UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the period ended June 30, 2000.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period
From ____________________ to ________________________
Commission file number 0-10652
NORTH VALLEY BANCORP
--------------------
(Exact name of registrant as specified in its charter)
California 94-2751350
---------- ----------
(State or other jurisdiction (IRS Employer ID Number)
of incorporation or organization)
880 E. Cypress Avenue, Redding, CA 96002
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 221-8400
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date.
Common Stock-3,720,018 shares as of July 31, 2000.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 2000 and December 31, 1999
Condensed consolidated statements of income - For the three months and six
months ended June 30, 2000 and 1999:
Condensed consolidated statement of cash flows - For the six months ended June
30, 2000 and 1999:
Notes to condensed consolidated financial statements - June 30, 2000 and
December 31, 1999 and the Six months ended June 30, 2000 and 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8K
SIGNATURES
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share amounts)
June 30, December 31,
ASSETS 2000 1999
--------- ---------
Cash and cash equivalents:
Cash and due from banks $ 13,979 $ 12,783
Federal funds sold 13,000 14,600
--------- ---------
Total cash and cash equivalents 26,979 27,383
Cash held in trust 218 282
Securities:
Available for sale, at fair value 24,911 25,569
Held to maturity, at amortized cost
with fair values of:
$28,049 at June 30, 2000
$28,975 at December 31,1999 27,247 28,146
Loans and leases, net of allowance for loan and
lease losses and deferred loan fees of:
$2,693 and $115 at June 30, 2000
$2,260 and $194 at December 31, 1999 222,460 215,397
Premises and equipment, net of
accumulated depreciation and
amortization 5,852 5,060
Other real estate owned 80
FHLB stock 666 911
Accrued interest receivable 1,982 2,035
Other assets 8,864 7,947
--------- ---------
TOTAL ASSETS $ 319,179 $ 312,810
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 42,254 $ 40,071
Interest-bearing deposits 237,158 235,190
--------- ---------
Total deposits 279,412 275,261
Accrued interest and other liabilities 4,835 4,303
--------- ---------
Total liabilities 284,247 279,564
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized
5,000,000 shares; none outstanding
Common stock, no par value: authorized
20,000,000 shares; outstanding
3,715,818 at June 30, 2000
and 3,714,418 at December 31,1999 10,439 10,427
Retained Earnings 24,662 22,936
Accumulated other comprehensive loss, net of tax (169) (117)
--------- ---------
Total stockholders' equity 34,932 33,246
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 319,179 $ 312,810
========= =========
See notes to condensed consolidated financial statements (unaudited).
2
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands except per share amounts)
Six Months Ended June 30, Three Months Ended June 30,
------------------------ ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
Loans and leases including fees $ 9,614 $ 8,428 $ 4,886 $ 4,261
Securities
Taxable 830 566 437 279
Exempt from federal taxes 832 1,008 413 498
Federal funds sold 576 431 286 186
-------- -------- -------- --------
Total interest income 11,852 10,433 6,022 5,224
INTEREST EXPENSE - DEPOSITS 4,517 4,001 2,283 1,989
-------- -------- -------- --------
NET INTEREST INCOME 7,335 6,432 3,739 3,235
PROVISION FOR LOAN AND LEASE LOSSES 600 555 120 300
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 6,735 5,877 3,619 2,935
-------- -------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 1,467 1,023 839 536
Gain on shares received from insurance company demutualization 683
Other fees and charges 454 431 223 216
Gain (loss) on sale of loans 54 (87) (50)
Gain on sale or calls of securities 4 16 4
Other 158 352 71 121
-------- -------- -------- --------
Total noninterest income 2,820 1,735 1,137 823
-------- -------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 3,018 2,293 1,543 1,154
Furniture and equipment expense 366 352 184 166
Occupancy expense 358 315 198 155
Merger & acquisition expense 356 127
Other 2,113 1,765 1,144 962
-------- -------- -------- --------
Total noninterest expenses 6,211 4,725 3,196 2,437
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME
TAXES 3,344 2,887 1,560 1,321
PROVISION FOR INCOME TAXES 937 824 437 375
-------- -------- -------- --------
NET INCOME $ 2,407 $ 2,063 $ 1,123 $ 946
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.65 $ 0.56 $ 0.30 $ 0.26
======== ======== ======== ========
Diluted $ 0.64 $ 0.55 $ 0.30 $ 0.25
======== ======== ======== ========
See notes to condensed consolidated financial statements (unaudited).
