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, 2003.
[ ] 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
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NORTH VALLEY BANCORP
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(Exact name of registrant as specified in its charter)
California 94-2751350
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State or other jurisdiction (IRS Employer ID Number)
of incorporation or organization)
300 Park Marina Circle, Redding, CA 96002
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 226-2900
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880 East Cypress Avenue, Redding, CA
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - 4,521,378 shares as of May 13, 2003.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--March 31, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Income--For the Three
months Ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows--For the
Three months Ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 22
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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, December 31,
2003 2002
------------ ------------
Cash and due from banks $ 36,128 $ 33,900
Federal funds sold 49,900 21,400
------------ ------------
Total cash and cash equivalents 86,028 55,300
Interest-bearing deposits in other financial institutions 396 517
Investment securities:
Available for sale, at fair value 102,363 110,475
Held to maturity, at amortized cost (fair value of $1,844 at
March 31, 2003 and $1,843 at December 31, 2002 1,455 1,455
Loans and leases net of allowance for loan and lease losses of
$6,878 and $6,723 at March 31, 2003 and
December 31, 2002 418,127 437,843
Premises and equipment, net of accumulated
depreciation and amortization 12,938 13,156
Other real estate 28 55
FHLB and FRB stock and other securities 3,308 3,258
Core deposit and other intangibles, net 2,651 2,772
Accrued interest receivable & other assets 31,112 30,939
------------ ------------
TOTAL ASSETS $ 658,406 $ 655,770
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 111,112 $ 108,140
Interest-bearing 455,469 446,913
------------ ------------
Total deposits 566,581 555,053
Other borrowed funds 24,176 32,888
Accrued interest and other liabilities 7,062 7,800
Company obligated mandatorily redeemable cumulative
trust preferred securities of subsidiary grantor trust 10,000 10,000
------------ ------------
Total liabilities 607,819 605,741
------------ ------------
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 6,930,792 and 6,951,141 at
March 31, 2003 and December 31, 2002 25,199 25,112
Retained earnings 24,244 23,260
Accumulated other comprehensive income, net of tax 1,144 1,657
------------ ------------
Total stockholders' equity 50,587 50,029
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 658,406 $ 655,770
============ ============
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,
---------------------------
2003 2002
------------ ------------
INTEREST INCOME:
Loans and leases including fees $ 7,684 $ 7,800
Securities:
Taxable 1,046 1,187
Exempt from federal taxes 354 404
Federal funds sold 108 100
------------ ------------
Total interest income 9,192 9,491
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INTEREST EXPENSE:
Deposits 1,596 2,302
Company obligated mandatorily redeemable cumulative trust
preferred securities of subsidiary grantor trust 256 256
Other borrowings 230 216
------------ ------------
Total interest expense 2,082 2,774
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NET INTEREST INCOME 7,110 6,717
PROVISION FOR LOAN AND LEASE LOSSES -- 420
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 7,110 6,297
NONINTEREST INCOME:
Service charges on deposit accounts 1,290 1,513
Other fees and charges 455 219
Gain on sale of loans 204
Gain on sales or calls of securities 151
Other 620 538
------------ ------------
Total noninterest income 2,720 2,270
------------ ------------
NONINTEREST EXPENSES:
Salaries and employee benefits 3,312 3,189
Occupancy 402 387
Equipment 749 415
Other 2,233 2,045
------------ ------------
Total noninterest expenses 6,696 6,036
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INCOME BEFORE PROVISION FOR INCOME
TAXES 3,134 2,531
PROVISION FOR INCOME TAXES 1,039 783
------------ ------------
NET INCOME $ 2,095 $ 1,748
============ ============
EARNINGS PER SHARE:
Basic $ 0.30 $ 0.25
============ ============
Diluted $ 0.29 $ 0.24
============ ============
See notes to condensed consolidated financial statements (unaudited).
4
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
For the three months
ended March 31,
----------------------------
2003 2002
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,095 $ 1,748
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 612 347
Amortization of premium on securities 82 105
Amortization of core deposit and other intangibles 121 120
Provision for loan and lease losses -- 420
Gain on sale or calls of securities (151) --
Gain on sale of loans (204 --
Effect of changes in:
Accrued interest receivable (3) 96
Other assets 177 (528)
Accrued interest and other liabilities (738) 549
------------ ------------
Net cash provided by operating activities 1,991 2,857
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of other real estate owned 27 56
Net changes in FHLB, FRB and other securities (50) (220)
Purchases of available for sale securities (9,991) (7,142)
Proceeds from sales of available for sale securities 4,344 539
Proceeds from maturities/calls of available for sale securities 12,968 11,014
Proceeds from sales of loans 18,661 --
Net decrease(increase) in interest-bearing deposits at financial
institutions 121 (8)
Net decrease(increase) in loans and leases 1,259 (7,809)
Purchases of premises and equipment, net (394) (200)
------------ ------------
Net cash (used in) provided by investing activities 26,945 (3,770
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 11,529 4,818
Net (decrease)increase in Federal funds purchased and other
borrowed funds (8,712) 5,839
Cash dividends paid (693) (468)
Repurchase of common stock (573) --
Cash received for stock options exercised 192 153
Compensation expense on stock options/grants 50 198
------------ ------------
Net cash provided by financing activities 1,792 10,540
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 30,728 9,627
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 55,300 46,375
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 86,028 $ 56,002
============ ============
ADDITIONAL INFORMATION:
Cash paid during the period for:
Interest $ 2,488 $ 2,937
============ ============
Income taxes $ 350 $ 50
============ ============
See notes to condensed consolidated financial statements (unaudited).
5
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 accounting principles generally accepted in the United States of
America 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 solely 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 accounting principles generally accepted in the United States of
America 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, 2002.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for any subsequent period or for
the year ended December 31, 2003.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries (North Valley Bank ("NVB"), Six
Rivers Bank ("SRB"), North Valley Capital Trust I, North Valley Trading Company,
which is inactive, and Bank Processing, Inc. ("BPI") a California corporation).
