SECURITIES AND EXCHANGE COMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
VALLEY NATIONAL CORPORATION
(Name of small business issuer in its charter)
IRS Employer ID. NO. 33-0825336
1234 EAST MAIN STREET, EL CAJON, CALIFORNIA 92021
(Address of principal executive offices)
Issuer's telephone number, including area code: (619) 593-3330
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months and (2) has
been subject to such filing requirements for the past 90 days. Yes / X / No / /
As of May 10, 1999, there were 2,650,462 shares of Common Stock ($0.0001 par
value) outstanding.
Transitional Small Business Disclosure Format: Yes / / No / X /
VALLEY NATIONAL CORPORATION
Balance Sheets
(Unaudited)
March 31, December 31,
Assets 1999 1998
------------------- -------------------
Cash and due from banks $ 12,820,000 $ 11,704,000
Federal funds sold 9,240,000 11,890,000
Interest-earning deposits 6,399,000 6,396,000
Securities:
Available-for-sale 23,625,000 23,609,000
Held-to-maturity 23,136,000 22,953,000
Federal Reserve Bank stock 445,000 445,000
Loans, net 154,360,000 149,708,000
Premises and equipment, net 4,878,000 4,978,000
Other real estate owned, net 1,065,000 1,103,000
Accrued interest receivable 1,582,000 1,617,000
Other assets 3,282,000 2,397,000
------------------- -------------------
Total assets $ 240,832,000 $ 236,800,000
------------------- -------------------
------------------- -------------------
Liabilities And Stockholders' Equity
Deposits:
Non-interest bearing $ 47,320,000 $ 44,015,000
Savings 114,918,000 115,940,000
Time deposits under $100,000 37,979,000 37,891,000
Time deposits of $100,000 or more 19,341,000 18,547,000
------------------- -------------------
Total deposits 219,558,000 216,393,000
Long-term debt 44,000 52,000
Accrued expenses and other liabilities 1,341,000 945,000
------------------- -------------------
Total liabilities 220,943,000 217,390,000
------------------- -------------------
Stockholders' equity:
Common stock, $.0001 par value; authorized 10,000,000 shares;
issued and outstanding 2,650,000 and 2,646,000 shares as of
March 31, 1999 and December 31, 1998, respectively 14,893,000 14,874,000
Accumulated other comprehensive income - unrealized gains on
securities available-for-sale, net 25,000 142,000
Retained earnings 4,971,000 4,394,000
------------------- -------------------
Total stockholders' equity 19,889,000 19,410,000
------------------- -------------------
Total liabilities and stockholders' equity $ 240,832,000 $ 236,800,000
------------------- -------------------
------------------- -------------------
See accompanying notes to consolidated financial statements.
2
VALLEY NATIONAL CORPORATION
Statements of Earnings
(Unaudited)
For the three months ended
March 31,
1999 1998
------------------ ------------------
Interest income:
Interest and fees on loans $ 3,689,000 $ 3,511,000
Interest on securities
Taxable 428,000 357,000
Exempt from federal income taxes 205,000 163,000
Interest on federal funds sold 164,000 198,000
Interest on interest-earning deposits 87,000 66,000
------------------ ------------------
4,573,000 4,295,000
------------------ ------------------
Interest expense:
Time deposits of $100,000 or more 209,000 194,000
Other deposits 1,185,000 1,363,000
------------------ ------------------
1,394,000 1,557,000
------------------ ------------------
Net interest income before provision for
loan losses 3,179,000 2,738,000
Provision for loan losses 150,000 181,000
------------------ ------------------
Net interest income after
provision for loan losses 3,029,000 2,557,000
------------------ ------------------
Other operating income:
Service charges on deposit accounts 412,000 400,000
Merchant processing fees 151,000 109,000
Mortgage brokerage fees 64,000 44,000
Gain on sale of loans 30,000 --
Other 145,000 97,000
------------------ ------------------
802,000 650,000
------------------ ------------------
Other operating expenses:
Compensation and employee benefits 1,364,000 1,327,000
Occupancy expense 305,000 284,000
Furniture and equipment 183,000 154,000
Other 988,000 762,000
------------------ ------------------
2,840,000 2,527,000
------------------ ------------------
Income before income taxes 991,000 680,000
Income tax expense 347,000 232,000
------------------ ------------------
Net earnings $ 644,000 $ 448,000
------------------ ------------------
------------------ ------------------
Basic earnings per share $ 0.23 $ 0.16
------------------ ------------------
------------------ ------------------
Diluted earnings per share $ 0.21 $ 0.15
------------------ ------------------
------------------ ------------------
See accompanying notes to consolidated financial statements.
