UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended March 31, 2000.
[ ] 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 (IRS Employer ID Number)
of incorporation or organization)
880 E. Cypress Avenue, Redding, CA 96002
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 221-8400
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date.
Common Stock -- 3,715,818 shares as of May 1, 2000.
1
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed consolidated balance sheets--March 31, 2000 and December 31,
1999
Condensed consolidated statements of income--For the three months
ended March 31, 2000 and 1999:
Condensed consolidated statement of cash flows--For the three months
ended March 31, 2000 and 1999;
Notes to condensed consolidated financial statements-- March 31, 2000
and December 31, 1999 and the Three months ended March 31, 2000 and
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
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
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share amounts)
ASSETS MARCH 31, 2000 DECEMBER 31, 1999
Cash and due from banks $ 14,873 $ 12,783
Federal funds sold 18,200 14,600
Cash held in trust 153 282
Securities:
Available for sale, at fair value 25,088 25,569
Held to maturity, at amortized cost (fair value of $28,941 at
March 31, 2000 and $28,975 at December 31, 1999 28,083 28,146
Loans and leases net of allowance for loan and lease losses of
$2,688 and $2,260 and deferred loan fees of $152 and $194 at
March 31, 2000 and December 31, 1999 215,145 215,397
Premises and equipment, net of accumulated
depreciation and amortization 5,250 5,060
Other real estate owned 146 80
FHLB stock 924 911
Accrued interest receivable 1,985 2,035
Other assets 8,733 7,947
----------- -----------
TOTAL ASSETS $ 318,580 $ 312,810
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 44,158 $ 40,071
Interest-bearing deposits 235,281 235,190
----------- -----------
Total deposits 279,439 275,261
Accrued interest and other liabilities 4,936 4,303
----------- -----------
Total liabilities 284,375 279,564
----------- -----------
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 3,715,818 and 3,714,418 at
March 31, 2000 and December 31, 1999 10,439 10,427
Retained Earnings 23,849 22,936
Accumulated other comprehensive loss, net of tax (83) (117)
----------- -----------
Total stockholders' equity 34,205 33,246
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 318,580 $ 312,810
=========== ===========
=============================================================================
See notes to condensed consolidated financial statements (unaudited).
3
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands except per share amounts)
FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
INTEREST INCOME
Loans and leases including fees $ 4,728 $ 4,167
Securities
Taxable 393 287
Exempt from federal taxes 419 510
Federal funds sold 290 245
---------- ----------
Total interest income 5,830 5,209
INTEREST EXPENSE - DEPOSITS 2,234 2,012
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NET INTEREST INCOME 3,596 3,197
PROVISION FOR LOAN AND LEASE LOSSES 480 255
---------- ----------
NET INTEREST INCOME AFTER PROVISION 3,116 2,942
FOR LOAN AND LEASE LOSSES
NONINTEREST INCOME:
Gain on shares received from insurance company
demutualization 683
Service charges on deposit accounts 628 487
Other fees and charges 231 215
Gain (loss) on sale of loans and leases 54 (37)
Gain on sale or calls of securities 16
Other 87 231
---------- ----------
Total noninterest income 1,683 912
NONINTEREST EXPENSES:
Salaries and employee benefits 1,475 1,139
Merger & acquisition expense 229
Furniture and equipment expense 182 186
Occupancy expense 160 160
Other 969 803
---------- ----------
Total noninterest expenses 3,015 2,288
INCOME BEFORE PROVISION FOR INCOME
TAXES 1,784 1,566
PROVISION FOR INCOME TAXES 500 449
-------------------------------
NET INCOME $ 1,284 $ 1,117
===============================
EARNINGS PER SHARE:
Basic $ 0.35 $ 0.30
===============================
Diluted $ 0.34 $ 0.30
===============================
===========================================================================
See notes to condensed consolidated financial statements (unaudited).