Significant intercompany items and transactions have been eliminated in
consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE B - SECURITIES
At March 31, 2003 and December 31, 2002, the amortized cost of securities and
their approximate fair value were as follows:
(in thousands) Gross Gross Carrying
Amortized Unrealized Unrealized Amount
Available for sale securities: Cost Gains Losses (Fair Value)
------------ ------------ ------------ ------------
March 31, 2003
Securities of U.S. government
agencies and corporations $ 12,700 $ 32 $ (327) $ 12,405
Obligations of states and political
subdivisions 21,724 1,121 (79) 22,766
Mortgage backed securities 52,898 803 (14) 53,687
Corporate securities 6,045 319 (29) 6,335
Other securities 7,126 87 (43) 7,170
------------ ------------ ------------ ------------
$ 100,493 $ 2,362 $ (492) $ 102,363
============ ============ ============ ============
December 31, 2002
Securities of U.S. government
agencies and corporations $ 11,220 $ 9 $ 11,229
Obligations of states and political
subdivisions 23,580 1,138 $ (67) 24,651
Mortgage backed securities 59,915 1,108 (4) 61,019
Corporate securities 8,976 520 9,496
Other securities 4,088 (8) 4,080
------------ ------------ ------------ ------------
$ 107,779 $ 2,775 $ (79) $ 110,475
============ ============ ============ ============
6
Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized
Held to maturity securities: Cost) Gains Losses Fair Value
------------ ------------ ------------ ------------
March 31, 2003
--------------
Obligation of states and political
subdivisions $ 1,455 $ 389 $ -- $ 1,844
============ ============ ============ ============
Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized
Held to maturity securities: Cost) Gains Losses Fair Value
------------ ------------ ------------ ------------
December 31, 2002
-----------------
Obligation of states and political
subdivisions $ 1,455 $ 388 $ -- $ 1,843
============ ============ ============ ============
Gross realized gains on sales or calls of available-for-sale securities
were $162,000 for the three months ended March 31, 2003. There were no gross
realized gains on sale of available-for-sale securities for the three months
ended March 31, 2002. Gross realized losses on sales or calls of
available-for-sale securities were $11,000 for the three months ended March 31,
2003. There were no gross realized losses on sales of available-for-sale
securities for the three months ended March 31, 2002.
There were no sales or transfers of held-to-maturity securities for the
three months ended March 31, 2003 and 2002.
Scheduled maturities of held-to-maturity and available-for-sale
securities (other than equity securities with an amortized cost of approximately
$7,126,000 and a fair value of approximately $7,170,000) at March 31, 2003, are
shown below (in thousands). The Company invests in mortgage backed securities
("MBSs") issued by the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation and Government National Mortgage Association. Actual
maturities of MBSs and other securities may differ from contractual maturities
because borrowers have the right to prepay mortgages without penalty or call
obligations with or without call penalties. The Company uses the "Wall Street"
consensus average life at the time the security is purchased to schedule
maturities of these MBSs and adjusts scheduled maturities periodically based
upon changes in the Wall Street estimates.
Held to Maturity Securities Available for Sale Securities
--------------------------- ---------------------------
Amortized
Cost Fair Value
(Carrying Amortized (Carrying
Amount) Fair Value Cost Amount)
------------ ------------ ------------ ------------
Due in 1 year or less $ 33,388 $ 33,798
Due after 1 year through 5 years 27,932 29,068
Due after 5 years through 10 years 6,503 6,535
Due after 10 years $ 1,455 $ 1,844 25,544 25,792
------------ ------------ ------------ ------------
$ 1,455 $ 1,844 $ 93,367 $ 95,193
============ ============ ============ ============
At March 31, 2003 and December 31, 2002 securities having fair value
amounts of approximately $60,138,000 and $65,052,000 were pledged to secure
public deposits, short-term borrowings, treasury, tax and loan balances and for
other purposes required by law or contract.
7
NOTE C - STOCK-BASED COMPENSATION
At March 31, 2003, the Company has three stock-based compensation
plans, the North Valley Bancorp 1989 Director Stock Option Plan, the 1998
Employee Stock Incentive Plan and the 1999 Director Stock Option Plan. The
Company accounts for these plan under the recognition and measurement principles
of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based compensation cost is reflected in net income
under the Employee Plan, as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant. Compensation expense is recognized in the financial statements for the
differences between the fair value of the options at the date of the grant and
the exercise price at 85% of the fair value for the Director Plans.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation. Pro forma adjustments to the Company's net earnings and earnings
per share are disclosed during the years in which the options become vested.
Three months ended March 31,
----------------------------
(in thousands) 2003 2002
------------ ------------
As reported $ 2,095 $ 1,748
Add: total stock-based compensation expense included in net
income, net of tax 30 119
Deduct: total stock-based compensation expense
determined under the fair value based method for all awards, net
of related tax effects (92) (99)
------------ ------------
Pro forma $ 2,033 $ 1,768
============ ============
Basic earnings per common share:
As reported $ 0.30 $ 0.25
Pro forma $ 0.29 $ 0.25
Diluted earnings per common and equivalent share:
As reported $ 0.29 $ 0.24
Pro forma $ 0.28 $ 0.25
Weighted average fair value of options
granted during the year $ 4.11 $ 3.12
- --------------------------------------------------------------------------------
The fair value of each option is estimated on the date of grant
using an option-pricing model with the following assumptions:
March 31, 2003 March 31, 2002
Dividend yield 3.12% 2.70%
Expected volatility 19.87% 21.44%
Risk-Free interest rate 5.00% 5.00%
Expected option life 7 years 7 years
- --------------------------------------------------------------------------------
8
NOTE D - 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 available-for-sale investment securities and
adjustments to the minimum pension liability. Reclassification adjustments
resulting from gains or losses on investment securities that were realized and
included in net income of the current period that also had been included in
other comprehensive income as unrealized holding gains or losses in the period
in which they arose are excluded from comprehensive income of the current
period. The Company's total comprehensive income was as follows:
Three months ended March 31,
----------------------------
(in thousands) 2003 2002
------------ ------------
Net income $ 2,095 $ 1,748
Other comprehensive income:
Reclassification adjustment and tax 109
Holding gain (loss) arising during period (622) (275)
------------ ------------
(513) (275)
Total comprehensive income $ 1,582 $ 1,473
============ ============
NOTE E - 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 periods ended March 31, 2003 and 2002 is
reconciled as follows:
Three months ended March 31,
---------------------------
(In thousands except earnings per share) 2003 2002
------------ ------------
Calculation of Basic Earnings Per Share
Numerator - net income $ 2,095 $ 1,748
Denominator - weighted average common
shares outstanding 6,937 7,005
------------ ------------
Basic Earnings Per Share $ 0.30 $ 0.25
============ ============
Calculation of Diluted Earnings Per Share
Numerator - net income $ 2,095 $ 1,748
Denominator - weighted average common
shares outstanding 6,937 7,005
Dilutive effect of outstanding options 303 210
------------ ------------
7,240 7,215
------------ ------------
Diluted Earnings Per Share $ 0.29 $ 0.24
============ ============
NOTE F - SEGMENT DISCLOSURE
The Company operates as three business segments: North Valley Bank, Six
Rivers Bank and Other. Management analyzes the operations of NVB, SRB and Other
separately. Other consists of North Valley Bancorp a multi-bank holding company
registered with and subject to regulation and supervision by the Board of
Governors of the Federal Reserve System and Bank Processing Inc, a California
corporation, both of which provide services to NVB and SRB. Management allocates
the costs of Bancorp and BPI to NVB and SRB based primarily on usage through a
variety of statistical data. NVB and SRB are separately chartered institutions
each with its own Board of Directors and regulated independently of each other.