3
VALLEY NATIONAL CORPORATION
Statements of Cash Flows
(Unaudited)
For the three months ended
March 31,
1999 1998
------------------ ------------------
Cash flows from operating activities:
Net earnings $ 644,000 $ 448,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on sale of loans (30,000) --
Depreciation and amortization 256,000 232,000
Gain on sale of other real estate owned (8,000) --
Provision for loan losses 150,000 181,000
Provision for losses on other real estate owned 15,000 15,000
Increase in accrued interest receivable and
other assets (773,000) (138,000)
Increase in accrued expenses and other liabilities 422,000 299,000
------------------ ------------------
Net cash provided by operating activities 676,000 1,037,000
------------------ ------------------
Cash flows from investing activities:
Purchases of securities held-to-maturity (202,000) (1,012,000)
Maturities of securities available-for-sale 1,597,000 4,534,000
Purchases of securities available-for-sale (1,827,000) (1,003,000)
Net additions to interest-earning deposits (3,000) --
Net (increase) decrease in loans outstanding (5,134,000) 2,891,000
Purchases of bank premises and equipment (117,000) (164,000)
Proceeds from sale of loans 362,000 --
Proceeds from sale of other real estate owned 31,000 --
------------------ ------------------
Net cash used in investing activities (5,293,000) 5,246,000
------------------ ------------------
Cash flows from financing activities:
Net increase in deposits 3,165,000 8,327,000
Payments on long-term debt (8,000) (7,000)
Proceeds from exercise of stock options 19,000 152,000
Cash dividends paid (93,000) (73,000)
------------------ ------------------
Net cash provided by financing activities 3,083,000 8,399,000
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (1,534,000) 14,682,000
Cash and cash equivalents at beginning of period 23,594,000 19,293,000
------------------ ------------------
Cash and cash equivalents at end of period $ 22,060,000 $ 33,975,000
------------------ ------------------
------------------ ------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,379,000 $ 1,562,000
Cash paid during the period for income taxes $ 68,000 $ 60,000
See accompanying notes to consolidated financial statements.
4
VALLEY NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
ITEM 1. (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
The interim financial statements included herein have been
prepared by Valley National Corporation (the "Corporation")
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The Corporation is a
bank holding company, which does substantially all of its business
through its wholly owned subsidiary Valle de Oro Bank, N.A. (the
"Bank"). A discussion of the Corporation is a discussion of the
Bank. Certain information and footnote disclosures, normally
included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations.
These consolidated financial statements should be read in
conjunction with the audited financial statements and notes
thereto included in the Corporation's latest Annual Report. In the
opinion of management, all adjustments, including normal recurring
adjustments necessary to present fairly the financial position of
the Corporation with respect to the interim financial statements
and the results of its operations for the interim period ended
March 31, 1999, have been included. Certain reclassifications may
have been made to prior year amounts to conform to the 1998
presentation. The results of operations for interim periods are
not necessarily indicative of results for the full year.
The Corporation operates six offices in San Diego County,
California. The Corporation's primary source of revenue is
interest from real estate and commercial loans to individuals and
small to middle-market businesses. The accounting and reporting
policies of the Corporation conform to generally accepted
accounting principles and to general practices within the banking
industry.
The following is a description of the more significant policies.
(b) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash
equivalents consist of cash, due from banks and Federal funds
sold. Generally, Federal funds are sold for one-day periods. The
Corporation keeps $350,000 on deposit at the Federal Reserve Bank
in accordance with a compensating balance arrangement.
(c) SECURITIES
Management determines the appropriate classification of securities
at the time of purchase. If management has the intent and the
Corporation has the ability at the time of purchase to hold
securities until maturity, they are classified as
held-to-maturity. Securities held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts
over the period to call or maturity of the related security using
the interest method. Securities to be held for indefinite periods
of time, but not necessarily to be held-to-maturity or on a
long-term basis, are classified as available-for-sale and carried
at fair value with unrealized gains or losses, net of tax,
reported as a separate component of other comprehensive income
until realized. Realized gains or losses on the sale of securities
available-for-sale, if any, are determined using the amortized
cost of the specific securities sold. Securities
available-for-sale include securities that
5
management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes
in interest rates, prepayment risk and other related factors.
Securities are individually evaluated for appropriate
classification, when acquired; consequently, similar types of
securities may be classified differently depending on factors
existing at the time of purchase.
When a security is sold, the realized gain or loss, determined on
a specific-identification basis, is included in earnings. To the
extent a security has a decline in fair value, which is determined
by the Corporation as other than temporary, the adjusted cost
basis is written down to fair value and the amount of the
write-down is charged to earnings.
(d) LOANS AND LOAN FEES
Loans are stated at the amount of principal outstanding. Interest
income is accrued daily on the outstanding loan balances using the
simple-interest method. Loans are generally placed on nonaccrual
status when the borrowers are past due 90 days and when payment in
full of principal or interest is not expected. At the time a loan
is placed on nonaccrual status, any interest income previously
accrued but not collected is reversed against current period
interest income. Income on nonaccrual loans is subsequently
recognized only to the extent cash is received and the loan's
principal balance is deemed collectible. Loans are restored to
accrual status when the loans become both well secured and are in
process of collection.
Nonrefundable fees and related direct costs associated with the
origination of loans are deferred and netted against outstanding
loan balances. Net deferred fees and costs are recognized in
interest income over the terms of the loans using the interest
method. The amortization of loan fees is discontinued on
nonaccrual loans.
(e) ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level deemed
appropriate by management to adequately provide for known and
inherent risks in the loan portfolio and other extensions of
credit, including off-balance sheet credit extensions. The
allowance is based upon a continuing review of the portfolio, past
loan loss experience, current economic conditions that may affect
the borrowers' ability to pay, and the underlying collateral value
of the loans. When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged off and
deducted from the allowance. The provision for loan losses and
recoveries on loans previously charged off are added to the
allowance.
A loan is considered impaired when it is probable that a creditor
will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. If the measure
of the impaired loan is less than the recorded investment in the
loan, a valuation allowance is established with a corresponding
charge to the provision for loan losses. Since substantially all
of the Corporation's loans are collateral dependent, the
calculation of the allowance for losses on impaired loans is
generally based on the fair value of the collateral, less
estimated costs of disposal.
