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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
-------------------- -------------------------
Commission file number 0-10652
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NORTH VALLEY BANCORP
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(Exact name of registrant as specified in its charter)
California 94-2751350
- - --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
880 E. Cypress Avenue, Redding, CA. 96002
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 221-8400
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
-------------------------
(Title of class)
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 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock, was $37,152,180
as of March 1, 2000.
The number of shares outstanding of common stock as of March 1, 2000, were
3,715,218.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 2000 Annual Meeting
of Shareholders are incorporated by reference in Part III, Items 10, 11, 12 and
13 of this Form 10-K.
TABLE OF CONTENTS PAGE
Part I
Item 1 Description of Business 2
Item 2 Description of Properties 21
Item 3 Legal Proceedings 21
Item 4 Submission of Matters to a Vote of Security Holders 22
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholders Matters 22
Item 6 Selected Financial Data 23
Item 7 Management's Discussion and Analysis of Financial Condition and Results 24
of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk 31
Item 8 Financial Statements and Supplementary Data 33
Item 9 Changes In and Disagreements With Accountants on Accounting 33
And Financial Disclosure
Part III
Item 10 Directors and Executive Officers of the Registrant; 33
Compliance with Section 16(a) of the Exchange Act
Item 11 Executive Compensation 34
Item 12 Security Ownership of Certain Beneficial Owners and Management 34
Item 13 Certain Relationships and Related Transactions 34
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
Financial Statements 35
Signatures 61
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Certain statements in this Annual Report on Form 10-K (excluding
statements of fact or historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Shasta
County; volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets. See also "Certain
Additional Business Risks" on pages 19 through 20 herein, and other risk factors
discussed elsewhere in this Report.
GENERAL
North Valley Bancorp (the "Company") is a bank holding company
registered with and subject to regulation and supervision by the Board of
Governors of the Federal Reserve System (the "Board of Governors"). The Company
was incorporated in 1980 in the State of California, and wholly owns its
principal subsidiaries, North Valley Bank (the "Bank"), North Valley Trading
Company (the "Trading Company"), which is inactive, and Bank Processing, Inc., a
California corporation. The sole subsidiary of the Bank, which is inactive, is
North Valley Basic Securities (the "Securities Company"). As used herein, the
terms "North Valley Bancorp" or the "Company" includes the subsidiaries of the
Company and the term "Bank" includes the subsidiary of the Bank, unless the
context requires otherwise.
At December 31, 1999, the Company had approximately 186 employees
(which includes 162 full-time equivalent employees); the Company had total
consolidated assets of $312,810,000; before consolidation the Bank had total
assets of $312,466,000 and total deposits of $275,832,000; assets of the Trading
Company were $2,000; assets of Bank Processing, Inc., were $266,000; and assets
of the Securities Company were $1,000.
The Bank was organized in September 1972, under the laws of the State
of California, and commenced operations in February 1973. The Bank is
principally supervised and regulated by the California Commissioner of Financial
Institutions (the "Commissioner") and conducts a commercial and retail banking
business, which includes accepting demand, savings, money market rate deposit
accounts, and time deposits, and making commercial, real estate and consumer
loans. It also offers installment note collections, issues cashier's checks and
money orders, sells travelers' checks and provides safe deposit boxes and other
customary banking services. As a federally insured bank, the Bank is also
subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and
deposits are insured by the FDIC up to the legal limits thereupon. The Bank does
not offer trust services or international banking services and does not plan to
do so in the near future.
The Bank operates twelve banking offices in Shasta and Trinity
Counties, for which it has received all of the requisite regulatory approvals.
The headquarters office in Redding opened in February 1973. In October 1973, the
Bank opened its Weaverville Office; in October 1974, its Hayfork Office; in
January 1978, its Anderson Office; and in September 1979, its Enterprise Office
(East Redding). On December 20, 1982, the Bank acquired the assets of two
branches of the Bank of California: one located in Shasta Lake and the other in
Redding, California. On June 1, 1985, the Bank opened its Westwood Village
Office in south Redding. On November 27, 1995, the Bank opened a new branch
located in Palo Cedro, California. During the year ended December 31, 1995, the
Bank purchased, in the ordinary course of business, the Hayfork branch for
$134,000 that the Bank had previously leased from a former Board member. In
1997, the Bank finished construction on its new site located in Shasta Lake,
California. The branch relocated from its leased facility to its new building on
2
October 14, 1997. The Bank opened two super-market branches in 1998 located in
Cottonwood, California, on January 20, 1998, and Redding, California, on
September 8, 1998. On May 11, 1998, the Bank opened a Business Banking Center in
Redding, California, to provide banking services to business and professional
clients.
The Trading Company, incorporated under the laws of the State of
California in 1984, formed a joint venture to explore trading opportunities in
the Pacific Basin. The joint venture terminated in July 1986, and the Trading
Company is now inactive. The Securities Company, formed to hold premises
pursuant to Section 752 of the California Financial Code, is inactive. North
Valley Consulting Services established as a consulting service for depository
institutions. In December 1988, North Valley Consulting Services changed its
name to Bank Processing, Inc. Bank Processing, Inc., was established as a bank
processing service to provide data processing services to other depository
institutions, pursuant to Section 225.25(b)(7) of Federal Reserve Regulation Y
and Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended
("BHCA").
Bank Processing, Inc., is utilizing "excess capacity" on their system
to process other depository institutions' data, and is currently processing
daily applications for the Bank and one other bank where entries are captured
and files updated by the "Liberty Banking Package, "which include: Demand
Deposits (DDA), Savings Deposits (SAV), Central Information Files (CIF),
Mortgage Loans (MLA), Installment Loans (ILA), Commercial Loans (CLA),
Individual Retirement Accounts (IRA), and Financial Information Statement, i.e.,
General Ledger (FIS). The data processing activities do not involve providing
hardware or software.
At December 31, 1999 Bank Processing, Inc., had cash of approximately
$129,000.
Since August 18, 1995, the Bank has maintained an agreement with Linsco
Private Ledger ("LPL") which furnishes brokerage services and standardized
investment advice to Bank customers at an LPL office located at 1327 South
Street, Redding, California in the upstairs portion of North Valley Bank. All
investments recommended to Bank customers appear on an approved list or are
specially approved by LPL's central office. The Bank shares in the fees and
commissions paid to LPL on a pre-determined schedule.
The Company does not hold deposits of any one customer or group of
customers where the loss of such deposits would have an effect on the Company.
The Company's business is not seasonal.
The Company has entered into an Agreement and Plan of Reorganization
and Merger, dated as of October 3, 1999, as amended on January 28, 2000, with
Six Rivers National Bank pursuant to which Six Rivers National Bank would become
a wholly owned subsidiary of the Company. On March 28, 2000, the shareholders of
the Company approved the transactions contemplated by said Agreement.
Consummation of such transactions remains subject to approval by the
shareholders of Six Rivers National Bank and receipt of all necessary regulatory
approvals.
SELECTED STATISTICAL DATA
The following tables present certain consolidated statistical
information concerning the business of the Company. This information should be
read in conjunction with the Consolidated Financial Statements and the notes
thereto and Management's Discussion and Analysis or Plan of Operation and other
information contained elsewhere herein. Averages based on daily averages.
Tax-equivalent adjustments (using a 33% tax rate for 1999, 31% for
1998, and 30% for 1997) have been made in calculating yields on tax-exempt
securities.
3
AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN
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 each of the past three years.
-----------------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE INCOME(1)/ RATES AVERAGE INCOME(1)/ RATES AVERAGE INCOME (1)/RATES
BALANCE EXPENSE EARNED BALANCE EXPENSE EARNED BALANCE EXPENSE EARNED
ASSETS
Federal funds sold $21,535 $1,040 4.83% $19,318 $1,019 5.27% $20,016 $1,079 5.39%
Available for sale (AFS)
securities:
Securities of US government
agencies and corporations 18,232 982 5.39% 20,708 1,206 5.82% 11,889 714 6.01%
Obligations of states and
political subdivision 293 26 8.87% 1,036 90 8.69% 2,867 208 7.25%
Other investments 174 0 0.00% 1,215 29 2.39% 866 33 3.81%
------ ------- ------ ------ ----- ----- ------ --- -----
Total AFS securities 18,699 1,008 5.39% 22,959 1,325 5.77% 15,622 955 6.11%
Held to maturity (HTM) securities:
Securities of US government
agencies and corporations 0 0 0.00% 930 54 5.81% 3,342 215 6.43%
Obligations of states and
political subdivision 31,840 2,839 8.92% 35,265 3,052 8.65% 36,541 3,181 8.71%
------- ------- ------- ------- ------ ------ ------- ------- ------
Total HTM securities 31,840 2,839 8.92% 36,195 3,106 8.58% 39,883 3,396 8.51%
FHLB 883 54 6.12% 819 56 6.84% 765 47 6.14%
Cash held in trust 463 30 6.48% 1,348 72 5.34% 597 33 5.53%
Total loans and leases (2)(3) 204,300 17,613 8.62% 175,556 15,860 9.03% 167,496 15,238 9.10%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest earning assets/
interest income 277,720 $22,584 8.13% 256,195 $21,438 8.37% 244,379 $20,748 8.49%
Nonearning assets 27,745 25,333 23,958
Less: Allowance for loan
losses (1,991) (1,859) (1,462)
-------- -------- --------
TOTAL ASSETS $303,474 $279,669 $266,875
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Deposits
Transaction $52,935 $995 1.88% $46,891 $1,044 2.23% $43,138 $1,003 2.33%
Savings & Money Market 54,844 1,504 2.74% 48,984 1,453 2.97% 46,547 1,418 3.05%
Time 119,945 5,735 4.78% 117,609 6,086 5.17% 116,440 6,223 5.34%
-------- -------- ------ -------- ------ ----- -------- ------- -----
Total interest bearing
deposits/interest
expense 227,724 8,234 3.62% 213,484 8,583 4.02% 206,125 8,644 4.19%
-------- ------ ------ ------ ------ ------
Non interest-bearing deposits 37,861 33,048 31,179
Other noninterest-bearing
Liabilities 6,027 3,380 3,409
-------- -------- --------
Total liabilities 271,612 249,912 240,713
Stockholders' equity 31,862 29,757 26,162
-------- -------- --------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $303,474 $279,669 $266,875
======== ======== ========
NET SPREAD 4.51% 4.35% 4.30%
===== ===== =====
NET INTEREST INCOME AND MARGIN $14,350 5.17% $12,855 5.02% $12,104 4.95%
======= ===== ======= ===== ======= =====
(1) Tax-equivalent basis
(2) Loans on nonaccrual status have been included in the computations of
average balances.