9
The accounting policies of the segments are the same as those described
in Note 1 to the Consolidated Financial Statements included in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 2002. The
Company evaluates performance based on operating results before income taxes not
including nonrecurring gains or losses.
The Company derives a majority of its revenues from interest income and
the chief operating decision maker relies primarily on net interest income and
non-interest income to assess the performance of the segments and make decisions
about resources to be allocated to the segment. Therefore, the total revenues
for the segments reported below consists of net interest income plus noninterest
income for the three months ended March 31, 2003 and 2002.
The Company does not have operating segments other than those reported.
Parent company financial information is included in the Other category in the
disclosures below along with the activity of BPI, North Valley Trading Co. and
North Valley Capital Trust I and represents the Company's Other operating
segment.
The Company does not have a single external customer from which it
derives 10 percent or more of its revenues and operates in one geographical
area.
Information about reportable segments, and reconciliation of such
information to the condensed consolidated financial statements as of and for the
three month periods ended March 31, follows:
Three months ended: NVB SRB Other Total
---------- ---------- ---------- ----------
March 31, 2003:
Total revenues $ 7,045 $ 2,925 $ (140) $ 9,830
Net income (loss) $ 1,800 $ 424 $ (129) $ 2,095
Interest income $ 6,350 $ 2,842 $ -- $ 9,192
Interest expense $ 1,092 $ 734 $ 256 $ 2,082
Depreciation and amortization $ 543 $ 217 $ 55 $ 815
Provision for loan and lease losses $ -- $ -- $ -- $ --
Total assets $ 442,873 $ 212,709 $ 2,595 $ 658,177
March 31, 2002:
Total revenues $ 6,492 $ 2,620 $ (125) $ 8,987
Net income (loss) $ 1,599 $ 293 $ (144) $ 1,748
Interest income $ 6,518 $ 2,972 $ -- $ 9,490
Interest expense $ 1,092 $ 734 $ 256 $ 2,082
Depreciation and amortization $ 231 $ 224 $ 12 $ 467
Provision for loan and lease losses $ 600 $ 100 $ -- $ 700
Total assets $ 405,220 $ 201,237 $ 1,078 $ 607,535
NOTE G-STOCK REPURCHASE PROGRAM
The Board of Directors of the Company has authorized a stock repurchase
program under which repurchases will be made from time to time by the Company,
in compliance with Securities and Exchange Commission rules, to a level as
authorized by the Board. On July 31, 2002, the Board of Directors authorized a
new common stock repurchase program. The program calls for the repurchase of up
to 3.0% of the Company's outstanding shares, or approximately 140,000 shares,
based on approximately 4,665,000 shares outstanding as of the date of the
announcement. Under this latest program, a total of 139,802 shares have been
repurchased through April 24, 2003 for total consideration of $2,787,391.
NOTE H - NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123. This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. The transition guidance
and annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reporting containing financial statements for interim periods
beginning after December 15, 2002. Because the Company accounts for the
compensation cost associated with its stock option plans under the intrinsic
value method, the alternative methods of transition will not apply to the
Company. The additional interim disclosure requirements of the Statement are
included in these financial statements. In management's opinion, the adoption of
this Statement did not have a material impact on the Company's consolidated
financial position or results of its operations or its cash flows.
On April 30, 2003, the FASB issued Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies the accounting for derivative instruments by providing
guidance related to circumstances under which a contract with a net investment
meets the characteristics of a derivative as discussed in Statement 133. The
Statement also clarifies when a derivative contains a financing component. The
10
Statement is intended to result in more consistent reporting for derivative
contracts and must be applied prospectively for contracts entered into or
modified after June 30, 2003, except for hedging relationships designated after
June 30, 2003. In management's opinion, adoption of this statement is not
expected to have a material effect on the Company's consolidated financial
position or results of operations.
NOTE I - SUBSEQUENT EVENTS
COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF SUBSIDIARY GRANTOR TRUST - During the first quarter of 2003, the
Company formed North Valley Capital Trust II as a special purpose entity ("SPE")
which is consolidated into the Company's financial statements. North Valley
Capital Trust II is a Delaware business trust wholly owned by the Company and
formed for the purpose of issuing Company obligated mandatorily redeemable
cumulative trust preferred securities of Subsidiary Grantor Trust holding solely
junior subordinated debentures.
On April 10, 2003, North Valley Capital Trust II issued 6,000 Trust
Preferred Securities with a liquidation value of $1,000 for gross proceeds of
$6,000,000. The entire proceeds of the issuance were invested by North Valley
Capital Trust I in $6,000,000 aggregate principal amount of 6.448% subordinated
debentures due in 2033 (the Subordinated Debentures) issued by the Company. The
Subordinated Debentures represent the sole assets of North Valley Capital Trust
II.
Holders of the trust preferred securities are entitled to cumulative
cash distributions at an annual rate of 6.448% of the liquidation amount of
$1,000 per security. The Company has the option to defer payment of the
distributions for a period of up to five years, as long as the Company is not in
default in the payment of interest on the Subordinated Debentures. The Company
has guaranteed, on a subordinated basis, distributions and other payments due on
the trust preferred securities (the Guarantee). The Guarantee, when taken
together with the Company's obligations under the Subordinated Debentures, the
Indenture Agreement pursuant to which the subordinated Debentures were issued
and the Company's obligations under the Trust Agreement governing the subsidiary
trust, provide a full and unconditional guarantee of amounts due on the Trust
Preferred Securities.
STOCK SPLIT - On March 12, 2003, The Company announced a 3 for 2 stock
split in the form of a dividend payable to holders of common stock on April 15,
2003, the record date. The stock dividend will be distributed on May 15, 2003
with each shareholder receiving one additional share for every two shares held
on the record date. Partial shares will be paid in cash based upon the market
price on the record date. All share and earnings per share figures in this
report have been adjusted to reflect the 3-for-2 stock split announced on March
12, 2003.