The allowance for loan losses is subjective and may be adjusted in
the future because of changes
6
in economic conditions and the repayment abilities of the
borrowers. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Corporation's allowance. These agencies may require the
Corporation to recognize additions to the allowance based on
their judgments related to information available to them at the
time of their examinations.
(f) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is charged to operating expense using
the straight-line method over the estimated useful lives of
depreciable assets, which range from 3 to 30 years. Leasehold
improvements are capitalized and amortized to operating expense
over the term of the respective lease or the estimated useful life
of the improvement, whichever is shorter.
(g) OTHER REAL ESTATE OWNED
Real estate properties acquired through loan foreclosure or
through acceptance of a deed-in-lieu of foreclosure are initially
recorded at fair value, less estimated selling costs at the date
of foreclosure. Once real estate properties are acquired,
valuations are periodically obtained by management and an
allowance for losses is established by a charge to operations if
the carrying value of a property exceeds its fair value, less
estimated costs of disposal. Real estate properties held for sale
are carried at the lower of cost, including the cost of
improvements and amenities incurred subsequent to acquisition, or
fair value, less estimated selling costs. Costs related to
development and improvement of properties are capitalized, whereas
costs relating to holding the properties are expensed.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the enactment
date.
(i) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by
the weighted-average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed by
dividing net earnings by the weighted-average number of shares of
common stock, common stock equivalents and other potentially
dilutive securities outstanding during the period.
The weighted-average number of shares used for the basic earnings
per share calculations was 2,782,000 and 2,722,000 as of March 31,
1999 and 1998. The weighted-average number of shares used for the
diluted earnings per share calculations was 3,012,000 and
2,973,000 as of March 31, 1999 and 1998, respectively. These
calculations reflect the 5% stock dividend declared April 21,
1999.
7
(j) USE OF ESTIMATES
Management of the Corporation has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
(k) COMPREHENSIVE INCOME
On January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("Statement 130"). Statement 130 establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements; it does not
change the display or components of present-day net earnings.
Comprehensive income for the three months ended March 31, 1999 and
1998 is as follows:
March 31,
1999 1998
----------------- ----------------
Net earnings $644,000 $448,000
Change in unrealized gains (losses) on securities
available-for-sale (194,000) 30,000
Income tax benefit (loss) 77,000 (13,000)
----------------- ----------------
Comprehensive net income $527,000 $465,000
----------------- ----------------
----------------- ----------------
(l) YEAR 2000
The Corporation has developed a remediation plan and is in the
process of converting computer systems and applications for the
Year 2000. Expenditures related to Year 2000 issues are expensed
as incurred.
(m) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the current year's presentation.
8
(2) SECURITIES AVAILABLE-FOR-SALE
The amortized cost, gross unrealized gains and losses and fair value of
securities available-for-sale as of March 31, 1999 and December 31,
1998 are as follows:
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED FAIR
GAINS LOSSES VALUE
---------------- -------------- --------------- ----------------
MARCH 31, 1999:
U.S. Treasury notes and U.S.
agency securities $14,571,000 $ 80,000 $ (59,000) $ 14,592,000
Obligations of states and
political subdivisions 8,711,000 106,000 (83,000) 8,734,000
Corporate obligations 301,000 -- (2,000) 299,000
---------------- -------------- --------------- ----------------
$23,583,000 $ 186,000 $ (144,000) $ 23,625,000
---------------- -------------- --------------- ----------------
---------------- -------------- --------------- ----------------
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED FAIR
GAINS LOSSES VALUE
---------------- -------------- ---------------- ----------------
DECEMBER 31, 1998:
U.S. Treasury notes and U.S.
agency securities $ 14,655,000 $ 155,000 $ (55,000) $ 14,755,000
Obligations of states and
political subdivisions 8,417,000 162,000 (23,000) 8,556,000
Corporate obligations 301,000 -- (3,000) 298,000
---------------- -------------- ---------------- ----------------
$ 23,373,000 $ 317,000 $ (81,000) $ 23,609,000
---------------- -------------- --------------- ----------------
---------------- -------------- --------------- ----------------
The maturity distribution based on amortized cost and fair value as of
March 31, 1999, by contractual maturity, is shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED FAIR
COST VALUE
------------- --------
Due in one year or less $ 2,094,000 $ 2,098,000
Due after one year through five years 14,072,000 14,082,000
Due after five years through ten years 5,807,000 5,791,000
Due after ten years 1,610,000 1,654,000
----------------- ---------------
$ 23,583,000 $ 23,625,000
----------------- ---------------
----------------- ---------------
As of March 31, 1999, securities held-to-maturity with an amortized cost
of $2,655,000 and securities
9
available-for-sale with a fair value of $1,566,000 totaling
$4,221,000 were pledged as security for public deposits and other
purposes as required by various statutes and agreements.