3
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in thousands) Six Months Ended June 30,
-------------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,407 $ 2,063
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 318 286
Amortization of premium on securities 42 (28)
Provision for loan and lease losses 600 555
Loss on sale/write down of other real estate owned - 289
Gain on shares received from insurance company demutualization (683)
Gain on sale or calls of securities (4) (16)
(Gain)/Loss on sales of loans and leases (54) 87
Provision/(benefit) for deferred taxes 95 (32)
Effect of changes in:
Cash held in trust 64 571
Accrued interest receivable 53 (88)
Other assets (1,015) (815)
Accrued interest and other liabilities 532 (206)
-------- --------
Net cash provided by operating activities 2,355 2,666
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale/(purchase) of FHLB stock 245 (47)
Proceeds from sale of other real estate owned 325 3,113
Purchases of available for sale securities (7,000) (13,000)
Proceeds from sales of available for sale securities 56 92
Proceeds from maturities or calls of available for sale securities 8,266 17,175
Proceeds from maturities or calls of held to maturity securities 893 1,510
Proceeds from sales of loans and leases 894 24,275
Net increase in loans and leases (8,748) (33,157)
Purchases of premises and equipment - net (1,110) (254)
-------- --------
Net cash used in investing activities (6,179) (293)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, demand accounts,and savings accounts 8,860 603
Net increase in time certificates (4,709) (614)
Cash dividends paid (743) (1,108)
Cash received for stock options exercised 12 82
-------- --------
Net cash provided by (used in) financing activities 3,420 (1,037)
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (404) 1,336
CASH AND CASH EQUIVALENTS:
Beginning of year 27,383 25,352
-------- --------
End of period $ 26,979 $ 26,688
======== ========
ADDITIONAL INFORMATION:
Transfer of foreclosed loans and leases from loans and leases receivable to other
real estate owned $ 245 $ 4,576
-------- --------
Cash payments:
Income tax payments $ 575 $ 833
======== ========
Interest payments $ 4,535 $ 4,032
======== ========
See notes to condensed consolidated financial statements (unaudited).
4
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2000 and December 31, 1999 and
the Six-months ended June 30, 2000 and 1999.
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of North Valley Bancorp and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
for the interim periods presented have been included. They do not, however,
include all the information and footnotes required by generally accepted
accounting principles for annual financial statements. For further information,
refer to the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
1999. Operating results for the six-months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Significant intercompany items
and transactions have been eliminated in consolidation.
NOTE B - COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive
income. The Company's only source of other comprehensive income is derived from
unrealized gains and losses on investment securities available-for-sale and
adjustments to the minimum pension liability. Reclassification adjustments
resulting from gains or losses on investment securities that were realized and
included in net income of the current period that also had been included in
other comprehensive income as unrealized holding gains or losses in the period
in which they arose are excluded from comprehensive income of the current
period. The Company's total comprehensive income was as follows:
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
(In thousands) 2000 1999 2000 1999
------- ------- ------- -------
Net income $ 2,407 $ 2,063 $ 1,123 $ 946
Other comprehensive income/(loss):
Holding (loss)/gain arising during period, net
of tax (50) (104) (84) (68)
Reclassification adjustment, net of tax (2) 11 (2)
------- ------- ------- -------
Total other comprehensive income/(loss) (52) (93) (86) (68)
------- ------- ------- -------
Total comprehensive income $ 2,355 $ 1,970 $ 1,037 $ 878
======= ======= ======= =======
5
NOTE C - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
There was no difference in the numerator, net income, used in the
calculation of basic earnings per share and diluted earnings per share. The
denominator used in the calculation of basic earnings per share and diluted
earnings per share for the six and three-month periods ended June 30, 2000 and
1999 is reconciled as follows:
(In thousands except earnings per share) Six-months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2000 1999 2000 1999
------ ------ ------ ------
Calculation of Basic Earnings Per Share
Numerator - net income $2,407 $2,063 $1,123 $ 946
Denominator - weighted average common
shares outstanding 3,715 3,698 3,716 3,702
------ ------ ------ ------
Basic Earnings Per Share $ 0.65 $ 0.56 $ 0.30 $ 0.26
====== ====== ====== ======
Calculation of Diluted Earnings Per Share
Numerator - net income $2,407 $2,063 $1,123 $ 946
Denominator - weighted average common
shares outstanding 3,715 3,698 3,716 3,702
Dilutive effect of outstanding options 13 38 13 37
------ ------ ------ ------
3,728 3,736 3,729 3,739
------ ------ ------ ------
Diluted Earnings Per Share $ 0.64 $ 0.55 $ 0.30 $ 0.25
====== ====== ====== ======
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
North Valley Bancorp (the "Company") is the bank holding company for
North Valley Bank (the "Bank"), a state-nonmember bank. The Bank operates out of
its main office located at 880 E. Cypress Avenue, Redding, CA 96002, with 12
branches, which include two supermarket branches in Shasta and Trinity Counties
in Northern California. The Company operates as one business segment providing
banking services to the Company's clients in Northern California. The Company's
principal business consists of attracting deposits from the general public and
using the funds to originate commercial, real estate and installment loans to
customers, who are predominately small and middle market businesses and middle
income individuals. The Company's primary source of revenues is interest income
from its loan and investment securities portfolios. The Company is not dependent
on any single customer for more than ten percent of the Company's revenues.
