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 September 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 - 5,801,420 shares as of November 10, 2000.
1
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 30, 2000 and December 31, 1999
Condensed consolidated statements of income--For the three months and nine
months ended September 30, 2000 and 1999
Condensed consolidated statement of cash flows--For the nine months ended
September 30, 2000 and 1999
Notes to condensed consolidated financial statements-- September 30, 2000 and
December 31, 1999 and the Nine months ended September 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share amounts)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
Cash and cash equivalents:
Cash and due from banks $ 14,047 $ 12,783
Federal funds sold 1,200 14,600
--------- ---------
Total cash and cash equivalents 15,247 27,383
Cash held in trust 221 282
Securities:
Available for sale, at fair value 28,324 25,569
Held to maturity, at amortized cost
with fair values of:
$26,417 at September 30, 2000
$28,975 at December 31,1999 25,507 28,146
Loans and leases, net of allowance for loan and
lease losses and deferred loan fees of:
$2,809 and $125 at September 30, 2000
$2,260 and $194 at December 31, 1999 228,782 215,397
Premises and equipment, net of
accumulated depreciation and
amortization 5,957 5,060
Other real estate owned 80
FHLB stock 680 911
Company owned life insurance 15,875 4,650
Accrued interest receivable 2,131 2,035
Other assets 3,313 3,297
--------- ---------
TOTAL ASSETS $ 326,037 $ 312,810
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 42,960 $ 40,071
Interest-bearing deposits 242,242 235,190
--------- ---------
Total deposits 285,202 275,261
Accrued interest and other liabilities 4,536 4,303
--------- ---------
Total liabilities 289,738 279,564
--------- ---------
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
3,720,018 at September 30, 2000
And 3,714,418 at December 31,1999 10,439 10,427
Retained Earnings 25,455 22,936
Accumulated other comprehensive income (loss), net of tax 405 (117)
--------- ---------
Total stockholders' equity 36,299 33,246
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 326,037 $ 312,810
========= =========
See notes to condensed consolidated financial statements (unaudited).
3
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except share amounts)
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
Loans and leases including fees $ 14,842 $ 12,840 $ 5,228 $ 4,412
Securities
Taxable 1,282 800 452 234
Exempt from federal taxes 1,227 1,481 395 473
Federal funds sold 740 705 164 274
-------- -------- -------- --------
Total interest income 18,091 15,826 6,239 5,393
INTEREST EXPENSE - DEPOSITS 6,929 6,056 2,412 2,055
-------- -------- -------- --------
NET INTEREST INCOME 11,162 9,770 3,827 3,338
PROVISION FOR LOAN AND LEASE LOSSES 780 835 180 280
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 10,382 8,935 3,647 3,058
-------- -------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 2,310 1,581 843 558
Gain on shares received from insurance company demutualization 683
Other fees and charges 619 802 165 371
Gain (loss) on sale of loans 52 (88) (2) (1)
Gain on sale or calls of securities 23 25 19 9
Other 309 546 151 194
-------- -------- -------- --------
Total noninterest income 3,996 2,866 1,176 1,131
-------- -------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 4,564 3,506 1,546 1,213
Furniture and equipment expense 571 515 205 163
Occupancy expense 507 482 149 167
Merger & integration expense 447 91
Other 3,242 2,717 1,129 952
-------- -------- -------- --------
Total noninterest expenses 9,331 7,220 3,120 2,495
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME
TAXES 5,047 4,581 1,703 1,694
PROVISION FOR INCOME TAXES 1,413 1,226 476 402
-------- -------- -------- --------
NET INCOME $ 3,634 $ 3,355 $ 1,227 $ 1,292
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.98 $ 0.91 $ 0.33 $ 0.35
======== ======== ======== ========
Diluted $ 0.97 $ 0.90 $ 0.33 $ 0.35
======== ======== ======== ========
See notes to condensed consolidated financial statements (unaudited).
