Noninterest Expense
The following table is a summary of the Company’s noninterest expense for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
(In thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries & employee benefits
|
|
$
|
5,213
|
|
$
|
5,306
|
|
$
|
15,854
|
|
$
|
16,340
|
|
Occupancy expense
|
|
|
773
|
|
|
773
|
|
|
2,247
|
|
|
2,296
|
|
Data processing expenses
|
|
|
544
|
|
|
552
|
|
|
1,651
|
|
|
1,674
|
|
Equipment expense
|
|
|
485
|
|
|
499
|
|
|
1,438
|
|
|
1,552
|
|
Professional services
|
|
|
426
|
|
|
161
|
|
|
1,025
|
|
|
971
|
|
ATM expense
|
|
|
275
|
|
|
237
|
|
|
764
|
|
|
742
|
|
Marketing
|
|
|
199
|
|
|
266
|
|
|
647
|
|
|
794
|
|
Operations expense
|
|
|
182
|
|
|
215
|
|
|
602
|
|
|
651
|
|
Director
|
|
|
148
|
|
|
92
|
|
|
501
|
|
|
407
|
|
Amortization of intangibles
|
|
|
37
|
|
|
163
|
|
|
362
|
|
|
488
|
|
Postage
|
|
|
158
|
|
|
141
|
|
|
461
|
|
|
395
|
|
Printing & supplies
|
|
|
157
|
|
|
143
|
|
|
503
|
|
|
531
|
|
Merger expense
|
|
|
—
|
|
|
5
|
|
|
|
|
|
761
|
|
Other
|
|
|
1,097
|
|
|
928
|
|
|
3,020
|
|
|
2,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
9,694
|
|
$
|
9,481
|
|
$
|
29,075
|
|
$
|
30,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense totaled $9,694,000 for the three months ended September 30, 2008, compared to $9,481,000 for the same period in 2007. This represents an increase of $213,000, or 2.3%, for the three months ended September 30, 2008 from the comparable period in 2007. Salaries and benefits decreased by $93,000 or 1.8% to $5,213,000 for the three months ended September 30, 2008 compared to $5,306,000 for the same period in 2007 due primarily to a
reduction in bonus accruals and a slight reduction in staffing. Professional services expense increased $265,000 for the three months ended September 30, 2008 compared to the same period in 2007. Professional services expense was greater for the three months ended September 30, 2008 compared to the same period a year ago which reflects that the amounts for the three months ended September 30, 2007 were lower for audit, legal and tax work due to the pending merger with Sterling Financial
Corporation which was later terminated. Most other expense categories for the three months ended September 30, 2008 experienced relatively small decreases or increases from the same respective period in 2007. The Company’s ratio of noninterest expense to average assets was 4.27% for the three months ended September 30, 2008 compared to from 4.16% for the same period in 2007. The Company’s efficiency ratio was 106.57% for the three months ended September 30, 2008 compared to
69.74% for the same period in 2007.
Noninterest expense totaled $29,075,000 for the nine months ended September 30, 2008, compared to $30,443,000 for the same period in 2007. This represents a decrease of $1,368,000, or 4.5%, for the nine months ended September 30, 2008 from the comparable period in 2007. This decrease is due primarily to merger related expenses associated with the terminated merger with Sterling Financial Corporation of $1,086,000 recognized for the nine months ended
September 30, 2007. Salaries and benefits decreased by $486,000 to $15,854,000 for the nine months ended September 30, 2008 compared to $16,340,000 for the same period in 2007 due primarily to a reduction in bonus accruals and a slight reduction in staffing. Most other expense categories for the nine months ended September 30, 2008 experienced relatively small changes from the same respective period in 2007. The Company’s ratio of noninterest expense to average assets was 4.19%
for the nine months ended September 30, 2008 compared to 4.53% for the same period in 2007. The Company’s efficiency ratio was 84.87% compared to 75.49% for the nine months ended September 30, 2008 and 2007, respectively.
Income Taxes
The Company recorded a benefit for income taxes for the quarter ended September 30, 2008 of $679,000, resulting in an effective tax benefit rate of 32.4%, compared to a provision for income taxes of $1,044,000, or an effective tax rate of 32.0%, for the quarter ended September 30, 2007. The benefit for income taxes for the nine month period ended September 30, 2008 was $1,266,000, resulting in an effective tax benefit rate of 32.4%, compared to a
provision for income taxes of $2,891,000, or an effective tax rate of 32.0%, for the same period in 2007.