On October 4, 1999, the Company and Six Rivers National Bank ("SRNB")
(headquartered in Eureka, California) announced the signing of a proposed merger
agreement and plan of reorganization which, pending regulatory approvals, would
result in the merger of SRNB into NVB, with SRNB to be operated as a wholly
owned subsidiary of the Company. The transaction is expected to be completed in
the second half of the fourth quarter. The merger agreement and plan of
reorganization provides for SRNB stockholders to receive shares of the Company
in exchange for SRNB stock based on a formula which is dependent on the average
closing price of the Company common stock in a tax free exchange expected to be
accounted for as a pooling of interests. The merger and related transactions
were approved by the shareholders of the Company on March 28, 2000 and by the
shareholders of SRNB on April 6, 2000.
Certain statements in this Form 10-Q (excluding statements of fact or
historical financial information) involve forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions, particularly in Shasta County; volatility of
rate sensitive deposits; operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; and
changes in the securities markets.
EARNINGS SUMMARY
Three Months Ended Six-months Ended
June 30, June 30,
--------------------- ---------------------
(In thousands except earnings per share) 2000 1999 2000 1999
------- ------- ------- -------
Net interest income $ 3,739 $ 3,235 $ 7,335 $ 6,432
Provision for loan losses (120) (300) (600) (555)
Noninterest income 1,137 823 2,820 1,735
Noninterest expense (3,196) (2,437) (6,211) (4,725)
Provision for income taxes (437) (375) (937) (824)
------- ------- ------- -------
Net income $ 1,123 $ 946 $ 2,407 $ 2,063
======= ======= ======= =======
Earnings Per Share
Basic $ 0.30 $ 0.26 $ 0.65 $ 0.56
======= ======= ======= =======
Diluted $ 0.30 $ 0.25 $ 0.64 $ 0.55
======= ======= ======= =======
Return on Average Assets 1.42% 1.27% 1.52% 1.40%
======= ======= ======= =======
Return on Average Equity 13.04% 12.13% 14.12% 13.30%
======= ======= ======= =======
7
The Company's consolidated net earnings grew 16.67% for the six months
ended June 30, 2000, to $2,407,000, or $0.64 diluted earnings per share,
compared to $2,063,000, or $0.55 diluted earnings per share for the comparable
period of 1999. Return on average assets was 1.52% and return on average equity
was 14.12% for the six months ended June 30, 2000, compared to 1.40% and 13.30%,
respectively, for the same period of 1999.
The Company's consolidated net earnings for the three months ended June
30, 2000 were $1,123,000, or $0.30 diluted earnings per share, compared to
$946,000, or $0.25 diluted earnings per share for the comparable period of 1999.
Return on average assets was 1.42% and return on average equity was 13.04% for
the quarter ended June 30, 2000 compared to 1.27% and 12.13% respectively, for
the same period in 1999.
The higher earnings for the three months and six months ended June 30,
2000, resulted from increased interest income from loan growth and rising
interest rates, increased non-interest income from service charges on deposit
accounts, and a one-time pre-tax revenue item received in the first quarter from
the demutualization of an insurance company from which the Bank owns policies.
Loan volume increased due to the continued growth of the Bank's Business Banking
Center, which focuses on development of existing and new commercial banking
relationships, and consumer loan growth. The increased income was offset
somewhat by higher levels of interest expense on deposits, salary and benefit
expenses and merger-related expenses.