4
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in thousands) FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,284 $ 1,117
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 148 143
Amortization of premium on securities 32 (36)
Provision for loan and lease losses 480 255
Loss on sale/write down of other real estate owned 208
Gain on shares received from insurance company demutualization (683)
Gain on sale or calls of securities (16)
Loss on sales of loans and leases 54 37
Changes in deferred taxes (20) (11)
Effect of changes in:
Cash held in trust 129 579
Accrued interest receivable 50 (32)
Other assets (779) (755)
Accrued interest and other liabilities 1,004 (11)
---------- ----------
Net cash provided by operating activities 1,699 1,478
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock (13) (11)
Proceeds from sale of other real estate owned 92 3,028
Purchases of available for sale securities (7,000) (11,000)
Proceeds from maturities or calls of available for sale securities 8,182 15,016
Proceeds from maturities or calls of held to maturity securities 60 1,110
Proceeds from sales of loans and leases 1,002 12,075
Net increase in loans and leases (1,442) (17,475)
Purchases of premises and equipment - net (338) (124)
---------- ----------
Net cash provided by investing activities 543 2,619
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, demand accounts, and savings accounts 5,978 345
Net increase in time certificates (1,800) 445
Cash dividends paid (742) (738)
Cash received for stock options exercised 12 53
---------- ----------
Net cash provided by financing activities 3,448 105
---------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 5,690 4,202
CASH AND CASH EQUIVALENTS:
Beginning of year 27,383 25,352
---------- ----------
End of period $ 33,073 $ 29,554
========== ==========
ADDITIONAL INFORMATION:
Transfer of foreclosed loans and leases from loans and leases receivable to other
real estate owned $ 158 $ 4,427
========== ==========
Cash payments:
Income tax payments $ 160 $ 208
========== ==========
Interest payments $ 2,245 $ 2,324
========== ==========
See notes to condensed consolidated financial statements (unaudited).
5
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2000 and December 31, 1999 and
the Three months ended March 31, 2000 and 1999.
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,
1999. Operating results for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
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 sources of other comprehensive income are derived from
unrealized gains and losses on investment securities available-for-sale and
adjustments to the minimum pension liability. Reclassification adjustments
resulting from gains or losses on investment securities that were realized and
included in net income of the current period that also had been included in
other comprehensive income as unrealized holding gains or losses in the period
in which they arose are excluded from comprehensive income of the current
period. The Company's total comprehensive income was as follows:
FOR THE THREE MONTHS ENDED MARCH 31,
(in thousands) 2000 1999
------------ ------------
Net income $ 1,284 $ 1,117
Other comprehensive income:
Holding gain (loss) arising during period, net
of tax 34 (36)
Reclassification adjustment, net of tax 11
------------ ------------
Total other comprehensive income 34 (25)
------------ ------------
Total comprehensive income $ 1,318 $ 1,092
============ ============
6
NOTE C - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
There was no difference in the numerator, net income, used in the
calculation of basic earnings per share and diluted earnings per share. The
denominator used in the calculation of basic earnings per share and diluted
earnings per share for the three-month period ended March 31, 2000 and 1999 is
reconciled as follows:
FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
(in thousands except earnings per share) ------------ ------------
Calculation of Basic Earnings Per Share
Numerator - net income $ 1,284 $ 1,117
Denominator - weighted average common
shares outstanding 3,715 3,694
------------ ------------
Basic Earnings Per Share $ 0.35 $ 0.30
============ ============
Calculation of Diluted Earnings Per Share
Numerator - net income $ 1,284 $ 1,117
Denominator - weighted average common
shares outstanding 3,715 3,694
Dilutive effect of outstanding options 13
------------ ------------
3,728 3,694
------------ ------------
Diluted Earnings Per Share $ 0.34 $ 0.30
============ ============
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.
On October 4, 1999, the Company and Six Rivers National Bank ("SRNB")
(headquartered in Eureka, California) announced the signing of a proposed merger
agreement and plan of reorganization which, pending regulatory approvals, would
result in the merger of SRNB into NVB, with SRNB to be operated as a wholly
owned subsidiary of the Company. The transaction is expected to be completed in
the third quarter of 2000. The merger agreement and plan of reorganization
provides for SRNB stockholders to receive shares of the Company in exchange for
SRNB stock based on a formula which is dependent on the average closing price of
the Company common stock in a tax free exchange expected to be accounted for as
a pooling of interests. The merger and related transactions were approved by the
shareholders of the Company on March 28, 2000 and by the shareholders of SRNB on
April 6, 2000.
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.