(3) Includes loan fees of $399,000, $302,000 and $259,000 for 1999, 1998
and 1997, respectively.
(4) Net interest margin is determined by dividing net interest income by
total average interest earning assets.
4
RATE VOLUME ANALYSIS OF CHANGES IN NET INTERST INCOME
The following table summarizes changes in net interest income resulting
from changes in average asset and liability balances (volume) and changes in
average interest rates.
1999 VERSUS 1998 1998 VERSUS 1997 1997 VERSUS 1996
TOTAL TOTAL TOTAL
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------- ------- --------- ------- ------- --------- ------- ------- ----------
INTEREST INCOME
Interest on Federal funds sold $ 107 $ (86) $ 21 $ (37) $ (23) $ (60) $ 71 $ 18 $ 89
Interest on AFS securities:
Securities of US government
agencies and corporations (133) (91) (224) 512 (20) 492 382 (9) 373
Obligations of states and
political subdivision (66) 2 (64) (158) 40 (118) (149) (26) (175)
Other investments 0 (29) (29) 8 (12) (4) 11 (5) 6
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest AFS
securities (199) (118) (317) 362 8 370 244 (40) 204
Interest on HTM securities:
Securities of US government
agencies and corporations 0 (54) (54) (140) (21) (161) (47) (19) (66)
Obligations of states and
political subdivision (310) 97 (213) (110) (19) (129) 140 (53) 87
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest HTM
securities (310) 43 (267) (250) (40) (290) 93 (72) 21
Dividends on FHLB 11 (13) (2) 4 5 9 3 4 7
Interest on trust (57) 15 (42) 40 (1) 39 33 0 33
Interest on trading account
securities 0 0 0 0 0 0 0 (58) (58)
Interest on total loans 2,475 (722) 1,753 728 (106) 622 896 (175) 721
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income 2,027 (881) 1,146 847 (157) 690 1,340 (323) 1,017
------- ------- ------- ------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Interest bearing liabilities
Deposits
Transaction 114 (163) (49) 84 (43) 41 72 0 72
Savings & Money Market 162 (101) 61 72 (37) 35 66 27 93
TIME 112 (463) (351) 60 (197) (137) 347 55 402
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest expense 388 (727) (339) 216 (277) (61) 485 82 567
------- ------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income $ 1,639 $ (154) $ 1,485 $ 631 $ 120 $ 751 $ 855 $ (405) $ 450
======= ======= ======= ======= ======= ======= ======= ======= =======
(1) The change in interest due to both rate and volume has been allocated to
volume.
5
INVESTMENT SECURITIES:
The Company's policy regarding investments is as follows:
TRADING SECURITIES are carried at fair value. Changes in fair value are
included in other operating income. The Company did not have any securities
classified as trading at December 31, 1999, 1998, and 1997.
AVAILABLE FOR SALE SECURITIES are carried at fair value and represent
securities not classified as trading securities nor as held to maturity
securities. Unrealized gains and losses resulting from changes in fair value are
recorded, net of tax, as a separate component of stockholders' equity. Gains or
losses on disposition are recorded in other operating income based on the net
proceeds received and the carrying amount of the securities sold, using the
specific identification method.
HELD TO MATURITY SECURITIES is carried at cost adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income. The Company's policy of carrying such investment
securities at amortized cost is based upon its ability and management's intent
to hold such securities to maturity.
At December 31, the amortized cost of securities and their approximate
fair value were as follows (in thousands):
GROSS GROSS CARRYING
AMORTIZED UNREALIZED UNREALIZED AMOUNT
AVAILABLE FOR SALE SECURITIES: COST GAINS LOSSES (FAIR VALUE)
DECEMBER 31, 1999
Securities of U.S. government
agencies and corporations $ 18,697 $ (172) $ 18,525
Mortgage backed securities 6,988 (64) 6,924
Other securities 139 $ 6 (25) 120
-------- -------- -------- --------
$ 25,824 $ 6 $ (261) $ 25,569
======== ======== ======== ========
DECEMBER 31, 1998
Securities of U.S. government
agencies and corporations $ 21,976 $ 62 $ (13) $ 22,025
Obligation of states and political
subdivisions 625 5 630
Other securities 215 5 (33) 187
-------- -------- -------- --------
$ 22,816 $ 72 $ (46) $ 22,842
======== ======== ======== ========
CARRYING
AMOUNT GROSS GROSS
(AMORTIZED UNREALIZED UNREALIZED
HELD TO MATURITY SECURITIES: COST) GAINS LOSSES FAIR VALUE
DECEMBER 31, 1999
Obligation of states and political
subdivisions $ 28,146 $ 843 $ (14) $ 28,975
======== ======== ======== ========
DECEMBER 31, 1998
Obligation of states and political
subdivisions $ 33,914 $ 2,025 $ 35,939
======== ======== ======== ========
6
Gross realized gains on sales or calls of securities categorized as
available for sale securities were $979,000 and $250,000 in 1998 and 1997,
respectively. There were no gross realized gains on sale of available for sale
securities in 1999. There were no gross realized losses on sale of available for
sale securities in 1999, 1998 or 1997.
Gross realized gains on calls of securities categorized as held to
maturity securities were $33,000 in 1999. There were no gross realized gains on
calls of held to maturity securities in 1998 and 1997. There were no gross
realized losses on calls of held to maturity securities in 1999, 1998 or 1997.
The policy of the Company requires that management determine the
appropriate classification of securities at the time of purchase. If management
has the intent and the Company has the ability at the time of purchase to hold
securities until maturity, they are classified as investments held to maturity,
and carried at amortized historical cost. Securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale and carried at market value. Securities held for indefinite
periods of time include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk, and other related factors.
Scheduled maturities of held to maturity and available for sale
securities (other than equity securities with an amortized cost of approximately
$139,000 and a fair value of approximately $120,000) at December 31, 1999, are
shown below (in thousands). Expected maturities may differ from contractual
maturities because borrowers may have the right to prepay with or without
penalty.
The following table sets forth the maturities of investment securities
at December 31, 1999, based on their amortized cost, and the weighted average
yields of such securities. Tax-equivalent adjustments have been made in
calculating yields on obligations of state and political subdivisions.
7
Maturity Distribution and Yields of Investment Securities:
Held to Maturity Available for Sale
----------------------- ------------------
Weighted Weighted
Average Amortized Average Amortized
Yield (1) Cost Yield (1) Cost
1999 1999 1999 1999
---------- --------- --------- ---------
December 31
Securities of U.S. government agencies and
corporations
Due within one year 5.05% 8,000
Due after one year but within five years 5.72% 10,697
Due after five years but within ten years 7.12% 3,985
Due after ten years 7.56% 3,003
------------------------
Total 5.94% 25,685
Obligations of states and political
subdivisions
Due within one year 9.44% $ 2,457
Due after one year but within five years 9.00% 9,810
Due after five years but within ten years 8.84% 9,188
Due after ten years 8.71% 6,691
----------------------
Total 8.92% 28,146
---------- --------
Total 8.92% $ 28,146 5.94% $25,685
========== ======== ======= =======
(1) Tax-equivalent basis at fiscal year end.
LOAN AND LEASE PORTFOLIO
The Company originates loans for business, consumer and real estate
activities and leases for equipment purchases. Such loans and leases are
concentrated in Shasta and Trinity Counties and neighboring communities.
Substantially all loans are collateralized. Generally, real estate loans are
secured by real property. Commercial and other loans are secured by bank
deposits or business or personal assets and leases are generally secured by
equipment. The Company's policy for requiring collateral is through analysis of
the borrower, the borrower's industry and the economic environment in which the
loan would be granted. The loans are expected to be repaid from cash flows or
proceeds from the sale of selected assets of the borrower.
8
Major classifications of loans and leases at December 31 are summarized
as follows (in thousands):
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Commercial, financial and agricultural $ 89,954 $ 66,517 $ 58,577 $ 58,153 $ 51,105
Real estate - construction 2,675 4,177 1,688 1,135 2,838
Real estate - mortgage 32,718 52,909 45,590 46,673 41,967
Installment 71,676 56,686 44,510 43,863 39,034
Direct financing leases 5,395 5,585 6,089 5,791 1,939
Other 15,433 13,904 13,390 13,283 12,888
-------- -------- -------- -------- --------
Total loans and leases receivable 217,851 199,778 169,844 168,898 149,771
Less:
Allowance for loan and lease losses 2,260 1,902 1,702 1,254 1,325
Deferred loan fees 194 442 635 661 638
-------- -------- -------- -------- --------
Net loans and leases $215,397 $197,434 $167,507 $166,983 $147,808
======== ======== ======== ======== ========
At December 31, 1999 and 1998, the Bank serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold to the
secondary market of approximately $106,862,000 and $78,568,000, respectively.
The Bank was contingently liable under letters of credit issued on
behalf of its customers for $2,366,000 and $485,000 at December 31, 1999 and
1998, respectively. At December 31, 1999, commercial and consumer lines of
credit, and real estate loans of approximately $24,014,000 and $3,381,000
respectively, were undisbursed. These instruments involve, to varying degrees,
elements of credit and market risk more than the amounts recognized in the
balance sheet. The contractual or notional amounts of these transactions express
the extent of the Bank's involvement in these instruments and do not necessarily
represent the actual amount subject to credit loss.
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturity of certain loan categories.
Excluded categories are residential mortgages of 1-4 family residences,
installment loans and lease financing outstanding as of December 31, 1999. Also
provided with respect to such loans are the amounts due after one year,
classified according to the sensitivity to changes in interest rates:
Within After One After
One Year Through Five Years Five Years Total
Commercial, financial and
agricultural $ 9,710 $14,918 $65,326 $89,954
Real Estate - construction 2,675 2,675
-------------------------------------------------------------
Total $12,385 $14,918 $65,326 $92,629
=============================================================
Loans maturing after one year with:
Fixed interest rates $ 7,876 $24,262 $32,138
Variable interest rates 7,042 41,064 48,106
------- ------- -------
Total $14,918 $65,326 $80,244
======= ======= =======
9
IMPAIRED, NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES
At December 31, 1999 and 1998, the recorded investment in loans for
which impairment has been recognized was approximately $374,000 and $2,871,000,
respectively. Of the 1999 balance, approximately $120,000 has a related
valuation allowance of $43,000. The remaining $254,000 did not require a
valuation allowance. Of the 1998 balance, approximately $2,269,000 has a related
valuation allowance of $226,900. The remaining $602,000 did not require a
valuation allowance. For the years ended December 31 1999, 1998 and 1997, the
average recorded investment in loans and leases for which impairment has been
recognized was approximately $1,411,000, $3,201,000 and $3,455,000,
respectively. During the portion of the year that the loans and leases were
impaired, the Company recognized interest income of approximately $193,000,
$232,000 and $153,000 for cash payments received in 1999, 1998 and 1997,
respectively.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full and timely collection of
interest or principal, or when a loan becomes contractually past due by 90 days
or more with respect to interest or principal (except that when management
believes a loan is well secured and in the process of collection, interest
accruals are continued on loans deemed by management to be fully collectible).