During the six months ending June 30, 2000, the Company incurred merger
and acquisition charges in the amount of $356,000 relating to the pending
transaction with Six Rivers National Bank (NASDAQ:SIXR). Additionally, increased
salary and benefit expenses and infrastructure costs were higher in preparation
for the closing of the transaction. The closing was projected to occur early in
the third quarter 2000 but has been delayed mainly due to competitive issues
raised by the Federal Reserve Bank with respect to Trinity County. Final closing
is subject to regulatory approvals, which are anticipated in September 2000,
with a closing of the merger shortly thereafter.
NET INTEREST INCOME
Net interest income is the principal source of the Company's operating
earnings. It represents the difference between interest earned on loans and
other investments and interest paid on deposits. The amount of interest income
and expense is affected by changes in volume and mix of earning assets and
interest-bearing deposits, along with changes in interest rates.
The following table is a summary of the Company's net interest income
presented on a fully taxable equivalent (FTE) basis for the periods indicated:
Three Months Ended Six-months Ended
June 30, June 30,
--------------------- ---------------------
(In thousands) 2000 1999 2000 1999
-------- -------- -------- --------
Interest income $ 6,022 $ 5,224 $ 11,852 $ 10,433
Interest expense (2,283) (1,989) (4,517) (4,001)
FTE adjustment 201 296 439 529
-------- -------- -------- --------
Net interest income (FTE) $ 3,940 $ 3,531 $ 7,774 $ 6,961
======== ======== ======== ========
Net interest income has been adjusted to a fully taxable equivalent
basis (FTE) for tax-exempt investments included in earning assets. The increase
in net interest income (FTE) for the six-month period ended June 30, 2000
resulted primarily from the increase in the volume of loans, which generally
carry higher interest rates than other earning assets, combined with an increase
in the rates earned on loans offset by an increase in rates paid on interest
earning deposits. Average loans increased to $218,429,000 for the six-months
ended June 30, 2000, as compared to $197,358,000 over the same period in 1999,
or a 10.7% increase. Average interest-bearing deposits for the six-months ended
June 30, 2000 totaled $235,365,000; as compared to $222,836,000 for the same
period in 1999 or a 5.6% increase.
The increase in net interest income (FTE) for the three month period
ended June 30, 2000 resulted primarily from the increase in the volume of loans,
which generally carry higher interest rates than other earning assets, combined
with an increase in the rates earned on loans offset by an increase in rates
paid on interest earning deposits. Average loans increased to $219,323,000 for
the three months ended June 30, 2000, as compared to $201,482,000 over the same
period in 1999, or an 8.9% increase. Average interest-bearing deposits for the
three months ended June 30, 2000 totaled $236,053,000; as compared to
$223,659,000 for the same period in 1999 or a 5.5% increase.
8
The following table is a summary of the Company's net interest margin
(FTE) for the periods indicated:
Three Months Ended Six-months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Yield on earning assets 8.53% 8.16% 8.44% 8.16%
Rate paid on interest-bearing deposits 3.88% 3.58% 3.85% 3.62%
---- ---- ---- ----
Net interest spread 4.65% 4.59% 4.59% 4.54%
==== ==== ==== ====
Net interest margin 5.40% 5.22% 5.34% 5.18%
==== ==== ==== ====
The increase for the six-months ended June 30, 2000 in the net interest
margin to 5.34% from 5.18% for the same period in 1999 was attributed to
the increase in the net spread (the difference between rates earned on interest
earning assets and rates paid on deposits), affected primarily by an increasing
interest rate environment and the change in the mix between loans and
investment securities for the period ended June 30, 2000 compared to the same
period in 1999. The increase for the six-months ended June 30, 2000 in the net
interest spread to 4.59% from 4.54% for the same period in 1999 was a result of
a 28 basis point increase in rates earned on interest earning assets
offset by a 23 basis point increase in interest paid on interest bearing
deposits.
For the three months ended June 30, 2000 the net interest margin was
5.40% compared to 5.22% for the same period in 1999. The increase in the net
interest margin was attributed to a 37 basis point increase on rates earned for
assets offset by a 30 basis point increase in rates paid on deposits, and the
change in the mix in the loans and investment securities.