7
EARNINGS SUMMARY
FOR THE THREE MONTHS ENDED
MARCH 31,
(in thousands except per share amounts) 2000 1999
----------- -----------
Net interest income $ 3,596 $ 3,197
Provision for loan losses (480) (255)
Noninterest income 1,683 912
Noninterest expense (3,015) (2,288)
Provision for income taxes (500) (449)
----------- -----------
Net income $ 1,284 $ 1,117
=========== ===========
Earnings Per Share
Basic $ 0.35 $ 0.30
Diluted $ 0.34 $ 0.30
Return on Average Assets 1.63% 1.53%
Return on Average Equity 15.33% 14.80%
The Company's consolidated net earnings for the three months ended March
31, 2000 were $1,284,000, or $0.34 diluted earnings per share, compared to
$1,117,000, or $0.30 diluted earnings per share for the comparable period of
1999. Return on average assets was 1.63% and return on average equity was 15.33%
for the quarter ended March 31, 2000 compared to 1.53% and 14.80% respectively,
for the same period in 1999.
Included in the earnings for the three months ended March 31, 2000 was a
one-time pre-tax revenue item of $683,000 which represents the initial value of
40,153 shares of common stock held by the Company in John Hancock Financial
Services Inc. ("JHFS"). The Company received the common stock as a result of its
ownership of certain insurance policies through John Hancock Insurance Company
and John Hancock's conversion from a mutual company to a stock company.
During the first quarter of 2000, the Company also increased its
provision to the allowance for loan and lease loss reserve (ALLR) by $480,000.
While the current loan portfolio continues to exhibit strong performance trends,
the first quarter provision increases the level of the ALLR to a range that is
more consistent with the inherent risk in the loan portfolio as the level of
commercial and consumer lending increases as a percent of the overall portfolio.
Additionally, during the first quarter of 2000, the Bank incurred merger
and acquisition charges relating to the pending transaction with Six Rivers
National Bank (NASDAQ:SIXR) in the amount of $229,000. The consolidated net
earnings for the three months ended March 31, 1999 included a $156,000 gain on
sale of Other Real Estate Owned.
The higher earnings for the quarter ended March 31, 2000 over the same
period in 1999 also resulted from increased net interest income from loan
growth, increased non-interest income from service charges on deposit accounts
offset somewhat by higher levels of interest expense on deposits, and salary and
benefit expense. The increase in loans and leases is primarily the result of
continued growth of the Bank's Business Banking Center, which focuses on
development of existing and new commercial banking relationships, and consumer
loan growth. Recent marketing efforts have resulted in improved penetration in
the retail and commercial deposit customer market, increasing the number of
deposit accounts and corresponding service charge income and demand deposit
levels. Non-interest bearing demand deposits increased 10% during the first
quarter of 2000, from $40,071,000 at December 31, 1999 to $44,158,000 at March
31, 2000.
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
leases and other investments and interest paid on deposits. The amount of
interest income and expense is affected by changes in volume and mix of earning
assets and interest-bearing deposits, along with changes in interest rates.
The following table is a summary of the Company's net interest income
presented on a fully taxable equivalent (FTE) basis for the periods indicated:
FOR THE THREE MONTHS ENDED
MARCH 31,
(in thousands) 2000 1999
----------- -----------
Interest income $ 5,830 $ 5,209
Interest expense (2,234) (2,012)
FTE adjustment 238 228
----------- -----------
Net interest income (FTE) $ 3,834 $ 3,425
=========== ===========
8
Net interest income has been adjusted to a fully taxable equivalent
basis (FTE) for tax-exempt investments included in earning assets. The increase
in net interest income (FTE) for the three month period ended March 31, 2000
resulted primarily from the increase in the volume of loans and leases, which
generally carry higher interest rates than other earning assets, offset by a
slight decrease in the rates earned on loans and leases combined with an
increase in rates, paid on interest earning deposits. Average loans and leases
increased to $217,268,000 for the three months ended March 31, 2000, as compared
to $193,187,000 over the same period in 1999, or a 12.5% increase. Average
interest-bearing deposits for the three months ended March 31, 2000 totaled
$234,677,000 as compared to $222,003,000 for the same period in 1999, or a 5.7%
increase.
The following table is a summary of the Company's net interest margin
(FTE) for the periods indicated:
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
Yield on earning assets 8.35% 8.16%
Rate paid on interest-bearing deposits 3.82% 3.68%
---- ----
Net interest spread 4.53% 4.48%
==== ====
Net interest margin 5.28% 5.14%
==== ====
For the three months ended March 31, 2000 the net interest margin was
5.28% compared to 5.14% for the same period in 1999. The increase in the net
interest spread was attributed to a 19 basis point increase on rates earned for
assets offset by a 14 basis point increase in rates paid on deposits.