(3) SECURITIES HELD-TO-MATURITY
The amortized cost, gross unrealized gains and losses and fair value of
securities held-to-maturity as of March 31, 1999 and December 31, 1998
are as follows:
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED FAIR
GAINS LOSSES VALUE
----------------- --------------- -------------- -----------------
MARCH 31, 1999:
U.S. Treasury notes and U.S.
government agencies $ 7,497,000 $ 49,000 $ (56,000) $ 7,490,000
Obligations of states and
political subdivisions 15,173,000 460,000 (29,000) 15,604,000
Corporate obligations 466,000 2,000 - 468,000
----------------- --------------- -------------- -----------------
$ 23,136,000 $ 511,000 $ (85,000) $ 23,562,000
----------------- --------------- -------------- -----------------
----------------- --------------- -------------- -----------------
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED FAIR
GAINS LOSSES VALUE
----------------- --------------- -------------- -----------------
DECEMBER 31, 1998:
U.S. Treasury notes and U.S.
government agencies $ 7,499,000 $ 85,000 $ (17,000) $ 7,567,000
Obligations of states and
political subdivisions 14,986,000 609,000 -- 15,595,000
Corporate obligations 468,000 2,000 -- 470,000
----------------- --------------- -------------- -----------------
$ 22,953,000 $ 696,000 $ (17,000) $ 23,632,000
----------------- --------------- -------------- -----------------
----------------- --------------- -------------- -----------------
The maturity distribution based on amortized cost and fair value as of
March 31, 1999, by contractual maturity, is shown below. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED FAIR
COST VALUE
----------- ----------
Due in one year or less $ 1,166,000 $ 1,172,000
Due after one year through five years 9,827,000 9,877,000
Due after five years through ten years 9,653,000 9,855,000
Due after ten years 2,490,000 2,658,000
--------------------- -------------------
$ 23,136,000 $ 23,562,000
--------------------- -------------------
--------------------- -------------------
10
(4) LOANS
The composition of the Corporation's loan portfolio is as follows:
MARCH 31, DECEMBER 31,
1999 1998
---------- --------------
Construction $ 7,557,000 $ 7,960,000
Real estate 77,508,000 66,850,000
Commercial and industrial loans 56,742,000 62,341,000
Installment 14,941,000 14,754,000
All other loans (including overdrafts) 290,000 308,000
------------------ ------------------
157,038,000 152,213,000
Less allowance for loan losses (1,832,000) (1,687,000)
Less deferred loan fees (846,000) (818,000)
------------------ ------------------
$ 154,360,000 $ 149,708,000
------------------ ------------------
------------------ ------------------
Although the Corporation seeks to avoid undue concentrations of loans to
a single industry or based upon a single class of collateral, the
Corporation's loan portfolio consists primarily of loans to borrowers
within San Diego County and, as a result, the Corporation's loan and
collateral portfolios are to some degree concentrated. The portfolio is
well diversified in both project type and area within the San Diego
County region. The Corporation evaluates each credit on an individual
basis and determines collateral requirements accordingly. When real
estate is taken as collateral, advances are generally limited to a
certain percentage of the appraised value of the collateral at the time
the loan is made, depending on the type of loan, the underlying property
and other factors.
The Corporation has established a monitoring system for its loans in
order to identify potential problem loans and to permit the periodic
evaluation of impairment and the adequacy of the allowance for loan
losses in a timely manner. Impaired loans included in the Corporation's
loan portfolio as of March 31, 1999 and December 31, 1998 were $143,000
and $92,000, respectively, which have aggregate specific related
allowance amounts of $35,000 and $9,000, respectively. For the three
months ended March 31, 1999, the average balance of impaired loans was
$130,000. For the three months ended March 31, 1999, no interest was
recognized on these loans during the period of impairment.
11
A summary of the activity in the allowance for loan losses for the three
months ended March 31, is as follows:
MARCH 31,
1999 1998
----------- ------------
Balance, beginning of period $ 1,687,000 $ 1,342,000
Provision for loan losses charged to expense 150,000 181,000
Loans charged off to the allowance (6,000) (44,000)
Recoveries credited to the allowance 1,000 15,000
--------------------- --------------------
Balance, end of period $ 1,832,000 $ 1,494,000
--------------------- --------------------
--------------------- --------------------
Loans on nonaccrual amounted to $478,000, and $92,000 as of March 31,
1999 and December 31, 1998, respectively. Interest income of $12,000
would have been recorded for the three months ended March 31, 1999 if
nonaccrual loans had been on a current basis, in accordance with their
original terms. No interest income was recognized on loans subsequently
transferred to nonaccrual status during the three months ended March 31,
1999. Loans contractually past due greater than 90 days and still
accruing interest totaled approximately $4,000 and $437,000, as of March
31, 1999 and December 31, 1998, respectively.
In the normal course of business, the Corporation has granted loans to
certain directors and their affiliates under terms which Corporation
management believes are consistent with the Corporation's general lending
policies. An analysis of this activity for the three months ended March
31, 1999 is as follows:
MARCH 31,
1999
-------------
Balance, beginning of period $ 1,113,000
Loans granted, including renewals 12,000
Repayments (60,000)
--------------------
Balance, end of period $ 1,065,000
--------------------
--------------------
The Corporation had additional commitments for loans of $1,905,000 to
these individuals as of March 31, 1999.