Financial Condition as of September 30, 2008 As Compared to December 31, 2007
Total assets at September 30, 2008 decreased $64,843,000 to $884,176,000, compared to $949,019,000 at December 31, 2007. Loans and leases decreased $49,945,000, or 6.7%, to $696,308,000 at September 30, 2008 from $746,253,000 at December 31, 2007. Deposits increased $18,392,000, or 2.5%, from December 31, 2007 to $755,131,000 at September 30, 2008. Investment securities decreased $21,092,000 to $83,280,000 at September 30, 2008, compared to $104,372,000
at December 31, 2007. Other borrowed funds decreased $78,937,000 or 90.5% to $8,255,000 at September 30, 2008 compared to $87,192,000 at December 31, 2007.
21
Loan and Lease Portfolio
Loans and leases, the Company’s major component of earning assets, decreased $49,945,000 during the first nine months of 2008 to $696,308,000 at September 30, 2008, from $746,253,000 at December 31, 2007. Commercial real estate loans and commercial loans increased by $19,887,000 and $1,771,000, respectively, during the first nine months of 2008, which was offset due to real estate construction loans decreasing by $76,939,000 over the same period.
Real estate – mortgage loans increased $9,411,000, while installment loans decreased $7,849,000 during the first nine months of 2008. Direct financing leases and other loans increased from December 31, 2007 by $3,641,000.
The Company’s average loan to deposit ratio was 95.3% for the quarter ended September 30, 2008 compared to 93.6% for the same period in 2007. The increase in the Company’s average loan to deposit ratio is driven by an increase in total average loans of $17,685,000 while total average deposits increased by $4,908,000.
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
94,190
|
|
$
|
92,419
|
|
Real estate - commercial
|
|
|
317,159
|
|
|
297,272
|
|
Real estate - construction
|
|
|
148,819
|
|
|
225,758
|
|
Real estate - mortgage
|
|
|
59,542
|
|
|
50,131
|
|
Installment
|
|
|
33,312
|
|
|
41,161
|
|
Direct financing leases
|
|
|
1,146
|
|
|
1,307
|
|
Other
|
|
|
43,100
|
|
|
39,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
697,268
|
|
|
747,345
|
|
|
|
|
|
|
|
|
|
Deferred loan fees, net
|
|
|
(960
|
)
|
|
(1,092
|
)
|
Allowance for loan and lease losses
|
|
|
(9,958
|
)
|
|
(10,755
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
686,350
|
|
$
|
735,498
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008, the recorded investment in loans and leases for which impairment had been recognized was approximately $20,136,000 compared to $3,359,000 at September 30, 2007 and $1,608,000 at December 31, 2007. Of the 2008 balance, there was a related valuation allowance of $792,000. If interest had been accrued on the nonperforming loans, such income would have approximated $507,000 and $1,563,000 for the three and nine months ended September
30, 2008, respectively, compared to $9,000 and $29,000 for the three and nine months ended September 30, 2007, respectively.
At December 31, 2007, the recorded investment in loans and leases for which impairment had been recognized was approximately $1,608,000. Of the 2007 balance, there was a related valuation allowance of $83,000. For the year ended December 31, 2007, the average recorded investment in loans and leases for which impairment had been recognized was approximately $1,572,000. During the portion of the year that the loans and leases were impaired, the Company
recognized interest income of approximately $38,000 for cash payments received in 2007.
Nonperforming loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) totaled $20,190,000 at September 30, 2008, an increase of $16,823,000 from the total at September 30, 2007 and an increase of $18,426,000 from December 31, 2007. Nonperforming loans as a percentage of total loans were 2.90% at September 30, 2008, compared to 0.47% at September 30, 2007, and 0.24% at December 31, 2007. Nonperforming assets
(nonperforming loans and OREO) totaled $26,042,000 at September 30, 2008, an increase of $21,773,000 from September 30, 2007, and an increase of $23,376,000 from December 31, 2007. Nonperforming assets as a percentage of total assets were 2.95% at September 30, 2008 compared to 0.46% at September 30, 2007, and 0.28% at December 31, 2007.
22
The level of nonperforming loans decreased $2,390,000 to $20,190,000 at September 30, 2008 from $22,580,000 at June 30, 2008 primarily as a result of charging off the specific reserves set for certain of these credits of $4,316,000 and secondarily due to paydowns received on certain loans. Specific reserves have been recorded totaling $792,000 for nonperforming loans at September 30, 2008. Nonperforming assets decreased $4,746,000 to $26,042,000 at
September 30, 2008 from $30,788,000 at June 30, 2008. As discussed in the Company’s first quarter 2008 Form 10-Q, there were four real estate projects with loans totaling $24,047,000 which were the primary reason for the increase in nonperforming loans at March 31, 2008: two loans were for residential development projects for $9,509,000 and $6,750,000, respectively, and the other two were residential acquisition and development loans for $4,876,000 and $2,912,000, respectively.
Set forth below is a discussion and update on those four loans.