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans when, in the judgment of management, the loans are estimated to be
fully collectible as to both principal and interest.
Nonperforming loans and leases at December 31 are summarized as follows
(in thousands):
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Nonaccrual loans and leases $ 346 $2,307 $ 536 $1,190 $ 282
Loans 90 days past due but still accruing interest 223 364 244 14 15
Restructured loans
Other real estate owned 80 575 212 69 87
------ ------ ------ ------ ------
Total nonaccrual and 90 days past due loans & leases $ 649 $3,246 $ 992 $1,273 $ 384
====== ====== ====== ====== ======
If interest on nonaccrual loans and leases had been accrued, such
income would have approximated $28,000 in 1999, $132,000 in 1998, and $32,000 in
1997. Interest income of $14,000 in 1999, $33,000 in 1998, and $28,000 in 1997
was recorded when it was received on the nonaccrual loans and leases.
Based on its review of impaired, past due and nonaccrual loans and
other information known to management at the date of this Report, in addition to
the nonperforming loans included in the above table, management has not
identified loans and leases about which it has serious doubts regarding the
borrowers' ability to comply with present loan repayment terms, such that said
loans might subsequently be classified as nonperforming.
At December 31, 1999, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonaccrual.
10
SUMMARY OF LOAN LOSS EXPERIENCE:
The following table summarizes the Company's loan and lease loss
experience for the years ended December 31:
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
DECEMBER 31 (DOLLARS IN THOUSANDS)
Average loans and leases outstanding $204,300 $175,556 $167,496 $157,644 $137,613
Allowance for loan and lease losses
at beginning of period 1,902 1,702 1,254 1,325 1,144
Loans and leases charged off:
Commercial, financial and agricultural 397 952 8 538 139
Real Estate - construction 2
Real Estate - mortgage 105 35 128 139 27
Installment 641 340 193 118 106
Other 67 33 33 16 9
-------- -------- -------- -------- --------
Total loans and leases charged off 1,210 1,360 362 813 281
Recoveries of loans and leases
previously charged off:
Commercial, financial and agricultural 99 10 15 7 52
Real Estate - construction
Real Estate - mortgage 30 12 4 9
Installment 390 104 20 14 23
Other 7 4 1 1 3
-------- -------- -------- -------- --------
Total recoveries of loans and leases
Previously charged off 526 130 40 22 87
-------- -------- -------- -------- --------
Net loans and leases charged off 684 1,230 322 791 194
Provisions for loan and lease losses 1,042 1,430 770 720 375
-------- -------- -------- -------- --------
Balance of allowance for loan and lease
losses at end of period $ 2,260 $ 1,902 $ 1,702 $ 1,254 $ 1,325
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans
and leases outstanding 0.33% 0.70% 0.19% 0.50% 0.14%
Allowance for loan and lease losses to
total loans and leases 1.04% 0.95% 1.00% 0.74% 0.88%
The Bank maintains an allowance for loan and lease losses (the
"Allowance") to provide for probable loan and lease losses in the loan and lease
portfolio. Additions to the Allowance are made by charges to operating expense
in the form of a provision for loan and lease losses. Loans and leases are
charged against the Allowance when management believes that the collectibility
of the principal is unlikely, while any recoveries are credited to the
Allowance.
The Company evaluates the adequacy of its Allowance by specific
categories of loans and leases rather than on an overall basis. In determining
the adequacy of the Allowance, management considers such factors as the Bank's
lending policies, historical loan and lease loss experience, non-performing
loans and leases and problem credits, evaluations made by bank regulatory
authorities, assessment of economic conditions, and other appropriate data in
its attempt to identify the risks in the loan portfolio. While these factors are
essentially judgmental, the management of the Company believes that the
Allowance at December 31, 1999 was adequate against foreseeable losses in its
loan and lease portfolio at that time. The risk of nonpayment of loans and
leases is inherent in commercial banking, and, while management has procedures
11
in place to identify loans and leases with more than a normal risk of default,
it is not always possible to identify all such potential problem credits. To
some extent, the degree of perceived risk is taken into account in establishing
the structure of, and interest rates and security for, specific loans and leases
and various types of loans and leases. The Bank also attempts to minimize its
credit risk exposure by use of thorough loan application, approval and review
procedures.
The following table shows the allocation of the Company's Allowance and
the percent of allowance in each category to the total allowance at the dates
indicated (dollars in thousands).
December 31 1999 1998 1997 1996 1995
-------------------- -------------------- -------------------- -------------------- --------------------
ALLOWANCE % ALLOWANCE % ALLOWANCE % ALLOWANCE % ALLOWANCE %
FOR OF FOR OF FOR OF FOR OF FOR OF
LOSSES ALLOWANCE LOSSES ALLOWANCE LOSSES ALLOWANCE LOSSES ALLOWANCE LOSSES ALLOWANCE
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Loan Categories:
Commercial, financial
Agricultural $ 1,076 48.0% $ 769 40.0% $ 993 58.0% $ 765 61.0% $ 875 66.0%
Real Estate-construction 57 2.0% 10 1.0%
Real Estate-mortgage 51 2.0% 481 25.0% 89 5.0% 117 9.0% 106 8.0%
Installment 331 15.0% 355 19.0% 400 24.0% 372 30.0% 344 26.0%
Other 22 1.0% 69 4.0%
Unallocated 723 32.0% 218 11.0% 220 13.0%
----------------------------------------------------------------------------------------------------------
Total $ 2,260 100.0% $ 1,902 100.0% $ 1,702 100.0% $ 1,254 100.0% $ 1,325 100.0%
==========================================================================================================
The Allowance totaled $2,260,000, or 1.04% of total loans outstanding
at December 31, 1999. Based on management's evaluation of the current loan
portfolio and economic trends during 1999, the Bank made a provision to its
Allowance of $1,042,000 which was due primarily to the increase in loan volume
and loans charged off during 1999. Management's continuing evaluation of the
loan portfolio and assessment of current economic conditions will dictate future
funding levels.
CERTIFICATES OF DEPOSIT
Maturities of time certificates of deposit of $100,000 or more
outstanding at December 31, 1999 are summarized as follows (dollars in
thousands):
Remaining maturities:
Three months or less $ 8,633
Over three through six months 8,977
Over six through twelve months 5,842
Over twelve months 301
-------
Total $23,753
=======
As of December 31, 1999, the Company did not have any brokered
deposits. In general, it is the Company's policy not to accept brokered
deposits.
12
RETURN ON EQUITY AND ASSETS:
The following table sets forth-certain financial ratios for the
Company:
DECEMBER 31 1999 1998 1997
- - ----------- ----- ----- -----
Return on average equity (net income
divided by average equity) 14.21% 13.73% 19.67%
Return on average assets (net income
divided by average total assets) 1.49% 1.46% 1.93%
Equity to assets ratio (average equity
divided by average total assets) 10.50% 10.64% 9.80%
Dividend payout ratio (dividends
paid or declared divided by net income) 32.73% 33.86% 24.96%
SHORT TERM BORROWINGS
At December 31, 1999, 1998, and 1997, the Bank did not have any short
term borrowings outstanding.
SUPERVISION AND REGULATION
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended. The
Banks' common stock, however, is exempt from such requirements. The Company is
also subject to the periodic reporting requirements of Section 13 of the
Securities Exchange Act of 1934, as amended, which include, but are not limited
to, annual, quarterly and other current reports with the Securities and Exchange
Commission.
The Bank is licensed by the California Commissioner of Financial
Institutions (the "Commissioner"), its deposits are insured by the FDIC, and it
has chosen not to become a member of the Federal Reserve System. Consequently,
the Bank is subject to the supervision of, and is regularly examined by, the
Commissioner and the FDIC. Such supervision and regulation include comprehensive
reviews of all major aspects of the Bank's business and condition, including its
capital ratios, allowance for loan and lease losses and other factors. However,
no inference should be drawn that such authorities have approved any such
factors. The Company and the Bank are required to file reports with the
Commissioner, the FDIC and the Board of Governors and provide such additional
information as the Commissioner, FDIC and the Board of Governors may require.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and any subsidiaries, which it may acquire or organize,
are deemed to be "affiliates" of the Bank within the meaning of that term as
defined in the Federal Reserve Act. This means, for example, that there are
limitations (a) on loans by the Bank to affiliates, and (b) on investments by
13
the Bank in affiliates' stock as collateral for loans to any borrower. The
Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
In addition, regulations of the Board of Governors promulgated under
the Federal Reserve Act require that reserves be maintained by the Bank in
conjunction with any liability of the Company under any obligation (promissory
note, acknowledgement of advance, banker's acceptance or similar obligation)
with a weighted average maturity of less than seven (7) years to the extent that
the proceeds of such obligations are used for the purpose of supplying funds to
the Bank for use in its banking business, or to maintain the availability of
such funds.
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, the Company and the Bank are
required to maintain capital equal to at least 8.0% of its assets and
commitments to extend credit, weighted by risk, of which at least 4.0% 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. The Company and the Bank are subject to
regulations issued by the Board of Governors and the FDIC, which require
maintenance of a certain level of capital. These regulations impose two capital
standards: a risk-based capital standard and a leverage capital standard.
Assets, commitments to extend credit and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
Under the Board of Governors' risk-based capital guidelines, assets
reported on an institution's balance sheet and certain off-balance sheet items
are assigned to risk categories, each of which has an assigned risk weight.