NONINTEREST INCOME
The following table is a summary of the Company's noninterest income
for the periods indicated:
Three Months Ended Six Months Ended
Noninterest Income June 30, June 30,
(In thousands) ------------------ -------------------
2000 1999 2000 1999
------- ------- ------- -------
Service charges on deposit accounts $ 839 $ 536 $ 1,467 $ 1,023
Other fees and charges 223 216 454 431
Gain (loss) on sale of loans (50) 54 (87)
Gain on shares received from insurance company demutualization 683
Gain on sale or calls of securities 4 4 16
Other 71 121 158 352
------- ------- ------- -------
Total noninterest income $ 1,137 $ 823 $ 2,820 $ 1,735
======= ======= ======= =======
Noninterest income increased to $2,820,000 for the six months ended
June 30, 2000 as compared to $1,735,000 for the same six months ended June 30,
1999, a $1,085,000 increase. This increase is primarily the result of a one-time
pre-tax revenue item of $683,000, which represents the initial value of 40,153
shares of John Hancock Financial Services, Inc., common stock received by the
Company. In addition, marketing efforts focusing on retail and commercial
deposit customers has resulted in a 5.4% increase in noninterest bearing demand
deposit accounts during the first six months of 2000. This has attributed to the
increase of $467,000 in service charges and other fees and charges for the
period ended June 30, 2000 as compared to the same period in 1999.
Noninterest income increased to $1,137,000 for the three months ended June 30,
2000 as compared to $823,000 for the same three months ended June 30, 1999, a
$314,000 increase primarily as a result of increase of marketing efforts as
discussed above.
9
NONINTEREST EXPENSE
The following table is a summary of the Company's noninterest expense
for the periods indicated:
Three Months Ended Six Months Ended
------------------ ----------------
NONINTEREST EXPENSE June 30, June 30,
(in thousands) ------------------ -----------------
2000 1999 2000 1999
------- -------- ------- -------
Salaries & employee benefits $1,543 $1,154 $3,018 $2,293
Occupancy expense 198 155 358 315
Furniture & equipment expense 184 166 366 352
Professional services 183 104 412 208
Merger and acquisition expense 127 356
Data processing expenses 119 96 251 200
Printing & supplies 84 68 161 135
Postage 68 53 130 107
Messenger expense 47 47 100 93
ATM expense 134 93 231 172
Other 509 501 828 850
------ ------ ------ ------
Total Noninterest expense $3,196 $2,437 $6,211 $4,725
====== ====== ====== ======
Noninterest expense totaled $6,211,000 for the six-month period ended
June 30, 2000, compared to $4,725,000 for the same period in 1999. The increased
salary and benefit expenses of $725,000 and infrastructure costs were higher in
preparation for the closing of the transaction with Six Rivers National Bank.
Professional fees increased $204,000 over the six month period primarily due to
the implementation of the High Performance Checking program in 2000. During the
six months ending June 30, 2000, the Company incurred merger and acquisition
charges in the amount of $356,000 relating to the pending transaction with Six
Rivers National Bank (NASDAQ:SIXR).
For the three-month period ending June 30, 2000 noninterest expense
increased $759,000. The increase in noninterest expense is attributed to the
growth of the Bank and the proposed merger transaction as discussed above.
INCOME TAXES
The provision for income taxes for the six-months ended June 30, 2000
was $937,000 as compared to $824,000 for the same period in 1999. The effective
income tax rate for state and federal income taxes was 28% for the six-months
ended June 30, 2000 compared to 28.5% for the same period in 1999. The
difference in the effective tax rate compared to the statutory tax rate is
primarily the result of the Bank's investment in municipals securities.
10
IMPAIRED, NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND OTHER REAL ESTATE
OWNED
At June 30, 2000, the recorded investment in loans and leases for which
impairment has been recognized was approximately $199,000. Of this balance,
approximately $120,000 has a related valuation allowance of $43,000. The
remaining $79,000 did not require a valuation allowance. For the period ended
June 30, 2000, the average recorded investment in loans and leases for which
impairment has been recognized was approximately $305,000. During the portion of
the year that the loans and leases were impaired, the Company recognized
interest income of approximately $27,000 for cash payments received in 2000.
At December 31, 1999, the recorded investment in loans and leases for
which impairment had been recognized was approximately $374,000. Of the 1999
balance, approximately $120,000 has a related valuation allowance of $43,000.
The remaining $254,000 did not require a valuation allowance. For the year ended
December 31 1999, the average recorded investment in loans and leases for which
impairment had been recognized was approximately $1,411,000. During the portion
of the year that the loans and leases were impaired, the Company recognized
interest income of approximately $193,000 for cash payments received in 1999.