The larger of the two residential development project loans (for $9,509,000 at March 31, 2008) was included in our classified loans and risk-rated – Substandard at December 31, 2007 based on slower sales and a weakening real estate market. During the first quarter of 2008, the project’s absorption rates slowed from one sale per month to an estimated one sale per two to three months and the updated sales projections through March 31, 2008
raised a concern as to whether the borrower could continue to make the scheduled interest payments. Interest payments were current at December 31, 2007 (last payment for this loan was December 20, 2007). The Company met with the borrower in the first quarter of 2008 to discuss the status of the project and potential other sources of payments on the project and concluded the best strategy would be for the borrower to finish the houses under construction, have no new house starts and sell
the finished lots. To understand the potential loss exposure and properly value the collateral support provided by the property with the continuing decline in real estate values in California, a new appraisal was ordered on the project in February 2008. The Company received the appraisal on March 7, 2008 and the appraisal demonstrated the continuing decline in the value of the underlying project. Although interest payments were current at December 31, 2007, the Company’s
assessment that the borrower did not have the ability to continue to make the scheduled interest payments coupled with the decline in appraised value resulted in a decision to consider this loan as impaired, place the loan on nonaccrual and revaluate the level of specific reserve for the credit. This loan was placed on nonaccrual on March 25, 2008. As of September 30, 2008, this loan with a balance of $4,497,000 remains on nonaccrual. The decrease of $4,959,000 from its June 30, 2008
balance of $9,456,000 is a result of the collection of $2,246,000 from the borrower and the charge-off of the $2,713,000 specific reserve on this credit during the third quarter of 2008 to reduce the loan to its net realizable value.
The second of the two residential development project loans (for $6,750,000 at March 31, 2008) was included in our classified loans and risk-rated – Substandard at December 31, 2007 based on slower sales and a weakening real estate market. During the first quarter of 2008, the project’s absorption rates slowed and the updated sales projections through March 31, 2008 raised a concern as to whether the borrower could continue to make the
scheduled interest payments. Interest payments were current at December 31, 2007 (last payment for this loan was January 3, 2008). The Company met with the borrower in the first quarter of 2008 to discuss the status of the project and potential other sources of payments on the project and concluded the best strategy would be for the borrower to finish the houses under construction, have no new house starts and sell the finished lots. To understand the potential loss exposure and
properly value the collateral support provided by the properties with the continuing decline in real estate values in California, a new appraisal was ordered on the project in January 2008. The Company received the appraisal on February 25, 2008 and the appraisal demonstrated the continuing decline in the values of the underlying project. Although interest payments were current at December 31, 2007, the Company’s assessment that the borrower did not have the ability to continue to
make the scheduled interest payments coupled with the decline in appraised value resulted in a decision to consider this loan as impaired, place the loan on nonaccrual and revaluate the level of specific reserves for the credit. This loan was placed on nonaccrual on March 25, 2008. This loan was paid down by $1,703,000 to $5,047,000 during the second quarter of 2008, and on June 27, 2008 the Company negotiated a deed in lieu of foreclosure and took the property into OREO (21 finished
lots and 8 homes) at a carrying value of $3,263,000 which represented the fair value of the property less estimated costs to sell at the time of transfer. On transfer to OREO, the Company took a charge to the Allowance for Loan and Lease Losses (ALLL) of $2,012,000 to reflect the fair value of the OREO compared to the specific reserve at that time of $1,300,000. The charge-off taken was $712,000 greater than the reserve established as a result of the actual sales price of the lots being
less than the value established based on the February 25, 2008 appraisal. The Company sold the 21 lots for $1,372,000 on June 30, 2008, and the remaining 8 homes remained in OREO at a carrying value of $1,891,000. These 8 homes were sold during the third quarter of 2008 and the Company recognized a $114,000 gain on the sale.
23
The larger of the two residential acquisition and development loans (for $4,876,000 at March 31, 2008) was risk-rated – Special Mention at December 31, 2007. Interest payments were current at December 31, 2007 (last payment was February 8, 2008). The Company met with the borrower during the first quarter of 2008 and concluded from the meeting that due to a lack of sales the borrower was not capable of making the scheduled interest payments and the
loan was placed on nonaccrual on March 31, 2008. The Company ordered a new appraisal on the property in May 2008 as part of the Company’s comprehensive review of its construction portfolio. The appraisal was received on May 23, 2008 and it demonstrated the continuing decline in the value of the underlying project. Although interest payments were current through February 2008, the Company’s assessment that the borrower did not have the ability to continue to make the
scheduled interest payments coupled with the decline in appraised value resulted in the decision to consider this loan as impaired, place the loan on nonaccrual and revaluate the level of the related specific reserve for the credit. The Company negotiated a deed in lieu of foreclosure with the borrower as a strategy to avoid the threat of bankruptcy and potentially create an extended workout period. The deed in lieu of foreclosure represented the best course of action for the Company as
we had spoken to interested buyers for the collateral and because we believed that having control of the asset improved our overall business position given the continuing decline in real estate values and the time requirements to work through a lengthy bankruptcy and foreclosure process. In negotiating the deed in lieu of foreclosure, the Company released certain existing collateral positions back to the borrower which resulted in a deficiency in the remaining available collateral
supporting this loan. Additionally, the Company obtained a new appraisal on May 23, 2008 for the 57 multi-family lots which indicated a further decline in value. At June 30, 2008, the Company took $5,414,000 of property into OREO consisting of 57 multi-family lots at a carrying value of $2,875,000 and 11 rental homes at a carrying value of $2,539,000 (the homes were from another loan that was cross-collateralized) and the Company took a charge against the allowance for loan and lease
losses on the transfer to OREO of $1,316,000. The Company did not have any specific reserves on this borrowing prior to the transfer. A portion of this property was sold at its carrying value during the third quarter of 2008 for $464,000, and the carrying value of the remaining OREO was $4,950,000 at September 30, 2008.
