<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1995
---------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
------------ ------------
Commission File No. 2-78293-LA
SOUTH VALLEY BANCORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2818095
- ---------------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
500 Tennant Station, Morgan Hill, CA 95037
- -------------------------------------------- --------------
(Address of principal executive offices) (Zip code)
(408) 778-1510
-------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 1,194,697 shares outstanding at May 12, 1995
Page 1 of 19
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994*
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,866,000 $ 6,015,000
Federal funds sold 13,900,000 13,700,000
------------ -------------
Total cash and cash equivalents 22,766,000 19,715,000
------------ -------------
Securities available-for-sale
($12,242,000 cost at March 31, 1995;
$10,544,000 cost at December 31, 1994) 12,207,000 10,460,000
Securities held-to-maturity
($16,750,000 market at March 31,1995;
$15,876,000 market at December 31, 1994)
17,160,000 16,765,000
Loans, net 86,111,000 88,241,000
Premises and equipment, net 5,487,000 4,519,000
Other assets 4,782,000 4,170,000
------------ ------------
TOTAL ASSETS $148,513,000 $143,870,000
============ ============
LIABILITIES
Deposits:
Noninterest bearing $ 27,698,000 $ 30,869,000
Interest bearing 102,260,000 93,772,000
------------ ------------
Total deposits 129,958,000 124,641,000
Other liabilities 1,991,000 2,977,000
------------ ------------
TOTAL LIABILITIES 131,949,000 127,618,000
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY
Preferred stock - no par value
authorized 2,000,000 shares, no shares issued --- ---
Common stock - no par value
authorized 4,000,000 shares
issued & outstanding 1,194,697 shares
at March 31, 1995 and December 31, 1994 11,331,000 11,331,000
Retained earnings 5,254,000 4,971,000
Unrealized gain on securities available-for-sale (21,000) (50,000)
------------ ------------
SHAREHOLDERS' EQUITY $ 16,564,000 $ 16,252,000
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $148,513,000 $143,870,000
============ ============
</TABLE>
* Derived from December 31, 1994 audited balance sheets included in the
Company's 1994 Annual Report on Form 10-K.
See Notes to Consolidated Condensed Financial Statements
-2-
<PAGE> 3
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans (including fees) $2,422,000 $1,973,000
Investment securities 423,000 304,000
Other 166,000 74,000
---------- ----------
Total interest income $3,011,000 $2,351,000
---------- ----------
INTEREST EXPENSE
Deposits 892,000 585,000
Other $ 25,000 $ 23,000
---------- ----------
Total interest expense $ 917,000 $ 608,000
---------- ----------
NET INTEREST INCOME $2,094,000 $1,743,000
Provision for credit losses 60,000 90,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 2,034,000 1,653,000
Other income 193,000 174,000
Other expense 1,631,000 1,234,000
---------- ----------
INCOME BEFORE INCOME TAXES 596,000 593,000
Provision for income taxes 218,000 216,000
---------- ----------
NET INCOME $ 378,000 $ 377,000
========== ==========
Per common and equivalent share
NET INCOME $ 0.32 $ 0.32
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
-3-
<PAGE> 4
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
----------- -----------
<S> <C> <C>
Increase (decrease) in cash and equivalents:
OPERATIONS
Net income $ 378,000 $ 377,000
Reconciliation to net cash provided by operations
Provision for credit losses 60,000 90,000
Depreciation and amortization 60,000 44,000
Origination of loans held for sale (856,000) (146,000)
Proceeds from sale of loans held for sale --- 145,000
Gain on sale of OREO --- (19,000)
(Decrease)increase in other assets (160,000) (20,000)
(Decrease)increase in other liabilities (216,000) 74,000
Increase(decrease) in deferred loan fees, net 18,000 (30,000)
----------- -----------
Net cash provided by (used for) operations (716,000) 515,000
----------- -----------
INVESTMENT ACTIVITIES
Proceeds from sale of OREO --- 558,000
Proceeds from maturities of securities 1,402,000 988,000
Purchase of securities (3,494,000) (963,000)
Net increase(decrease) in loans 2,041,000 (1,068,000)
Capital expenditures (635,000) (522,000)
----------- -----------
Net cash used for investment activities (686,000) (1,007,000)
----------- -----------
FINANCING ACTIVITIES
Net increase in deposit accounts 5,317,000 4,940,000
Net increase(decrease) in other borrowings (769,000) 42,000
Payment of cash dividends (95,000) ---
----------- -----------
Net cash provided by financing activities 4,453,000 4,982,000
----------- -----------
Net increase in cash and equivalents 3,051,000 4,490,000
Cash and cash equivalents, beginning of period 19,715,000 16,243,000
----------- -----------
Cash and cash equivalents, end of period $22,766,000 $20,733,000
=========== ===========
OTHER CASH FLOW INFORMATION
Interest paid $ 851,000 $ 500,000
Income taxes paid 25,000 160,000
</TABLE>
See Notes to Consolidated Condensed Financial Statements
-4-
<PAGE> 5
SOUTH VALLEY BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1995 (Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated condensed financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position at March 31, 1995 and December 31, 1994, and the results of operations
and cash flows for the three month periods ended March 31, 1995 and 1994.