STOCK REPURCHASE PLAN - On April 28, 2003, the Board of Directors
authorized a new common stock repurchase program. The program calls for the
repurchase of up to 3.0% of the Company's outstanding shares, or approximately
136,000 shares, based on approximately 4,555,000 shares outstanding as of the
date of the announcement, or 204,000 shares based on approximately 6,833,000
shares outstanding after giving effect to the 3 for 2 stock split payable on May
15, 2003 to holders of record of April 15, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- --------------------------------------------------------------------------------
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 and Humboldt Counties;
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. In addition, recent
events, including those of September 11, 2001, and efforts of the U.S.
Government to combat terrorism, have increased the uncertainty related to the
national and California economic outlook and could have an effect on the future
operations of the Company or its customers, including borrowers.
Critical Accounting Policies
- ----------------------------
General
North Valley Bancorp's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within its statements is, to a
significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. North Valley Bancorp uses historical loss factors as one factor in
determining the inherent loss that may be present in its loan portfolio. Actual
losses could differ significantly from the historical factors that are used.
11
Other estimates that we use are related to the expected useful lives of our
depreciable assets. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could
change. Certain amounts in 2002 have been reclassified to conform with the 2003
financial statement presentation.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is an estimate of the losses
that are inherent in our loan portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accountings Standards
(SFAS) No. 5 "Accounting for Contingencies", which requires that losses be
accrued when they are probable of occurring and estimable and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", which requires that losses
be accrued for impaired loans based on the differences between that value of
collateral, present value of future cash flows or values that are observable in
the secondary market and the loan balance.
Our allowance for loan and lease losses has three basic components: the
formula allowance, the specific allowance and the unallocated allowance. Each of
these components is determined based upon estimates that can and do change when
the actual events occur. The formula allowance uses a historical loss view as an
indicator of future losses and therefore this estimate could differ from losses
that occur in the future. However, since this history is updated with the most
recent loss information, the errors that might otherwise occur are mitigated.
The specific allowance uses various techniques to arrive at an estimate of loss
for specific loans. Historical loss information, expected cash flows and fair
market value of collateral are used to estimate those losses. The use of these
values is inherently subjective and our actual losses could be greater or less
than the estimates. The unallocated allowance captures losses that are
attributable to various economic events, industry or geographic sectors whose
impact on the portfolio have occurred but have yet to be recognized in either
the formula or specific allowances including model imprecision. For further
information regarding our allowance for credit losses, see "Allowance for Loan
and Lease Losses" on page 16.
Corporate Reform Legislation
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the
"Act") on July 30, 2002, which responds to recent issues in corporate governance
and accountability. Among other matters, key provisions of the Act provide for:
o Expanded oversight of the accounting profession by creating a new
independent oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by
the CEO and CFO, and makes it a crime for an issuer to interfere with
an audit.
o Enhanced financial disclosures, including periodic reviews for the
largest issuers and real time disclosure of material company
information.
o Enhanced criminal penalties for a broad array of white-collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
The effect of the Act upon corporations is uncertain; however, it is likely
that compliance costs may increase as corporations modify procedures if required
to conform to the provisions of the Act. The Company does not currently
anticipate that compliance with the Act will have a material effect upon its
financial position or results of its operations or its cash flows.
Overview
- --------
North Valley Bancorp (the "Company") is a multi-bank holding company
registered with and subject to regulation and supervision by the Board of
Governors of the Federal Reserve System (the "Board of Governors"). The Company
was incorporated in 1980 in the State of California. The Company wholly owns its
principal subsidiaries, North Valley Bank ("NVB"), Six Rivers Bank ("SRB"),
North Valley Capital Trust I, North Valley Capital Trust II, North Valley
Trading Company, which is inactive, and Bank Processing, Inc. ("BPI"), a
California corporation. The sole subsidiary of NVB, which is inactive, is North
Valley Basic Securities (the "Securities Company").
The Company conducts a commercial and retail banking business with NVB
operating eleven full service banking offices, including two supermarket
branches, in Shasta and Trinity Counties and with SRB operating seven full
service banking offices in Humboldt, Del Norte and Mendocino counties. The
Company operates as three business segments - NVB, SRB, and Other - providing
demand, savings, money market rate deposit accounts, and time deposits, and
making commercial, real estate and consumer loans. The Company also offers
installment note collections, issues cashier's checks and money orders, sells
travelers' checks and provides safe deposit boxes and other customary banking
services. 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 10% of the Company's revenues.
12
Earnings Summary
- ----------------
Three months ended March 31,
----------------------------
(in thousands except per share amounts) 2003 2002
------------ ------------
Net interest income $ 7,110 $ 6,717
Provision for loan and lease losses -- 420
Noninterest income 2,720 2,270
Noninterest expense 6,696 6,036
Provision for income taxes 1,039 783
------------ ------------
Net income $ 2,095 $ 1,748
============ ============
Earnings Per Share
Basic $ 0.30 $ 0.25
Diluted $ 0.29 $ 0.24
Annualized Return on Average Assets 1.28% 1.16%
Annualized Return on Average Equity 16.85% 16.38%
The Company's consolidated net income for the three months ended March
31, 2003 was $2,095,000, or $0.29 per diluted share, compared to $1,748,000, or
$0.24 diluted earnings per share for the same period in 2002. Return on average
assets was 1.28% and return on average equity was 16.85% for the three months
ended March 31, 2003 improving over the 1.16% and 16.38% for the same period in
2002.
For the three months ended March 31, 2003, the Company took no
provision for loan losses. This compares to $420,000 for the same period in
2002. The decreased level of provision is due to the results of the Company's
methodology for measuring the adequacy of the allowance for loan losses. Factors
include size and mix of loan portfolio, non-performing loan levels,
charge-off/recovery activity and other factors including economic activity.
Management believes that the current level of allowance for loan and lease
losses as of March 31, 2003 of $6,878,000 or 1.62% of total loans and leases is
adequate at this time. The allowance for loan and lease losses was $6,723,000 or
1.52% of total loans and leases at December 31, 2002. For further information
regarding our allowance for loan and lease losses, see "Allowance for Loan and
Lease Losses" on page 17.
Net Interest Income
- -------------------
Net interest income is the principal source of the Company's operating
earnings and represents the difference between interest earned on loans and
leases and other investments and interest paid on deposits and other borrowings.