4
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,634 $ 3,355
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 506 489
Amortization of premium on securities 155 (19)
Provision for loan and lease losses 780 835
Loss on sale/write down of other real estate owned 635
Gain on shares received from insurance company demutualization (683)
Gain on sale or calls of securities (23) (25)
(Gain)/loss on sales of loans and leases (52) 88
Provision/(benefit) for deferred taxes 63 (8)
Effect of changes in:
Cash held in trust 61 374
Accrued interest receivable (96)
Other assets (885) (924)
Accrued interest and other liabilities 233 (376)
-------- --------
Net cash provided by operating activities 3,693 4,424
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale (purchase) of FHLB stock 231 (58)
Proceeds from sale of other real estate owned 325 3,190
Purchases of available for sale securities (10,500) (13,000)
Proceeds from sales of available for sale securities 56 100
Proceeds from maturities or calls of available for sale securities 8,993 20,625
Proceeds from maturities or calls of held to maturity securities 2,630 3,160
Proceeds from sales of loans and leases 948 26,993
Net increase in loans and leases (15,306) (44,577)
Purchases of life insurance (10,641)
Purchases of premises and equipment - net (1,403) (404)
-------- --------
Net cash used in investing activities (24,667) (3,971)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, demand accounts, and savings accounts 13,062 4,994
Net change in time certificates (3,121) 1,496
Cash dividends paid (1,115) (1,478)
Cash received for stock options exercised 12 88
-------- --------
Net cash provided by financing activities 8,838 5,100
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (12,136) 5,553
CASH AND CASH EQUIVALENTS:
Beginning of year 27,383 25,352
-------- --------
End of period $ 15,247 $ 30,905
======== ========
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 $ 2,087 $ 1,248
======== ========
Interest payments $ 6,921 $ 6,068
======== ========
See notes to condensed consolidated financial statements (unaudited).
5
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2000 and December 31, 1999 and the Nine-months ended
September 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 accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting 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
nine-months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.
On October 11, 2000 Six Rivers National Bank was merged with and into
North Valley Bancorp with Six Rivers National Bank operating as a wholly owned
subsidiary of North Valley Bancorp. The financial statements contained herein
have not been restated to include any activity of Six Rivers National Bank (see
Note E).
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:
NINE-MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
(IN THOUSANDS) 2000 1999 2000 1999
---- ---- ---- ----
Net income $ 3,634 $ 3,355 $ 1,227 $ 1,292
Other comprehensive income/(loss):
Holding (loss) gain arising during period, net
of tax 505 (104) 499
Reclassification adjustment, net of tax 17 18 13 7
------- ------- ------- -------
Total other comprehensive income/(loss) 522 (86) 512 7
------- ------- ------- -------
Total comprehensive income $ 4,156 $ 3,269 $ 1,739 $ 1,299
======= ======= ======= =======
6
NOTE C - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
There was no difference in the numerator, net income, used in the
calculation of basic earnings per share and diluted earnings per share. The
denominator used in the calculation of basic earnings per share and diluted
earnings per share for the nine and three-month periods ended September 30, 2000
and 1999 is reconciled as follows:
(IN THOUSANDS EXCEPT EARNINGS PER SHARE) NINE-MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
CALCULATION OF BASIC EARNINGS PER SHARE
Numerator - net income $3,634 $3,355 $1,227 $1,292
Denominator - weighted average common
shares outstanding 3,717 3,701 3,719 3,705
------ ------ ------ ------
Basic Earnings Per Share $ 0.98 $ 0.91 $ 0.33 $ 0.35
====== ====== ====== ======
CALCULATION OF DILUTED EARNINGS PER SHARE
Numerator - net income $3,634 $3,355 $1,227 $1,292
Denominator - weighted average common
shares outstanding 3,717 3,701 3,719 3,705
Dilutive effect of outstanding options 25 19 52 20
------ ------ ------ ------
3,742 3,720 3,771 3,725
------ ------ ------ ------
Diluted Earnings Per Share $ 0.97 $ 0.90 $ 0.33 $ 0.35
====== ====== ====== ======
7
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued in