Certain information and footnote disclosures normally presented in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These interim consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1994 Annual Report to Shareholders. The
results of operations for the three month period ended March 31, 1995 may not
necessarily be indicative of the operating results for the full year.
2. BRANCH ACQUISITION
On July 27, 1994 the Bank entered into an agreement to purchase certain
assets and assume certain liabilities of the San Juan Bautista branch office of
Bank of America, NT&SA as of the close of business on February 16, 1995. As a
result of the transaction the Bank assumed deposit liabilities of $8,514,000,
received cash of $7,560,000, and acquired tangible assets valued at
approximately $688,000. This transaction resulted in approximately $266,000 of
intangible assets, representing the excess of the liabilities assumed over the
fair value of the tangible assets acquired.
3. INVESTMENT SECURITIES
The Company is required under Financial Accounting Standards Board (FASB)
Statement No. 115, "Accounting for Investments in Certain Debt and Equity
Securities", to classify debt and equity securities into one of three
categories: held-to-maturity, trading or available-for-sale. Investment
securities classified as held-to-maturity are measured at amortized cost based
on the Company's positive intent and ability to hold such securities to
maturity. Trading securities are bought and held principally for the purpose of
selling them in the near term and are carried at market value with a
corresponding recognition of unrecognized holding gain or loss in the results
of operations. The remaining investment securities are classified as
available-for-sale and are measured at market value with a corresponding
recognition of the unrealized holding gain or loss (net of tax effect) as a
separate component of shareholders' equity until realized. Any gains and losses
on sales of investments are computed on a specific identification basis.
-5-
<PAGE> 6
The carrying value and approximate market value of securities at March 31, 1995
and December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Book Unrealized Unrealized Market
In thousands Value Gains Losses Value
- ------------ ----- ---------- ---------- ------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE
FOR SALE:
March 31, 1995
U.S. Treasury and
agency securities $ 9,865 --- $ 33 $ 9,832
State and municipal
obligations 1,362 1 3 1,360
Other 1,015 --- --- 1,015
------- ---- ---- -------
Total $12,242 $ 1 $ 36 $12,207
======= ==== ==== =======
SECURITIES HELD
TO MATURITY:
March 31, 1995
U.S. Treasury and
agency securities $11,420 $ 48 $435 $11,033
State and municipal
obligations 5,740 45 68 5,717
------- ---- ---- -------
Total $17,160 $ 93 $503 $16,750
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
Book Unrealized Unrealized Market
In thousands Value Gains Losses Value
- ------------ ----- ---------- ---------- ------
<S> <C> <C> <C> <C>
INVESTMENTS AVAILABLE
FOR SALE:
December 31, 1994
U.S. Treasury and
agency securities $ 7,962 $ 14 $ 87 $ 7,889
State and municipal
obligations 1,567 1 9 1,559
Other 1,015 --- 3 1,012
------- ---- ---- -------
Total $10,544 $ 15 $ 99 $10,460
======= ==== ==== =======
INVESTMENTS HELD
TO MATURITY:
December 31, 1994
U.S. Treasury and
agency securities $11,583 $--- $770 $10,813
State and municipal
obligations 5,182 19 138 5,063
------- ---- ---- -------
Total $16,765 $ 19 $908 $15,876
======= ==== ==== =======
</TABLE>
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
Three months ended
March 31
In thousands 1995 1994
- ------------ ---- ----
<S> <C> <C>
Beginning balance $1,331 $1,246
Provision charged to expense 60 90
Loans charged off (122) (25)
Recoveries 78 6
------ ------
Ending balance $1,347 $1,317
====== ======
</TABLE>
The allowance for credit losses reflects management's judgment as to the level
which is considered adequate to absorb potential losses inherent in the loan
portfolio. This allowance is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based upon information currently available to analyze
credit loss potential, including (1) the loan portfolio balance in the period;
(2) a comprehensive grading and review of new and existing loans outstanding;
(3) actual previous charge-offs; and, (4) changes in economic conditions.