The second of the two residential acquisition and development loans (for $2,912,000 at March 31, 2008) was risk-rated – Substandard at December 31, 2007. The loan was 30 days past due at December 31, 2007 (last payment was November 21, 2007). The Company met with the borrower during the first quarter of 2008 and concluded from the meeting that due to a lack of sales the borrower was not capable of making the scheduled interest payments and the
loan was placed on nonaccrual on March 4, 2008. The Company ordered a new appraisal on the property in January 2008 as part of the Company’s comprehensive review of its construction portfolio. The appraisal was received on February 29, 2008 and it demonstrated the continuing decline in the value of the underlying project. The Company’s assessment that the borrower did not have the ability to continue to make the scheduled interest payments coupled with the decline in
appraised value resulted in the decision to consider this loan as impaired, place the loan on nonaccrual and revaluate the level of the related specific reserves for this credit. During the second quarter of 2008, the Company negotiated a deed in lieu of foreclosure and transferred the property into OREO at a carrying value of $1,996,000 which represented the fair value of the property less estimated costs to sell at the time of the transfer. Upon transfer the Company took a charge to
the allowance of $1,018,000, compared to the specific reserve established of $900,000. On June 30, 2008, the Company sold the OREO property for $1,996,000 with no additional gain or loss on the sale being recorded.
As discussed in the Company’s 2008 second quarter Form 10-Q for the period ended June 30, 2008, the total dollar amount of reductions in nonperforming loans from pay downs and the transfers to OREO during the second quarter of 2008 was $15,195,000. This decrease was offset by increases in certain other identified nonperforming loans totaling $12,025,000 added to nonperforming loans during the second quarter of 2008. The increase was primarily due
to the addition of two construction loans identified as impaired, totaling $10,201,000, in the second quarter of 2008. Set forth below is a discussion of those two loans.
The larger of the two loans (for $7,262,000 at June 30, 2008) is a mixed-use construction loan for a project located in Sonoma County and was risk-rated – Substandard at March 31, 2008. Interest payments were current at June 30, 2008 (last payment was June 13, 2008). The Company ordered a new appraisal on the property in April, 2008 as part of the Company’s comprehensive review of its construction portfolio. The appraisal was received on May
9, 2008 and it demonstrated the continuing decline in the value of the underlying project. When the Company received the updated appraisal showing the decline in collateral values on this loan, the Company met with the borrower, requiring the borrower to bring in additional cash to re-margin the loan and establish interest reserves. When the borrower was unable to comply with the requests, the Company determined that the loan was impaired, placed the loan on nonaccrual status, reversed
all accrued and unpaid interest and recorded a specific reserve of $750,000 representing the amount of the probable loss based on the estimated fair value of the underlying collateral, per the updated appraisal less estimated costs to sell. Although interest payments were current at June 30, 2008, the Company’s assessment that the borrower did not have the ability to continue to make the scheduled interest payments coupled with a decline in the recently appraised value resulted in
the decision to consider this loan as impaired and to place the loan on nonaccrual. As of September 30, 2008, this loan with a balance of $4,506,000 remains on nonaccrual. The decrease of $2,756,000 from the June 30, 2008 balance of $7,262,000 is a result of the collection of $2,256,000 from the borrower and the charge-off of $500,000 of the specific reserve. At September 30, 2008, this loan had a $250,000 specific reserve.