June 1998 and amended by SFAS No. 138, issued in June 2000. The requirements of
SFAS No. 133 as amended by SFAS No.138 will be effective for the Company in the
first quarter of the fiscal year beginning January 1, 2001. The standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under the standard, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The Company
intends to adopt the standard effective January 1, 2001. Management does not
expect the adoption of SFAS No. 133 as amended by SFAS No. 138 to have a
significant impact on the financial position or results of operations of the
Company because the Company does not have significant derivative activity.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued in September 2000. SFAS
No. 140 is a replacement of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". Most of the
provisions of SFAS No. 125 were carried forward to SFAS No. 140 without
reconsideration by the FASB, and some were changed in only minor ways. In
issuing SFAS No. 140, the FASB included issues and decisions that had been
addressed and determined since the original publication of SFAS No. 125. SFAS
No. 140 is effective for transfers after March 31, 2001. It is effective for
disclosures about securitizations and collateral and for recognition and
reclassification of collateral for fiscal years ending after December 15, 2000.
Management does not expect the adoption of SFAS No. 140 to have a significant
impact on the financial position or results of operations of the Company.
NOTE E - MERGER WITH SIX RIVERS NATIONAL BANK
On October 11, 2000 Six Rivers National Bank was merged with and into
North Valley Bancorp with Six Rivers National Bank operating as a wholly owned
subsidiary of North Valley Bank. The merger resulted in the issuance of
approximately 2.1 million shares of North Valley Bancorp's common stock based on
a conversion ratio of 1.40 shares of North Valley Bancorp common stock for each
share of Six Rivers National Bank common stock. The merger will be accounted for
using the pooling-of-interests method of accounting. Historical financial
information presented in future reports will be restated to include Six Rivers
National Bank. No material adjustments are expected to be recorded to conform
Six Rivers National Bank's accounting policies to those of North Valley Bancorp.
The following unaudited pro-forma combined financial information
summarizes the combined results of operations of North Valley Bancorp and Six
Rivers National Bank based on the pooling-of-interests method of accounting, as
if the combination had been consummated on January 1 of each of the periods
presented. This information is derived from the historical financial statements
of each company. Weighted average shares and earnings per share were calculated
based on a conversion ratio of 1.40 to 1.
UNAUDITED PRO-FORMA COMBINED SUMMARY OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
Net interest income $ 17,724 $ 16,182
========== ==========
Net Income $ 4,252 $ 4,293
========== ==========
Earnings per share:
Basic $ 0.73 $ 0.75
========== ==========
Diluted $ 0.73 $ 0.74
========== ==========
Weighted average common shares used
in computing basic earnings per share 5,791,800 5,751,443
========== ==========
Weighted average common shares used
in computing diluted earnings per share 5,835,000 5,777,082
========== ==========
8
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 11
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.
Effective October 11, 2000, the Company completed the merger with Six
Rivers National Bank. Under the terms of the merger agreement, Six Rivers
National Bank shareholders received 1.4 shares of North Valley Bancorp common
stock for each share of Six Rivers National Bank common stock. On the closing
date there were approximately 1.5 million shares of Six Rivers National Bank
common stock outstanding and approximately 85,000 common stock options
outstanding to be converted to North Valley Bancorp common stock or common stock
options. The merger will be accounted for as a pooling of interests. Six Rivers
National Bank now operates as a wholly-owned subsidiary of North Valley Bancorp.
The financial information herein represents only the activities of North Valley
Bancorp as of September 30, 2000 and December 31, 1999 and for the three and
nine month periods ended September 30, 1999 and 2000, and does not include any
financial information of Six Rivers National Bank. Pro forma information for
North Valley Bancorp and Six Rivers National Bank as of September 30, 2000 was
filed with the Securities and Exchange Commission on October 26, 2000, on Form
8-K.