NONINTEREST INCOME
The following table is a summary of the Company's noninterest income for the
periods indicated:
FOR THE THREE MONTHS ENDED
Noninterest Income MARCH 31,
(in thousands) 2000 1999
----------- -----------
Gain on shares received from insurance
company demutualization $ 683
Service charges on deposit accounts 628 $ 487
Other fees and charges 231 215
Gain (loss) on sale of loans and leases 54 (37)
Gain on sale or calls of securities 16
Other 87 231
----------- -----------
Total noninterest income $ 1,683 $ 912
=========== ===========
Noninterest income increased to $1,683,000 for the three months ended
March 31, 2000 as compared to $912,000 for the same three months ended March 31,
1999, a $771,000 increase. This increase is primarily the result of a one-time
pre-tax revenue item of $683,000, which represents the initial value of 40,153
shares of JHFS common stock received by the Company.
Marketing efforts focusing on retail and commercial deposit customers
has resulted in a 10% increase in noninterest bearing demand deposit accounts
for the first quarter of 2000. This has attributed to the increase of $157,000
in service charges and other fees and charges for the period ended March 31,
2000 as compared to the same period in 1999. Other noninterest income for the
three months ended March 31, 1999 included $156,000 gain on sale of Other Real
Estate Owned.
9
NONINTEREST EXPENSE
The following table is a summary of the Company's noninterest expense
for the periods indicated:
FOR THE THREE MONTHS ENDED
Noninterest Expense MARCH 31,
(in thousands) 2000 1999
----------- -----------
Salaries & employee benefits $ 1,475 $ 1,139
Merger & acquisition expense 229
Furniture & equipment expense 182 186
Occupancy expense 160 160
Data processing expenses 132 104
ATM expense 97 79
Printing & supplies 77 67
Postage 62 54
Messenger expense 53 46
Professional services 50 104
Other 498 349
----------- -----------
Total Noninterest expense $ 3,015 $ 2,288
=========== ===========
Noninterest expense totaled $3,015,000 for the three-month period ended
March 31, 2000, compared to $2,288,000 for the same period in 1999. The
Company's efficiency ratio for the first quarter of 2000 was 57.11%, up slightly
from the 55.70% efficiency ratio achieved for the first quarter of 1999. The
increase resulted primarily from a increase in employee expenses and other
infrastructure and merger and acquisition costs from the pending Six Rivers
National Bank combination.
INCOME TAXES
The provision for income taxes for the three months ended March 31, 2000
was $500,000 as compared to $449,000 for the same period in 1999. The effective
income tax rate for state and federal income taxes was 28.0% for the three
months ended March 31, 2000 compared to 28.7% for the same period in 1999. The
difference in the effective tax rate compared to the statutory tax rate is
primarily the result of the Bank's investment in municipal securities.
IMPAIRED, NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES AND OTHER REAL
ESTATE OWNED
At March 31, 2000, the recorded investment in loans and leases for which
impairment has been recognized was approximately $411,000. Of this balance,
approximately $187,000 has a related valuation allowance of $77,000. The
remaining $224,000 did not require a valuation allowance. For the period ended
March 31, 2000, the average recorded investment in loans an leases for which
impairment has been recognized was approximately $393,000. During the portion of
the year that the loans and leases were impaired, the Company recognized
interest income of approximately $24,000 for cash payments received in 2000.
At December 31, 1999, the recorded investment in loans and leases for
which impairment had been recognized was approximately $374,000. Of the 1999
balance, approximately $120,000 has a related valuation allowance of $43,000.
The remaining $254,000 did not require a valuation allowance. For the year ended
December 31 1999, the average recorded investment in loans and leases for which
impairment had been recognized was approximately $1,411,000. During the portion
of the year that the loans and leases were impaired, the Company recognized
interest income of approximately $193,000 for cash payments received in 1999.