24
The second of the two loans (for $2,939,000 at June 30, 2008) is a residential development project located in Placer County and was risk-rated – Substandard at March 31, 2008. Interest payments were current at June 30, 2008 (last payment was June 25, 2008). The Company ordered a new appraisal on the property in February, 2008 as part of the Company’s comprehensive review of its construction portfolio. The appraisal was received on March 26,
2008 and it demonstrated the continuing decline in the value of the underlying project. When the Company received the updated appraisal showing the decline in collateral values on this loan, the Company met with the borrower, requiring the borrower to bring in additional cash to re-margin the loan and establish interest reserves. When the borrower was unable to comply with the requests, the Company determined that the loan was impaired, placed the loan on nonaccrual status, reversed all
accrued and unpaid interest and recorded a specific reserve of $250,000 representing the amount of the probable loss based on the estimated fair value of the underlying collateral, per the updated appraisal less estimated costs to sell. Although interest payments were current at June 30, 2008, the Company’s assessment that the borrower did not have the ability to continue to make the scheduled interest payments coupled with a decline in the recently appraised value resulted in the
decision to consider this loan as impaired and to place the loan on nonaccrual. During the third quarter of 2008, the specific reserve for this loan was increased to $680,000 and it was charged-off to reduce the loan to its nets realizable value of $2,259,000 at September 30, 2008.
The total dollar amount of reductions in nonperforming loans during the third quarter of 2008 was $9,982,000 due primarily to the pay downs and charge-offs noted above. There were no transfers to OREO during the third quarter of 2008. This decrease was offset by the addition of 23 loans on nonaccrual status totaling $7,592,000 (which are primarily secured by real-estate) during the third quarter of 2008. The largest of this group is a $1,125,000
residential lot development loan located in Shasta County. This loan was risk-rated – Special Mention at June 30, 2008. The loan was 30 days past due at June 30, 2008 (last payment was May 14, 2008). During the second quarter of 2008, sales activity on the project had slowed, and to understand the potential loss exposure and properly value the collateral support provided by the property with the continuing decline in real estate values in California, the Company ordered a new
appraisal on the project in June, 2008. The appraisal was received on July 6, 2008 and it demonstrated the continuing decline in the value of the underlying project. When the Company received the updated appraisal showing the decline in collateral values on this loan, the Company met with the borrower, requiring the borrower to bring in additional cash to re-margin the loan and establish interest reserves. When the borrower was unable to comply with the requests, the Company determined
that the loan was impaired, placed the loan on nonaccrual status and reversed all accrued and unpaid interest. The Company has not recorded a specific reserve for this loan as it does not anticipate a loss based on the estimated fair value of the underlying collateral, per the updated appraisal less estimated costs to sell.
Gross loan and lease charge offs for the third quarter of 2008 were $5,305,000 and recoveries totaled $86,000 resulting in net charge offs of $5,219,000. This compares to net recoveries of $6,000 for the third quarter of 2007. Gross charge offs for the nine months ended September 30, 2008 were $10,081,000 and recoveries totaled $184,000 resulting in net charge offs of $9,897,000. This compares to net charge-offs of $79,000 for the nine months ended
September 30, 2007.
The Company continues to evaluate the loan and lease portfolio as part of a focused internal credit review process. As part of the ongoing evaluation, the Company has identified additional internal downgrades to certain credits subsequent to September 30, 2008. If these credits deteriorate further, the Company may have additional increases in nonperforming loans and it may require additional provisions for loan and lease losses.
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.
25
Nonperforming assets at September 30, 2008, and December 31, 2007, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans and leases
|
|
$
|
20,136
|
|
$
|
1,608
|
|
Loans and leases past due 90 days and accruing interest
|
|
|
54
|
|
|
156
|
|
Other real estate owned
|
|
|
5,852
|
|
|
902
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
26,042
|
|
$
|
2,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans and leases to total gross loans and leases
|
|
|
2.89
|
%
|
|
0.22
|
%
|
Nonperforming loans and leases to total gross loans and leases
|
|
|
2.90
|
%
|
|
0.24
|
%
|
Total nonperforming assets to total assets
|
|
|
2.95
|
%
|
|
0.28
|
%
|
Allowance for Loan and Lease Losses
A summary of the allowance for loan and lease losses at September 30, 2008 and September 30, 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
10,755
|
|
$
|
8,831
|
|
Provision for loan and lease losses
|
|
|
9,100
|
|
|
850
|
|
Net (charge-offs) recoveries
|
|
|
(9,897
|
)
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
Balance end of period
|
|
$
|
9,958
|
|
$
|
9,602
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses to total loans and leases
|
|
|
1.43
|
%
|
|
1.34
|
%
|
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 the probable losses in loans and leases receivable. 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. The Company also engages a third
party credit review consultant to analyze the Company’s loan and lease loss adequacy. In addition, various regulatory agencies, as an integral part of their examination process, periodically reviews 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 two primary types of allowances:
|
|
|
|
1.
|
Formula Allowance
|
|
|
|
|
|
Formula allowances are based upon loan and lease loss factors that reflect management’s estimate of probable losses in various segments or pools within the loan and lease portfolio. The loss factor for each segment or pool 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.