Capital ratios are calculated by dividing the institution's qualifying capital
by its period-end risk-weighted assets. The guidelines establish two categories
of qualifying capital: Tier 1 capital (defined to include common shareholders'
equity and noncumulative perpetual preferred stock) and Tier 2 capital which
includes, among other items, limited life (and in case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for credit losses. Tier 2 capital may also include up
to 45% of the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if any, of
fair market value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to exclude all or a
portion of the unrealized gains upon a determination that the equity securities
are not prudently valued. Unrealized gains and losses on other types of assets,
such as bank premises and available-for-sale debt securities, are not included
in Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
Under the Board of Governors' leverage capital standard an institution
is required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. The Board of
Governors and the FDIC have adopted a minimum leverage ratio for bank holding
companies as a supplement to the risk-weighted capital guidelines. The leverage
ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets)
for the highest rated bank holding companies or those that have implemented the
risk-based capital market risk measure. All other bank holding companies must
maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital
ratios required for bank holding companies that have significant financial
and/or operational weakness, a high risk profile, or are undergoing or
anticipating rapid growth.
At December 31, 1999, the Bank and the Company are in compliance with
the risk-based capital and leverage ratios described above. See Item 8 note 16
of the Financial Statements incorporated by reference for a listing of the
Company's risk-based capital ratios at December 31, 1999 and 1998.
14
The Board of Governors and FDIC adopted regulations implementing a
system of prompt corrective action pursuant to Section 38 of the Federal Deposit
Insurance Act and Section 131 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). The regulations establish five capital
categories with the following characteristics: (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%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without the prior
approval of the FDIC and the FDIC must prohibit a critically undercapitalized
institution from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than in the usual
course of business, including investment expansion, acquisition, sale of assets
or other similar actions; (2) extending credit for any highly leveraged
transaction; (3) amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material change in accounting
methods; (5) engaging in certain affiliate transactions; (6) paying excessive
compensation or bonuses; and (7) paying interest on new or renewed liabilities
at rates which would increase the weighted average costs of funds beyond
prevailing rates in the institution's normal market areas.
15
Under the FDICIA, the federal financial institution agencies have
adopted regulations which require institutions to establish and maintain
comprehensive written real estate policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. The FDICIA further generally prohibits an insured state bank from
engaging as a principal in any activity that is impermissible for a national
bank, absent FDIC determination that the activity would not pose a significant
risk to the Bank Insurance Fund, and that the bank is, and will continue to be,
within applicable capital standards. Similar restrictions apply to subsidiaries
of insured state banks. The Company does not currently intend to engage in any
activities which would be restricted or prohibited under the FDICIA.
The Federal Financial Institution Examination Counsel ("FFIEC") on
December 13, 1996, approved an updated Uniform Financial Institutions Rating
System ("UFIRS"). In addition to the five components traditionally included in
the so-called "CAMEL" rating system which has been used by bank examiners for a
number of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and liquidity),
UFIRS includes for all bank regulatory examinations conducted on or after
January 1, 1997, a new rating for a sixth category identified as sensitivity to
market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital adequacy
in conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings.
The Bank has a current rating of "outstanding" for CRA compliance.
The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from the Bank. The payment of cash dividends
and/or management fees by the Bank is subject to restrictions set forth in the
California Financial Code, as well as restrictions established by the FDIC. See
Item 5 below for further information regarding the payment of cash dividends by
the Company and the Bank.
COMPETITION
At June 30, 1999, the competing commercial and savings banks had
seventeen banking offices in Shasta and Trinity Counties where the Bank operates
its twelve banking offices. Additionally, the Bank competes with thrifts and, to
a lesser extent, credit unions, finance companies and other financial service
providers for deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services, which the Bank is not authorized nor prepared to offer
currently. The Bank has arranged with its correspondent banks and with others to
16
provide some of these services for its customers. For borrowers requiring loans
in excess of the Bank's legal lending limits, the Bank has offered, and intends
to offer in the future, such loans on a participating basis with its
correspondent banks and with other independent banks, retaining the portion of
such loans which is within its lending limits. As of December 31, 1999, the
Bank's aggregate legal lending limits to a single borrower and such borrower's
related parties were $5,172,000 on an unsecured basis and $8,619,000 on a fully
secured basis based on regulatory capital of $34,477,000.
The business of the Bank is concentrated in its service area, which
primarily encompasses Shasta County, including the Redding area, and to a lesser
extent, the contiguous areas of Trinity County. The economy of the service area
of the Bank is dependent upon agriculture; tourism, retail sales, population
growth and smaller service oriented businesses.
Based upon data as of the most recent practicable date (June 30, 1999),
there were 42 operating commercial and savings bank branches in Shasta and
Trinity Counties with total deposits of $1,444,735,000. This was an increase of
$58,866,000 over the June 30, 1998 balances. The Bank held a total of
$222,136,000 in deposits, representing approximately 16.1% of total commercial
and savings banks deposits in Shasta County, and a total of $38,734,000 in
deposits, representing approximately 52.8% of total commercial and savings banks
deposits in Trinity County, as of June 30, 1999.
In order to compete with the major financial institutions in their
primary service areas, the Bank uses to the fullest extent possible, the
flexibility, which is accorded by its independent status. This includes an
emphasis on specialized services, local promotional activity, and personal
contacts by the Bank's officers, directors and employees. The Bank also seeks to
provide special services and programs for individuals in its primary service
area who are employed in the agricultural, professional and business fields,
such as loans for equipment, furniture, tools of the trade or expansion of
practices or businesses.
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rate paid by the Bank to obtain
their deposits and other borrowings and the interest rate received by the Bank
on loans extended to customers and on securities held in the Bank's portfolio
comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
The interest rate differentials of the Bank, and therefore their
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on the Bank are not predictable.
In 1996, pursuant to congressional mandate, the FDIC reduced bank
deposit insurance assessment rates to a range from $0 to $0.27 per $100 of
deposits, dependent upon a bank's risk. Based upon the above risk-based
assessment rate schedule, the Bank's current capital ratios and the Bank's
current levels of deposits, the Bank anticipates no change in the assessment
rate applicable to the Bank during 2000 from that in 1999.
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank, which has been in existence for at least five years.
17
The federal financial institution agencies, especially the Office of
the Comptroller of the Currency ("OCC") and the Board of Governors, have taken
steps to increase the types of activities in which national banks and bank
holding companies can engage, and to make it easier to engage in such
activities. The OCC has issued regulations permitting national banks to engage
in a wider range of activities through subsidiaries. "Eligible institutions"
(those national banks that are well capitalized, have a high overall rating and
a satisfactory CRA rating, and are not subject to an enforcement order) may
engage in activities related to banking through operating subsidiaries subject
to an expedited application process. In addition, a national bank may apply to
the OCC to engage in an activity through a subsidiary in which the bank itself
may not engage.
On November 12, 1999, President Clinton signed into law The Financial
Services Modernization Act of 1999 (the "FSMA"), which is potentially the most
significant banking legislation in many years. The FSMA eliminates most of the
remaining depression-era "firewalls" between banks, securities firms and
insurance companies which was established by The Banking Act of 1933, also known
as the Glass-Steagall Act ("Glass-Steagall). Glass-Steagall sought to insulate
banks as depository institutions from the perceived risks of securities dealing
and underwriting, and related activities. The FSMA repeals Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can now
acquire securities firms or create them as subsidiaries, and securities firms
can now acquire banks or start banking activities through a financial holding
company. The FSMA includes provisions which permit national banks to conduct
financial activities through a subsidiary that are permissible for a national
bank to engage in directly, as well as certain activities authorized by statute,
or that are financial in nature or incidental to financial activities to the
same extent as permitted to a "financial holding company" or its affiliates.
This liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
business in the United States. Consequently, the common ownership of banks,
securities firms and insurance firms is now possible, as is the conduct of
commercial banking, merchant banking, investment management, securities
underwriting and insurance within a single financial institution using a
"financial holding company" structure authorized by the FSMA.
Prior to the FSMA, significant restrictions existed on the affiliation
of banks with securities firms and on the direct conduct by banks of securities
dealing and underwriting and related securities activities. Banks were also
(with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The FSMA removes these restrictions and substantially
eliminates the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies, which qualify as
financial holding companies can now insure, guarantee, or indemnify against
loss, harm, damage, illness, disability, or death; issue annuities; and act as a
principal, agent, or broker regarding such insurance services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the FSMA, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. Implementing regulations have recently been
issued for comment by all of the federal financial institution regulatory
agencies and the Securities and Exchange Commission. These regulations will
require, in general, that financial institutions (1) may not disclose non-public
personal information of customers to non-affiliated third parties without notice
to their customers, who must have opportunity to direct that such information
not be disclosed; (2) may not disclose customer account numbers except to
consumer reporting agencies; and (3) must give prior disclosure of their privacy
policies before establishing new customer relationships.
18
The Company and the Bank have not determined whether or when either of
them may seek to acquire and exercise new powers or activities under the FSMA,
and the extent to which competition will change among financial institutions
affected by the FSMA has not yet become clear.
Certain legislative and regulatory proposals that could affect the Bank
and the banking business in general are periodically introduced before the
United States Congress, the California State Legislature and Federal and state
government agencies. It is not known to what extent, if any, legislative
proposals will be enacted and what effect such legislation would have on the
structure, regulation and competitive relationships of financial institutions.
It is likely, however, that such legislation could subject the Company and the
Bank to increased regulation, disclosure and reporting requirements and increase
competition and the Bank's cost of doing business.
In addition to legislative changes, the various federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such and regulations may have on the Company and the Bank.
DISCHARGE OF MATERIALS INTO THE ENVIRONMENT
Compliance with federal, state and local regulations regarding the
discharge of materials into the environment may have a substantial effect on the
capital expenditure, earnings and competitive position of the Company and the
Bank in the event of lender liability or environmental lawsuits. Under federal
law, liability for environmental damage and the cost of cleanup may be imposed
upon any person or entity that is an "owner" or "operator" of contaminated
property. State law provisions, which were modeled after federal law, are
substantially similar. Congress established an exemption under Federal law for
lenders from "owner" and/or "operator" liability, which provides that "owner"
and/or "operator" do not include "a person, who, without participating in the
management of a vessel or facility, holds indicia of ownership primarily to
protect his security interests in the vessel or facility."
In the event that the Company or the Bank was held liable as an owner
or operator of a toxic property, it could be responsible for the entire cost of
environmental damage and cleanup. Such an outcome could have a serious effect on
the Company's consolidated financial condition depending upon the amount of
liability assessed and the amount of cleanup required.