12
(5) PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
MARCH 31, DECEMBER 31,
1999 1998
----------- -------------
Land $ 746,000 $ 746,000
Buildings 1,510,000 1,500,000
Leasehold improvements 3,330,000 3,318,000
Furniture, fixtures and equipment 3,972,000 3,888,000
--------------- --------------
9,558,000 9,452,000
Less accumulated depreciation and amortization (4,680,000) (4,474,000)
--------------- --------------
$ 4,878,000 $ 4,978,000
--------------- --------------
--------------- --------------
(6) OTHER REAL ESTATE OWNED
A summary of the changes in the allowance for possible losses on other
real estate owned is as follows:
MARCH 31,
1999 1998
------ ------
Balance, beginning of period $ 300,000 $ 235,000
Provision charged to expense 15,000 15,000
Charge-offs - 5,000
------------ ------------
Balance, end of period $ 315,000 $ 255,000
------------ ------------
------------ ------------
(7) DEPOSITS
The maturity distribution of time deposits as of March 31, 1999 is as
follows:
Three months or less $ 22,574,000
Over three through six months 15,511,000
Over six through twelve months 13,967,000
Over twelve months 5,268,000
--------------
Total $ 57,320,000
--------------
--------------
13
(8) LONG-TERM DEBT
Long-term debt of $44,000 and $52,000 at March 31, 1999 and December 31,
1998, respectively, consisted of a mortgage note payable in monthly
installments of $3,100 through July 2000, including interest at a fixed
rate of 8.5%. Future maturities of long-term debt are as follows:
1999 $ 26,000
2000 18,000
---------------
$ 44,000
---------------
---------------
(9) COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes of
financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the counterparty to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Commitments to extend credit amounting to $49,059,000 and
$43,138,000 were outstanding as of March 31, 1999 and December 31,
1998, respectively. Of these commitments to extend credit, $7,899,000
and $7,747,000 represent home equity lines of credit at March 31, 1999
and December 31, 1998, respectively, which will be repaid over a ten
year period if drawn upon. The Corporation evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral
obtained by the Corporation, if deemed necessary upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include certificates of deposit,
accounts receivable, inventory, property, plant and equipment,
residential real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending
loan facilities to customers. The Corporation holds various types of
collateral
14
(primarily certificates of deposit) to support those commitments
for which collateral is deemed necessary. The Corporation had
approximately $488,000 in standby letters of credit outstanding
as of both March 31, 1999 and December 31, 1998, respectively.
Most of the letters of credit expire within twelve months.
Management does not anticipate any material losses will arise from
additional fundings of the aforementioned lines of credit or letters of
credit.
As of March 31, 1999, the Corporation had lines of credit in the amount
of $11,500,000 from correspondent banks, of which no amounts were
outstanding. These lines are renewable annually. The availability of
the lines of credit, as well as adjustments in deposit programs,
provides for liquidity in the event that the level of deposits should
fall abnormally low. These sources provide that funding thereof may be
withdrawn depending upon the financial strength of the Corporation.
Because of the nature of its activities, the Corporation is at all
times subject to pending and threatened legal actions that arise out of
the normal course of its business. In the opinion of management, the
disposition of these matters will not have a material adverse effect on
the Corporation's financial position or results of operations.
(10) REGULATORY MATTERS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
March 31, 1999, that the Bank meets all capital adequacy requirements to
which it is subject.
As of March 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
15
The Bank's actual capital amounts and ratios are also presented in the
following table.
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ----- ------- ------
As of March 31, 1999:
Total Capital (to
Risk-Weighted Assets) $21,696,000 12.31% $ 14,095,000 (greater than)8.0% $17,619,000 (greater than)10.0%
Tier I Capital (to
Risk-Weighted $19,864,000 11.27% $ 7,048,000 (greater than)4.0% $10,571,000 (greater than)6.0%
Tier I Capital (to
Average Assets) $19,864,000 8.25% $ 9,630,000 (greater than)4.0% $12,037,000 (greater than)5.0%
Under Federal banking law, dividends declared by the Bank in any
calendar year may not, without the approval of the Comptroller of the
Currency (OCC), exceed its net earnings for that year combined with its
retained income from the preceding two years. However, the OCC has
previously issued a bulletin to all national banks outlining new
guidelines limiting the circumstances under which national banks may
pay dividends even if the banks are otherwise statutorily authorized to
pay dividends. The limitations impose a requirement or in some cases
suggest that prior approval of the OCC should be obtained before a
dividend is paid if a national bank is the subject of administrative
action or if the payment could be viewed by the OCC as unsafe or
unusual.
16
(11) OTHER EXPENSES
Other expenses are as follows for the three months ended March 31:
MARCH 31,
---------------------------------------
1999 1998
------------------ ------------------
Stationery and supplies $ 77,000 $ 58,000
Telephone, courier and postage 95,000 87,000
Data processing 150,000 137,000
Merchant processing expense 110,000 78,000
Promotional expenses 68,000 71,000
Professional services 106,000 36,000
Insurance 43,000 51,000
FDIC and regulatory assessments 23,000 21,000
Other real estate owned expenses 2,000 21,000
Other 314,000 202,000
------------------ ------------------
$ 988,000 $ 762,000
------------------ ------------------
------------------ ------------------
17
ITEM 2. Management's Discussion and Analysis or Plan of Operation
Statements made in this report that state the intentions, beliefs, expectations
or predictions of the future by the Corporation or its management are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Corporation's actual results could differ
materially from those projected in such forward-looking statements.
LIQUIDITY
Cash and cash equivalents, primarily federal funds sold, decreased $1.5 million
during the three month period ended March 31, 1999 primarily as a result of
increased lending and slower deposit growth. Net loans increased $4.7 million
during the first three months of 1999 as a result of a strong local economy and
improved loan demand, especially for commercial real estate. Total deposits, by
comparison, grew at a slower rate in the first quarter of 1999 resulting in a
decrease in federal funds sold. Beginning in the latter part of 1998, the
Corporation began reducing interest rates on deposits to improve its net
interest margin. As a result, deposit growth slowed.