Beginning in 1995, the Company adopted FASB Statements No. 114, "Accounting by
Creditors for Impairment of a Loan" and No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosure." Under the new
standard, the 1995 allowance for credit losses related to loans that are
identified for evaluation in accordance with Statements 114 and 118 is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans. Prior to
1995, the allowance for credit losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans. The implementation of FASB Statements 114 and 118 did not have
a material effect on the Company's financial position or operating results for
the first quarter of 1995.
-6-
<PAGE> 7
Management believes that the allowance for credit losses at March 31, 1995 is
adequate, based on information currently available. However, no prediction of
the ultimate level of loans charged-off in future years can be made with any
certainty.
Nonperforming assets are comprised of loans delinquent 90 days or more with
respect to interest or principal, loans for which the accrual of interest has
been discontinued, and other real estate which has been acquired through
foreclosure and is awaiting disposition.
Unless well secured and in the process of collection, loans are placed on
nonaccrual status when a loan becomes 90 days past due as to interest or
principal, when the payment of interest or principal in accordance with the
contractual terms of the loan becomes uncertain or when a portion of the
principal balance has been charged off. When a loan is placed on nonaccrual
status, the accrued and unpaid interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be returned to accrual
status when all delinquent interest and principal become current in accordance
with the terms of the loan agreement and remaining principal is considered
collectible or when the loan is both well secured and in process of collection.
Real estate and other assets acquired in satisfaction of indebtedness are
recorded at the lower of estimated fair market value net of anticipated selling
costs or the recorded loan amount, and any difference between this and the loan
amount is treated as a loan loss. Costs of maintaining other real estate owned
and gains or losses on the subsequent sale are reflected in current earnings.
Nonperforming loans and other real estate owned (foreclosed properties) are
summarized below:
<TABLE>
<CAPTION>
March 31 December 31
In thousands 1995 1994
- ------------ -------- -----------
<S> <C> <C>
Past due 90 days or more
and still accruing:
Real estate $ 141 $ 543
Commercial 196 171
Installment and other 13 13
------ ------
$ 350 $ 727
------ ------
Nonaccrual:
Real estate $ 598 $1,073
Commercial 279 132
Installment and other --- 55
------ ------
$ 877 $1,260
------ ------
Total nonperforming loans $1,227 $1,987
====== ======
Other real estate owned $2,469 $1,627
====== ======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $45,327,000 and standby letters of credit of
$374,000 at March 31, 1995. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Bank during 1995.
Approximately $13,083,000 of loan commitments outstanding at March 31, 1995
relate to real estate construction loans and are expected to fund within the
next twelve months. The remainder relate primarily to revolving lines of
credit or other commercial loans, and many of these commitments are expected to
expire without being drawn upon. Therefore, the total commitments do not
necessarily represent future cash requirements. The Bank evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt or equity
securities or business assets.
-7-
<PAGE> 8
Stand-by letters of credit are commitments written by the Bank to guarantee the
performance of a customer to a third party. These guarantees are issued
primarily relating to purchases of inventory by the Bank's commercial customers
and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to customers and the Bank accordingly
uses evaluation and collateral requirements similar to those for loan
commitments. Virtually all such commitments are collateralized.
6. NET INCOME PER SHARE COMPUTATION
Net income per common and equivalent share is calculated using weighted average
shares and the dilutive effect of stock options outstanding during the period
totaling 1,195,459 and 1,194,697 for the three month periods ended March 31,
1995 and 1994.
7. CASH DIVIDEND
On April 20, 1995 the Board of Directors declared a cash dividend of $.08 per
common share payable May 5, 1995 to shareholders of record as of April 28,
1995.
-8-
<PAGE> 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summary of Financial Results
At March 31, 1995, total assets of South Valley Bancorporation were
$148,513,000, an increase of $4,643,000 or 3.2% over December 31, 1994 total
assets of $143,870,000. Average total assets for the quarter were $141,681,000
compared to $127,925,000 for the same period one year earlier, representing an
increase of $13,756,000 or 10.7%.
In February 1995, the Bank entered into an agreement to purchase certain assets
and assume certain liabilities of the San Juan Bautista office of Bank of
America, NT & SA. This transaction resulted in an increase in total assets of
the Bank of approximately $8,514,000. This increase was partially offset by
deposit outflows at the Bank's existing offices resulting in a net increase in
total assets of $4,643,000. The increase in total assets at March 31, 1995
compared to December 31, 1994 was primarily invested in the Bank's securities
portfolio as well as in fixed assets acquired as part of the transaction.
Net loans at March 31, 1995 were $86,111,000 compared to $88,241,000 at
December 31, 1994, a decrease of $2,130,000 or (2.4%). The decrease in loan
balances primarily represents decreases in construction and commercial loans.
