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NOVB > SEC Filings for NOVB > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for NORTH VALLEY BANCORP

Form 10-Q for NORTH VALLEY BANCORP


12-May-2014

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 probable incurred losses 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 3 to the Notes to Condensed Consolidated Financial Statements in Item 1 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 evaluates the value of OREO and records 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, 2014, 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 10 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 10 to the Notes to Condensed Consolidated Financial Statements in Item 1 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.

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

Proposed Merger with TriCo Bancshares

As announced by the Company on January 21, 2014 and reported in the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 22, 2014 (the "Current Report"), the Company has entered into an Agreement and Plan of Merger and Reorganization dated January 21, 2014 (the "Merger Agreement"), pursuant to which the Company would merge with and into TriCo Bancshares, a California corporation ("TriCo"), with TriCo being the surviving corporation. Immediately thereafter, the Company's subsidiary bank, North Valley Bank, would be merged with and into TriCo's subsidiary bank, Tri Counties Bank. Under the terms of the Merger Agreement, the Company shareholders would receive a fixed exchange ratio of 0.9433 shares of TriCo common stock for each share of Company common stock. Holders of the Company's outstanding in-the-money stock options would receive cash, net of applicable taxes withheld, for the value of their unexercised stock options. The transactions contemplated by the Merger Agreement are expected to close in the third quarter of 2014, pending approvals of the Company shareholders and the TriCo shareholders, the receipt of all necessary regulatory approvals, and the satisfaction of other closing conditions which are customary for such transactions. For additional information, reference should be made to the text of the Agreement and Plan of Merger and Reorganization, filed as an exhibit to the Current Report, and to other information regarding TriCo and the Company, their respective businesses and the status of their proposed merger, as reported from time to time in other filings with the Securities and Exchange Commission.

Financial Results



(in thousands except per share amounts)     Three months ended March 31,
                                              2014                2013
Net interest income                       $       7,762       $       7,436
Provision for loan losses                             -                   -
Noninterest income                                2,430               4,329
Noninterest expense                               8,756               9,888
Provision for income taxes                          517                 616
Net income                                $         919       $       1,261

Per Share Amounts
Basic and Diluted Earnings Per Share      $        0.13       $        0.18

Annualized Return on Average Assets                0.41 %              0.57 %
Annualized Return on Average Equity                3.92 %              5.30 %

The Company had net income of $919,000, or $0.13 per diluted share, for the three months ended March 31, 2014. This compares to net income of $1,261,000, or $0.18 per diluted share, for the three months ended March 31, 2013. The decrease in net income for three months ended March 31, 2014 compared to the three months ended March 31, 2013 was primarily due to a decrease in noninterest income, which was partially offset by an increase in net interest income and a decrease in noninterest expense.

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, investments and other earning assets, 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 $31,000 and $55,000 in taxable-equivalent interest income on tax-free investments for the three month periods ended March 31, 2014 and 2013, respectively.

Net interest income for the three months ended March 31, 2014 was $7,793,000, a $302,000, or 4.0%, increase from net interest income of $7,491,000 for the same period in 2013. Interest income increased $227,000, or 2.9%, to $8,150,000 for the three month period ended March 31, 2014 compared to the same period in 2013, due primarily to both an increase in average loan balances and an increase in rates paid on average securities. The Company had foregone interest income for the loans placed on nonaccrual status of $10,000 during the three months ended March 31, 2014 compared to $85,000 for the same period in 2013. Average loans outstanding during the three months ended March 31, 2014 increased $22,734,000, or 4.7%, to $507,149,000 compared to the same period in 2013. This higher loan volume increased interest income by $303,000. The average yield earned on the loan portfolio decreased 22 basis points to 5.11% for the three months ended March 31, 2014 compared to the same period in 2013. This decrease in yield decreased interest income for the three months ended March 31, 2014 by $274,000. The increase to interest income from the loan portfolio was $29,000 for the three months ended March 31, 2014. The average balance of the entire investment portfolio increased $5,921,000, or 2.1%. However, the Company's higher yielding tax-exempt securities decreased $4,876,000 which caused a $25,000 reduction in interest income although the average balance increased. This decrease was offset by an increase in average yield of the investment portfolio of 22 basis points which increased interest income by $216,000.

Interest expense for the three months ended March 31, 2014 compared to the same period in 2013, decreased $75,000, or 17.4%, to $357,000. The average rate paid on other borrowed funds decreased 4 basis points to 2.45% for the quarter ended March 31, 2014 compared to 2.49% for the same period in 2013, resulting in a decrease to interest expense of $2,000. The average rates paid on time deposits decreased 13 basis points to 0.37% and reduced interest expense by $45,000 along with a decrease in average time deposits of $19,794,000 which reduced interest expense by $25,000 for the quarter ended March 31, 2014.

The net interest margin for the three months ended March 31, 2014 decreased 4 basis points to 3.77% from 3.81% for the same period in 2013 and an increase of 6 basis points from the 3.71% net interest margin for the linked quarter ended December 31, 2013.