|
|
|
|
|
|
The formula allowance is adjusted for qualitative factors that are 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 to determine the adjustment to the formula allowance at September 30, 2008 included the following, which existed at the balance sheet date:
|
|
|
|
|
|
|
|
·
|
General business and economic conditions effecting the Company’s key lending areas
|
|
|
|
|
·
|
Real estate values and market trends in Northern California
|
26
|
|
|
|
·
|
Loan volumes and concentrations, including trends in past due and nonperforming loans
|
|
|
|
|
·
|
Seasoning of the loan portfolio
|
|
|
|
|
·
|
Status of the current business cycle
|
|
|
|
|
·
|
Specific industry or market conditions within portfolio segments
|
|
|
|
|
·
|
Model imprecision
|
|
|
|
|
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.”
|
The $9,958,000 in formula and specific allowances reflects management’s estimate of the inherent loss in various pools or segments in the portfolio and individual loans and leases, and includes adjustments for general economic conditions, trends in the portfolio and changes in the mix of the portfolio.
Management anticipates continued growth in commercial lending and commercial real estate and to a lesser extent consumer and real estate mortgage lending. As a result, future provisions will be required and the ratio of the allowance for loan and lease losses to loans and leases outstanding may increase to reflect portfolio risk, increasing concentrations, loan type and changes in economic conditions.
Deposits
Total deposits increased $18,392,000, or 2.50%, to $755,131,000 at September 30, 2008 compared to $736,739,000 at December 31, 2007. Time certificate deposits and interest-bearing demand deposits increased $25,555,000, or 10.6%, and $16,402,000, or 11.2%, respectively from December 31, 2007. These increases were partially offset by decreases in noninterest-bearing demand deposits and savings and money market deposits of $10,546,000, or 6.3%, and
$13,019,000, or 7.2%, respectively from December 31, 2007. During the first nine months of 2008, the Company continued to experience a shift in deposits from noninterest-bearing demand to interest-bearing demand and time certificates.
|
|
|
|
|
|
|
|
(in thousands)
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
157,069
|
|
$
|
167,615
|
|
Interest-bearing demand
|
|
|
163,458
|
|
|
147,056
|
|
Savings
|
|
|
168,173
|
|
|
181,192
|
|
Time certificates
|
|
|
266,431
|
|
|
240,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
755,131
|
|
$
|
736,739
|
|
|
|
|
|
|
|
|
|
As a result of the deposit increase (coupled with the reduction in loans outstanding and the pay downs on investment securities), the Company relied less on other borrowed funds which decreased $78,937,000, or 90.5%, to $8,255,000 at September 30, 2008 compared to $87,192,000 at December 31, 2007.
The Emergency Economic Stabilization Act of 2008 included a provision for an increase in the amount of deposits insured by the FDIC to $250,000. If not renewed, the additional FDIC insurance provision expires December 31, 2009. On October 14, 2008, the FDIC announced a new program -- the Temporary Liquidity Guarantee Program that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by
the existing deposit insurance limit of $250,000. All eligible institutions will be covered under the program for the first 30 days without incurring any costs. After the initial period, participating institutions will be assessed a 10 basis point surcharge on the additional insured deposits.
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 borrowings, when needed, are primary sources of funds that contribute to liquidity. Unused lines of credit from correspondent banks to provide
federal funds of $24,515,000 as of September 30, 2008 were also available to provide liquidity. In addition, NVB is a member of the Federal Home Loan Bank (“FHLB”) providing additional unused borrowing capacity of $132,112,000 secured by certain loans and investment securities as of September 30, 2008. The Company also has a line of credit with the Federal Reserve Bank of San Francisco (“FRB”) of $1,618,000 secured by first deeds of trust on eligible commercial
real estate loans and leases. As of September 30, 2008, borrowings consisted of overnight advances of $8,255,000 with the FHLB and correspondent bank lines of credit, and $31,961,000 was outstanding in the form of subordinated debt issued by the Company.
27
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 available for sale investment securities) totaled $109,219,000 and $132,910,000 (or 12.4% and 14.0% of total assets) at September 30, 2008 and December 31, 2007, respectively.
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 $635,857,000 and $632,236,000 at September 30, 2008 and December 31, 2007, respectively.
In assessing liquidity, historical information such as seasonal loan demand, local economic cycles and the economy in general are considered along with current ratios, management goals and unique characteristics of the Company. Management believes the Company is in compliance with its policies relating to liquidity.
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.
28
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 third 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.
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 make 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, 2007.
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.
Capital Resources
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 positive because it limits the Company’s ability to earn a high rate of return
on stockholders’ equity (ROE). Stockholders’ equity decreased to $76,734,000 as of September 30, 2008, as compared to $81,471,000 at December 31, 2007. The decrease was due to a net loss of $2,648,000, cash dividends paid out in the amount of $2,239,000 and an increase in unrealized loss on available for sale securities of $702,000, partially offset by the stock option exercises and stock based compensation of $852,000. Under current regulations, management believes that the
Company meets all capital adequacy requirements and North Valley Bank was considered well capitalized at September 30, 2008 and December 31, 2007.