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 NINE-MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(IN THOUSANDS EXCEPT 2000 1999 2000 1999
EARNINGS PER SHARE) ---- ---- ---- ----
Net interest income $ 3,827 $ 3,338 $ 11,162 $ 9,770
Provision for loan losses (180) (280) (780) (835)
Noninterest income 1,176 1,131 3,996 2,866
Noninterest expense (3,120) (2,495) (9,331) (7,220)
Provision for income taxes (476) (402) (1,413) (1,226)
-------- -------- -------- --------
Net income $ 1,227 $ 1,292 $ 3,634 $ 3,355
======== ======== ======== ========
Earnings Per Share
Basic $ 0.33 $ 0.35 $ 0.98 $ 0.91
======== ======== ======== ========
Diluted $ 0.33 $ 0.35 $ 0.97 $ 0.90
======== ======== ======== ========
Return on Average Assets 1.50% 1.68% 1.51% 1.50%
======== ======== ======== ========
Return on Average Equity 13.78% 16.01% 13.98% 14.25%
======== ======== ======== ========
9
The Company's consolidated net earnings grew 8.32% for the nine months
ended September 30, 2000, to $3,634,000, or $0.97 diluted earnings per share,
compared to $3,355,000, or $0.90 diluted earnings per share for the comparable
period of 1999. Return on average assets was 1.51% and return on average equity
was 13.98% for the nine months ended September 30, 2000, compared to 1.50% and
14.25%, respectively, for the same period of 1999.
The Company's consolidated net earnings for the three months ended
September 30, 2000 were $1,227,000, or $0.33 diluted earnings per share,
compared to $1,292,000, or $0.35 diluted earnings per share for the comparable
period of 1999. Return on average assets was 1.50% and return on average equity
was 13.78% for the quarter ended September 30, 2000 compared to 1.68% and 16.01%
respectively, for the same period in 1999.
The higher earnings for the nine months ended September 30, 2000,
resulted from increased net interest income from loan growth and rising interest
rates, increased non-interest income from service charges on deposit accounts
offset somewhat by higher levels of interest expense on deposits, merger and
integration costs and salary and benefit expense. Noninterest income increased
39.43% in the nine-month period ending September 30, 2000, resulting primarily
from additional service charges generated from new accounts. The Company
received a one-time revenue item in the amount of $683,000 during the first
quarter resulting from the demutualization of an insurance company from which
the Bank owns policies. The combination of the higher rate environment, current
asset mix and strong core deposit growth has contributed to the increase in net
interest margin from 5.16% at September 30, 1999, to 5.39% at September 30,
2000.
The Company incurred merger and integration expenses in the amount of
$447,000 comprised of professional fees, filing fees, and printing costs
relating to the merger with Six Rivers National Bank for the first nine months
of 2000. Additionally, salary and benefit expenses were higher as the Company
prepared for the closing of the Six Rivers transaction. During the fourth
quarter of the current fiscal year, the Company expects to incur certain
additional merger and integration expenses and paid an additional $366,000 in
costs relating to financial advisory services and professional fees from October
1, 2000 through early November.
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 NINE-MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
(IN THOUSANDS) 2000 1999 2000 1999
---- ---- ---- ----
Interest income $ 6,239 $ 5,393 $ 18,091 $ 15,826
Interest expense (2,412) (2,055) (6,929) (6,056)
FTE adjustment 217 256 656 785
-------- -------- -------- --------
Net interest income (FTE) $ 4,044 $ 3,594 $ 11,818 $ 10,555
======== ======== ======== ========
The increase in net interest income adjusted to a fully taxable
equivalent basis (FTE) for the nine-month period ended September 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 $221,485,000 for the nine-months
ended September 30, 2000, as compared to $200,656,000 over the same period in
1999, or a 10.4% increase. Average interest-bearing deposits for the nine-months
ended September 30, 2000 totaled $237,316,000; as compared to $224,632,000 for
the same period in 1999 or a 5.7% increase.
