FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number 0-10652
NORTH VALLEY BANCORP
(Exact name of small business issuer in its charter)
California 94-2751350
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
880 E. Cypress Avenue, Redding, CA. 96002
(Address of principal executive offices)(Zip code)
Issuer's telephone number (916) 221-8400
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period 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
The number of shares outstanding of common stock as of March 1, 1996, was
1,842,558.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 1996 and
December 31, 1995
Condensed consolidated statements of income--Three months
ended March 31, 1996 and 1995
Consolidated statement of cash flows--Three months ended
March 31, 1996 and 1995
Notes to condensed consolidated financial statements--
March 31, 1996
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K
SIGNATURES
PART I. FINANCIAL INFORMATION
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS March 31 December 31
1996 1995
(unaudited) (Note)
ASSETS: (000's omitted)
Cash and due from banks $ 8,480 $ 11,868
Federal funds sold 19,800 16,600
Trading securities at market 1,979 -0-
Investment securities:
Available for sale, at fair value 11,080 12,684
Held to maturity, at amortized cost 38,490 35,217
(market value of $39,941 and $37,057
at March 31, 1996 and December 31,
1995, respectively)
Loans receivable 149,484 149,133
Less: Allowance for possible loan losses 1,345 1,325
Net loans receivable 148,139 147,808
Premises and equipment owned, net 3,785 3,805
FHLB stock 702 662
Accrued interest receivable 1,681 1,715
Other assets 4,879 4,713
TOTAL ASSETS $239,015 $235,072
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non interest bearing $ 25,072 $ 25,006
Interest bearing 189,069 186,069
Total deposits 214,141 211,075
Accrued interest and other liabilities 2,908 3,024
TOTAL LIABILITIES $217,049 $214,099
SHAREHOLDERS' EQUITY:
Common stock, no par value--
Authorized 20,000,000 shares,
issued and outstanding 1,842,558 for
March 31, 1996 and 1,841,048 for
December 31, 1995 9,780 9,766
Retained Earnings 12,110 11,086
Unrealized gain on investment
securities, available for sale 76 121
TOTAL STOCKHOLDERS' EQUITY 21,966 20,973
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $239,015 $235,072
=======================================================================
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date.
=======================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31
1996 1995
(000's omitted,
except per share data)
Interest Income:
Loans including fees $ 3,475 $ 3,056
Investment securities:
Taxable 167 270
Exempt from federal taxes 581 521
Federal funds sold 262 271
TOTAL INTEREST INCOME $ 4,485 $ 4,118
Interest Expense on Deposits 1,995 1,667
NET INTEREST INCOME 2,490 2,451
Provision for loan losses 105 75
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,385 2,376
Other Operating Income:
Service charges on deposit accounts 335 324
Other customer fees and charges 203 186
Gain on sale of loans 52 10
Gain on sale of securities -0- 20
Other 42 123
TOTAL OTHER OPERATING INCOME 632 663
Other Operating Expenses:
Salaries & employee benefits 985 929
Occupancy expense 106 104
Furniture & equipment expense 122 111
Other 408 508
TOTAL OTHER OPERATING EXPENSES 1,621 1,652
Income before provision for income taxes 1,396 1,387
Provision for Income Taxes 372 376
NET INCOME $ 1,024 $ 1,011
Net income per common share $ .55 $ .55
Weighted average shares outstanding
used to compute net income per share 1,866,789 1,854,311
====================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES Three Months Ended
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: (000's omitted)
Net income $ 1,024 $ 1,011
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 101 90
Amortization of premium on investment
securities 5 3
Provision for loan losses 105 75
Gain on sale of available for sale securities 0 ( 17)
Gain on sale of trading securities 0 ( 3)
Gain on sales of loans ( 52) ( 10)
Provision for deferred taxes 16 3
Effect of changes in:
Accrued interest receivable 34 ( 86)
Other assets ( 162) ( 194)
Accrued interest and other liabilities 381 ( 20)
Total adjustments 428 ( 159)
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,452 852
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock ( 40) ( 30)
Purchase of trading securities ( 1,980) ( 2,002)
Proceeds from sales of trading securities 0 1,007
Purchase of available for sale securities ( 1,465) ( 80)
Proceeds from sales of available for sale securities 1 47
Proceeds from maturities of available
for sale securities 3,000 5,000
Purchase of held to maturity securities ( 5,244) ( 2,224)
Proceeds from maturities or calls of held
to maturity securities 1,970 -0-
Proceeds from sales of loans 4,516 744
Net increase in loans ( 4,900) ( 5,468)
Purchases of premises and equipment ( 81) ( 170)
Net cash used in investing activities ( 4,223) ( 3,176)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in demand deposits, NOW accounts,
and savings accounts 2,394 ( 2,721)
Net increase in time certificates 672 12,477
Cash dividends paid ( 497) ( 427)
Cash received for stock options exercised 14 23
Cash paid in lieu of fractional shares 0 0
Net cash provided by financing activities 2,583 9,352
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 188) 7,028
CASH AND CASH EQUIVALENTS, beginning of year 28,468 19,997
CASH AND CASH EQUIVALENTS, end of period $28,280 $27,025
ADDITIONAL INFORMATION:
Cash Payments:
Income tax payments $ 121 $ 600
Interest payments $ 1,975 $ 1,615
===========================================================================
See notes to condensed consolidated financial statements (unaudited).