29
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”). Pursuant to the EESA, the Secretary of the Treasury was authorized to establish the Troubled Asset Relief Program (“TARP”) and to invest in financial institutions and purchase mortgages, mortgage-backed securities and certain other financial instruments from financial institutions, in an aggregate amount up to $700
billion, for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the United States Department of the Treasury (the “UST”) announced a Capital Purchase Program (“CPP”) to invest up to $250 billion of this $700 billion amount in certain eligible U.S. banks, thrifts and their holding companies in the form of non-voting, senior preferred stock. Bank holding companies and banks eligible to participate as a Qualifying
Financial Institution (“QFI”) in the CPP will be expected to comply with certain standardized terms and conditions specified by the UST, including the following:
|
|
|
|
·
|
Submission of an application prior to November 14, 2008 to the QFI’s Federal banking regulator to obtain preliminary approval to participate in the CPP;
|
|
|
|
|
·
|
If the QFI receives preliminary approval, it will have 30 days within which to submit final documentation and fulfill any outstanding requirements;
|
|
|
|
|
·
|
The minimum amount of capital eligible for purchase by the UST under the CPP is 1 percent of the Total Risk-Weighted Assets of the QFI and the maximum is the lesser of (i) an amount equal to 3 percent of the Total Risk-Weighted Assets of the QFI or (ii) $25 billion;
|
|
|
|
|
·
|
Capital acquired by a QFI under the CPP will be accorded Tier 1 capital treatment;
|
|
|
|
|
·
|
The preferred stock issued to the UST will be non-voting (except in the case of class votes) senior perpetual preferred stock that ranks senior to common stock and pari passu with existing preferred stock (except junior preferred stock);
|
|
|
|
|
·
|
In addition to the preferred stock, the UST will be issued warrants to acquire shares of the QFI’s common stock equal in value to 15 percent of the amount of capital purchased by the UST;
|
|
|
|
|
·
|
Dividends on the preferred stock are payable to the UST at the rate of 5% per annum for the first 5 years and 9% per annum thereafter;
|
|
|
|
|
·
|
Subject to certain exceptions and other requirements, no redemption of the preferred stock is permitted during the first 3 years;
|
|
|
|
|
·
|
Certain restrictions on the payment of dividends to shareholders of the QFI shall remain in effect while the preferred stock purchased by the UST is outstanding;
|
|
|
|
|
·
|
Any repurchase of QFI shares will require the consent of the UST, subject to certain exceptions;
|
|
|
|
|
·
|
The preferred shares must not be subject to any contractual restrictions on transfer; and
|
|
|
|
|
·
|
The QFI must agree to be bound by certain executive compensation and corporate governance requirements and senior executive officers must agree to certain compensation restrictions.
|
The Company is continuing to evaluate whether to participate in the CPP. Such determination will be made by the Company’s Board of Directors and will depend upon various factors including, without limitation, the requirements imposed upon the Company under the securities purchase agreement and related documentation that will be provided to a participating QFI and the evaluation of other factors including the summary factors listed
above.
30
The Company’s and North Valley Bank’s capital amounts and risk-based capital ratios are presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital Adequacy
Purposes
|
|
To be Well Capitalized
Under Prompt Corrective
Action Provisions
|
|
|
|
|
|
|
|
Amount
|
|
Ratio
|
Minimum
Amount
|
|
Minimum
Ratio
|
Minimum
Amount
|
|
Minimum
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
103,658
|
|
|
12.54
|
%
|
$
|
66,130
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier 1 capital (to risk weighted assets)
|
|
$
|
88,972
|
|
|
10.77
|
%
|
$
|
33,044
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier 1 capital (to average assets)
|
|
$
|
88,972
|
|
|
10.05
|
%
|
$
|
35,412
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
108,098
|
|
|
12.00
|
%
|
$
|
72,065
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier 1 capital (to risk weighted assets)
|
|
$
|
93,954
|
|
|
10.43
|
%
|
$
|
36,032
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier 1 capital (to average assets)
|
|
$
|
93,954
|
|
|
10.29
|
%
|
$
|
36,522
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Valley Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
103,310
|
|
|
12.50
|
%
|
$
|
66,118
|
|
|
8.00
|
%
|
$
|
82,648
|
|
|
10.00
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
$
|
93,351
|
|
|
11.30
|
%
|
$
|
33,045
|
|
|
4.00
|
%
|
$
|
49,567
|
|
|
6.00
|
%
|
Tier 1 capital (to average assets)
|
|
$
|
93,351
|
|
|
10.57
|
%
|
$
|
35,327
|
|
|
4.00
|
%
|
$
|
44,158
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
105,715
|
|
|
11.73
|
%
|
$
|
72,099
|
|
|
8.00
|
%
|
$
|
90,124
|
|
|
10.00
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
$
|
94,960
|
|
|
10.54
|
%
|
$
|
36,038
|
|
|
4.00
|
%
|
$
|
54,057
|
|
|
6.00
|
%
|
Tier 1 capital (to average assets)
|
|
$
|
94,960
|
|
|
10.43
|
%
|
$
|
36,418
|
|
|
4.00
|
%
|
$
|
45,523
|
|
|
5.00
|
%
|
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 nine months ended September 30, 2008 compared to December 31, 2007. Please see discussion under the caption “Interest Rate Sensitivity” on page 28.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such
information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2008. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2008 that has materially affected or is reasonable likely to materially affect, the Company’s internal control over financial reporting.