Real estate construction loans of $13,344,000 at March 31, 1995 represented a
decrease of $3,469,000 or (20.6%) from $16,813,000 at December 31, 1994.
Commercial loans decreased $1,104,000 or (3.4%) to $32,515,000 at March 31,
1995 from $33,619,000 at December 31, 1994. Partially offsetting these
decreases were a slight increase in installment loans to $11,661,000 at March
31, 1995 from $11,579,000 at December 31, 1994, an increase of $82,000 or .7%
and an increase of $2,395,000 or 8.5% in other real estate loans to $30,542,000
at March 31, 1995 compared to $28,057,000 at December 31, 1994.
Investment securities were $29,367,000 at March 31, 1995 compared to
$27,225,000 at December 31, 1994 representing an increase of $2,142,000. Of the
$26,568,000 outstanding at March 31, 1995 $12,207,000 was designated as
available-for-sale and carried at market value. The amortized cost of
securities designated as available-for-sale at March 31, 1995 was $12,242,000.
Securities designated as held-to-maturity at March 31, 1995 were carried at an
amortized cost of $17,160,000. The estimated market value of the
held-to-maturity portfolio at quarter end was $16,750,000. The held-to-maturity
portfolio at March 31, 1995 consists primarily of securities issued by U.S.
government-sponsored agencies (FNMA, FHLMC and FHLB) and investment grade
municipal bonds with maturities within five years. Investment securities
classified as held-to-maturity are measured at amortized cost based on the
Company's intent and ability to hold such securities to maturity.
During the quarter, the Bank made $3,494,000 of securities purchases to replace
$1,352,000 of maturities and to more fully employ excess liquidity.
Federal funds sold balances of $13,900,000 at March 31, 1995 represent a slight
increase of $200,000 over $13,700,000 at December 31, 1994. Total deposits of
$129,958,000 at March 31, 1995 represent an increase of $5,317,000 or 4.3% from
balances of $124,641,000 at December 31, 1994. The increase is comprised of
increases in interest-bearing demand, savings and time deposits.
-9-
<PAGE> 10
Interest-bearing demand deposits were $35,429,000 at March 31, 1995 compared to
$31,823,000 at December 31, 1994, an increase of $3,606,000 or 11.3%. Savings
balances of $33,533,000 represent an increase of $1,689,000 or 5.3% over
$31,844,000 at December 31, 1994. Additionally, time deposits increased
$3,193,000 or 10.6% to $33,298,000 at March 31, 1995 from $30,105,000 at
December 31, 1994. Partially offsetting these increases was a decrease in
noninterest bearing demand balances of $3,171,000 or 10.3% to $27,698,000 at
March 31, 1995 from $30,869,000 at December 31, 1994.
Core deposits (time deposits less than $100,000, demand and savings) gathered
in the local communities served by the Bank continue to be the Bank's primary
source of funds for loans and investments. Core deposits of $117,475,000
represented 90.4% of total deposits at March 31, 1995 compared to $113,478,000
and 91.0% of total deposits at December 31, 1994. The Company has never
purchased funds through deposit brokers.
FIRST QUARTER 1995 AND 1994
Net income for the first quarter of 1995 was $378,000 or $.32 per share
compared to $377,000 or $.32 per share for the comparable period in 1994. The
following discussion highlights changes in certain items in the consolidated
condensed statements of income.
Net interest income
Net interest income, the difference between interest earned on loans and
investments and interest paid on deposits, is the principal component of the
Bank's earnings. The components of net interest income are as follows:
-10-
<PAGE> 11
<TABLE>
<CAPTION>
(Unaudited)
Three months ended March 31
In thousands (except percentages) 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Avg Avg Avg Avg
Balance Interest Yield(1) Balance Interest Yield(1)
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning Assets:
Loans(2) $ 87,016 $ 2,422 11.1% $ 84,822 $ 1,973 9.4%
Investment Securities:
Taxable 20,513 340 6.6% 14,750 210 5.8%
Nontaxable(3) 6,738 126 7.5% 7,485 142 7.7%
Federal funds sold 11,477 166 5.8% 8,823 74 3.4%
-------- ------- -------- -------
Total interest earning assets 125,744 $ 3,054 9.6% 115,880 $ 2,399 8.4%
------- -------
Cash and due from banks 8,396 7,954
Other assets net of deferred
loan fees and allowance
for loan losses(4) 7,541 4,091
-------- --------
$141,681 $127,925
======== ========
Liabilities & Shareholders'
Equity:
Interest bearing liabilities:
Demand deposits $ 32,635 $ 216 2.6% $ 29,534 $ 137 1.9%
Time deposits 66,949 676 4.0% 58,916 448 3.1%
Other borrowings 1,518 25 6.6% 1,821 23 5.1%
-------- ------- -------- -------
Total interest bearing
liabilities 101,102 $ 917 3.6% 90,271 $ 608 2.7%
------- -------
Demand deposits 23,632 21,992
Other liabilities 541 801
-------- --------
Total liabilities 125,275 113,064
Shareholders' Equity 16,406 14,861
-------- --------
$141,681 $127,925
======== ========
Net interest income & margin $ 2,137 6.7% $ 1,791 6.3%
======= ======= ====
</TABLE>
1 Annualized
2 Loan interest income includes fee income of $242,000 and $236,000 for the
quarters ended March 31, 1995 and 1994, respectively.
