden 2,455,307 31,664
Douglas M. Treadway 2,374,253 112,718
J. M. "Mike Wells, Jr. 2,384,853 102,118
Each of the directors named above was elected at the meeting and each
director's term of office continued after the meeting.
Proposal For: 1,616,086 43.68% 77.40%
2:
Adopt North Valley Against: 435,890 11.78% 20.88%
Bancorp 1999 Abstain: 36,094 0.98% 1.73%
Director Stock Option Plan
Proposal For: 2,216,866 61.63% 89.14%
3:
Amend North Valley Against: 212,356 5.74% 8.54%
Bancorp 1998 Employee Abstain: 57,749 1.56% 2.32%
Stock Incentive Plan
Proposal For: 2,433,060 65.77% 97.83%
4:
Ratify Appointment Against: 27,004 0.73% 1.09%
of Deloitte/ Touche Abstain: 26,907 0.73% 1.08%
as independent public
Accountants for 1999.
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 August 13, 1999
Sharon Benson
Senior Vice President &
Chief Financial Officer