The increase in net interest income (FTE) for the three month period
ended September 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 $227,531,000
for the three months ended September 30, 2000, as compared to $207,144,000 over
the same period in 1999, or a 9.8% increase. Average interest-bearing deposits
for the three months ended September 30, 2000 totaled $241,177,000; as compared
to $228,167,000 for the same period in 1999 or a 5.7% increase.
10
The following table is a summary of the Company's net interest margin
(FTE) for the periods indicated:
THREE MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
Yield on earning assets 8.78% 8.02% 8.56% 8.11%
Rate paid on interest-bearing deposits 3.97% 3.57% 3.89% 3.60%
---- ---- ---- ----
Net interest spread 4.81% 4.45% 4.67% 4.51%
==== ==== ==== ====
Net interest margin 5.50% 5.11% 5.39% 5.16%
==== ==== ==== ====
The increase for the nine months ended September 30, 2000 in the net
interest margin to 5.39% from 5.16% 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 September 30, 2000 compared to the
same period in 1999. The increase for the nine months ended September 30, 2000
in the net interest spread to 4.67% from 4.51% for the same period in 1999 was a
result of a 45 basis point increase in rates earned on interest earning assets
partially offset by a 29 basis point increase in interest paid on interest
bearing deposits.
For the three months ended September 30, 2000 the net interest margin
was 5.50% compared to 5.11% for the same period in 1999. The increase was
attributed to the increases in loans and deposits affected primarily by an
increasing interest rate environment and the change in the mix between loans and
investment securities. The increase in the net interest spread was attributed to
a 76 basis point increase on rates earned for assets due to the rising interest
rate environment and the change in the mix in the loans and investment
securities offset by a 40 basis point increase in rates paid on deposits.
NONINTEREST INCOME
The following table is a summary of the Company's noninterest income
for the periods indicated:
THREE MONTHS ENDED NINE-MONTHS ENDED
Noninterest Income SEPTEMBER 30, SEPTEMBER 30,
(In thousands) ------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
Service charges on deposit accounts $ 843 $ 558 $ 2,310 $ 1,581
Other fees and charges 165 371 619 802
Gain (loss) on sale of loans (2) (1) 52 (88)
Gain on shares received from insurance
company demutualization 683
Gain on sale or calls of securities 19 9 23 25
Other 151 194 309 546
------- ------- ------- -------
Total noninterest income $ 1,176 $ 1,131 $ 3,996 $ 2,866
======= ======= ======= =======
Noninterest income increased to $3,996,000 for the nine months ended
September 30, 2000 as compared to $2,866,000 for the same nine months ended
September 30, 1999, a $1,130,000 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 25% increase in noninterest
bearing demand deposit accounts during the first nine months of 2000. This has
attributed to the increase of $729,000 in service charges on deposit accounts
for the period ended September 30, 2000 as compared to the same period in 1999.
The decrease of $183,000 in other fees and charges was primarily attributed to
$135,000 in mortgage servicing rights income from the sale of real estate loans
for the period ending September 30, 1999. The reduction in other noninterest
income for the nine month period was mainly attributed to a $156,000 gain in
other real estate owned in 1999.
Noninterest income increased to $1,176,000 for the three months ended
September 30, 2000 as compared to $1,131,000 for the same three months ended
September 30, 1999, a $45,000 increase primarily as a result of increase in
service charges of $285,000 from the marketing efforts as discussed above.