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, 2014                 Three months ended March 31, 2013
                            Average            Yield/        Interest         Average            Yield/        Interest
                            Balance             Rate          Amount          Balance             Rate          Amount

Assets
Earning assets:
Federal funds sold       $       45,487            0.23 %   $       26     $       33,113            0.23 %   $       19
Investment securities:
Taxable                         281,290            2.36 %        1,639            270,493            2.06 %        1,376
Tax exempt (1)                    4,964            7.35 %           90              9,840            6.68 %          162
Total investments               286,254            2.45 %        1,729            280,333            2.23 %        1,538
Loans (2)(3)                    507,149            5.11 %        6,395            484,415            5.33 %        6,366
Total earning assets            838,890            3.94 %        8,150            797,861            4.03 %        7,923

Nonearning assets                90,022                                           109,804
Allowance for loan
losses                           (9,283 )                                         (10,487 )
Total nonearning
assets                           80,739                                            99,317

Total assets             $      919,629                                    $      897,178

Liabilities and
Stockholders' Equity
Interest bearing
liabilities:
Transaction accounts     $      206,635            0.04 %   $       19     $      188,138            0.04 %   $       18
Savings and money
market                          254,360            0.12 %           74            238,785            0.13 %           78
Time certificates               146,404            0.37 %          133            166,198            0.50 %          203
Other borrowed funds             21,651            2.45 %          131             21,651            2.49 %          133
Total interest bearing
liabilities                     629,050            0.23 %          357            614,772            0.28 %          432
Demand deposits                 180,295                                           169,080
Other liabilities                15,283                                            16,843
Total liabilities               824,628                                           800,695
Stockholders' equity             95,001                                            96,483
Total liabilities and
stockholders' equity     $      919,629                                    $      897,178
Net interest income                                         $    7,793                                        $    7,491
Net interest spread                                3.71 %                                            3.75 %
Net interest margin                                3.77 %                                            3.81 %

(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 $67 and $118 for the three months ended March 31, 2014 and 2013, 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, 2014
                                                      compared with
                                            Three months ended March 31, 2013
                                                                           Total
                                       Average          Average           Increase
                                       Volume         Yield/Rate         (Decrease)
Interest Income
Interest on Federal funds sold        $       7       $         -       $          7
Interest on investments:
Taxable securities                           56               207                263
Tax exempt securities (1)                   (81 )               9                (72 )
Total investments                           (25 )             216                191
Interest on loans                           303              (274 )               29
Total interest income                       285               (58 )              227

Interest Expense
Transaction accounts                  $       2       $        (1 )     $          1
Savings and money market                      5                (9 )               (4 )
Time deposits                               (25 )             (45 )              (70 )
Other borrowed funds                          -                (2 )               (2 )
Total interest expense                      (18 )             (57 )              (75 )

Total change in net interest income   $     303       $        (1 )     $        302

(1) Taxable equivalent

Provision for Loan Losses

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 40.

The Company did not record a provision for loan losses for the three months ended March 31, 2014 and 2013. 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, 2014 reflects management's assessment of the overall adequacy of the allowance for loan losses including the consideration of the level of nonperforming loans, other trends in the quality and performance of our loan portfolio, and other general economic factors. Management believes that the current level of allowance for loan losses as of March 31, 2014 of $9,058,000, or 1.78% of total loans, is adequate at this time. The allowance for loan losses was $9,301,000, or 1.83% of total loans, at December 31, 2013.

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,
                                                                   2014                2013
Service charges on deposit accounts                            $         698       $         952
Other fees and charges                                                 1,012               1,120
Earnings on cash surrender value of life insurance policies              347                 463
Gain on sale of loans, net                                               229                 925
Gain on sales or calls of securities, net                                  -                 543
Other                                                                    144                 326
Total                                                          $       2,430       $       4,329

Noninterest income for the quarter ended March 31, 2014 decreased $1,899,000, or 43.9%, to $2,430,000 compared to $4,329,000 for the same period in 2013. Service charges on deposits decreased by $254,000 to $698,000 for the first quarter of 2014 compared to $952,000 for the same period in 2013. Other fees and charges decreased by $108,000 to $1,012,000 for the first quarter of 2014 compared to $1,120,000 for the first quarter of 2013, and earnings on cash surrender value of life insurance policies decreased by $116,000 to $347,000 for the first quarter of 2014 compared to $463,000 for the first quarter of 2013. The Company recorded gains on the sale of mortgage loans of $184,000, and gains on the sale of SBA loans of $45,000 for the first quarter of 2014 compared to gains of $757,000 and $168,000, respectively, for the same period in 2013. The Company did not record a gain on the sale of investments securities for the first quarter of 2014 compared to gains on the sale of investment securities of $543,000 for the same period in 2013. Other noninterest income decreased $182,000, to $144,000 for the quarter ended March 31, 2014 compared to $326,000 for the same period in 2013. The decrease in other noninterest income was primarily attributed to a decrease in OREO rental income received from an OREO property sold in the second quarter 2013.

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,
                                      2014                2013
Salaries and employee benefits    $       5,023       $       5,162
Data processing                             651                 661
Occupancy expense                           623                 633
Professional services                       240                 269
Furniture and equipment expense             216                 220
Director expense                            201                 193
Merger expenses                             200                   -
Loan expense                                160                 305
ATM and on-line banking                     154                 139
FDIC and state assessments                  141                 218
Marketing expense                           138                 150
Postage                                     109                 122
Messenger                                   108                 106
Printing and supplies                       103                 127
Operations expense                           97                 116
Amortization of intangibles                  36                  36
Other real estate owned expense              10                 376
Other                                       546               1,055
Total                             $       8,756       $       9,888

. . .
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