Nonaccrual loans and leases consist of loans and leases on which the
accrual of interest has been discontinued and other loans and leases where
management believes that borrowers' financial condition is such that the
collection of interest is doubtful, or when a loan or lease becomes
contractually past due by 90 days or more with respect to interest or principal
(except that when management believes a loan or lease is well secured and in the
process of collection, interest accruals are continued on loans and leases
considered by management to be fully collectible). Loans or leases are charged
off when management determines that the loan or lease is considered
uncollectible. Other real estate owned consists of real property acquired
through foreclosure on the related collateral underlying defaulted loans and
leases.
10
A summary of non-performing assets at March 31, 2000, and December 31,
1999, is as follows:
MARCH 31, DECEMBER 31,
2000 1999
Total nonaccrual loans and leases $ 244 $ 346
Troubled debt restructuring
Loans and leases 90 days past due and still accruing
interest 41 223
------------ ------------
Total nonperforming loans and leases 285 569
Other real estate owned 146 80
------------ ------------
Total nonperforming assets $ 431 $ 649
============ ============
Nonaccrual loans and leases to total gross loans and
leases 0.11% 0.16%
Nonperforming loans and leases to total gross loans
and leases 0.13% 0.26%
Total nonperforming assets to total assets 0.14% 0.21%
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company maintains an allowance for loan and lease losses to absorb
inherent losses in the loan and lease portfolio. Management attributes general
reserves to different types of loans and leases using percentages, which are
based upon perceived risk, associated with the portfolio and underlying
collateral. The allowance for probable loan and lease losses is a general
reserve available against the total loan and lease portfolio and off balance
sheet credit exposure. While management uses available information to recognize
losses on loans and leases, 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 and lease 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, 2000, based on known information, management believes that the
allowance for loan and lease losses was adequate to absorb losses inherent in
existing loans and leases and commitments to extend credit, based on evaluations
of the collectibility and prior loss experience of loans and leases and
commitments to extend credit as of such date.
A summary of the allowance for loan and lease losses at March 31, 2000,
March 31, 1999 and December 31, 1999, is as follows:
MARCH 31, MARCH 31, DECEMBER 31,
(in thousands) 2000 1999 1999
----------- ----------- -----------
Balance beginning of year $ 2,260 $ 1,902 $ 1,902
Provision for loan and lease losses 480 255 1,042
Net charge offs (52) (319) (684)
----------- ----------- -----------
Balance end of period $ 2,688 $ 1,838 $ 2,260
=========== =========== ===========
Allowance for loan and lease losses to nonaccrual loans and
leases 1101.64% 204.00% 653.18%
Allowance for loan and lease losses to nonperforming loans and
leases 943.16% 145.99% 397.19%
Allowance for loan and lease losses to total gross loans and
leases 1.23% 0.92% 1.04%
Allowance for loan and lease losses to nonperforming assets 623.67% 60.76% 348.23%
Ratio of net charge-offs to average loans and leases
outstanding 0.02% 0.17% 0.33%
The evaluation process is designed to determine the adequacy of the
allowance for loan and lease losses. This process attempts to assess the risk of
losses inherent in the loan and lease portfolio by segregating the allowance for
loan and lease losses into three components: "Specific," "loss migration," and
"general." The specific component is established by allocating a portion of the
allowance for loan and lease 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 and lease impairment, evaluation of the performing loan and
lease portfolio, continual evaluation of problem loans and leases identified as
having a higher degree of risk, off balance sheet risks, net charge off trends,
and other factors. Loan activity increased in the first quarter of 2000
particularly in commercial and consumer loans with a higher risk characteristic
attributing to the increase in the allowance for loan loss. The allowance for
loan and lease losses was 1.23% of total loans and leases as of March 31, 2000,
compared to 1.04% on December 31, 1999.
11
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 and lease losses and the related provision for
loan and lease losses in future periods.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors and borrowers.
Collection of principal and interest on loans and leases, the liquidations and
maturities of investment securities, deposits with other banks, customer
deposits 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 for $10,500,000 as of March 31, 2000 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 $9,903,000
secured by first deeds of trust on eligible 1-4 unit residential loans. The
Company also has a line of credit with Federal Reserve Bank ("FRB") of
$13,026,000 secured by first deeds of trust on eligible commercial real estate
loans and leases. The Company has not utilized the line of credit from the FHLB
System or FRB.