By comparison, cash and cash equivalents, especially federal funds sold,
increased $14.7 million during the three month period ended March 31, 1998.
During this period, deposits grew $8.3 million while net loans declined as a
result of loan payoffs coupled with a competitive market for new loans.
Securities available-for-sale declined during this period due to maturing
securities that were not re-invested.
As of March 31, 1999 available-for-sale securities totaled $23.6 million. Of
this amount, $2.1 million mature in one year or less. In addition, the
Corporation invests in interest-earning deposits with other financial
institutions, a majority of which mature in one year or less. Both securities
available-for-sale and interest-earning deposits act as secondary sources of
liquidity, if needed.
The Corporation also maintains lines of credit with correspondent banks for the
purchase of overnight funds in amounts up to $11.5 million, subject to
availability. The Corporation also has the ability to borrow funds from the
Federal Reserve's discount window. Historically, the Corporation has used these
facilities infrequently.
CAPITAL RESOURCES
The ability of the Corporation to obtain funds for the payment of dividends and
for other cash requirements is largely dependent upon the amount of dividends
that may be declared by the Bank. Generally, a national banking association may
declare a dividend without the approval of the Office of the Comptroller of the
Currency as long as the total of dividends declared by the bank in a calendar
year does not exceed the total of its net profits for that year combined with
its retained profits for the preceding two years. In addition, dividends paid by
a national bank are regulated by the Office of the Comptroller of the Currency
under its general supervisory authority as it relates to a bank's requirement to
maintain adequate capital.
Valle de Oro Bank continues to be classified, under the federal banking
agencies' regulatory requirements, as "well" capitalized. The Bank maintains a
margin of capital in excess of the minimum requirements, which will allow for
future growth (see Note 10 to the unaudited consolidated financial statements).
Historically, the Bank has increased capital primarily through the generation
and retention of net earnings.
18
The Corporation's quarterly cash dividend was increased in the third quarter of
1998 to $0.07 per share from $0.06 per share. This increase reflected the
Corporation's continuing rise in net earnings, and is not expected to adversely
affect the Corporation's level of capital.
RESULTS OF OPERATIONS
Net earnings for the three months ended March 31, 1999 were $644,000 compared to
$448,000 for the same period in 1998. Basic earnings per share for the three
months ended March 31, 1999 was $0.23 compared to $0.16 per share for the same
period in 1998. Diluted earnings per share for the period ended March 31, 1999
was $0.21 compared to $0.15 per share for the same period in 1998. The increase
in net earnings was the result of higher net interest income due to the
increased amount of earning assets, and higher other operating income, but
offset, somewhat, by higher operating expenses due to the growth of the
Corporation.
For the first three months of 1999 the Corporation's earning assets continued to
grow. As a result, net interest income before provision for loan losses
increased to $3.2 million compared to $2.7 million in the first three months of
1998. In the first quarter of 1999 average-earning assets increased to $216.4
million compared to $190.0 million in the same period in 1998. Between these two
periods, average loans increased $14.6 million. In recent months, the
Corporation's commercial real estate lending activity has been strong, followed
by increases in multi-family real estate and home equity credit lines. In
addition to the growth in average loans, average securities increased followed
by interest-earning deposits. Average federal funds sold remained the same.
Analysis of Net Interest Earned and Paid
For the three months ended March 31,
1999 1998
----------- -----------
Average Int Earned/ Average Int Earned/
(In thousands) Amount Paid Yield Amount Paid Yield
---------- ----------- -------- ----------- ----------- -----------
Loans, net $ 148,793 $ 3,689 9.92% $ 134,167 $ 3,511 10.47%
Securities:
Taxable 29,724 428 5.76% 23,318 357 6.12%
Exempt from federal income taxes 17,461 205 7.83% 13,294 163 8.17%
Federal funds sold 14,101 164 4.65% 14,736 198 5.37%
Interest-earnings deposits 6,373 87 5.46% 4,500 66 5.87%
----------- ---------- -------- ----------- ----------- -----------
Total $ 216,452 $ 4,573 8.45% $ 190,015 $ 4,295 9.04%
Time deposits of $100,000 or more $ 17,519 $ 209 4.77% $ 14,413 $ 194 5.38%
All other interest-bearing deposits 155,731 1,185 3.04% 140,801 1,363 3.87%
----------- ---------- -------- ----------- ----------- -----------
Total $ 173,250 $ 1,394 3.22% $ 155,214 $ 1,557 4.01%
Interest income/earning assets $ 4,573 8.45% $ 4,295 9.04%
Interest expense/earning assets 1,394 2.58% 1,557 3.28%
---------- ---------- -----------
Net interest income $ 3,179 5.87% $ 2,738 5.76%
---------- ----------
---------- ----------
Interest on tax-exempt securities is stated on a fully tax-equivalent basis.
In the first quarter of 1998, net interest income before provision for loan
losses increased as a result of the growth of average earning assets, especially
loans and tax-exempt securities. Average federal funds sold and taxable
securities declined during this period. However, the decline in average federal
funds sold was offset
19
by the rise in average yield.
