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NOVB > SEC Filings for NOVB > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for NORTH VALLEY BANCORP


10-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 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 the Northern California region; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; California state budget problems; the U.S. "war on terrorism" and military action by the U.S. in the Middle East; and changes in the securities markets.

Critical Accounting Policies

General

North Valley Bancorp's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. Another estimate that we use is related to the expected useful lives of our depreciable assets. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan Losses. The allowance for loan losses is an estimate of probable incurred loan losses in the Company's loan portfolio as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to non-impaired loans. Non-impaired loans are evaluated collectively for impairment as a group by loan type and common risk characteristics.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For further information on the allowance for loan losses, see Note 4 to the Notes to Condensed Consolidated Financial Statements in Item I above.

Allowance for Loan Losses on Off-Balance-Sheet Credit Exposures. The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet.

Other Real Estate Owned ("OREO"). OREO represents properties acquired through foreclosure or physical possession. Write-downs to fair value at the time of transfer to OREO are charged to allowance for loan losses. Subsequent to foreclosure, management periodically evaluate the value of OREO held for sale and record a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. The reported value of OREO is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties. Management's evaluation of these factors involves subjective estimates and judgments that may change.

Share Based Compensation. At March 31, 2013, the Company had two stock-based compensation plans: the 1998 Employee Stock Incentive Plan and the 2008 Stock Incentive Plan, which are described more fully in Note 9 to the Notes to Condensed Consolidated Financial Statements. Compensation cost is recognized on all share-based payments over the requisite service periods of the awards based on the grant-date fair value of the options determined using the Black-Scholes-Merton based option valuation model. Critical assumptions that are assessed in computing the fair value of share-based payments include stock price volatility, expected dividend rates, the risk free interest rate and the expected lives of such options. Compensation cost recorded is net of estimated forfeitures expected to occur prior to vesting. For further information on the computation of the fair value of share-based payments, see Note 9 to the Notes to Condensed Consolidated Financial Statements in Item I above.

Impairment of Investment Securities. An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term "other than temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.

Accounting for Income Taxes. The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity's proportionate share of the consolidated provision for income taxes.

The Company applies the asset and liability method to account for income taxes. Deferred tax assets and liabilities are calculated by applying applicable tax laws to the differences between the financial statement basis and the tax basis of assets and liabilities. The effect on deferred taxes of changes in tax laws and rates is recognized in operations in the period that includes the enactment date. On the consolidated balance sheet, net deferred tax assets are included in other assets.

The Company accounts for uncertainty in income taxes by recording only tax positions that met the more likely than not recognition threshold, that the tax position would be sustained in a tax examination with the assumption that the examination will occur .

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

The Company evaluates deferred income tax assets for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws, our ability to successfully implement tax planning strategies, or variances between our future projected operating performance and our actual results. The Company is required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period. Future adjustments to the deferred tax asset valuation allowance, if any, will be determined based upon changes in the expected realization of net deferred tax assets. The realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the carry back and carries forward periods under the tax law.

Business Organization

North Valley Bancorp (the "Company") is a California corporation and a bank holding company for North Valley Bank, a California state-chartered, Federal Reserve member bank ("NVB"). NVB operates out of its main office located at 300 Park Marina Circle, Redding, California 96001, with twenty-two branches, including two supermarket branches in eight counties in Northern California. The Company views its service area as having four distinct markets: the Redding market, the Coastal market, the I-80 Corridor market and the Santa Rosa market.

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 its revenues.

Overview



Financial Results



(in thousands except per share amounts)     Three months ended March 31,
                                              2013                2012
Net interest income                       $       7,436       $       7,392
Provision for loan losses                             -                 400
Noninterest income                                4,329               3,259
Noninterest expense                               9,888               9,656
Provision for income taxes                          616                 115
Net income                                $       1,261       $         480

Per Share Amounts
Basic and Diluted Income Per Share        $        0.18       $        0.07

Annualized Return on Average Assets                0.57 %              0.21 %
Annualized Return on Average Equity                5.30 %              2.12 %

The Company had net income of $1,261,000 for the three months ended March 31, 2013, compared to $480,000 for the three months ended March 31, 2012. The increase in net income for three months ended March 31, 2013 compared to the three months ended March 31, 2012 was primarily attributed to an increase in gains on sale of loans, an increase in gains on sale of securities and a decrease in the provision for loan losses. The Company did not record a provision for loan losses for the quarter ended March 31, 2013 compared to a provision for loan losses of $400,000 for the quarter ended March 31, 2012 . Net interest income increased $44,000 for the three months ended March 31, 2013, compared to the same period in 2012. Noninterest income increased $1,070,000 for the three months ended March 31, 2013 compared to the same period in 2012 primarily due to the recording of gains on sale of real estate loans and gains on sale of securities. Noninterest expense increased $232,000 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 due primarily to the recording of a $500,000 additional reserve for expenses expected to be incurred during 2013 in connection with the anticipated settlement of a compliance exam conducted by the Federal Reserve Bank of San Francisco in 2010.