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1996
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-QSB 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 complete
financial statements. For further information, refer to the
consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the fiscal year ended
December 31, 1995. Operating results for the three months ended
March 31, 1996 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1996.
The condensed consolidated financial statements include the accounts
of the Company. Significant intercompany items and transactions have
been eliminated.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Pronouncements
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights (SFAS No. 122). SFAS No. 122 requires that the Company
recognize as a separate asset rights to service mortgage loans for
others, whether those servicing rights are originated or purchased.
Previously, only purchased servicing rights were capitalizable as an
asset. SFAS No. 122 also requires that capitalized servicing rights
be assessed for impairment based on fair value, rather than an
estimate of undiscounted future cash flows. The adoption of SFAS No.
122 did not have a material effect on the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDING MARCH 31, 1996.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto included
elsewhere herein which are incorporated by reference herein. Since
the Company is a holding company whose principal asset is the Bank,
the following discussion relates principally to the financial
condition and results of operations of the Bank.
Overview
The Company's net income was $1,024,000, a 1.29% increase from
$1,011,000 for the period ending March 31, 1995. On a per share
basis, March 31, 1996 and 1995 profits were $.55, as adjusted to give
effect to the three-for-two split effected in the form of a 50% stock
dividend.
Net Interest Income
Net interest income is the principal source of the Company's
earnings, which represents the difference between interest earned on
loans (including yield-related loan fees) and investments and
interest paid on deposits. Tax exempt interest income from
investment securities is adjusted to an amount which would have been
earned if such income were subject to federal income tax. Net
interest income on a fully taxable equivalent basis (FTE) was
$2,777,000 for the first quarter ending March 31, 1996, an increase
of 2.36% over $2,713,000 for the first quarter ending March 31, 1995.
The increase in loan balances and increasing yields on interest
earning assets offset increases in interest paid on time deposits.
Net interest income (FTE) expressed as a percentage of average
earning assets, is referred to as net interest margin. The net
interest margin for March 31, 1996, decreased to 5.13% from 5.39% for
the same period ending March 31, 1995. The higher yield on interest
bearing liabilities was offset by the repricing of earning assets.
Non-Interest Income
Non-interest income is primarily derived from fees earned by the
Company for deposit-related customer services. Total non-interest
income decreased $31,000 to $632,000 in the first quarter ending
March 31, 1996, compared to $663,000 for first quarter ending March
31, 1995.
A summary of non-interest income for the three months ended March 31,
1996 and 1995, is presented below:
Non-Interest Income
(in thousands) March 31
1996 1995
Service charges on deposit accounts $ 335 324
Other fees and charges 203 186
Gain on sale of loans 52 10
Gain on sale of securities -0- 20
Other 42 123
Total Non-interest income $ 632 663
Non-Interest Expense
Non-interest expense decreased $31,000 in the first quarter 1996
compared to first quarter 1995.
Salaries and employee benefits expenses were $985,000 as of March 31,
1996, and $929,000 for the period ending March 31, 1995. The
increase in salary and benefit expense is attributed to normal salary
increases, increased employer taxes and an increase in the net
pension cost for the supplemental retirement plans for directors and
key executives.
FDIC and California State Banking assessments decreased to $7,000 at
March 31, 1996 compared to $114,000 for the same period ended March
31, 1995. The FDIC determined that the Bank Insurance Fund (BIF) was
fully recapitalized at the end of May 1995. As a result, on August
8, 1995 the FDIC reduced the assessment rates for well capitalized
institutions to $.04 per $100 in domestic deposits from $.23
effective June 1, 1995. The Company paid $.23 per $100 in deposits
for the first five months of 1995 and $.04 per $100 for the remaining
seven months as compared to paying $.23 per $100 in deposits for the
full year in 1994. For the six month assessment period beginning
January 1, 1996, the FDIC reduced the assessment rate to $.00 per
$100 in domestic deposits.
The Company improved its efficiency ratio (derived by dividing total
non-interest expenses by net interest income exclusive of provision
for loan losses and non-interest income) to 51.9% compared to 53% in
1995. The efficiency ratio is a measurement as to how efficiently
the Company allocates its resources.