3 Tax exempt interest income has been adjusted to fully taxable equivalent
basis using the Federal statutory rate of 34% ($43,000 and $48,000 for each of
the quarters ended March 31, 1995 and 1994, respectively).
4 Includes the average allowance for loan losses of $1,372,000 and $1,266,000,
and average deferred loan fees of $475,000 and $560,000 for the quarters ended
March 31, 1995 and 1994, respectively.
Net tax equivalent interest income for the quarter ended March 31, 1995 was
$2,137,000 representing an improvement of $346,000 or 19.3% over $1,791,000 for
the comparable period in 1994. As a percentage of average earning assets, net
taxable equivalent interest margin for the first quarter of 1995 improved to
6.7% from 6.3% in the same period one year earlier. The increase in net
taxable equivalent interest margin is primarily due to an increase in taxable
equivalent interest income.
Taxable equivalent interest income recognized in the quarter ended March 31,
1995 was $3,026,000 representing an increase of $627,000 or 26.1% over
$2,399,000 for the first quarter of 1994. The
-11-
<PAGE> 12
increase in taxable equivalent interest income was primarily due to increases
in the volume of average earning assets and rates earned on such assets.
Earning assets averaged $125,744,000 in the quarter ended March 31, 1995
compared to $115,880,000 in the same period in 1994, representing an increase
of $9,864,000 or 8.5%. The increase in average earning assets included
increases in average loan, investment and Fed funds sold balances of
$2,194,000, $5,016,000 and $2,654,000 or 2.6%, 22.6% and 30.1%, respectively.
In addition, the average yield on interest earning assets increased to 9.6% in
the first quarter of 1995 compared to 8.4% for the first quarter of 1994. Loan
fees recognized during the first quarter of 1995 of $242,000 compared to
$236,000 one year earlier as a result of the increase in average loans
outstanding.
Partially offsetting the increase in taxable equivalent interest income was an
increase in the cost of liabilities funding the growth in average earning
assets. Interest expense for the three months ended March 31, 1995 was
$917,000 and represented an increase of $309,000 or 50.8% over $608,000 for the
first quarter of 1994. During the three months ended March 31, 1995, the
average rate paid by the Bank on interest-bearing liabilities was 3.6%
compared to 2.7% for the same period in 1994. In addition to the increase in
rates, interest expense was impacted by an increase in the volume of average
interest bearing liabilities. Average interest bearing liabilities were
$101,102,000 in the quarter ended March 31, 1995 compared to $90,271,000 for
the same period in 1994, an increase of $10,831,000 or 12.0%. The increase in
average noninterest bearing demand deposits also contributed to the improvement
in net taxable equivalent interest during the quarter. Average noninterest
bearing demand deposits were $23,632,000 for the quarter ended March 31, 1995
compared to $21,992,000 for the same quarter in 1994.
Provision for credit losses
The provision for credit losses is based upon management's evaluation of the
adequacy of the existing allowance for loan losses in relation to total loans
and the inherent risk in the loan portfolio. Management's evaluation takes
into consideration such factors as changes in the composition of the portfolio,
overall portfolio quality, loan concentrations, specific problem loans, and
current and anticipated economic conditions that may affect borrowers' ability
to repay.
The Bank's loans are virtually all made within its defined market area of South
Santa Clara and San Benito counties. Real estate construction loans
represented 15% of total loans at March 31, 1995, the majority of which are for
the construction of single family residential properties. In addition, 35% of
the Bank's loans were real estate term loans. These loans were primarily loans
made to Bank depositors secured by first deeds of trust on commercial and
residential properties and with original loan to value ratios not exceeding
75%. Commercial loans comprise 37% of total loans at March 31, 1995. The
Bank's loans are not concentrated in any particular industry. The Bank's
service area is somewhat dependent on the economy of the greater Santa Clara
Valley, generally known as Silicon Valley, which has a concentration of
technology companies, and accordingly, the ability of the Bank's borrowers to
repay loans may be affected by the performance of this sector of the economy.