11
NONINTEREST EXPENSE
The following table is a summary of the Company's noninterest expense
for the periods indicated:
THREE MONTHS ENDED NINE-MONTHS ENDED
NONINTEREST EXPENSE SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) ------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Salaries & employee benefits $1,546 $1,213 $4,564 $3,506
Occupancy expense 149 167 507 482
Furniture & equipment expense 205 163 571 515
Professional services 187 123 599 331
Merger and integration expense 91 447
Data processing expenses 170 116 421 316
Printing & supplies 46 66 207 201
Postage 77 49 207 156
Messenger expense 46 48 146 141
ATM expense 120 89 351 261
Other 483 461 1,311 1,311
------ ------ ------ ------
Total Noninterest expense $3,120 $2,495 $9,331 $7,220
====== ====== ====== ======
Noninterest expense totaled $3,120,000 and $9,331,000 for the three
and nine-month period ended September 30, 2000, compared to $2,495,000 and
$7,220,000 for the same periods in 1999. The increased salary and benefit
expenses and infrastructure costs were higher in preparation for the closing and
conversion of Six Rivers to the Company's data processing and centralized
services scheduled for December 1, 2000. Professional fees increased $268,000
over the nine month period as compared to the same period in 1999 primarily due
to the implementation of the High Performance Checking program. Data Processing
increased $105,000 over the nine month period as compared to the same period in
1999 due to the completion of the wide area network system and associated
communication lines. During the nine months ending September 30, 2000, the
Company incurred merger and integration charges in the amount of $447,000
comprised of professional fees, filing fees, and printing costs relating to the
transaction with Six Rivers National Bank.
INCOME TAXES
The provision for income taxes for the nine-months ended September 30,
2000 was $1,413,000 as compared to $1,226,000 for the same period in 1999. The
effective income tax rate for state and federal income taxes was 28.0% for the
nine-months ended September 30, 2000 compared to 27% 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 level of investments in municipals
securities.
12
IMPAIRED, NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND OTHER REAL ESTATE
OWNED
At September 30, 2000, the recorded investment in loans and leases for
which impairment has been recognized was approximately $163,000. Of this
balance, approximately $118,000 has a related valuation allowance of $43,000.
The remaining $45,000 did not require a valuation allowance. For the period
ended September 30, 2000, the average recorded investment in loans and leases
for which impairment has been recognized was approximately $257,000. During the
portion of the year that the loans and leases were impaired, the Company
recognized interest income of approximately $12,000 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 September 30, 2000, and December
31, 1999, is as follows:
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2000 1999
Total nonaccrual loans $ 45 $ 346
Loans 90 days past due and still accruing 168 223
------ ------
Total nonperforming loans 213 569
Other real estate owned 80
------ ------
Total nonperforming assets $ 213 $ 649
====== ======
Nonaccrual loans to total gross loans 0.02% 0.16%
==== ====
Nonperforming loans to total gross loans 0.09% 0.26%
==== ====
Total nonperforming assets to total assets 0.07% 0.21%
==== ====
13
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 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 September 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 is as follows:
NINE-MONTHS ENDED YEAR ENDED
----------------------------- ------------
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- ------------
(IN THOUSANDS) 2000 1999 1999
---- ---- ----
Balance beginning of year $ 2,260 $ 1,902 $ 1,902
Provision for loan losses 780 835 1,042
Net charge offs (231) (617) (684)
------- ------- -------
Balance end of period $ 2,809 $ 2,120 $ 2,260
======= ======= =======
Loan activity increased in the nine months 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 1.21% of total loans and leases as of September 30, 2000, compared to
1.04% on December 31, 1999.
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.
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 $11,500,000 as of September 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
$12,202,000 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 $69,078,000 and
$81,098,000 (or 21.2% and 25.9% of total assets) at September 30, 2000 and
December 31, 1999, respectively. Total liquid assets for September 30, 2000 and
December 31, 1999 include investment securities of $25,507,000 and $28,146,000,
respectively, classified as held to maturity based on the Company's intent and
ability to hold such securities to maturity.