A summary of non-interest expense for the three months ended March
31, 1996 and 1995, is presented below:
Non-Interest Expense March 31
(in thousands) 1996 1995
Salaries & employee benefits $ 985 929
Occupancy expense 106 104
Furniture & equipment expense 122 111
Professional services 9 30
Data processing expenses 55 63
Printing & supplies 56 52
Postage 47 44
FDIC & State banking assessments 7 114
Correspondent bank expense 35 31
ATM expense 33 36
Other 166 138
Total Non-interest expense $ 1,621 1,652
Income Taxes
The provision for income taxes for the first quarter 1996 was
$372,000 as compared to $376,000 for the same period in 1995.
Impaired, Nonaccrual, Past Due and Restructured Loans and Other Real
Estate Owned
At March 31, 1996 the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, was approximately
$1,841,000. Of that balance approximately $1,127,000 has a related
valuation allowance of $227,000. The remaining $714,000 did not
require a valuation allowance. For the quarter ended March 31, 1996,
the average recorded investment in loans for which impairment has
been recognized was approximately $1,778,000. During the portion of
the year that the loans were impaired the Company recognized
approximately $49,000 of interest income.
At December 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, was approximately
$1,715,000. Of that balance approximately $1,078,000 has a related
valuation allowance of $254,000. The remaining $637,000 did not
require a valuation allowance. For the year ended December 31, 1995,
the average recorded investment in loans for which impairment has
been recognized was approximately $1,473,000. During the portion of
the year that the loans were impaired the Company recognized
approximately $205,000 of interest income.
Nonaccrual loans are loans on which the accrual of interest has been
discontinued. Accrual of interest is discontinued on a loan when
management believes that borrowers' financial condition is such that
the collection of interest is doubtful, or when a loan becomes
contractually past due by 90 days or more with respect to interest or
principal. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current
period interest income. Income on such loans is then recognized only
to the extent that cash is received and where the future collection
of principal is probable. Interest accruals are resumed on such
loans when in the judgement of management, the loans are estimated to
be fully collectible as to both principal and interest.
The Company's allowance for loan losses is maintained at a level
deemed by management to be adequate to provide for possible losses in
the loan portfolio based on the Bank's current loan portfolio
performance, anticipated growth in the portfolio, prevailing economic
conditions, historical credit loss experience, and other factors
deemed appropriate by management.
A summary of non-performing assets at March 31, 1996 and December 31,
1995, is as follows:
Non-Performing Assets March 31 December
(in thousands) 1996 1995
Nonaccrual loans $ 511 282
Accruing loans past due 90 days
or more 46 15
Restructured loans -0- -0-
Other real estate owned 92 87
Total $ 649 384
Allowance for Loan Losses
Management assesses the adequacy of the allowance for loan loss based
on loan loss experience, specific identification of potential losses
in the portfolio and economic conditions. Additions to the Allowance
are made by charges to operating expenses in the form of a provision
for possible loan losses. The Allowance for loan losses totaled
$1,345,000 or .90% of total loans at March 31, 1996, compared to
$1,325,000 or .89% at December 31, 1995. Net charge-offs were
$85,000 or .06% of average loans for the three months ended March 31,
1996. A provision for loan losses of $105,000 and $75,000 was
charged to income as of March 31, 1996 and 1995, respectively.
Management's continuing evaluation of the loan portfolio and
assessment of current economic conditions will dictate future funding
levels.
Liquidity and Interest Rate Sensitivity
Liquidity represents the Company's ability to satisfy cash flow
requirements created by fluctuations in deposits and to meet
borrowers' credit needs. Effective liquidity management insures that
sufficient funds are available to comply with demands from
depositors, borrowers and other commitments on a timely basis.
Collection of principal and interest on loans, the liquidations of
investment securities, deposit inflow 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 in the amount of $9,000,000 as of March 31, 1996, 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 $5,020,000 secured by first deeds of trust on
eligible 1-4 unit residential loans. The Company had not borrowed
from FHLB as of March 31, 1996.
The Company manages both assets and liabilities to preserve liquidity
and earnings stability. Total liquid assets (cash and due from
banks, federal funds sold, and investment securities) totaled
$79,829,000 and $76,369,000 (or 33.40% and 32.49% of total assets) at
March 31, 1996 and December 31, 1995, respectively. Total liquid
assets include investment securities classified as held to maturity
based on the Company's intent to hold such securities to maturity of
$38,490,000 and $35,217,000 for March 31, 1996 and December 31, 1995,
respectively.
The Company's ability to generate retail core deposits consisting of
demand deposits, NOW, regular savings, money market deposit accounts
and time deposits of less than $100,000 provides a continued source
of liquidity. Core deposits totaled $197,318,000 and $193,731,000 at
March 31, 1996 and December 31, 1995, respectively.
Management considers the Company's liquidity sufficient to satisfy
its funding demand for normal banking transactions for the next
twelve months.