The yield on earning assets declined in the first quarter of 1999 to 8.45%, on a
tax-equivalent basis, from 9.04% in the same period of 1998. However, interest
expense to average earning assets fell at a faster rate from 3.28% in the first
quarter of 1998 to 2.58% in the first quarter of 1999. This resulted in an
increase in the net yield on interest-earning assets from 5.76% to 5.87%. The
combination of both the increased volume of earning assets and increased net
interest margin was a factor for the increased net earnings during the first
quarter of 1999.
Changes Due to Volume and Rate
v 1999 Change due to 1998 Change due to
(In thousands) Volume Rate Total Volume Rate Total
----------- ---------- --------- --------- -------- ---------
Loans, net $ 363 $ (185) $ 178 $ 460 $ (92) $ 368
Securities:
Taxable 92 (21) 71 (2) - (2)
Exempt from federal income taxes 49 (7) 42 45 - 45
Federal funds sold (7) (27) (34) (5) 13 8
Interest-earnings deposits 26 (5) 21 8 - 8
----------- ------------ ---------- ---------- --------- ---------
Total $ 523 $ (245) $ 278 $ 506 $ (79) $ 427
Time deposits of $100,000 or more $ 37 $ (22) $ 15 $ (2) $ 2 $ -
All other deposits 114 (292) (178) 146 33 179
----------- ------------ ---------- ---------- --------- ---------
Total $ 151 $ (314) $ (163) $ 144 $ 35 $ 179
----------- ------------ ---------- ---------- --------- ---------
----------- ------------ ---------- ---------- --------- ---------
Net interest income $ 372 $ 69 $ 441 $ 362 $ (114) $ 248
----------- ------------ ---------- ---------- --------- ---------
----------- ------------ ---------- ---------- --------- ---------
In the first quarter of 1998, yields on average earning assets declined while
interest expense increased. This increase in interest expense, especially, other
interest-bearing deposits, offset some of the increases in net interest income
attributable to the volume increases in average earning assets.
PROVISION FOR LOAN LOSSES
When determining the provision for loan losses, management considers such
factors as loan growth, historical loan losses, delinquencies, current economic
factors, collateral values, and potential risks identified in the portfolio. As
a result of lower loan delinquencies and net loan losses, the provision for loan
losses declined in the first quarter of 1999 compared to the first quarter of
1998. Net loan losses were $5,000 for the quarter ended March 31, 1999 compared
to $29,000 for the same period in 1998. However, loans on nonaccrual status
increased from $92,000 as of December 31, 1998 to $478,000 as of March 31, 1999.
OTHER OPERATING INCOME
Service charges on deposit accounts increased to $412,000 in the first three
months of 1999 compared to $400,000 in the same period in 1998 as a result of
the growth in deposits and the increased number of accounts subject to charge.
The Corporation has not changed its service charge fees in several years. The
Corporation continues to implement new products such as "PC Banking and Bill
Pay" to expand its services and improve fee income.
20
Merchant processing fees increased as a result of raising merchant transaction
fees and new customers.
Mortgage brokerage fees have increased due to low mortgage rates and the
resulting increased real estate sales and refinancing activity.
Gain on sale of loans is the result of sales of the guaranteed portion of SBA
loans. Other income increased primarily as a result of increased commissions
earned on the sale of mutual funds, annuities and other nondeposit investment
products.
OTHER OPERATING EXPENSE
Compensation and employee benefits increased $37,000 to $1,364,000 in the first
three months of 1998 compared to $1,327,000 for the same period in 1998.
Staffing levels have remained fairly steady over the past year and expense
controls have been effective.
Occupancy expense increased $21,000 to $305,000 and furniture and equipment
expense increased $29,000 to $183,000 in the first three months of 1999 compared
to the same period in 1998 primarily due to higher depreciation resulting from
acquisitions of additional equipment and to increases in the operating and
maintenance costs of premises and equipment.
Other operating expense increased $226,000 in the first quarter of 1999 compared
to the first quarter of 1998. Data processing, merchant processing expense,
stationery, telephone and postage increased as a result of the growth of the
Corporation. Professional services and other operating expenses increased as a
result of costs related to the formation of Valley National Corporation, which
was completed on March 31, 1999.
INFLATION
There were no adverse effects on the operations of the Corporation as a result
of inflation during the three month period ended March 31, 1999. Inflation, in
the form of substantially higher interest rates or operating costs, has not been
a significant factor in the operations of the Corporation.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Corporation's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
variety of system miscalculations, operating problems and system failures.
The Corporation is addressing its year 2000 ("Y2K") issues using a five phase
program. The five phases are awareness, assessment, renovation, validation, and
implementation. A brief description of each phase and the Corporation's progress
toward completing each phase follows.
The awareness phase identifies potential Y2K problems, develops an overall
strategy for addressing the issues, obtains support from the board of directors
and management, appoints a project team of employees to direct the Corporation's
activities, and implements an internal and external communication program to
raise awareness of the problems and issues. The Corporation completed this phase
as of March 31, 1998.
21
The assessment phase identifies all information technology systems i.e.,
hardware, software, networks, ATMs, etc., and non-information technology systems
such as alarm and security systems, and environmental controls, etc. This phase
also develops a system to evaluate and assess borrower and vendor preparedness,
including a tracking and monitoring system to identify potential problems.