Nonaccrual loans and leases consist of loans and leases on which the
accrual of interest has been discontinued and other loans and leases where
management believes that borrowers' financial condition is such that the
collection of interest is doubtful, or when a loan or lease becomes
contractually past due by 90 days or more with respect to interest or principal
(except that when management believes a loan or lease is well secured and in the
process of collection, interest accruals are continued on loans and leases
considered by management to be fully collectible). Loans or leases are charged
off when management determines that the loan or lease is considered
uncollectible. Other real estate owned consists of real property acquired
through foreclosure on the related collateral underlying defaulted loans and
leases.
A summary of non-performing assets at June 30, 2000, and December 31,
1999, is as follows:
June 30, December 31,
(In thousands) 2000 1999
-------- ------------
Total nonaccrual loans $ 80 $346
Loans 90 days past due and still accruing 23 223
---- ----
Total nonperforming loans 103 569
Other real estate owned 80
---- ----
Total nonperforming assets $103 $649
==== ====
Nonaccrual loans to total gross loans 0.04% 0.16%
==== ====
Nonperforming loans to total gross loans 0.05% 0.26%
==== ====
Total nonperforming assets to total assets 0.03% 0.21%
==== ====
11
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan and lease losses to absorb
inherent losses in the loan and lease portfolio. Management attributes general
reserves to different types of loans and leases using percentages, which are
based upon perceived risk, associated with the portfolio and underlying
collateral. The allowance for probable loan and lease losses is a general
reserve available against the total loan and lease portfolio and off balance
sheet credit exposure. While management uses available information to recognize
losses on loans and leases, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for probable loan and lease losses. Such agencies may
require the Company to provide additions to the allowance based on their
judgment of information available to them at the time of their examination. At
June 30, 2000, based on known information, management believes that the
allowance for loan and lease losses was adequate to absorb losses inherent in
existing loans and leases and commitments to extend credit, based on evaluations
of the collectibility and prior loss experience of loans and leases and
commitments to extend credit as of such date.
A summary of the allowance for loan and lease losses at June 30, 2000,
June 30, 1999 and December 31, 1999, is as follows:
June 30, June 30, December 31,
-------- -------- ------------
(In thousands) 2000 1999 1999
---- ---- ----
Balance beginning of year $ 2,260 $ 1,902 $ 1,902
Provision for loan losses 600 555 1,042
Charge-offs (232) (747) (1,210)
Recoveries 65 222 526
------- ------- -------
Balance end of period $ 2,693 $ 1,932 $ 2,260
======= ======= =======
The evaluation process is designed to determine the adequacy of the
allowance for loan and lease losses. This process attempts to assess the risk of
losses inherent in the loan and lease portfolio by segregating the allowance for
loan and lease losses into three components: "Specific," "loss migration," and
"general." The specific component is established by allocating a portion of the
allowance for loan and lease losses to individual classified credits on the
basis of specific circumstances and assessments. The loss migration component is
calculated as a function of the historical loss migration experience of the
internal loan credit risk rating categories. The general component is an
unallocated portion that supplements the first two components and includes:
management's judgement of the current economic conditions, borrower's financial
condition, loan and lease impairment, evaluation of the performing loan and
lease portfolio, continual evaluation of problem loans and leases identified as
having a higher degree of risk, off balance sheet risks, net charge off trends,
and other factors. Loan activity increased in the first half of 2000
particularly in commercial and consumer loans with a higher risk characteristic
attributing to the increase in the allowance for loan loss. The allowance for
loan and lease losses was 1.20% of total loans and leases as of June 30, 2000,
compared to 1.04% on December 31, 1999.
There is uncertainty concerning future economic trends. Accordingly, it
is not possible to predict the effect future economic trends may have on the
levels of the allowance for loan and lease losses and the related provision for
loan and lease losses in future periods.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors and borrowers.
Collection of principal and interest on loans and leases, the liquidations and
maturities of investment securities, deposits with other banks, customer
deposits and short term borrowing, when needed, are primary sources of funds
that contribute to liquidity. Unused lines of credit from correspondent banks to
provide federal funds for $10,500,000 as of June 30, 2000 were available to
provide liquidity. In addition, the Bank is a member of the Federal Home Loan
Bank ("FHLB") System providing an additional line of credit of $11,664,000
secured by first deeds of trust on eligible 1-4 unit residential loans. The
Company also has a line of credit with Federal Reserve Bank ("FRB") of
$12,705,000 secured by first deeds of trust on eligible commercial real estate
loans and leases. The Company has not utilized the line of credit from the FHLB
System or FRB.