At March 31, 1995, virtually all loans were collateralized, and the majority
have adjustable rates. Generally, real estate loans were secured by real
property, and commercial and other loans were secured by bank deposits and
business or personal assets. Repayment is generally expected from the sale of
the related property for real estate construction loans, and from the cash flow
of the borrower for commercial and other loans.
-12-
<PAGE> 13
In the first quarter of 1995, the Bank increased its provision for loan losses
through a charge to earnings of $60,000. The provision compares to $90,000 for
the same period in 1994. The decrease in loan loss provision for the quarter
is primarily attributed to the decrease in loan balances at March 31, 1995
compared to the same date in 1994. Loan balances of $122,000, which were
previously identified and were fully reserved for, were charged-off in the
first quarter of 1995 compared to $25,000 charged- off in the first quarter of
1994. Recoveries of loan balances previously charged-off were $78,000 for the
quarter ended March 31, 1995 compared to $6,000 for the same period in 1994.
See Note 4 of the consolidated condensed financial statements at page 6 of this
document for further discussion of nonperforming loans and the allowance for
credit losses.
At March 31, 1995 the allowance for credit losses was $1,347,000 or 1.53% of
total loans, compared to $1,331,000 or 1.47% at December 31, 1994.
Management believes that the allowance for loan losses is maintained at an
adequate level for known and anticipated future risks inherent in the loan
portfolio. However, the Company's loan portfolio, particularly the real estate
related segments, may be adversely affected if California's economic conditions
and Santa Clara County real estate market continue to weaken. As a result, the
level of nonperforming loans, the provision for loan losses and the level of
the allowance for loan losses may increase.
Other income and expense
Other income consists primarily of service charges on deposit accounts and fees
for miscellaneous services. Total other income was $193,000 for the first
quarter of 1995 as compared to $174,000 for the first quarter of 1994. Growth
in other income primarily resulted from increases in deposit-related service
charges reflecting an increase in the number of deposit accounts served by the
Bank.
Noninterest expense increased $397,000 or 32.2% to $1,631,000 in the quarter
ended March 31, 1995 from $1,234,000 in the same period one year earlier. As a
percentage of average earning assets, other expenses, on an annualized basis,
increased to 5.3% in the first quarter of 1995 from 4.3% in the first quarter
of 1994. Increases in noninterest expense are attributed primarily to increases
in salary and benefit expense and data processing expense.
Salary and benefits expense was $780,000 in the quarter ended March 31, 1995
compared to $677,000 in the same period one year earlier. The increase in
salary and benefits expense is primarily due to increased headcount as a result
of the addition of the San Juan Bautista office and expanded business hours in
previously existing Bank offices.
Data processing expense of $113,000 in the first quarter of 1995 is a net
increase over 1994 as a result of the decision by the Bank to outsource the
function during the fourth quarter of 1994.
The Bank also experienced increases in occupancy, FF&E, postage and ATM network
charges during the period ended March 31, 1995 when compared to the same period
in 1994.
-13-
<PAGE> 14
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity
Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and withdrawal requirements of its customers. Both assets and
liabilities contribute to the Bank's liquidity position. Assets such as cash
and due from banks, Federal funds sold and investment securities, as well as
loan repayments, contribute to liquidity. Of greater significance are the
diverse sources comprising the Bank's funding base. These include demand
deposits, interest bearing transaction accounts and time deposits.
Liquidity is measured by various ratios, the most common being the ratio of
cash, deposits with other banks, Federal funds sold and unpledged securities to
total deposits. At March 31, 1995 this ratio was 37.8% (35.3% at December 31,
1994). Another key liquidity ratio is gross loans to total deposits. This
ratio was 67.7% at March 31, 1995 and 70.8% at December 31, 1994.
Interest rate sensitivity
Interest rate sensitivity is a measure of the exposure to fluctuations in the
Bank's future earnings caused by fluctuations in interest rates. If assets and
liabilities do not reprice simultaneously and in equal amounts, the potential
for such exposure exists. It is management's objective to maintain stability
in net interest margin through the maintenance of an appropriate mix of
interest rate sensitive assets and liabilities. Management regularly reviews
general economic and financial conditions, both external and internal, and
determines whether the positions taken with respect to liquidity and interest
rate sensitivity continue to be appropriate. The Bank also utilizes a monthly
"GAP" report which identifies rate sensitivity over the short- and long-term.