Results of Operation

Net Interest Income and Net Interest Margin (fully taxable equivalent basis)

Net interest income is the difference between interest earned on loans and investments and interest paid on deposits and borrowings, and is the primary revenue source for the Company. Net interest margin is net interest income expressed as a percentage of average earning assets. These items have been adjusted to give effect to $55,000 and $74,000 in taxable-equivalent interest income on tax-free investments for the three month periods ended March 31, 2013 and 2012, respectively.

Net interest income for the three months ended March 31, 2013 was $7,491,000, a $25,000, or 0.3%, increase from net interest income of $7,466,000 for the same period in 2012. Interest income decreased $760,000, or 8.8%, to $7,923,000 for the three month period ended March 31, 2013 compared to the same period in 2012, due primarily to both a decrease in rates earned on loans and securities and a decrease in average securities which was partially offset by an increase in average loan balances. The Company had foregone interest income for the loans placed on nonaccrual status of $85,000 during the three months ended March 31, 2013 compared to $155,000 for the same period in 2012. The average loans outstanding during the three months ended March 31, 2013 increased $32,936,000, or 7.3%, to $484,415,000 compared to the same period in 2012. This higher loan volume increased interest income by $473,000. The average yield earned on the loan portfolio decreased 42 basis points to 5.33% for the three months ended March 31, 2013. This decrease in yield decreased interest income for the three months ended March 31, 2013 by $577,000. The total decrease to interest income from the loan portfolio was $104,000 for the three months ended March 31, 2013. The average balance of the investment portfolio decreased $49,428,000, or 15.0%, which accounted for a $341,000 decrease in interest income and a decrease in average yield of the investment portfolio of 43 basis points reduced interest income by $306,000.

Interest expense for the three months ended March 31, 2013 compared to the same period in 2012, decreased $785,000, or 64.5%, to $432,000. The decrease was primarily related to the average rates paid on time deposits which decreased 52 basis points to 0.50% and reduced interest expense by $220,000 along with a decrease in average time deposits of $46,702,000 which reduced interest expense by $119,000 for the period ended March 31, 2013 The average rate paid on other borrowed funds decreased 357 basis points to 2.49% for the period ended March 31, 2013 compared to 6.06% for the same period in 2012, resulting in a decrease to interest expense of $194,000 along with a decrease in average other borrowed funds of $10,310,000 which reduced interest expense by $156,000.

The net interest margin for the three months ended March 31, 2013 increased 20 basis points to 3.81% from 3.61% for the same period in 2012 and a 12 basis point decrease from the 3.93% net interest margin for the linked quarter ended December 31, 2012.

The following table sets forth the Company's consolidated condensed average daily balances and the corresponding average yields received and average rates paid of each major category of assets, liabilities, and stockholders' equity for the periods indicated:

Schedule of Average Daily Balance and Average Yields and Rates

(Dollars in thousands)



                               Three months ended March 31, 2013                 Three months ended March 31, 2012
                            Average            Yield/        Interest         Average            Yield/        Interest
                            Balance             Rate          Amount          Balance             Rate          Amount

Assets
Earning assets:
Federal funds sold       $       33,113            0.23 %   $       19     $       48,950            0.23 %   $       28
Investment securities:
Taxable                         270,493            2.06 %        1,376            316,776            2.49 %        1,967
Tax exempt (1)                    9,840            6.68 %          162             12,985            6.73 %          218
Total investments               280,333            2.23 %        1,538            329,761            2.66 %        2,185
Loans (2)(3)                    484,415            5.33 %        6,366            451,479            5.75 %        6,470
Total earning assets            797,861            4.03 %        7,923            830,190            4.20 %        8,683

Nonearning assets               109,804                                            98,614
Allowance for loan
losses                          (10,487 )                                         (12,628 )
Total nonearning
assets                           99,317                                            85,986

Total assets             $      897,178                                    $      916,176

Liabilities and
Stockholders' Equity
Interest bearing
liabilities:
Transaction accounts     $      188,138            0.04 %   $       18     $      175,999            0.11 %   $       47
Savings and money
market                          238,785            0.13 %           78            219,729            0.26 %          145
Time certificates               166,198            0.50 %          203            212,900            1.02 %          542
Other borrowed funds             21,651            2.49 %          133             31,961            6.06 %          483
Total interest bearing
liabilities                     614,772            0.28 %          432            640,589            0.76 %        1,217
Demand deposits                 169,080                                           158,384
Other liabilities                16,843                                            26,478
Total liabilities               800,695                                           825,451
Stockholders' equity             96,483                                            90,725
Total liabilities and
stockholders' equity     $      897,178                                    $      916,176
Net interest income                                         $    7,491                                        $    7,466
Net interest spread                                3.75 %                                            3.44 %
Net interest margin                                3.81 %                                            3.61 %

(1) Tax-equivalent basis; non-taxable securities are exempt from federal taxation.