The Bank takes reasonable steps to avoid loaning against property that
may be contaminated. In order to identify possible hazards, the Bank requires
that all fee appraisals contain a reference to a visual assessment of hazardous
waste by the appraiser. Further, on loans proposed to be secured by industrial,
commercial or agricultural real estate, an Environmental Questionnaire must be
completed by the borrower and any areas of concern addressed. Additionally, the
borrower is required to review and sign a Hazardous Substance Certificate and
Indemnity at the time the note is signed.
If the investigation reveals and if certain warning signs are
discovered, but it cannot be easily ascertained, that an actual environmental
hazard exists, the Bank may require that the owner/buyer of the property, at
his/her expense, have an Environmental Inspection performed by an insured,
bonded environmental engineering firm acceptable to the Bank.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can
be impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
Shares of Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could adversely
affect the market price. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock, of which approximately
3,714,418 were outstanding at December 31, 1999. Pursuant to its stock option
plans, at December 31, 1999, the Company had outstanding options to purchase
476,994 shares of Company Common Stock. As of December 31, 1999, 636,347 shares
of Company Common Stock remained available for grants under the Company's stock
option plans. Sales of substantial amounts of Company Common Stock in the public
19
market could adversely affect the market price of Common Stock. Pursuant to the
Agreement and Plan of Reorganization and Merger, dated as of October 3, 1999, as
amended on January 28, 2000, between the Company and Six Rivers National Bank,
the Company expects to issue approximately 1,644,238 shares of its common stock
to shareholders and optionees of Six Rivers National Bank Common Stock.
A large portion of the loan portfolio of the Company is dependent on
real estate. At December 31, 1999, real estate served as the principal source of
collateral with respect to approximately 53% of the Company's loan portfolio. A
worsening of current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available-for-sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value for Company Common Stock. Acts of nature, including fires,
earthquakes and floods, which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also negatively impact the
Company's financial condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or employee
fraud. The Company maintains a system of internal controls to mitigate against
such occurrences and maintains insurance coverage for such risks, but should
such an event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
YEAR 2000 COMPLIANCE
The Company recognized the material nature of the business issues
surrounding computer processing of dates into and beyond the Year 2000 and began
taking corrective action pursuant to the interagency statements issued by the
Federal Financial Institutions Examination Council. Management believes the
company and the Bank have completed all of the activities within their control
to ensure that the Company's and the Bank's systems are Year 2000 compliant.
Year 2000 readiness costs were approximately $74,000 for the year ending
December 31, 1999. The Company does not expect to incur further expenses related
to Year 2000 issues.
The Company did not experience any material disruptions due to the Year
2000 issues nor have they experienced any disruption of service from third party
vendors, suppliers or service providers.
Although the Company did not experience any material business
disruptions of their internal computer systems or software applications due to
the start of the Year 2000 nor have they experienced any problems with their
computer systems or software applications or their third party vendors,
suppliers and service providers, the following dates remain that could present a
Year 2000 problem: March 31, the end of the first quarter; October 10, the first
date to require an eight-digit field; December 31, 2000, and January 1, 2001,
the last date of this year and first date of next; and December 31, 2001, the
end of the first 365-day year of the new century. Management believes that
appropriate actions have been taken to address these remaining Year 2000 issues
and contingency plans are in place to minimize the financial impact. Management
however cannot be certain that Year 2000 issues affecting computer systems,
software applications, customer, suppliers or service providers will not have a
material adverse impact on the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. SFAS No. 133
requires that derivative instruments used to hedge be identified specifically to
assets, liabilities, firm commitments or anticipated transactions and measured
as effective and ineffective when hedging changes in fair value or cash flows.
Derivative instruments that do not qualify as either a fair value or cash flow
hedge will be valued at fair value with the resultant gain or loss recognized in
current earnings. Changes in the effective portion of fair value hedges will be
recognized in current earnings along with the change in fair value of the hedged
item. Changes in the effective portion of the fair value of cash flow hedges
will be recognized in other comprehensive income until realization of the cash
flows of the hedged through current earnings. Any ineffective portion of hedges
will be recognized in current earnings. In June 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
137, "Accounting for Derivative Instruments and Hedging Activities" - Deferral
20
of the Effective Date of FASB Statement No. 133. This statement defers the
effective date of Statement No. 133 for all entities, which have not yet adopted
the Statement; to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, with earlier application encouraged. The adoption
of SFAS No. 133 and No. 137 is not expected to significantly impact the
Company's earnings or financial position.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal executive office is located at 880 E. Cypress
Avenue, Redding, Shasta County, California. The office, which occupies
approximately 2,100 square feet of space, is located within the Enterprise
Office of its subsidiary, North Valley Bank.
The Bank owns the land and building on which its headquarters office is
located at 880 E. Cypress Avenue, Redding, California, as well as the land and
buildings on which the Hayfork, Anderson, Weaverville, Redding and Country Club
(Bechelli Lane) branches are located. On February 2, 1990, the Bank completed
construction on a 6,000 square foot building adjacent to the 880 E. Cypress
location. Such building and land owned by the Bank and located at 836 E. Cypress
Avenue, currently houses Bank Processing, Inc., and the Bank's Customer Service
centers. Construction costs were approximately $376,000. During the year ended
December 31, 1995, the Bank purchased, in the ordinary course of business, the
Hayfork facility for $134,000, which the Bank previously leased, from a former
Board member. The Palo Cedro and Westwood Village branches as well as the
warehouse facilities for the Bank located at 1401 Gold Street, Redding,
California, are located in leased facilities or on leased land with various
lease expiration dates through August 14, 2005. During 1997, the Bank purchased
land in the city of Shasta Lake for $176,000 and completed construction on a
4,250 square foot building for approximately $805,000 to relocate the Shasta Dam
facility. It opened for business on October 14, 1997. On January 20, 1998, the
Bank opened its first grocery store branch and leases 540 square feet located in
Holiday Market in Cottonwood and on September 8, 1998, opened its second grocery
store branch in the Holiday Market on Placer Street in Redding, leasing 488
square feet. On May 11, 1998, the Bank opened its Business Banking Center
located at 443 Redcliff Drive, Suite 110, Redding and leases 3,767 square feet.
During the year ended December 31, 1999, the Company spent $141,000 for
rental of the Westwood Village branch, Palo Cedro branch, the two grocery store
branches, and the business banking center and the warehouse for the Bank. Net
occupancy expenses for all facilities for the year ended December 31, 1999, were
$641,000. In the opinion of management, the properties are adequately covered by
insurance.
From time to time, the Bank acquires real property through foreclosure
of defaulted loans. The policy of the Bank is not to use or permanently retain
any such properties but to resell them when practicable.
Permissible investments of banks and bank holding companies are subject
to regulation and limitation by Federal and State agencies. For example, federal
law prohibits the Bank from making any investment, which is prohibited, for
national banks. See " Financial Condition" in Item 7, MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION for more
information on investments in loans and securities. See "Supervision and
Regulation" in Item 1, Description of Business, for additional information
related to investment policies.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
against any of its property. The Bank, because of the nature of its business, is
generally subject to various legal actions, threatened or filed, which involve
ordinary, routine litigation incidental to its business. Some of the pending
cases seek punitive damages in addition to other relief. Although the amount of
the ultimate exposure, if any, cannot be determined at this time, the Company,
based on the advice of counsel, does not expect that the final outcome of
threatened or filed suits will have a materially adverse effect on its
consolidated financial position.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The North Valley Bancorp common stock is listed and trades on the
Nasdaq National Market under the symbol "NOVB". The shares were first listed in
the Nasdaq Stock Market in April 1998.
The following table summarizes trades occurring in the quarters ended
March 31, 1998 of which the Company had knowledge, setting forth the high and
low bid prices, reflects inter-dealer prices, without retail mark-up, mark down
or commission and may not represent actual transactions for the periods
indicated. The following table also summarizes the Common Stock high and low
trading prices and volume of shares traded in the quarters ended June 30, 1998
through December 31, 1999 as reported by Nasdaq.
PRICE OF COMMON APPROXIMATE CASH DIVIDENDS
STOCK TRADING VOLUME DECLARED
QUARTER ENDED: HIGH LOW
------- -------
March 31, 1998 $ 15.80 $ 14.37 364,600
June 30, 1998 18.69 15.38 263,518 $ 0.175
September 30, 1998 16.38 13.75 191,898
December 31, 1998 14.38 12.00 433,866 $ 0.20
March 31, 1999 $ 13.25 $ 11.75 196,305 $ 0.10
June 30, 1999 13.50 12.00 88,765 $ 0.10
September 30, 1999 12.00 10.00 130,774 $ 0.10
December 31, 1999 11.75 9.75 415,039 $ 0.10
The information for March 1998 was provided by Hoefer & Arnett, Inc.,
Sutro & Co. and the Company, based upon trades of which management was aware,
and does not include purchases of stock pursuant to the exercise of employee
stock options or other private transactions.
The Company had approximately 845 shareholders of record as of March 1,
2000.
See "Supervision and Regulation" in Item 1, DESCRIPTION OF BUSINESS,
for information related to shareholder and dividend matters including
information on limitations on dividends.