14
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 $262,485,000 and $251,508,000 at September 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
$1,189,000), 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 $ 943 $ 3,605 $ 7,529 $ 13,430 $ 25,507
Available for sale securities 5,967 9,230 11,938 $ 27,135
Fed funds sold 1,200 1,200
Loans and leases -net of deferred
loan fees 49,508 14,468 111,734 55,881 231,591
--------- --------- --------- --------- ---------
Total earning assets $ 51,651 $ 24,040 $ 128,493 $ 81,249 $ 285,433
========= ========= ========= ========= =========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 11,788 $ 11,788
Savings deposits 107,221 107,221
Time deposits $ 43,192 75,108 $ 4,933 $ 123,233
--------- --------- --------- --------- ---------
Total interest bearing
Liabilities $ 43,192 $ 194,117 $ 4,933 $ $ 242,242
========= ========= ========= ========= =========
Interest rate sensitivity gap $ 8,459 $(170,077) $ 123,560 $ 81,249
========= ========= ========= =========
Cumulative interest rate
sensitivity gap $ 8,459 $(161,618) $ (38,058) $ 43,191
========= ========= ========= =========
At September 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 in the quarter ended September
30, 2000, the asset liability simulation model showed the Company was only
slightly liability sensitive. Due to an increasing interest rate environment,
low interest rate risk and a slightly liability sensitive posture, the Company's
net interest margin increased to 5.39% for the period ended September 30, 2000,
compared to 5.16% for the period ended September 30, 1999.
15
FINANCIAL CONDITION AS OF SEPTEMBER 30, 2000 AS COMPARED TO DECEMBER 31, 1999
Total assets at September 30, 2000, were $326,037,000, compared to
December 31, 1999 assets of $312,810,000. Increases in average deposits of 5.7%
were used to fund a 5.1% increase in average earning assets for the nine months
ended September 30, 2000.
Investment securities and federal funds sold totaled $55,031,000 at
September 30, 2000, compared to $68,315,000 at December 31, 1999. The decrease
was primarily in federal funds sold attributed to an increase in loan activity
and the additional investment in company owned life insurance. The Company is a
member of Federal Home Loan Bank of San Francisco and holds $680,000 in FHLB
stock at September 30, 2000.
During the first nine months of 2000, net loans and leases increased
to $228,782,000 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 78.9%.
Total deposits increased to $285,202,000 at September 30, 2000
compared to $275,261,000 at December 31, 1999 with $2,889,000 of the growth
primarily in noninterest bearing demand accounts while interest bearing savings
and demand accounts which increased $10,173,000 offset by a reduction of
$3,121,000 in time certificates.
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 $36,299,000 as of September 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 SEPTEMBER DECEMBER 31, MINIMUM FOR CAPITAL TO BE WELL CAPITALIZED UNDER PROMPT
--------- ------------ ------------------- -----------------------------------
2000 1999 ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
---- ---- ----------------- ----------------------------
Leverage Ratio 10.98% 10.47% 4.00% N/A
Tier 1 risk-based capital ratio 13.88% 14.13% 4.00% N/A
Total risk-based capital ratio 14.97% 15.10% 8.00% N/A
BANK
Leverage Ratio 10.64% 10.20% 4.00% 5.00%
Tier 1 risk-based capital ratio 13.44% 13.74% 4.00% 6.00%
Total risk-based capital ratio 14.61% 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%
September 30, 2000) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values.
16
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, 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
N/A
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K during the quarter ended September 30,
2000:
Filed August 3, 2000 Change in Agreement and Plan of
Reorganization and Merger with Six Rivers National Bank and
earnings press release dated July 20, 2000.
Filed September 29, 2000 Press release regarding regulatory
approvals received for merger and branch purchase agreement
(Six Rivers National Bank Weaverville Branch to Scott Valley
Bank.
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: November 14, 2000
-----------------
BY:
/s/ SHARON BENSON
- -----------------------------------------------
Sharon Benson
Senior Vice President & Chief Financial Officer
17