Interest rate sensitivity management concentrates on reducing the
impact on net interest income due to shifts in interest rates.
The Company measures its interest rate sensitivity with an asset
liability simulation model. The model analyzes the mix and repricing
characteristics of interest rate sensitive assets and liabilities
using multipliers (how interest rates change when Fed Funds rate
changes by 1%) and lags (time it takes for rates to change after Fed
Funds rate changes). The model simulates the effects on net interest
income when the Fed Funds rate experiences a 1% increase or decrease
compared to current levels. In management's view, the Company has
low interest rate risk in the short term as measured by the model,
specifically the next twelve months.
The following table shows the interest sensitive assets and
liabilities gap, which is the measure of interest sensitive assets
over interest bearing liabilities, for each individual repricing
period on a cumulative basis:
March 31, 1996 Within 3 3 months 1-5 5+
(in thousands) months to 1 Year Years Years TOTAL
EARNING ASSETS:
Held to maturity
securities $ 2,000 $ 630 $ 9,958 $25,902 $ 38,490
Available for sale
securities 494 1,644 1,829 7,113 11,080
Trading account
securities -0- -0- 1,979 -0- 1,979
Fed Funds Sold 19,800 -0- -0- -0- 19,800
Loans 51,566 20,421 42,682 34,815 149,484
Total earning assets $73,860 $22,695 $56,448 $67,830 $220,833
INTEREST BEARING LIABILITIES:
Interest bearing demand
deposits $ -0- 38,664 $ -0- $ -0- $ 38,664
Savings deposits -0- 42,158 -0- -0- 42,158
Time deposits 43,831 59,393 5,023 -0- 108,247
Total interest bearing
liabilities $43,831 $140,215 $ 5,023 $ -0- $189,069
INTEREST RATE SENSITIVITY
GAP $30,029 $(117,520)$ 51,425 $67,830
CUMULATIVE INTEREST RATE
SENSITIVITY GAP $30,029 $( 87,491)$(36,066)$31,764
At March 31, 1996, the gap table indicates the Company as liability
sensitive in the twelve month period. Interest rate sensitivity
measured by the gap method does not consider the impact of different
multipliers (how interest rates change when Fed Funds rate changes by
1%) and lags (time it takes for rates to change after Fed Funds rate
changes). 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.
Even though the Bank had a negative gap in the twelve month period as
of March 31, 1996, the asset liability simulation model showed the
Bank was slightly asset sensitive in 1996.
Financial Condition
Total assets at March 31, 1996, were $239,015,000, representing an
increase of 1.68% over December 31, 1995 assets of $235,072,000.
During first quarter 1996, net loans increased to $149,484,000, from
$149,133,000 at December 31, 1995. Loans are the major component of
earning assets. The Bank's average loan to deposit ratio was 70.39%
and 66.86% at March 31, 1996 and December 31, 1995, respectively.
Investment securities and federal funds sold totaled $71,349,000 at
March 31, 1996, compared to $64,501,000 at December 31, 1995.
Funding for increased loan and investment activity came from
increases in deposits. Total deposits increased $3,066,000 as of
March 31, 1996, to $214,141,000, as compared to $211,075,000 at
December 31, 1995. The increase was primarily in interest-bearing
instruments.
The Company maintains capital levels to support conservative internal
growth and to encourage confidence from depositors and investors.
Shareholders' equity increased to $21,966,000 as of March 31, 1996,
as compared to $20,973,000 for year end 1995.
Banking regulators require bank holding companies and banks to
maintain capital equal to at least 8% of their assets, weighted by
risk. At least 4% of the total 8% ratio must consist of Tier 1
capital (primarily shareholders' equity).
In addition, banking regulators also require bank holding companies
and banks to maintain a certain Tier 1 leverage ratio. The leverage
ratio is measured by the ratio of Tier 1 capital to adjusted average
assets.
The table below provides a comparison of the Company's risk based
capital ratio and leverage ratio to the minimum regulatory guidelines
for the periods indicated:
MINIMUM
REGULATORY
March 31 December 31 REQUIREMENTS
RISK-BASED CAPITAL RATIOS: 1996 1995
Tier 1 13.19% 12.76% 4.00%
Total 14.00% 13.57% 8.00%
LEVERAGE RATIO 9.23% 8.87% 3.00%-5.00%
Impact of Inflation
Impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because its
assets and liabilities consist largely of monetary items. The
relatively low proportion of the Company's fixed assets (less than
1.6% at March 31, 1996) reduces both the potential of inflated
earnings resulting from understated depreciation and the potential
understatement of absolute asset values.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
No reports on form 8-K were filed during the quarter ended March 31,
1996.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
North Valley Bancorp
(Registrant)
Date May 13, 1996 /s/ J. F. Cowee
J. F. Cowee
Chief Financial Officer
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