(2) Loans on nonaccrual status have been included in the computations of averages balances.

(3) Includes loan fees of $118 and $38 for the three months ended March 31, 2013 and 2012, respectively.

The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate.

Changes in Volume/Rate

(Dollars in thousands)



                                            Three months ended March 31, 2013
                                                      compared with
                                            Three months ended March 31, 2012
                                                                            Total
                                       Average           Average          Increase
                                        Volume         Yield/Rate        (Decrease)
Interest Income
Interest on Federal funds sold        $       (9 )     $         -       $        (9 )
Interest on investments:
Taxable securities                          (288 )            (303 )            (591 )
Tax exempt securities (1)                    (53 )              (3 )             (56 )
Total investments                           (341 )            (306 )            (647 )
Interest on loans                            473              (577 )            (104 )
Total interest income                        123              (883 )            (760 )

Interest Expense
Transaction accounts                  $        3       $       (32 )     $       (29 )
Savings and money market                      12               (79 )             (67 )
Time deposits                               (119 )            (220 )            (339 )
Other borrowed funds                        (156 )            (194 )            (350 )
Total interest expense                      (260 )            (525 )            (785 )

Total change in net interest income   $      383       $      (358 )     $        25

(1) Taxable equivalent.

Provision for Loan Losses

The provision for loan losses reflects changes in the credit quality of the entire loan portfolio. The provision for loan losses is recorded to bring the allowance for loan losses to a level considered appropriate by management based on factors which are discussed under "Allowance for Loan Losses" starting on page 37.

The Company did not record a provision for loan losses for the quarter ended March 31, 2013 compared to a provision for loan losses of $400,000 for the quarter ended March 31, 2012. The process for determining allowance adequacy and the resultant provision for loan losses includes a comprehensive analysis of the loan portfolio. Factors in the analysis include size and mix of the loan portfolio, nonperforming loan levels, charge-off/recovery activity and other qualitative factors including economic environment and activity. The decision to not record a provision for the three months ended March 31, 2013 reflects management's assessment of the overall adequacy of the allowance for loan losses including the consideration of the level of nonperforming loans and the overall effect of a sluggish economy, particularly in real estate. Management believes that the current level of allowance for loan losses as of March 31, 2013 of $9,651,000, or 1.98% of total loans, is adequate at this time. The allowance for loan losses was $10,458,000, or 2.12% of total loans, at December 31, 2012. For further information regarding our allowance for loan losses, see "Allowance for Loan Losses" starting on page 37.

Noninterest Income



The following table is a summary of the Company's noninterest income for the
periods indicated (in thousands):



                                                     Three months ended March 31,
                                                       2013                2012
Service charges on deposit accounts                $         952       $       1,052
Other fees and charges                                     1,120               1,197
Gain on sale of loans                                        925                 405
Gain (loss) on sales or calls of securities, net             543                  (9 )
Increase in cash value of life insurance                     463                 324
Other                                                        326                 290
Total                                              $       4,329       $       3,259

Noninterest income for the quarter ended March 31, 2013 increased $1,070,000, or 32.8%, to $4,329,000 compared to $3,259,000 for the same period in 2012. Service charges on deposits decreased by $100,000 to $952,000 for the first quarter of 2013 compared to $1,052,000 for the same period in 2012. The Company had a $925,000 gain on sale of loans for the quarter ended March 31, 2013, an increase of $520,000 compared to $405,000 for the same period in 2012 due primarily to a gain on sale of mortgage loans. Of the $925,000 gain on sale of loans for the first quarter of 2013, the sale of mortgage loans was $757,000 and the sale of SBA loans was $168,000 compared to the sale of mortgage loans of $361,000 and the sale of SBA loans of $43,000 for the first quarter of 2012. The Company had a $543,000 gain on sale of securities for the three months ended March 31, 2013, an increase of $552,000 compared to a loss on sale of securities of $9,000 for the same period in 2012.

Noninterest Expense



The following table is a summary of the Company's noninterest expense for the
periods indicated (in thousands):



                                    Three months ended March 31,
                                      2013                2012
Salaries and employee benefits    $       5,162       $       5,057
Data processing                             661                 617
Occupancy expense                           633                 640
Other real estate owned expense             376                 634
Loan expense                                305                 128
Professional services                       269                 287
Furniture and equipment expense             220                 245
FDIC and state assessments                  218                 313
Director expense                            193                 138
Marketing expense                           150                 195
ATM and on-line banking                     139                 250
Printing and supplies                       127                 124
Postage                                     122                 121
Operations expense                          116                 117
Messenger                                   106                 113
Amortization of intangibles                  36                  36
Other                                     1,055                 641
Total                             $       9,888       $       9,656

. . .

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