The Company manages both assets and liabilities by monitoring asset and
liability mixes, volumes, maturities, yields and rates in order to preserve
liquidity and earnings stability. Total liquid assets (cash and due from banks,
federal funds sold, and investment securities) totaled $79,137,000 and
$81,098,000 (or 24.8% and 25.9% of total assets) at June 30, 2000 and December
31, 1999, respectively. Total liquid assets for June 30, 2000 and December 31,
1999 include investment securities of and $27,247,000 and $28,146,000,
respectively, classified as held to maturity based on the Company's intent and
ability to hold such securities to maturity.
12
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 $257,728,000 and $251,508,000 at June 30, 2000
and December 31, 1999, respectively.
In assessing liquidity, historical information such as seasonal loan
demand, local economic cycles and the economy in general are considered along
with current ratios, management goals and unique characteristics of the Company.
Management believes the Company is in compliance with its policies relating to
liquidity.
Asset and liability management focuses on interest rate risk due to
asset and liability cash flows and market interest rate movement. The primary
objective of managing interest rate risk is to ensure that both assets and
liabilities react to changes in interest rates to minimize the effects of
interest rate movements on net interest income. An asset and liability
management simulation model is used to quantify the exposure and impact of
changing interest rates on earnings.
The following table shows the interest sensitive assets and liabilities
gap (other than equity securities with a fair value of approximately $753,000),
which is the measure of interest sensitive assets over interest-bearing
liabilities, for each individual repricing period on a cumulative basis:
Within Three Three Months One to Five Greater Than
(IN THOUSANDS) Months to One Year Years Five Years Total
--------- --------- --------- --------- ---------
EARNING ASSETS
Held to maturity securities $ 1,102 $ 3,050 $ 8,418 $ 14,677 $ 27,247
Available for sale securities - 4,949 10,107 9,102 24,158
Fed funds sold 13,000 13,000
Loans-net of deferred loan fees 43,199 17,263 106,423 58,268 225,153
--------- --------- --------- --------- ---------
Total earning assets $ 57,301 $ 25,262 $ 124,948 $ 82,047 $ 289,558
========= ========= ========= ========= =========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits 11,061 11,061
Savings deposits 104,455 104,455
Time deposits $ 47,587 $ 70,153 $ 3,902 $ -- $ 121,642
--------- --------- --------- --------- ---------
Total interest bearing
liabilities $ 47,587 $ 185,669 $ 3,902 $ -- $ 237,158
========= ========= ========= ========= =========
Interest rate sensitivity gap $ 9,714 $(160,407) $ 121,046 $ 82,047
========= ========= ========= =========
Cumulative interest rate
sensitivity gap $ 9,714 $(150,693) $ (29,647) $ 52,400
========= ========= ========= =========
At June 30, 2000, the gap table indicates the Company as liability
sensitive in the twelve-month period. The interest rate sensitivity gap is
defined as the difference between amount of interest-earning assets anticipated
to mature or reprice within a specific time period and the amount of
interest-bearing liabilities anticipated to mature or reprice within that time
period. The year-end gap report is based on the contractual interest repricing
date. The gap method does not consider the impact of different multipliers (how
interest rates change when the Fed Funds rate changes by 1%) and lags (time it
takes for rates to change after the Fed Funds rate changes). The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant and may be affected by many factors, including the behavior
of customers in response to changes in interest rates and future impact of new
business strategies. This table should, therefore, be used only as a guide as to
the possible effect changes in interest rates might have on the net margins of
the Company. The Company's model analyzes the impact on earnings of future rate
changes by including factors for lags and multipliers for key bank rates. Both
methods of measuring interest rate sensitivity do not take into account actions
taken by management to modify the effect to net interest income if interest
rates were to rise or fall.
Although the Company had a negative gap at June 30, 2000, the asset
liability simulation model showed the Company was slightly liability sensitive
at June 30, 2000. This means that when interest rates increase, yields on
earning assets would be expected to decrease faster than rates paid for
deposits, causing the net interest margin to decrease. Due to an increasing
interest rate environment in the first quarter of 2000, the Company's liability
sensitive posture had a positive impact on net interest margins. In a declining
rate environment, the opposite impact would be expected; i.e., the net interest
margin should increase.