The amount of interest income and expense is affected by changes in the 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 tax-exempt investments
included in earning assets, for the periods indicated:
Three months ended March 31,
---------------------------
(In thousands) 2003 2002
------------ ------------
Interest income $ 9,192 $ 9,491
Less: Interest expense 2,082 2,774
FTE adjustment 183 208
------------ ------------
Net interest income (FTE) $ 7,293 $ 6,925
============ ============
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 periods ended March 31, 2003
resulted primarily from the decreasing rates paid on interest-bearing
liabilities as well as the growth in average earning assets, which was offset by
lower yields on those assets. During 2002, the Federal Reserve Bank Board
reduced short-term interest rates by 50 basis points on top of the total
reduction in 2001 of 475 basis points. Management has thus far been able to
effectively manage the net interest margin during the dramatic change in rates
due to its diversified balance sheet, strong core deposit base and proactive
management of the investment portfolio and borrowings. While average interest
earning assets for the three months ended March 31, 2003 increased by
$40,875,000 or 7.6% from the same period last year, yields on average earning
assets decreased 74 basis points from 7.28% to 6.54%. Average interest bearing
liabilities increased by $36,241,000 or 8.0% for the three months ended March
31, 2003 compared to the same period in 2001 while the average rate paid on
those liabilities decreased 76 basis points from 2.48% to 1.72%. The Company's
net interest margin (FTE) decreased slightly from 5.20% for the three month
period ended March 31, 2002 to 5.09% for the same period ended March 31, 2003.
The following table is a summary of the Company's net interest margin
(FTE) for the periods indicated:
Three months
Ended March 31,
---------------------
2003 2002
------ ------
Yield on earning assets 6.54% 7.28%
Rate paid on interest-bearing 1.72% 2.48%
------ ------
liabilities
Net interest spread 4.82% 4.81%
====== ======
Net interest margin 5.09% 5.20%
====== ======
13
Noninterest Income
- ------------------
The following table is a summary of the Company's noninterest income
for the periods indicated:
Noninterest Income Three months Ended March 31,
---------------------------
(In thousands) 2003 2002
------------ ------------
Service charges on deposit accounts $ 1,290 $ 1,301
Other fees and charges 455 431
Gain (loss) on sale of loans 204 --
Gain on sale or calls of securities 151 --
Other 620 538
------------ ------------
Total noninterest income $ 2,720 $ 2,270
============ ============
Non-interest income increased from $2,270,000 for the three months
ended March 31, 2002 to $2,720,000 for the same period in 2003. Service charges
on deposits decreased slightly to $1,290,000 for the three months ended March
31, 2003 from $1,301,000 for the same period in 2002. Other fees and charges
increased slightly from $431,000 during the first quarter of 2002 to $455,000
for the same period in 2003. This increase was primarily due to an increase in
ATM service charge income. The Company recorded $204,000 in gains on sales of
mortgages and $151,000 in gains on sales and calls of investment securities.
Please see the paragraph below for a discussion of mortgage loan sales. Other
income increased from $538,000 for the quarter ended March 31, 2002 to $620,000
for the same period in 2003. The increase in other income was primarily due to
an increase on earnings on life insurance holdings which were purchased to fund
the Company's salary continuation plan and an increase in operational
recoveries.
During the fourth quarter of 2002, the Company began to sell new
production conforming first trust deed mortgage loans into the secondary market
and retaining the servicing on these loans. This is part of a strategy to
maintain a beneficial product mix within the loan portfolio while also
maintaining a shorter duration within the loan portfolio due to the historically
low interest rate environment. While this strategy may serve to slightly reduce
the overall yield on earning assets in the near-term, the benefit is that when
rates do start to move back up, the Company will be in a better position to
respond to rate changes and maintain a consistent net interest margin. This
strategy also provided $204,000 in gains on loan sales for the three months
ended March 31, 2003 as compared to $0 in the same period in 2002.
Noninterest Expense
- -------------------
The following table is a summary of the Company's noninterest expense
for the periods indicated:
Three months Ended March 31,
---------------------------
(In thousands) 2003 2002
------------ ------------
Salaries & employee benefits $ 3,312 $ 3,189
Equipment expense 749 415
Occupancy expense 402 387
Marketing 198 267
Data processing expenses 37 73
ATM expense 249 156
Printing & supplies 163 133
Postage 130 172
Messenger expense 69 115
Professional services 242 193
Other 1,145 936
------------ ------------
Total Noninterest expense $ 6,696 $ 6,036
============ ============
Noninterest expense totaled $6,696,000 for the three-month period ended
March 31, 2003, compared to $6,036,000 for the same period in 2002. Salaries and
benefits increased by $123,000 or 3.9% to $3,312,000 for the three months ended
March 31, 2003 compared to $3,189,000 for the same period in 2002. The increase
in salary expense was due to regular merit increases and new employees
associated with a new branch facility but was partially offset by a reduction in
employees in BPI due to the change in core systems which requires less
personnel. Equipment expense increased for the three month period ended March
31, 2003 due to the opening of one new branch in August of 2002 and an increase
in depreciation expense associated with the Company's new core operating system.
All other expense categories combined totaled $2,635,000 for the three months
ended March 31, 2003 compared to $2,432,000 for the same period in 2002, an
increase of $203,000 or 8.3% and was due to normal growth. Other significant
changes were ATM expense and professional services which increased for the
three-month period ended March 31, 2003 compared to the same periods in 2002.
The Company's efficiency ratio for the first three months of 2003 was 68.1%,
slightly higher than the 67.2% efficiency ratio achieved for the first three
months of 2002.
14
Income Taxes
- ------------
The provision for income taxes for the three months ended March 31,
2003 was $1,039,000 as compared to $783,000 for the same period in 2002. The
effective income tax rate for state and federal income taxes was 33.2% for the
three months ended March 31, 2003 compared to 30.9 % for the same period in
2002. The increase in the effective tax rate was due to a decrease in the
Company's tax-exempt income relative to total revenues. The difference in the
effective tax rate compared to the statutory tax rate (approximately 42.05%) is
primarily the result of the Company's investment in municipal securities and
life insurance policies whose income is exempt from Federal taxes.
Impaired, Nonaccrual, Past Due and Restructured Loans and Leases and Other
Nonperforming Assets
- --------------------------------------------------------------------------------
The Company considers a loan or lease impaired if, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
and leases is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all
collateral-dependent loans and leases are measured for impairment based on the
fair value of the collateral.
At March 31, 2003, the recorded investment in loans and leases for
which impairment has been recognized was approximately $1,367,000 with a related
valuation allowance, which is included in the specific allowance of $652,000.
For the period ended March 31, 2003 the average recorded investment in loans and
leases for which impairment has been recognized was approximately $1,410,000.
During the portion of the year that the loans and leases were impaired, the
Company recognized interest income of approximately $4,000 for cash payments
received in 2003.