The following table sets forth the distribution of repricing opportunities,
based on contractual terms, of the Bank's earning assets and interest-bearing
liabilities at March 31, 1995, the interest rate sensitivity gap (i.e. interest
rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.
interest rate sensitive assets divided by interest rate sensitive liabilities)
and the cumulative interest rate sensitivity gap ratio.
-14-
<PAGE> 15
<TABLE>
<CAPTION>
In thousands
- ---------------------------------------------------------------------------------------------------------------------
Over three
Assets and Liabilities Next day months and Over one
which Mature or and within within and within Over
Reprice Immediately three months one year five years five years Total
- ---------------------- ----------- ------------ ---------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $13,900 $ -- $ -- $ -- $ -- $ 13,900
Investment securities 3,000 3,573 4,003 10,690 8,136 29,402
Loans, excluding
nonaccrual loans
and overdrafts 56,684 974 14,891 10,093 4,452 87,094
------- ------- ------- ------- ------- --------
Total $73,584 $ 4,547 $18,894 $20,783 $12,588 $130,396
======= ======= ======= ======= ======= ========
Interest bearing
liabilities:
Interest bearing demand $35,429 $ 35,429
Savings 33,533 33,533
Time certificates 635 $ 5,826 $22,215 $ 4,622 33,298
Other borrowings 614 59 390 $ 70 1,133
------- ------- ------- ------- ------- --------
Total $69,597 $ 6,440 $22,274 $ 5,012 $ 70 $103,393
======= ======= ======= ======= ======= ========
Interest rate
sensitivity gap $ 3,987 $(1,893) $(3,380) $15,771 $12,518
Cumulative interest
rate sensitivity gap $ 3,987 $ 2,094 $(1,286) $14,485 $27,003
Ratios:
Interest rate
sensitivity gap 1.06x 0.71x 0.85x 4.15x
Cumulative interest
rate sensitivity gap 1.06x 1.03x 0.99x 1.14x 1.26x
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Management has historically maintained a cumulative negative interest rate
sensitivity gap within one year. This mismatch in gap is largely a result of
the Bank's practice of pricing its demand and savings accounts on a floating
rate index based on the prime rate. Volatile interest rate fluctuations are
detrimental to the net interest margin in the instance of rapidly rising
interest rates. In a rising interest rate environment, certificates of deposit
are priced to encourage a lengthening in average maturity and reduce the
mismatch in gap.
CAPITAL RESOURCES
The Company has been able to sustain its growth in capital through profit
retention and the exercise of stock options by Directors and officers of the
Company. In the first quarter of 1995, the Company declared and paid its third
consecutive cash dividend to shareholders. In the first three months of 1995
shareholders' equity grew by $312,000 through retention of earnings offset by
distribution of $95,000 to shareholders in payment of the dividend.
The Company and Bank are subject to capital adequacy guidelines issued by the
Federal Reserve Board of Governors (FRB) and the Office of the Comptroller of
the Currency (OCC). The FRB and the OCC have adopted risk based capital
guidelines for bank holding companies and national banks. For 1995, the
Company and the Bank are required to maintain capital equal to a least 8% of
assets and commitments to extend credit, weighted by risk ("risk-adjusted"
assets). Further, capital equal to at least 4% of risk-adjusted assets must
consist primarily of common equity (including retained earnings) and the
remainder may consist of subordinated debt, cumulative preferred stock or a
limited amount of loan loss reserves. Certain assets and commitments to extend
credit present less risk than others and will be assigned to lower risk
weighted categories requiring less capital
-15-
<PAGE> 16
allocation than the 8% total ratio. For example, cash and government
securities are assigned to a 0% risk weighted category; most home mortgage
loans are assigned to a 50% risk weighted category requiring a 4% capital
allocation; and commercial loans are assigned to a 100% risk weighted category
requiring an 8% capital allocation.
In addition, the FRB and the OCC require the Company and the Bank to maintain a
3% minimum leverage ratio as a supplement to the risk weighted capital
guidelines. The minimum leverage ratio is intended to limit the ability of
banking organizations to leverage their equity capital base by increasing
assets and liabilities without increasing capital proportionately. The 3%
ratio constitutes a minimum ratio for well-run banking organizations under the
FRB's standards and organizations experiencing or anticipating significant
growth or failing to meet such standards will be required to maintain a minimum
leverage ratio ranging from 100 to 200 basis points in excess of the 3% ratio.
At March 31, 1995, the Bank and the Company are in compliance with the
risk-based capital and leverage ratios noted above. The following table sets
forth the risk-based capital and leverage ratios of the Company.