13
FINANCIAL CONDITION AS OF JUNE 30, 2000 AS COMPARED TO DECEMBER 31, 1999
Total assets at June 30, 2000, were $319,179,000, compared to December
31, 1999 assets of $312,810,000. Increases in average deposits of 6.7% were used
to fund a 7.8% increase in average earning assets for the six months ended June
30, 2000.
Investment securities and federal funds sold totaled $65,158,000 at
June 30, 2000, compared to $68,315,000 at December 31, 1999. The Company is a
member of Federal Home Loan Bank of San Francisco and holds $666,000 in FHLB
stock at June 30, 2000.
During the first six months of 2000, net loans and leases increased to
$222,460,000 from $215,397,000 at December 31, 1999. Loans and leases are the
Company's major component of earning assets. The Bank's average loan to deposit
ratio was 78.5%.
Total deposits increased to $279,412,000 at June 30, 2000 compared to
$275,261,000 at December 31, 1999 with the growth primarily in noninterest
bearing demand accounts, which increased $2,183,000, or 5.4%.
The Company maintains capital to support capital needs future growth
and dividend payouts while maintaining the confidence of depositors and
investors by increasing shareholder value. The Company has provided the majority
of its capital requirements through the retention of earnings. Stockholders'
equity increased to $34,932,000 as of June 30, 2000, as compared to $33,246,000
at December 31, 1999.
The Company and the Bank have levels of capital in excess of all
regulatory requirements. The risk-based capital ratios are listed below.
Company June 30, December 31, Minimum for Capital To Be Well Capitalized Under Prompt
- ------- -------- ------------ ------------------- -----------------------------------
2000 1999 Adequacy Purposes Corrective Action Provisions
---- ---- ----------------- ----------------------------
Leverage Ratio 10.97% 10.47% 4.00% N/A
Tier 1 risk-based capital ratio 14.35% 14.13% 4.00% N/A
Total risk-based capital ratio 15.46% 15.10% 8.00% N/A
Bank
Leverage Ratio 10.69% 10.20% 4.00% 5.00%
Tier 1 risk-based capital ratio 13.99% 13.74% 4.00% 6.00%
Total risk-based capital ratio 15.10% 14.70% 8.00% 10.00%
IMPACT OF INFLATION
Impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because a financial
institution's assets and liabilities consist largely of monetary items. The
relatively low proportion of the Bank's fixed assets (approximately 1.8% June
30, 2000) reduces both the potential of inflated earnings resulting from
understated depreciation and the potential understatement of absolute asset
values.
14
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 six months ended June 30, 2000 compared to
December 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
against any of its property. The Bank, because of the nature of its business, is
generally subject to various legal actions, threatened or filed, which involve
ordinary, routine litigation incidental to its business. Some of the pending
cases seek punitive damages in addition to other relief. Although the amount of
the ultimate exposure, if any, cannot be determined at this time, the Company
does not expect that the final outcome of threatened or filed suits will have a
materially adverse effect on its consolidated financial position.
ITEM 2. CHANGES IN SECURITIES
No changes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of North Valley Bancorp was held on
Tuesday, May 30, 2000. Shareholders of North Valley Bancorp approved the
following proposals:
1 Election of directors. All management nominees were elected and there
was no solicitation in opposition to management's nominees in the proxy
statement.
2. Ratification of Deloitte & Touche as independent public accountants for
the Corporation for 2000.
Results of the election are presented below:
REGULAR MEETING OF SHAREHOLDERS
TUESDAY, MAY 30, 2000
TOTAL SHARES OUTSTANDING: 3,715,818
TOTAL SHARES VOTED: 2,755,346 74.15%
SHARES % OUTSTANDING % OF
VOTED SHARES QUORUM
PROPOSAL 1: For: 2,746,350 73.91% 99.67%
Election of Directors Against: 8,996 0.24% 0.33%
Abstain: 0 0.00% 0.00%
PROPOSAL 2: For: 2,735,206 73.61% 99.27%
Ratify Deloitte & Touche as Against: 7,784 0.21% 0.28%
independent public accountants Abstain: 12,356 0.33% 0.45%
for 2000
ITEM 5. OTHER INFORMATION
N/A
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K during the quarter ended June 30, 2000:
Filed April 12, 2000 Results of Both Shareholder Meetings
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTH VALLEY BANCORP
(Registrant)
Date August 14, 2000
By: /s/ SHARON BENSON
- -----------------------------------------------
Sharon Benson
Senior Vice President & Chief Financial Officer
16