At December 31, 2002, the recorded investment in loans and leases for
which impairment had been recognized was approximately $1,452,000 with a related
valuation allowance of $365,000. For the year ended December 31, 2002, the
average recorded investment in loans and leases for which impairment had been
recognized was approximately $948,000. During the portion of the year that the
loans and leases were impaired, the Company recognized interest income of
approximately $63,000 for cash payments received in 2002.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full and timely collection of
interest or principal, 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 deemed by management to be fully collectible).
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans when, in the judgment of management, the loans are estimated to be
fully collectible as to both principal and interest. The increase in
nonperforming loans was primarily due to the addition of four nonperforming
single-family residential loans, which are all in the process of collection.
Non-performing assets at March 31, 2003, and December 31, 2002, are
summarized as follows:
March 31, December 31,
2003 2002
------------ ------------
Nonaccrual loans and leases $ 1,326 $ 1,452
Loans and leases 90 days past due and still
accruing interest 1,810 864
------------ ------------
Total nonperforming loans and leases
3,136 2,316
Other real estate 28 55
------------ ------------
Total nonperforming assets $ 3,164 $ 2,371
============ ============
Nonaccrual loans and leases to total gross loans
and leases 0.31% 0.33%
Nonperforming loans and leases to total gross
loans and leases 0.74% 0.52%
Total nonperforming assets to total assets 0.48% 0.36%
15
Allowance for Loan and Lease Losses
- -----------------------------------
A summary of the allowance for loan and lease losses at March 31, 2003,
March 31, 2002 and December 31, 2002, is as follows:
March 31, March 31, December 31,
(In thousands) 2003 2002 2002
------------ ------------ ------------
Balance beginning of period $ 6,723 $ 5,786 $ 5,786
Provision for loan and lease losses -- 420 1,795
Net (recoveries) charge offs (155) 177 858
------------ ------------ ------------
Balance end of period $ 6,878 $ 6,029 $ 6,723
============ ============ ============
Allowance for loan and lease losses to nonaccrual loans
and leases 518.70% 763.17% 463.02%
Allowance for loan and lease losses to nonperforming
loans and leases 219.32% 261.00% 290.28%
Allowance for loan and lease losses to total gross loans
and leases 1.62% 1.49% 1.51%
Ratio of net charge-offs to average loans and
leases outstanding (annualized) (0.16%) 0.16% 0.20%
The allowance for loan and lease losses is established through a
provision for loan and lease losses based on management's evaluation of the
risks inherent in the loan and lease portfolio. In determining levels of risk,
management considers a variety of factors, including, but not limited to, asset
classifications, economic trends, industry experience and trends, geographic
concentrations, estimated collateral values, historical loan and lease loss
experience, and the Company's underwriting policies. The allowance for loan and
lease losses is maintained at an amount management considers adequate to cover
losses in loans and leases receivable, which are considered probable and
estimable. While management uses the best information available to make these
estimates, future adjustments to allowances may be necessary due to economic,
operating, regulatory, and other conditions that may be beyond the Company's
control. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize additions to
the allowance based on judgments different from those of management.
The allowance for loan and lease losses is comprised of three primary
types of allowances:
1. Formula Allowance
Formula allowances are based upon loan and lease loss factors that
reflect management's estimate of the inherent loss in various segments of or
pools within the loan and lease portfolio. The loss factor is multiplied by the
portfolio segment (e.g. multifamily permanent mortgages) balance to derive the
formula allowance amount. The loss factors are updated periodically by the
Company to reflect current information that has an effect on the amount of loss
inherent in each segment.
2. Specific Allowance
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to an individually
impaired credit. In other words, these allowances are specific to the loss
inherent in a particular loan. The amount for a specific allowance is calculated
in accordance with SFAS No. 114, "Accounting By Creditors For Impairment Of A
Loan".
3. Unallocated Allowance
The Company maintains an unallocated loan and lease loss allowance that
is based upon management's evaluation of conditions that are not directly
measured in the determination of the formula and specific allowances. The
evaluation of inherent loss with respect to these conditions is subject to a
higher degree of uncertainty because they are not identified with specific
problem credits or historical performance of loan and lease portfolio segments.
The conditions evaluated in connection with the unallocated allowance at March
31, 2003 included the following, which existed at the balance sheet date:
General Factors:
o General business and economic conditions effecting the Company's
key lending areas
o Real estate values in Northern California
o Loan volumes and concentrations, including trends in past due and
nonperforming loans
16
o Seasoning of the loan portfolio
o Status of the current business cycle
o Specific industry or market conditions within portfolio segments
o Model imprecision
At March 31, 2003, the allowance for loan losses was comprised of
$5,795,000 in formula and specific allowances and $1,083,000 in unallocated
allowance. The $5,795,000 in formula and specific allowances reflects
management's estimate of the inherent loss in various pools or segments in the
portfolio, and includes adjustments for general economic conditions, trends in
the portfolio, changes in the mix of the portfolio and the level of formula
allowance is consistent from 2002 to 2003.
The $1,083,000 in unallocated allowance at March 31, 2003, is nearly
flat with the $1,098,000 in unallocated allowance as of December 31, 2002. The
Company's analysis of economic factors in determining the appropriate level of
unallocated reserves has not significantly changed from December 31, 2002.
Management anticipates that as the Company continues to implement its strategic
plan the Company will:
o generate further growth in loans receivable held for investment
o emphasize the origination and purchase of income property real estate loans
o continue expansion of commercial business lending
As a result, future provisions will be required and the ratio of the
allowance for loan and lease losses to loans outstanding may increase.
Experience across the financial services industry indicates that commercial
business and income property loans may present greater risks than residential
real estate loans, and therefore should be accompanied by suitably higher levels
of reserves.
Liquidity
- ---------
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 $23,500,000 as of March 31, 2003 were available to
provide liquidity. The Company has a revolving, unsecured line of credit for
$3,000,000 with a correspondent bank as of March 31, 2003. In addition, NVB and
SRB are both members of the Federal Home Loan Bank ("FHLB") System providing
additional borrowing capacity of $24,970,000 secured by certain loans and
investment securities as of March 31, 2003. The Company also has a line of
credit with Federal Reserve Bank ("FRB") of $7,493,000 secured by first deeds of
trust on eligible commercial real estate loans and leases. As of March 31, 2003,
borrowings consisted of $23,501,000 in medium-term FHLB advances, long-term
borrowings of $275,000 were outstanding with the FHLB, $401,000 was outstanding
with the FRB under the Treasury, Tax, and Loan program and $10,000,000 was
outstanding in the form of Company obligated mandatorily redeemable cumulative
trust preferred securities.