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 $86,244,000 and
$81,098,000 (or 27.1% and 25.9% of total assets) at March 31, 2000 and December
31, 1999, respectively. Total liquid assets for March 31, 2000 and December 31,
1999 include investment securities of and $28,083,000 and $28,146,000,
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 $256,466,000 and $251,508,000 at March 31, 2000
and December 31, 1999, 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 following table shows the interest sensitive assets and liabilities
gap (other than equity securities with a fair value of approximately $833,000),
which is the measure of interest sensitive assets over interest-bearing
liabilities, for each individual repricing period on a cumulative basis:
MARCH 31, 2000 WITHIN THREE THREE MONTHS ONE TO FIVE GREATER THAN
(IN THOUSANDS) MONTHS TO ONE YEAR YEARS FIVE YEARS TOTAL
------------ ------------ ------------ ------------ ------------
EARNING ASSETS
Held to maturity securities $ 353 $ 2,116 $ 9,979 $ 15,635 $ 28,083
Available for sale securities 2,963 12,086 9,206 24,255
Federal funds sold 18,200 18,200
Loans and leases-net of deferred loan fees 37,240 18,197 102,319 60,077 217,833
------------ ------------ ------------ ------------ ------------
Total earning assets $ 55,793 $ 23,276 $ 124,384 $ 84,918 $ 288,371
============ ============ ============ ============ ============
INTEREST BEARING LIABILITIES
Interest bearing demand
deposits $ 9,806 $ 9,806
Savings deposits 100,921 100,921
Time deposits $ 47,056 $ 73,632 $ 3,866 $ 124,554
------------ ------------ ------------ ------------ ------------
Total interest bearing
Liabilities $ 47,056 $ 184,359 $ 3,866 $ $ 235,281
============ ============ ============ ============ ============
Interest rate sensitivity gap $ 8,737 $ (161,083) $ 120,518 $ 84,918
Cumulative interest rate
Sensitivity gap $ 8,737 $ (152,346) $ (31,828) $ 53,090
12
At March 31, 2000, 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.
Although the Company had a negative gap in the quarter ended March 31,
2000, the asset liability simulation model showed the Company was slightly asset
sensitive at March 31, 2000. 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 the first quarter of 2000, 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 MARCH 31, 2000 AS COMPARED TO DECEMBER 31, 1999
Total assets at March 31, 2000, were $318,580,000, compared to December
31, 1999 assets of $312,810,000. Increases in average deposits of 4.5% were used
to fund a 4.9% increase in average earning assets for the three months ended
March 31, 2000.
Investment securities and federal funds sold totaled $71,371,000 at
March 31, 2000, compared to $68,315,000 at December 31, 1999. The Company is a
member of Federal Home Loan Bank of San Francisco and holds $924,000 in FHLB
stock at March 31, 2000.
During the first quarter of 2000, net loans and leases decreased to
$215,145,000 from $215,397,000 at December 31, 1999. Loans and leases are the
Company's major component of earning assets. The Bank's average loan to deposit
ratio was 78.3%.
Total deposits increased to $279,439,000 at March 31, 2000 compared to
$275,261,000 at December 31, 1999 with the growth primarily in noninterest
bearing demand accounts, which increased $4,087,000, or 10.2%.
The Company maintains capital to support capital needs future growth and
dividend payouts while maintaining the confidence of depositors and investors by
increasing shareholder value. The Company has provided the majority of its
capital requirements through the retention of earnings. Stockholders' equity
increased to $34,205,000 as of March 31, 2000, as compared to $33,246,000 at
December 31, 1999.
The Company and the Bank have levels of capital in excess of all
regulatory requirements. The risk-based capital ratios are listed below.
COMPANY MARCH 31, DECEMBER 31, MINIMUM FOR CAPITAL TO BE WELL CAPITALIZED UNDER
ADEQUACY PURPOSES
2000 1999 PROMPT CORRECTIVE ACTION PROVISIONS
Leverage Ratio 10.80% 10.47% 4.00% N/A
Tier 1 risk-based capital ratio 14.37% 14.13% 4.00% N/A
Total risk-based capital ratio 15.50% 15.10% 8.00% N/A
BANK
Leverage Ratio 10.52% 10.20% 4.00% 5.00%
Tier 1 risk-based capital ratio 13.98% 13.74% 4.00% 6.00%
Total risk-based capital ratio 15.12% 14.70% 8.00% 10.00%
IMPACT OF INFLATION
Impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because a financial
institution's assets and liabilities consist largely of monetary items. The
relatively low proportion of the Bank's fixed assets (approximately 1.6% at
March 31, 2000) reduces both the potential of inflated earnings resulting from
understated depreciation and the potential understatement of absolute asset
values.