22
ITEM 6. SELECTED FINANCIAL DATA
North Valley Bancorp & Subsidiaries
(Dollars In Thousands Except Per Share Data)
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
FOR THE YEAR ENDED DECEMBER 31
Net interest income $ 13,411 $ 11,885 $ 11,089 $ 10,564 $ 9,910
Net income $ 4,528 $ 4,085 $ 5,145 $ 4,107 $ 4,083
PERFORMANCE RATIOS:
Return on average assets 1.49% 1.46% 1.93% 1.66% 1.79%
Return on average equity 14.21% 13.73% 19.67% 18.09% 20.44%
CAPITAL RATIOS:
Risk based capital:
Tier 1 (4% Minimum Ratio) 14.13% 14.14% 14.80% 12.58% 12.76%
Total (8% Minimum Ratio) 15.10% 15.05% 15.73% 13.29% 13.57%
Leverage Ratio 10.47% 10.18% 9.94% 8.98% 8.87%
BALANCE SHEET DATA AT DECEMBER 31
Assets $ 312,810 $ 296,362 $ 270,757 $ 256,877 $ 235,072
Investment securities and
federal funds sold $ 68,315 $ 75,056 $ 78,932 $ 67,320 $ 64,501
Net loans $ 215,397 $ 197,434 $ 167,507 $ 166,983 $ 147,808
Deposits $ 275,261 $ 259,881 $ 238,522 $ 229,228 $ 211,075
Stockholders' equity $ 33,246 $ 30,180 $ 28,066 $ 23,900 $ 20,973
COMMON SHARE DATA
Net income(1)
Basic $ 1.22 $ 1.11 $ 1.41 $ 1.11 $ 1.11
Diluted $ 1.21 $ 1.10 $ 1.39 $ 1.10 $ 1.10
Cash dividends $ 0.40 $ 0.38 $ 0.35 $ 0.35 $ 0.32
Book value (2) $ 8.95 $ 8.18 $ 7.63 $ 6.55 $ 5.70
Shares Outstanding 3,714,418 3,690,220 3,678,184 3,647,376 3,682,096
SUMMARY OF OPERATIONS
Total interest income $ 21,645 $ 20,468 $ 19,733 $ 18,641 $ 17,469
Total interest expense 8,234 8,583 8,644 8,077 7,559
---------- ---------- ---------- ---------- ----------
Net interest income 13,411 11,885 11,089 10,564 9,910
Provision for loan and lease losses 1,042 1,430 770 720 375
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and lease losses 12,369 10,455 10,319 9,844 9,535
Total non interest income 3,737 4,095 4,138 2,581 2,630
Total non interest expense 10,105 8,886 8,312 6,786 6,412
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 6,001 5,664 6,145 5,639 5,753
Provision for income taxes 1,473 1,579 1,000 1,532 1.670
---------- ---------- ---------- ---------- ----------
Net Income $ 4,528 $ 4,085 $ 5,145 $ 4,107 $ 4,083
========== ========== ========== ========== ==========
(1) Net income per share amounts have been adjusted to give effect to a two for
one stock split on October 15, 1998 and a three-for-two stock split
effected in the form of a 50% stock dividend on November 1, 1995
(2) Represents stockholders' equity divided by the number of shares of common
stock outstanding at the end of the period indicated.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
North Valley Bancorp (the "Company") is the bank holding company for
North Valley Bank (the "Bank"), a state-nonmember bank. The Bank operates out of
its main office located at 880 E. Cypress Avenue, Redding, CA 96002, with twelve
branches, which include two supermarket branches in Shasta and Trinity Counties
in Northern California. The Company operates as one business segment providing
banking services to the Company's clients in Northern California. The Company's
principal business consists of attracting deposits from the general public and
using the funds to originate commercial, real estate and installment loans to
customers, who are predominately small and middle market businesses and middle
income individuals. The Company's primary source of revenues is interest income
from its loan and investment securities portfolios. The Company is not dependent
on any single customer for more than ten percent of the Company's revenues.
Certain statements in this Form 10-K (excluding statements of fact or
historical financial information) involve forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions, particularly in Shasta County; volatility of
rate sensitive deposits; operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; and
changes in the securities markets.
EARNINGS SUMMARY
For the year ended December 31,
1999 1998 1997
-------- -------- --------
(in thousands except per
share amounts)
Net interest income $ 13,411 $ 11,885 11,089
Provision for loan and lease losses (1,042) (1,430) (770)
Noninterest income 3,737 4,095 4,138
Noninterest expense (10,105) (8,886) (8,312)
Provision for income taxes (1,473) (1,579) 1,000)
-------- -------- --------
Net income $ 4,528 $ 4,085 $ 5,145
======== ======== ========
Earnings Per Share
Basic $ 1.22 $ 1.11 $ 1.41
Diluted $ 1.21 $ 1.10 $ 1.39
Return on Average Assets 1.49% 1.46% 1.93%
Return on Average Equity 14.21% 13.73% 19.67%
For the year ended December 31, 1999, the Company achieved net income
of $4,528,000 as compared to $4,085,000 for the same period in 1998 and
$5,145,000 in 1997. On a per share basis, diluted earnings per share was $1.21
for the year ended December 31, 1999 compared to $1.10 for the same period in
1998 and $1.39 for the same period in 1997.
24
For the year ended December 31, 1999, the Company paid or declared
quarterly dividends totaling $1,482,000 to stockholders of the Company. The
Company's return on average total assets and average stockholders' equity were
1.49% and 14.21% for the period ended December 31, 1999, compared with 1.46% and
13.73% for the same period in 1998 and 1.93% and 19.67% for the same period in
1997.
For the year ended December 31, 1999, the increase in net interest
income over the same period in 1998 was primarily due to the increase in average
loans outstanding, coupled with a decrease in rates paid on average interest
bearing deposits and offset by a decrease in rates earned on average earning
assets. The Company's loan and lease loss provision decreased $388,000. For the
year ended December 31, 1999, noninterest income was impacted by a reduction in
gain on available for sale securities of $946,000 offset by increased service
charge and other fee income from the expanded customer base over the same period
in 1998. The increase in noninterest expense in 1999 over 1998 is primarily the
result of costs associated with the addition of two super-market branches, the
Business Banking Center as well as an expanded Investment Services Department.
The Company has made a substantial investment in technology updates that have
resulted in the addition of new products and services to provide for future
expansion. For the year ended 1997 the Company had $250,000 in securities gains,
a lower effective tax rate and collected $889,000 in net proceeds from a life
insurance policy.
NET INTEREST INCOME
Net interest income is the difference between interest income (which
includes yield-related loan fees) and interest expense. Net interest income on a
taxable-equivalent basis was $14,350,000 in 1999, compared with $12,855,000 in
1998 and $12,104,000 in 1997.
Net interest income has been adjusted to a fully taxable equivalent
basis (FTE) for tax-exempt investments included in earning assets. The increase
in net interest income (FTE) for the year ended December 31, 1999 over the same
period in 1998 and in 1998 over 1997 resulted primarily from the increase in the
volume of loans, which generally carry higher interest rates than other earning
assets, offset by a decrease in the rates earned on loans combined with a
decrease in rates, paid on interest earning deposits. Average loans increased to
$204,300,000 for the year ended December 31, 1999, as compared to $175,556,000
for the same period in 1998, or a 16.4% increase after increasing 4.8% in 1998
from 1997. Average interest-bearing deposits for the year ended December 31,
1999 totaled $227,724,000 as compared to $213,484,000 for the same period in
1998 or a 6.7% increase after increasing 3.6% in 1998 over 1997.
The increase for the year ended December 31, 1999 in the net interest
margin of 5.17% compared to 5.02% for the same period in 1998 was attributed to
the increases in loans and deposits, and the increase in the net spread (the
difference between rates earned on interest earning assets and rates paid on
deposits), affected primarily by a stable to slightly increasing interest rate
environment and the change in the mix between loans and investment securities
for the year ended December 31, 1999. The increase for the year ended December
31, 1999 in the net interest spread to 4.51% from 4.35% for the same period in
1998 was a result of a 24 basis point reduction in rates earned on interest
earning assets partially offset by a 40 basis point reduction in interest paid
on interest bearing deposits.
NONINTEREST INCOME
The following table is a summary of the Company's noninterest income
for the periods indicated:
(IN THOUSANDS) 1999 1998 1997
Service charges on deposit accounts $ 2,143 $ 1,786 $ 1,400
Other fees and charges 1,009 851 802
Gain (loss) on sale of loans (71) 130 160
Gain on sale of available for sale securities 33 979 250
Life insurance proceeds 1,139
Other 623 349 387
------- ------- -------
Total noninterest income $ 3,737 $ 4,095 $ 4,138
======= ======= =======
25
sPAGE>
Noninterest income decreased $358,000 to $3,737,000 for the year ended
December 31, 1999 from $4,095,000 for the same period in 1998. This decrease is
primarily the result of a decrease in gain on sale of securities of $946,000
offset by an increase of $357,000 in service charge income, $158,000 increase in
other fees and charges and an increase in other income of $274,000. For the year
ended December 31, 1998 compared to the same period in 1997 noninterest income
decreased $43,000 due to increases in service charges and other fees as a result
of increased activity and increase in gain on sale of AFS securities offset by
the increase in proceeds from life insurance in 1997.
NONINTEREST EXPENSE
The following table is a summary of the Company's noninterest expense
for the periods indicated:
(IN THOUSANDS) 1999 1998 1997
------- ------- -------
Salaries & employee benefits $ 4,814 $ 4,679 $ 4,522
Furniture & equipment expense 675 666 553
Occupancy expense 641 557 503
Professional Services 455 373 235
ATM expense 356 284 247
Printing & supplies 269 292 232
Postage 219 196 182
Messenger expense 194 178 139
Data processing expenses 167 156 156
Merger & acquisition expense 149
Other 2,166 1,505 1,543
------- ------- -------
Total noninterest expenses $10,105 $ 8,886 $ 8,312
======= ======= =======
Noninterest expense totaled $10,105,000 for the year ended December 31,
1999, compared to $8,886,000 for the same period in 1998. The increase was
primarily a result of $339,000 in losses included in other expenses resulting
from the sale of OREO properties and $149,000 in costs associated with the
pending merger with Six Rivers National Bank. Salaries and employee benefits in
1999 increased $135,000 or 2.9% from 1998 due to increases in staffing levels
and incentive pay. The increase in noninterest expense was also related to the
expansion of the branch system to include two new grocery store branches and the
business banking center, which were open for the entire year in 1999 but for
only a portion of the corresponding 1998 period, increased lending expenses such
as credit reports and appraisal fees from the growth in the loan portfolio,
along with technology updates.
INCOME TAXES
The provision for income taxes for the year ended December 31, 1999 was
$1,473,000 as compared to $1,579,000 for the same period in 1998 and $1,000,000
for the same period in 1997. The effective income tax rate for state and federal
income taxes was 24.6%, for the year ended December 31, 1999 compared to 27.9%
for the same period in 1998 and 16.3% for the same period in 1997. The
difference in the effective tax rate compared to the statutory tax rate is
primarily the result of the Bank's investment in municipal securities. The
increase in the effective tax rate in 1998 is the result of the nontaxability of
the proceeds from a life insurance policy in 1997.
IMPAIRED, NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES AND OTHER REAL
ESTATE OWNED
At December 31, 1999 and 1998, the recorded investment in loans for
which impairment has been recognized was approximately $374,000 and $2,871,000.
Of the 1999 balance, approximately $120,000 has a related valuation allowance of
$43,000. The remaining $254,000 did not require a valuation allowance. Of the
1998 balance, approximately $2,269,000 has a related valuation allowance of
$227,000. The remaining $602,000 did not require a valuation allowance. For the
years ended December 31 1999, 1998 and 1997, the average recorded investment in
26
loans an leases for which impairment has been recognized was approximately
$1,411,000, $3,201,000 and $3,455,000, respectively. During the portion of the
year that the loans and leases were impaired, the Company recognized interest
income of approximately $193,000, $232,000 and $153,000 for cash payments
received in 1999, 1998 and 1997, respectively.