<TABLE>
<CAPTION>
Dollars March 31, 1995 December 31,1994
in thousands Amount Ratio Amount Ratio
- ------------ ------ ----- ------ -----
<S> <C> <C> <C> <C>
RISK BASED
CAPITAL RATIOS
Tier 1 Capital $ 16,580 15.2% $ 16,303 15.5%
Total Capital $ 17,927 16.4% $ 17,621 16.7%
Total risk
adjusted assets $108,866 $105,461
-------- --------
LEVERAGE RATIOS
Tier 1 Capital to
average total assets $ 16,580 13.2% $ 16,303 12.1%
Quarterly average
total assets $125,744 $134,776
-------- --------
</TABLE>
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA). The FDICIA, among other matters,
substantially revises banking regulations and establishes a framework for
determination of capital adequacy of financial institutions. Under FDICIA,
financial institutions are placed into one of five capital adequacy categories
as follows: (1) Well capitalized, consisting of institutions with a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio
of 6% or greater and a leverage ratio of 5% or greater, and the institution is
not subject to an order, written agreement, capital directive or prompt
corrective action directive; (2) Adequately capitalized, consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or
greater, and the institution does not meet the definition of a well capitalized
institution; (3) Undercapitalized, consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of
less than 4%, or a leverage ratio of less than 4%; (4) Significantly
undercapitalized, consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) Critically undercapitalized, consisting of
an institution with a ratio of tangible equity to total assets that is equal to
or less than 2%.
Financial institutions classified as undercapitalized or below are subject to
various limitations including, among other matters, certain supervisory actions
by bank regulatory authorities and restrictions related to (1) growth of
assets, (2) payment of interest on subordinated indebtedness, (3) payment of
dividends or other capital distributions, and (4) payment of management fees to
a parent holding company. The FDICIA requires the bank regulatory authorities
to initiate corrective action regarding financial institutions which fail to
meet minimum capital requirements. Such action may include orders to, among
other matters, augment capital and reduce total assets. Critically
undercapitalized
-16-
<PAGE> 17
financial institutions may also be subject to appointment of a receiver or
conservator unless the financial institution submits an adequate capitalization
plan.
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on manufacturing, or other commercial concerns, primarily because
its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company indirectly through its effect on market rates of
interest, and thus the ability of the Bank to attract loan customers. Inflation
affects the growth of total assets by increasing the level of loan demand, and
potentially adversely affects the Company's capital adequacy because loan growth
in inflationary periods can increase at rates higher than the rate that capital
grows through retention of earnings which the Company may generate in the
future. In addition to its effects on interest rates, inflation directly
affects the Company by increasing the Company's operating expenses.
The effect of inflation was not material to the Company's results of operations
during the periods covered by this report.
-17-
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
None.
Item 2. Changes in securities.
None.
Item 3. Defaults upon senior securities.
None.
Item 4. Submission of matters to a vote of security holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - One report on Form 8-K dated April 4,
1995 reporting termination of merger negotiations with
Cupertino National Bancorp was filed on April 10, 1995.
-18-
<PAGE> 19
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.
May 9, 1995 SOUTH VALLEY BANCORPORATION
By /s/ THOMAS A. SA
------------------------------------
(Thomas A. Sa, Senior Vice President
and Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE
Principal Executive Officer and Director:
BRAD L. SMITH President, Chief Executive Officer
------------------------- and Director
(Brad L. Smith)
Principal Financial and Accounting Officer:
THOMAS A. SA Senior Vice President and Chief
------------------------- Financial Officer
(Thomas A. Sa)
Dated: May 9, 1995
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 8,866
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,207
<INVESTMENTS-CARRYING> 17,160
<INVESTMENTS-MARKET> 16,750
<LOANS> 87,458
<ALLOWANCE> (1,347)
<TOTAL-ASSETS> 148,513
<DEPOSITS> 129,958
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,991
<LONG-TERM> 0
<COMMON> 11,331
0
0
<OTHER-SE> 5,233
<TOTAL-LIABILITIES-AND-EQUITY> 148,513
<INTEREST-LOAN> 2,422
<INTEREST-INVEST> 423
<INTEREST-OTHER> 166
<INTEREST-TOTAL> 3,011
<INTEREST-DEPOSIT> 892
<INTEREST-EXPENSE> 917
<INTEREST-INCOME-NET> 2,094
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,631
<INCOME-PRETAX> 596
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 378
<EPS-PRIMARY> $.32
<EPS-DILUTED> $.32
<YIELD-ACTUAL> .096
<LOANS-NON> 877
<LOANS-PAST> 350
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,331
<CHARGE-OFFS> (122)
<RECOVERIES> 78
<ALLOWANCE-CLOSE> 1,347
<ALLOWANCE-DOMESTIC> 1,347
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