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 $194,438,000 and
$167,747,000 (or 29.5% and 25.6% of total assets) at March 31, 2003 and December
31, 2002, respectively. Total liquid assets for March 31, 2003 and December 31,
2002 include investment securities of $1,455,000 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 $519,780,000 and $506,162,000 at March 31, 2003
and December 31, 2002, respectively.
17
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.
Interest Rate Sensitivity
- -------------------------
The Company constantly monitors earning asset and deposit levels,
developments and trends in interest rates, liquidity, capital adequacy and
marketplace opportunities. Management responds to all of these to protect and
possibly enhance net interest income while managing risks within acceptable
levels as set forth in the Company's policies. In addition, alternative business
plans and contemplated transactions are also analyzed for their impact. This
process, known as asset/liability management, is carried out by changing the
maturities and relative proportions of the various types of loans, investments,
deposits and other borrowings in the ways prescribed above.
The tool used to manage and analyze the interest rate sensitivity of a
financial institution is known as a simulation model and is performed with
specialized software built for this specific purpose for financial institutions.
This model allows management to analyze three specific types of risks: market
risk, mismatch risk, and basis risk.
Market Risk
Market risk results from the fact that the market values of assets or
liabilities on which the interest rate is fixed will increase or decrease with
changes in market interest rates. If the Company invests in a fixed-rate, long
term security and then interest rates rise, the security is worth less than a
comparable security just issued because the older security pays less interest
than the newly issued security. If the security had to be sold before maturity,
then the Company would incur a loss on the sale. Conversely, if interest rates
fall after a fixed-rate security is purchased, its value increases, because it
is paying at a higher rate than newly issued securities. The fixed rate
liabilities of the Company, like certificates of deposit and fixed-rate
borrowings, also change in value with changes in interest rates. As rates drop,
they become more valuable to the depositor and hence more costly to the Company.
As rates rise, they become more valuable to the Company. Therefore, while the
value changes when rates move in either direction, the adverse impacts of market
risk to the Company's fixed-rate assets are due to rising rates and for the
Company's fixed-rate liabilities, they are due to falling rates. In general, the
change in market value due to changes in interest rates is greater in financial
instruments that have longer remaining maturities. Therefore, the exposure to
market risk of assets is lessened by managing the amount of fixed-rate assets
and by keeping maturities relatively short. These steps, however, must be
balanced against the need for adequate interest income because variable-rate and
shorter-term assets generally yield less interest than longer-term or fixed-rate
assets.
Mismatch Risk
The second interest-related risk, mismatch risk, arises from the fact
that when interest rates change, the changes do not occur equally in the rates
of interest earned and paid because of differences in the contractual terms of
the assets and liabilities held. A difference in the contractual terms, a
mismatch, can cause adverse impacts on net interest income.
The Company has a certain portion of its loan portfolio tied to the
national prime rate. If these rates are lowered because of general market
conditions, e.g., the prime rate decreases in response to a rate decrease by the
Federal Reserve Open Market Committee ("FOMC"), these loans will be repriced. If
the Company were at the same time to have a large proportion of its deposits in
long-term fixed-rate certificates, interest earned on loans would decline while
interest paid on the certificates would remain at higher levels for a period of
time until they mature. Therefore net interest income would decrease
immediately. A decrease in net interest income could also occur with rising
interest rates if the Company had a large portfolio of fixed-rate loans and
securities that was funded by deposit accounts on which the rate is steadily
rising.
This exposure to mismatch risk is managed by attempting to match the
maturities and repricing opportunities of assets and liabilities. This may be
done by varying the terms and conditions of the products that are offered to
depositors and borrowers. For example, if many depositors want shorter-term
certificates while most borrowers are requesting longer-term fixed rate loans,
the Company will adjust the interest rates on the certificates and loans to try
to match up demand for similar maturities. The Company can then partially fill
in mismatches by purchasing securities or borrowing funds from the FHLB with the
appropriate maturity or repricing characteristics.
Basis Risk
The first interest-related risk, basis risk, arises from the fact that
interest rates rarely change in a parallel or equal manner. The interest rates
associated with the various assets and liabilities differ in how often they
change, the extent to which they change, and whether they change sooner or later
than other interest rates. For example, while the repricing of a specific asset
and a specific liability may occur at roughly the same time, the interest rate
on the liability may rise one percent in response to rising market rates while
the asset increases only one-half percent. While the Company would appear to be
evenly matched with respect to mismatch risk, it would suffer a decrease in net
interest income. This exposure to basis risk is the type of interest risk least
able to be managed, but is also the least dramatic. Avoiding concentration in
only a few types of assets or liabilities is the best means of increasing the
chance that the average interest received and paid will move in tandem. The
wider diversification means that many different rates, each with their own
volatility characteristics, will come into play.
18
Net Interest Income and Net Economic Value Simulations
To quantify the extent of all of these risks both in its current
position and in transactions it might take in the future, the Company uses
computer modeling to simulate the impact of different interest rate scenarios on
net interest income and on net economic value. Net economic value or the market
value of portfolio equity is defined as the difference between the market value
of financial assets and liabilities. These hypothetical scenarios include both
sudden and gradual interest rate changes, and interest rate changes in both
directions. This modeling is the primary means the Company uses for interest
rate risk management decisions.
The hypothetical impact of sudden interest rate shocks applied to the
Company's asset and liability balances are modeled quarterly. The results of
this modeling indicate how much of the Company's net interest income and net
economic value are "at risk" (deviation from the base level) from various sudden
rate changes. This exercise is valuable in identifying risk exposures. The
results for the Company's most recent simulation analysis indicate that the
Company's net interest income at risk over a one-year period and net economic
value at risk from 2% shocks are within normal expectations for sudden changes
and do not materially differ from those of December 31, 2002.
For this simulation analysis, the Company has made certain assumptions
about the duration of its non-maturity deposits that are important to
determining net economic value at risk.
Segment Discussion
- ------------------
Management recognizes that each of the subsidiary banks operate in a
different market and also have unique operating challenges. NVB has historically
operated in a more efficient manner than does SRB. This is primarily due to the
operating history and infrastructure of SRB. Since the merger with SRB in
October 2000, management has been focused on making SRB a more efficient
organization and has had some success in making SRB more profitable. Total
revenues and net income at SRB are both up for the first three months of 2003 as
compared to the same period in 2002, total revenues increased from $2,624,000 in
2002 to $2,925,000 in 2003 while net income is up from $293,000 in 2002 to
$424,000 in 2003, a 44.7% increase.