The Corporation's program to assess borrower preparedness includes commercial,
real estate and consumer borrowers. The program is designed to evaluate each
borrower's exposure to Y2K issues, the borrower's preparedness in addressing
this exposure, and an assessment of the borrower's ability to meet its
obligations under a worst case Y2K scenario. Based on this assessment,
additional amounts are specifically allocated, as necessary, to cover potential
losses for borrowers considered having a high Y2K risk rating. In addition,
funds have been allocated to cover potential Y2K related losses, in general,
without regard to specific borrowers.
The Corporation has completed all of its information and non-information
technology system assessments. In addition, it has communicated with borrowers
and vendors, established a monitoring system, logged responses, and assigned
risk factors. The Corporation has begun quantifying the Y2K risk factors
associated with its borrowers and assigned preliminary allocations of the
allowance for loan losses. This allocation process will be reviewed and revised
on a quarterly basis through, at least, the first quarter of 2000. Accordingly,
monitoring and communication with borrowers and vendors is ongoing.
The Corporation has also made initial assessments of its liquidity position in
relation to the Y2K impact on large depositors and the deposit base, in general.
At this time, the Corporation does not see a high level of concern by customers
regarding their ability to conduct normal banking activities. However, the
Corporation has made an initial assessment of its projected level of cash and
cash-equivalents for the upcoming 1999 year-end, and is taking appropriate steps
to ensure adequate funds will be available to meet customer needs, should the
need arise. Such steps include adjusting the maturity date of certain assets to
fall in the latter part of the fourth quarter of 1999 and offering attractive
rates on time deposits for terms of one year or more. The Corporation plans to
review and appraise this issue on a quarterly basis and more frequently after
June 1999.
The renovation phase involves making the necessary information technology and
non-information technology changes and upgrades necessary to be Y2K compliant.
The Corporation has installed new item processing equipment, new voice response
hardware and software, and new local area network servers. It has upgraded its
communication system, purchased new security and alarm systems, and installed
three new automated teller machines. The Corporation considers the renovation
phase on all mission critical systems to be complete.
The validation phase is the testing phase. The Corporation uses a third party
data processing vendor whose software is Y2K compliant. During the first quarter
of 1999, proxy testing was completed with no significant Y2K issues found. The
Corporation has finished testing its other internal specialized systems.
The implementation phase introduces system changes into its operating
environment. Once tested, Y2K compliant systems are ready to be introduced into
the Corporation's operating environment. The target date for implementation of
all systems is September 30, 1999.
Contingency planning has begun. The board of directors has appointed business
resumption contingency planning project manager. A workgroup has been
established, and an outside consulting firm was engaged to help prepare a Y2K
business resumption contingency plan. A business resumption contingency planning
outline has been developed which provides a guided approach to assessing
possible Y2K disruption risk,
22
determines a logical course of action to fix the problem, or a plan to implement
an alternative procedure. The Corporation is currently in the process of
identifying Y2K disruption risks and preparing written operating procedures. The
Corporation intends to complete a full business resumption plan by June 30,
1999. The process of validating contingency procedures will be performed in the
second and third quarters of 1999.
With respect to the cost of preparing for Y2K, the Corporation's use of a
third-party data processor and its policy of periodically upgrading in-house
hardware and software systems have mitigated its direct expenses for Y2K. In
1998 the Corporation spent approximately $30,000, not including the cost of a
significant amount of Corporation staff time, on assessing, renovating and
testing its various systems. In the first quarter of 1999, the Corporation has
spent approximately $9,000 on its Y2K efforts. The Corporation's operating
budget related to Y2K matters is $50,500 in 1999 and $13,500 in 2000. In 1999,
its capital budget related to Y2K matters has recently been increased to
$100,000, including the cost of a generator that was approved and ordered in the
first quarter for installation in the second quarter of 1999.
Although significant steps are being taken to alleviate many of the Y2K
concerns, management still considers the most likely worst case Y2K scenario
will involve the inability of the Corporation's utility and telephone service
providers to furnish consistent, uninterrupted power and telecommunication
services to the Corporation in the early weeks of 2000. This view continues to
be based solely on a lack of meaningful disclosure provided to the Corporation
by these companies. The correspondence the Corporation has received to date has
been somewhat general in nature, and lacking the specific steps they have taken
and still need to take to become fully compliant. Due to the complexity of
today's power and telecommunication systems, management feels that there may be
a good chance of occasional power outages, or loss of telephone service that may
last for several hours or even several days.
If the Corporation lost telephone service for a few hours, it would be
disruptive and certainly change normal operations but, most likely, the
Corporation would not close its doors. The Corporation has undertaken a plan to
receive and use data in hardcopy form and use cellular or digital wireless
communications in the event of telephone service disruptions.
Electrical service is a vital part of the Corporation's operation. If the
Corporation lost power for more than a few hours it, most likely, would have to
close its doors and discontinue normal operations. For this type of contingency,
the Corporation has approved and ordered an electrical generator at a cost of
approximately $50,000 to provide power to one of its offices. If a loss of power
occurs for an extended period of time, the Corporation would consolidate
operations at this office. The generator has the capacity to provide consistent,
uninterrupted power for 5 days. Management feels this will keep the Corporation
operating, with limited services, under a worst-case electrical disruption.
23
PART II-OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
The Corporation filed no reports on Form 8-K during the
quarter.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VALLEY NATIONAL CORPORATION
- ---------------------------
Registrant
DATE: MAY 12, 1999
- -------------------
/S/ PAUL M. CABLE
- -------------------------------------------------
Paul M. Cable,
Senior Vice President and Chief Financial Officer
25