31
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 1a. RISK FACTORS
There have been no material changes to the risk factors as previously disclosed by the Company in its response to Item 1A of Part I of its Form 10-K for the fiscal year ended December 31, 2007, other than with respect to the risk factor identified as
Real Estate Values
,which was supplemented by the Company in Item 1A of Part II of its Form 10-Q for the period ended June 30, 2008, and with respect to the additional risk factors set forth
below.
The effects of legislation in response to current credit conditions may adversely affect the Company.
Legislation passed at the federal level and/or by the State of California in response to current conditions affecting credit markets could cause the Company to experience higher credit losses if such legislation reduces the amount that borrowers are otherwise contractually required to pay under existing loan contracts with North Valley Bank. Such legislation could also result in the imposition of limitations upon North Valley Bank’s ability to
foreclose on property or other collateral or make foreclosure less economically feasible. Such events could result in increased loan losses and require a material increase in the allowance for loan losses and thereby adversely affect the Company’s results of operations, financial condition, future prospects, profitability and stock price.
The effects of changes to FDIC insurance coverage limits are uncertain and increased premiums may adversely affect the Company.
The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Current economic conditions have increased expectations for bank failures. In such event, the FDIC would take control of failed banks and guarantee payment of deposits up to applicable insured limits from the Deposit Insurance Fund. Insurance premium assessments to insured financial institutions may increase as necessary to maintain adequate funding of the
Deposit Insurance Fund.
The Emergency Economic Stabilization Act of 2008 included a provision for an increase in the amount of deposits insured by the FDIC to $250,000. On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. All eligible institutions will be covered under the
program for the first 30 days without incurring any costs. After the initial period, participating institutions will be assessed a 10 basis point surcharge on the additional insured deposits through the scheduled end of the program, currently December 31, 2009. Increased premiums will impact the Company’s earnings.
It is not clear how depositors may respond regarding the increase in insurance coverage. Despite the increase, some depositors may reduce the amount of deposits held at North Valley Bank if concerns regarding bank failures persist, which could affect the level and composition of the Bank’s deposit portfolio and thereby directly impact the Bank’s funding costs and net interest margin. North Valley Bank’s funding costs may also be
adversely affected in the event that activities of the Federal Reserve Board and the U.S. Department of the Treasury to provide liquidity for the banking system and improvement in capital markets are curtailed or are unsuccessful. Such events could reduce liquidity in the markets, thereby increasing funding costs to the Bank or reducing the availability of funds to the Bank to finance its existing operations and thereby adversely affect the Company’s results of operations,
financial condition, future prospects, profitability and stock price.
The Troubled Asset Relief Program includes restrictions that affect participating institutions and their shareholders.
The Emergency Economic Stabilization Act of 2008 gave the United States Department of the Treasury authority to deploy up to $700 billion into the financial system with an objective of improving liquidity in capital markets. On October 14, 2008, the Treasury Department announced plans to direct $250 billion of this authority into a Capital Purchase Program (“CPP”) under which the Treasury Department will make preferred stock investments in
bank holding companies, banks and other qualifying financial institutions. The terms and conditions of the CPP could reduce investment returns to shareholders of participating bank holding companies and banks by restricting dividends to common shareholders, diluting existing shareholders’ interests, and restricting capital management practices. The Company is currently evaluating whether to participate in the CPP.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
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Rule 13a-14(a) / 15d-14(a) Certifications
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Section 1350 Certifications
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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.
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NORTH VALLEY BANCORP
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(Registrant)
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Date: November 10, 2008
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By:
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/s/ Michael J. Cushman
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Michael J. Cushman
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President & Chief Executive Officer
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(Principal Executive Officer)
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/s/ Kevin R. Watson
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Kevin R. Watson
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Executive Vice President & Chief Financial Officer
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(Principal Financial Officer & Principal Accounting Officer)
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