Financial Condition as of March 31, 2003 As Compared to December 31, 2002
- -------------------------------------------------------------------------
Total assets at March 31, 2003, were $658,406,000, compared to December
31, 2002 assets of $655,770,000. Investment securities and federal funds sold
totaled $153,718,000 at March 31, 2003, compared to $133,330,000 at December 31,
2002.
Net loans and leases, the Company's major component of earning assets,
decreased during the first three months of 2003 to $418,127,000 at March 31,
2003 from $437,843,000 at December 31, 2002. The Company's average loan to
deposit ratio was 80.2% at December 31, 2002 and 78.1% for the three months
ended March 31, 2003. The decrease in loans outstanding is primarily due to the
sale of the Company's fixed-rate single-family mortgage originations as
discussed on page 14 of this report.
Total deposits increased to $566,581,000 at March 31, 2003 compared to
$555,053,000 at December 31, 2002 with an increase in noninterest-bearing
deposits, interest-bearing checking, and in savings of $16,510,000 and a
decrease in time deposits of $4,982,000. The decrease in time certificates is
primarily due to the low rate environment in which customers are more inclined
to keep their deposits in shorter duration instruments. The increase in demand
and interest bearing demand balances is attributed to the success of the
"Positively Free Checking" program. This change in the deposit mix from December
31, 2002 had a positive effect on the Company's cost of funds, which was reduced
from 2.48% for the three months ended March 31, 2002 to 1.72% for the three
months ended March 31, 2003.
The Company maintains capital to support future growth and dividend
payouts while trying to effectively manage the capital on hand. From the
depositor standpoint, a greater amount of capital on hand relative to total
assets is generally viewed as positive. At the same time, from the standpoint of
the shareholder, a greater amount of capital on hand may not be viewed as very
positive because it limits the Company's ability to earn a high rate of return
on stockholders' equity (ROE). Stockholders' equity increased to $50,587,000 as
of March 31, 2003, as compared to $50,029,000 at December 31, 2002. The increase
was primarily as a result of the net income of $2,095,000, the effect of stock
options exercised of $192,000, compensation expenses recorded on stock options
and grants of $50,000, offset by a decrease in the unrealized gain on
available-for-sale of securities of $513,000, by cash dividends of $693,000, and
the stock repurchase of $573,000. Under current regulations, the management
believes that the Company meets all capital adequacy requirements and both of
the Company's subsidiary banks were considered well capitalized at March 31,
2003 and December 31, 2002.
19
The Company's and the Bank's capital amounts (in thousands) and risk-based
capital ratios are presented below.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- --------------------------- ---------------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
Company
As of March 31, 2003:
Total capital
(to risk weighted assets) $ 62,575 12.99% $ 38,542 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 56,542 11.74% $ 19,271 4.00% N/A N/A
Tier I capital
(to average assets) $ 56,542 8.69% $ 26,022 4.00% N/A N/A
As of December 31, 2002:
Total capital
(to risk weighted assets) $ 61,581 12.58% $ 39,157 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 55,455 11.33% $ 19,578 4.00% N/A N/A
Tier I capital
(to average assets) $ 55,455 8.59% $ 25,815 4.00% N/A N/A
North Valley Bank
As of March 31, 2003:
Total capital
(to risk weighted assets) $ 42,394 12.62% $ 26,865 8.00% $ 33,582 10.00%
Tier I capital
(to risk weighted assets) $ 38,196 11.37% $ 13,433 4.00% $ 20,149 6.00%
Tier I capital
(to average assets) $ 38,196 8.71% $ 17,536 4.00% $ 21,919 5.00%
As of December 31, 2002:
Total capital
(to risk weighted assets) $ 41,380 12.12% $ 27,316 8.00% $ 34,146 10.00%
Tier I capital
(to risk weighted assets) $ 37,192 10.89% $ 13,658 4.00% $ 20,487 6.00%
Tier I capital
(to average assets) $ 37,192 8.61% $ 17,279 4.00% $ 21,598 5.00%
Six Rivers Bank
As of March 31, 2003:
Total capital
(to risk weighted assets) $ 19,480 13.56% $ 11,491 8.00% $ 14,363 10.00%
Tier I capital
(to risk weighted assets) $ 17,673 12.30% $ 5,745 4.00% $ 8,618 6.00%
Tier I capital
(to average assets) $ 17,673 8.42% $ 8,395 4.00% $ 10,494 5.00%
As of December 31, 2002:
Total capital
(to risk weighted assets) $ 18,958 13.03% $ 11,641 8.00% $ 14,551 10.00%
Tier I capital
(to risk weighted assets) $ 17,130 11.77% $ 5,821 4.00% $ 8,731 6.00%
Tier I capital
(to average assets) $ 17,130 8.24% $ 8,316 4.00% $ 10,394 5.00%
20
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, 2003 compared
to December 31, 2002. Please see page 19 for discussion on Interest Rate
Sensitivity.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
Within the 90 days prior to the date of filing this report, an evaluation was
carried out under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design of our disclosure controls and procedures (as
defined in Rule 13(a)-14(c) of the Securities Exchange Act of 1934). Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in ensuring
that the information required to be disclosed by the Company in the reports it
files or submits under the Act is (i) accumulated and communicated to the
Company's management (including the Chief Executive Officer and Chief Financial
Officer) in a timely manner, and (ii) recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation described above in Item 4.
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 Company, 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
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 99.44 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 with Respect to the North Valley
Bancorp Quarterly Report on Form 10-Q for the Quarter ended March
31, 2003
(b) Reports on Form 8-K during the quarter ended March 31, 2003:
Filed January 23, 2003 - 2002 Fourth Quarter Earnings Announcement
Filed March 12, 2003 - 3 for 2 Stock Split Announcement
Filed March 12, 2003 - Cash Dividend Announcement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH VALLEY BANCORP
- --------------------
(Registrant)
Date May 14, 2003
------------
By:
/s/ MICHAEL J. CUSHMAN
- --------------------------------------------------
Michael J. Cushman
President & Chief Executive Officer
/s/ EDWARD J. CZAJKA
- --------------------------------------------------
Edward J. Czajka
Executive Vice President & Chief Financial Officer
22
CERTIFICATIONS
I, Michael J. Cushman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of North Valley
Bancorp (the Registrant);
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ MICHAEL J. CUSHMAN
- ----------------------------------
Michael J. Cushman
President, Chief Executive Officer
(Principal Financial Officer)
23
I, Edward J. Czajka, certify that:
1. I have reviewed this quarterly report on Form 10-Q of North Valley
Bancorp (the Registrant);
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ EDWARD J. CZAJKA
- -------------------------------------------------
Edward J. Czajka
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
24