13
YEAR 2000 COMPLIANCE
The Company recognized the material nature of the business issues
surrounding computer processing of dates into and beyond the Year 2000 and began
taking corrective action pursuant to the interagency statements issued by the
Federal Financial Institutions Examination Council. Management believes the
Company and the Bank have completed all of the activities within their control
to ensure that the Company's and the Bank's systems are Year 2000 compliant.
Year 2000 readiness costs were approximately $74,000 for the year ending
December 31, 1999. The Company does not expect to incur further expenses related
to Year 2000 issues.
The Company and the Bank did not experience any material disruptions due
to the Year 2000 issues nor have they experienced any disruption of service from
third party vendors, suppliers or service providers.
Although the Company and the Bank did not experience any material
business disruptions of their internal computer systems or software applications
due to the start of the Year 2000 nor have they experienced any problems with
their computer systems or software applications or their third party vendors,
suppliers and service providers, the following dates remain that could present a
Year 2000 problem: October 10, the first date to require an eight-digit field;
December 31, 2000, and January 1, 2001, the last date of this year and first
date of next; and December 31, 2001, the end of the first 365-day year of the
new century. Management believes that appropriate actions have been taken to
address these remaining Year 2000 issues and contingency plans are in place to
minimize the financial impact. Management however cannot be certain that Year
2000 issues affecting computer systems, software applications, customer,
suppliers or service providers will not have a material adverse impact on the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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, 2000 compared
to December 31, 1999.
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 Company entered into a certain Agreement and Plan of Reorganization
and Merger dated October 3, 1999, as amended on January 28, 2000 (the "Plan of
Reorganization") with Six Rivers National Bank, a national banking association
with its headquarters in Eureka, California ("SRNB"), and NVB Interim National
Bank, an interim national banking association to be formed at the direction of
the Company to facilitate the business combination contemplated by the parties.
Under the terms of the Plan of Reorganization, SRNB is expected to merge with
and into NVB Interim National Bank and the resulting national banking
association will continue operations with the national bank charter number of
Six Rivers and the name "Six Rivers National Bank" as a wholly owned subsidiary
of the Company. Under the terms of the Plan of Reorganization, the closing of
the merger is subject to the prior approval of the shareholders of the Company
and the shareholders of SRNB, respectively.
At a Special Meeting of the shareholders of the Company, held on March
28, 2000, the Plan of Reorganization and the transactions described therein were
approved by the shareholders. There were 2,214,144 votes cast for the proposal,
287,684 votes cast against the proposal or withheld, and 33,180 shares abstained
from voting. There were no broker non-votes.
Also at the Special Meeting held on March 28, 2000, the shareholders of
the Company approved a proposal to amend the Articles of Incorporation and
Bylaws of the Company to provide for the classification of the Board of
Directors. There were 1,928,191 votes cast for the proposal, 554,767 votes cast
against the proposal or withheld, and 52,050 shares abstained from voting. There
were no broker non-votes.
14
On April 6, 2000, at a Special Meeting of the shareholders of SRNB,
adjourned from March 28, 2000, the shareholders of SRNB voted for and approved
the Plan of Reorganization and the transactions described therein.
Consummation of the transactions described in the Plan of Reorganization
remains subject to receipt of all applicable regulatory approvals.
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K during the quarter ended March 31, 2000:
Filed January 31, 2000 - Year end 1999 Press Release and Change
in Six Rivers National Bank "SRNB" "Termination" Date.
Filed February 1, 2000 - SRNB Employment Contracts
Filed February 4, 2000 - SRNB Year end 1999 Press Release
Filed February 22, 2000 - SRNB Exhibits to Plan of
Reorganization Incorporated by Reference.
Filed March 20, 2000 - North Valley Bancorp "NVB" Cash Dividend
Press Release March 10, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH VALLEY BANCORP
- --------------------
(Registrant)
Date May 12, 2000
By:
/s/ SHARON BENSON
- -----------------------------------------------
Sharon Benson
Senior Vice President & Chief Financial Officer
15