Nonaccrual loans consist of loans on which the accrual of interest has
been discontinued and other loans where management believes that borrowers'
financial condition is such that the collection of interest is doubtful, or when
a loan becomes contractually past due by 90 days or more with respect to
interest or principal (except that when management believes a loan is well
secured and in the process of collection, interest accruals are continued on
loans considered by management to be fully collectible). Loans are charged off
when management determines that the loan is considered uncollectible. Other real
estate owned consists of real property acquired through foreclosure on the
related collateral underlying defaulted loans.
A summary of non-performing assets at December 31, 1999, 1998 and 1997
is as follows:
(IN THOUSANDS) 1999 1998 1997
------ ------ ------
Total nonaccrual loans and leases $ 346 $2,307 $ 536
Troubled debt restructuring --
Loans and leases 90 days past due and still accruing 223 364 244
------ ------ ------
Total nonperforming loans and leases 569 2,671 780
Other real estate owned 80 575 212
------ ------ ------
Total nonperforming assets $ 649 $3,246 $ 992
====== ====== ======
Nonaccrual loans and leases to total gross loans 0.16% 1.16% 0.32%
Nonperforming loans and leases to total gross loans 0.26% 1.34% 0.46%
Total nonperforming assets to total assets 0.21% 1.10% 0.37%
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained at a level that
management of the Company considers to be adequate for losses that can be
reasonably anticipated in relation to the risks inherent in the loan and lease
portfolio. The allowance is increased by a provision charged to operating
expenses and reduced by net charge-offs. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions, historical loan and lease
loss experience, and the evaluation of risks which vary with the type of loan or
lease, creditworthiness of the borrower and the value of the underlying
collateral. At December 31, 1999, based on known information, management
believes that the allowance for loan and lease losses was adequate to absorb
losses inherent in existing loans and leases and commitments to extend credit,
based on evaluations of the collectibility and prior loss experience of loans
and leases and commitments to extend credit as of such date.
The evaluation process is designed to determine the adequacy of the
allowance for loan losses. This process attempts to assess the risk of losses
inherent in the loan portfolio by segregating the allowance for loan losses into
three components: "Specific," "loss migration," and "general." The specific
component is established by allocating a portion of the allowance for loan
losses to individual classified credits based on specific circumstances and
assessments. The loss migration component is calculated as a function of the
historical loss migration experience of the internal loan credit risk rating
categories. The general component is an unallocated portion that supplements the
first two components and includes: management's judgement of the current
economic conditions, borrower's financial condition, loan impairment, evaluation
of the performing loan portfolio, continual evaluation of problem loans
identified as having a higher degree of risk, off balance sheet risks, net
charge off trends, and other factors.
27
The allowance for loan and lease losses totaled $2,260,000 or 1.04% of
the total loan and leases outstanding at December 31, 1999 compared to
$1,902,000 or 0.95% of total loans outstanding at December 31, 1998 and
$1,702,000 or 1.00% at December 31, 1997. The increase in the allowance in 1999
over 1998 and in 1998 over 1997 is primarily related to the overall growth in
the loan and lease portfolio and the change in the underlying loan mix to
increase the level of commercial credits.
There is uncertainty concerning future economic trends. Accordingly, it
is not possible to predict the effect future economic trends may have on the
levels of the allowance for loan losses and the related provision for loan
losses in future periods.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors and borrowers.
Collection of principal and interest on loans, the liquidations and maturities
of investment securities, deposits with other banks, customer deposits and short
term borrowing, when needed, are primary sources of funds that contribute to
liquidity. Unused lines of credit from correspondent banks to provide federal
funds for $10,500,000 as of December 31, 1999 were available to provide
liquidity. In addition, the Bank is a member of the Federal Home Loan Bank
("FHLB") System providing an additional line of credit of $9,903,000 secured by
first deeds of trust on eligible 1-4 unit residential loans. The Company also
had a line of credit with Federal Reserve Bank ("FRB") of $15,332,000 secured by
first deeds of trust on eligible commercial real estate loans. The Company had
not utilized the line of credit from the FHLB system or FRB as of December 31,
1999.
The Company manages both assets and liabilities by monitoring asset and
liability mixes, volumes, maturities, yields and rates in order to preserve
liquidity and earnings stability. Total liquid assets (cash and due from banks,
federal funds sold, and investment securities) totaled $81,098,000 and
$82,108,000 (or 25.92% and 27.71% of total assets) at December 31, 1999 and
December 31, 1998, respectively. Total liquid assets for December 31, 1999 and
December 31, 1998 include investment securities of $28,146,000 and $33,914,000,
respectively, classified as held to maturity based on the Company's intent and
ability to hold such securities to maturity.
Core deposits, defined as demand deposits, interest bearing demand
deposits, regular savings, money market deposit accounts and time deposits of
less than $100,000, continue to provide a relatively stable and low cost source
of funds. Core deposits totaled $251,508,000 and $241,412,000 at December 31,
1999 and December 31, 1998, respectively.
In assessing liquidity, historical information such as seasonal loan
demand, local economic cycles and the economy in general are considered along
with current ratios, management goals and unique characteristics of the Company.
Management believes the Company is in compliance with its policies relating to
liquidity.
Asset and liability management focuses on interest rate risk due to
asset and liability cash flows and market interest rate movement. The primary
objective of managing interest rate risk is to ensure that both assets and
liabilities react to changes in interest rates to minimize the effects of
interest rate movements on net interest income. An asset and liability
management simulation model is used to quantify the exposure and impact of
changing interest rates on earnings.
28
The following table shows the interest sensitive assets and liabilities
gap (other than equity securities with a fair value of approximately $120,000),
which is the measure of interest sensitive assets over interest-bearing
liabilities, for each individual repricing period on a cumulative basis:
DECEMBER 31, 1999 WITHIN THREE THREE MONTHS ONE TO FIVE GREATER THAN
(IN THOUSANDS) MONTHS TO ONE YEAR YEARS FIVE YEARS TOTAL
------------ ------------ ------------ ------------ --------
EARNING ASSETS
Held to maturity securities $ 60 $ 2,397 $ 9,810 $ 15,879 $ 28,146
Available for sale securities 7,950 10,575 6,924 25,449
Fed funds sold 14,600 14,600
Loans-net of deferred loan fees 40,063 16,395 102,560 58,639 217,657
-------- --------- -------- -------- --------
Total earning assets $ 62,673 $ 18,792 $122,945 $ 81,442 $285,852
======== ========= ======== ======== ========
INTEREST BEARING LIABILITIES
Interest bearing demand
Deposits $ 9,888 $ 9,888
Savings deposits 98,948 98,948
Time deposits 45,790 76,002 4,532 30 126,354
-------- --------- -------- -------- --------
Total interest bearing
Liabilities $ 45,790 $ 184,838 $ 4,532 $ 30 $235,190
======== ========= ======== ======== ========
Interest rate sensitivity gap $ 16,883 $(166,046) $118,413 $ 81,412
Cumulative interest rate
Sensitivity gap $ 16,883 $(149,163) $(30,750) $ 50,662
At December 31, 1999, the gap table indicates the Company as liability
sensitive in the twelve-month period. The interest rate sensitivity gap is
defined as the difference between amount of interest-earning assets anticipated
to mature or reprice within a specific time period and the amount of
interest-bearing liabilities anticipated to mature or reprice within that time
period. The year-end gap report is based on the contractual interest repricing
date. The gap method does not consider the impact of different multipliers (how
interest rates change when the Fed Funds rate changes by 1%) and lags (time it
takes for rates to change after the Fed Funds rate changes). The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant and may be affected by many factors, including the behavior
of customers in response to changes in interest rates and future impact of new
business strategies. This table should, therefore, be used only as a guide as to
the possible effect changes in interest rates might have on the net margins of
the Company. The Company's model analyzes the impact on earnings of future rate
changes by including factors for lags and multipliers for key bank rates. Both
methods of measuring interest rate sensitivity do not take into account actions
taken by management to modify the effect to net interest income if interest
rates were to rise or fall.
Although the Company had a negative gap in the year ended December 31,
1999, the asset liability simulation model showed the Company was slightly asset
sensitive at December 31, 1999. This means that when interest rates increase,
yields on earning assets would be expected to increase faster than rates paid
for deposits, causing the net interest margin to increase. Due to a slightly
increasing interest rate environment in 1999, the Company's asset sensitive
posture had a slightly positive impact on net interest margins as predicted by
the asset liability simulation model. In a declining rate environment, the
opposite impact would be expected; i.e., the net interest margin should decline.
29
FINANCIAL CONDITION AS OF DECEMBER 31, 1999 AS COMPARED TO DECEMBER 31, 1998
Total assets at December 31, 1999, were $312,810,000, compared to
December 31, 1998 assets of $296,362,000. Increases in average deposits of 7.73%
were used to fund an 8.40% increase in average earning assets for the period
ended December 31, 1999.
Investment securities and federal funds sold totaled $68,315,000 at
December 31, 1999, compared to $75,056,000 at December 31, 1998 as these
investments were used to fund loan demand. The Company is a member of Federal
Home Loan Bank of San Francisco and holds $911,000 in FHLB stock.
During 1999, net loans increased to $215,397,000 from $197,434,000 at
December 31, 1998. Loans are the Company's major component of earning assets.
The Bank's average loan to deposit ratio was 76.9% in 1999 compared to 71.2% in
1998.
Total deposits increased to $275,261,000 at December 31, 1999 compared
to $259,881,000 at December 31, 1998. All deposit types increased in 1999 over
1998.
The Company maintains capital to support capital needs future growth
and dividend payouts while maintaining the confidence of depositors and
investors by increasing shareholder value. The Company has provided the majority
of its capital requirements through the retention of earnings offset by the
payout of dividends. Stockholders' equity increased to $33,246,000 as of
December 31, 1999, as compared to $30,180,000 at December 31, 1998.
The Company and the Bank had levels of capital that exceeded regulatory
guidelines. The risk-based capital ratios are listed below.
TO BE WELL
CAPITALIZED UNDER MINIMUM FOR
PROMPT CORRECTIVE CAPITAL ADEQUACY
CAPITAL RATIO ACTION PROVISIONS PURPOSES
------- ----- ----------------- ----------------
COMPANY:
Tier I capital
(to average assets) $ 33,138 10.47% N/A 4.00%
Tier I capital
(to risk weighted assets) $ 33,138 14.13% N/A 4.00%
Total capital
(to risk weighted assets) $ 35,398 15.10% N/A 8.00%
BANK
Tier 1 capital
(to average assets) $ 32,217 10.20% 5.00% 4.00%
Tier I capital
(to risk weighted assets) $ 32,217 13.74% 6.00% 4.00%
Total capital
(to risk weighted assets) $ 34,477 14.70% 10.00% 8.00%
IMPACT OF INFLATION
Impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because a financial
institution's assets and liabilities consist largely of monetary items. The
relatively low proportion of the Bank's fixed assets (approximately 1.6%
December 31, 1999) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values.
30
YEAR 2000 COMPLIANCE
The Company recognized the material nature of the business issues
surrounding computer processing of dates into and beyond the Year 2000 and began
taking corrective action pursuant to the interagency statements issued by the
Federal financial Institutions Examination Council. Management believes the
company and the Bank have completed all of the activities within their control
to ensure that the Company's and the Bank's systems are Year 2000 compliant.
Year 2000 readiness costs were approximately $74,000 for the year ending
December 31, 1999. The Company does not expect to incur further expenses related
to Year 2000 issues.
The Company did not experience any material disruptions due to the Year
2000 issues nor have they experienced any disruption of service from third party
vendors, suppliers or service providers.
Although the Company did not experience any material business
disruptions of their internal computer systems or software applications due to
the start of the Year 2000 nor have they experienced any problems with their
computer systems or software applications or their third party vendors,
suppliers and service providers, the following dates remain that could present a
Year 2000 problem: March 31, the end of the first quarter; October 10, the first
date to require an eight-digit field; December 31, 2000, and January 1, 2001,
the last date of this year and first date of next; and December 31, 2001, the
end of the first 365-day year of the new century. Management believes that
appropriate actions have been taken to address these remaining Year 2000 issues
and contingency plans are in place to minimize the financial impact. Management
however cannot be certain that Year 2000 issues affecting computer systems,
software applications, customer, suppliers or service providers will not have a
material adverse impact on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative financial instruments include futures, forwards, interest
rate swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options. However, the Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates and generally require collateral from the borrower. Letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party up to a stipulated amount and with
specified terms and conditions.
Commitments to extend credit and letters of credit are not recorded as
an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by
management. Interest rate risk is the potential of economic losses due to future
interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximize
income. Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. An asset and liability management simulation
model is used by the Company to quantify the exposure and impact of changing
interest rates on earnings. The Company has no market risk sensitive instruments
held for trading purposes. Management believes that the Company's market risk is
reasonable at this time.
31
The condensed GAP report summarizing the Company's interest rate
sensitivity is as follows:
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
The following table presents (dollars in thousands) the scheduled maturity of
market risk sensitive instruments at December 31, 1999:
Maturing in Less than 1-2 2-3 3-5 5+
1 year Years Years Years Years Total
-------- -------- -------- -------- -------- --------
ASSETS
Debt Securities $ 10,407 $ 9,366 $ 2,253 $ 8,766 $ 22,803 $ 53,595
Loans, net of deferred loan fees
56,458 9,539 27,962 65,059 58,639 217,657
-------- -------- -------- -------- -------- --------
Total $ 66,865 $ 18,905 $ 30,215 $ 73,825 $ 81,442 $271,252
======== ======== ======== ======== ======== ========
LIABILITIES
Savings, Demand, MMDA $108,836 $108,836
Time Deposits
121,792 4,008 468 56 30 126,354
-------- -------- -------- -------- -------- --------
Total $230,628 $ 4,008 $ 468 $ 56 $ 30 $235,190
======== ======== ======== ======== ======== ========
Average Estimated
Interest Fair
Total Rate Value
-------- -------- ---------
ASSETS
Debt Securities $ 53,595 5.95% $ 54,424
Loans, net of deferred
loan fees $217,657 8.94% $214,449
LIABILITIES
Savings, Demand, MMDA $108,836 2.33% $108,836
Time Deposits $126,354 5.00% $126,548
32
TABLE OF MARKET RISK SENSITIVE INSTRUMENTS
The following table presents (dollars in thousands) the scheduled maturity of
market risk sensitive instruments at December 31, 1998:
Maturing in Less than 1-2 2-3 3-5 5+
1 year Years Years Years Years Total
-------- -------- -------- -------- -------- --------
ASSETS
Debt Securities $ 24,747 $ 2,756 $ 4,639 $ 5,092 $ 19,335 $ 56,569
Loans, net of deferred loan fees 15,030 7,844 11,180 48,970 116,312 199,336
-------- -------- -------- -------- -------- --------
Total $ 39,777 $ 10,600 $ 15,819 $ 54,062 $135,647 $255,905
======== ======== ======== ======== ======== ========
LIABILITIES
Savings, Demand, MMDA $103,915 $103,915
Time Deposits 112,444 5,281 780 59 30 118,594
-------- -------- -------- -------- -------- --------
Total $216,359 $ 5,281 $ 780 $ 59 $ 30 $222,509
======== ======== ======== ======== ======== ========
Average Estimated
Interest Fair
Total Rate Value
-------- -------- ---------
ASSETS
Debt Securities $ 56,569 5.79% $ 58,594
Loans, net of deferred
loan fees $199,336 8.44% $202,541
LIABILITIES
Savings, Demand, MMDA $103,915 2.31% $103,915
Time Deposits $118,594 4.96% $118,951
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this item are set forth following
Item 14 of this Form 10-K, and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The information concerning directors and executive officers required by
this item is incorporated by reference from the section of the Company's
Definitive Proxy Statement for the 2000 Annual Meeting of Shareholders of the
Company to be filed with the Securities and Exchange Commission (the
"Commission") entitled "Election of Directors" (not including the share
information included in the beneficial ownership tables nor the footnotes
33
thereto nor the subsections entitled "Committees of the Board of Directors",
"Compensation Committee Interlocks and Insider Participation" and "Meetings of
the Board of Directors") and the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the section of the Company's Definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders of the Company to be filed with the Commission entitled
"Executive Compensation" and the subsection entitled "Election of Directors -
Compensation Committee Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
sections of the Company's Definitive Proxy Statement for the 2000 Annual Meeting
of Shareholders of the Company to be filed with the Commission, entitled
"Election of Directors - Security Ownership of Certain Beneficial Owners and
Management", as to share information in the tables of beneficial ownership and
footnotes thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the section of the Company's Definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Certain
Relationships and Related Transactions".
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the report:
1. Financial Statements:
2. Exhibits: See Index to Exhibits at page 58.
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K during the last
quarter of 1999: on October 12, 1999, and December 23, 1999.
(c) Exhibits
See Index to Exhibits at page 58 of this Annual Report on Form
10-K, which is incorporated herein by reference.
(d) Financial Statement Schedules
Not applicable.
34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
North Valley Bancorp
Redding, California
We have audited the accompanying consolidated balance sheets of North Valley
Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of North Valley Bancorp and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE, L.L.P.
- - -----------------------------
Deloitte & Touche, L.L.P.
January 28, 2000
35
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998 (IN THOUSANDS EXCEPT SHARE AMOUNTS)
- - ---------------------------------------------------------------------------------------------------------
ASSETS 1999 1988
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 12,783 $ 7,052
Federal funds sold 14,600 18,300
--------- ---------
Total cash and cash equivalents 27,383 25,352
CASH HELD IN TRUST 282 873
Securities:
Available for sale, at fair value 25,569 22,842
Held to maturity, at amortized cost (fair value of $28,975 and
$35,939 at December 31, 1999 and 1998) 28,146 33,914
Loans and leases, net of allowance for loan and lease losses of $2,260 and
$1,902 and deferred loan fees of $194 and $442 at December 31, 1999 and 1998 215,397 197,434
Premises and equipment, net of accumulated depreciation
and amortization 5,060 5,028
Other real estate owned 80 575
FHLB stock 911 841
Accrued interest receivable 2,035 1,770
Other assets 7,947 7,733
--------- ---------
TOTAL ASSETS $ 312,810 $ 296,362
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 40,071 $ 37,372
Interest-bearing:
Savings 98,948 95,617
Time certificates 126,354 118,594
Demand accounts 9,888 8,298
--------- ---------
Total deposits 275,261 259,881
Accrued interest and other liabilities 4,303 6,301
--------- ---------
Total liabilities 279,564 266,182
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares;
none outstanding
Common stock, no par value: authorized 20,000,000 shares:
outstanding 3,714,418 and 3,690,220 at December 31, 1999
and 1998 10,427 10,237
Retained earnings 22,936 19,890
Accumulated other comprehensive income (loss), net of tax (117) 53
--------- ---------
Total stockholders' equity 33,246 30,180
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 312,810 $ 296,362
========= =========
See notes to consolidated financial statements.
36
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
- - --------------------------------------------------------------------------
1999 1998 1997
INTEREST INCOME:
Loans include fees $ 17,277 $ 15,482 $ 14,871
Lease financing 336 366 367
Securities:
Taxable 1,066 1,428 1,042
Exempt from federal taxes 1,926 2,173 2,374
Federal funds sold 1,040 1,019 1,079
-------- -------- --------
Total interest income 21,645 20,468 19,733
INTEREST EXPENSE - DEPOSITS 8,234 8,583 8,644
-------- -------- --------
NET INTEREST INCOME 13,411 11,885 11,089
PROVISION FOR LOAN AND LEASE LOSSES 1,042 1,430 770
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 12,369 10,455 10,319
-------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 2,143 1,786 1,400
Other fees and charges 1,009 851 802
Gain (loss) on sale of loans (71) 130 160
Gain on sale or calls of securities 33 979 250
Life insurance proceeds 1,139
Other 623 349 387
-------- -------- --------
Total noninterest expenses 3,737 4,095 4,138
-------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 4,814 4,679 4,522
Furniture and equipment expense 675 666 553
Occupancy expense 641 557 503
Merger and acquisition expense 149
Other 3,826 2,984 2,734
-------- -------- --------
Total noninterest expenses 10,105 8,886 8,312
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,001 5,664 6,145
PROVISION FOR INCOME TAXES 1,473 1,579 1,000
-------- -------- --------
NET INCOME $ 4,528 $ 4,085 $ 5,145
======== ======== ========
EARNINGS PER SHARE:
Basic $ 1.22 $ 1.11 $ 1.41
======== ======== ========
Diluted $ 1.21 $ 1.10 $ 1.39
======== ======== ========
See notes to consolidated financial statements.
37
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS EXCEPT SHARE AND PER
SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK OTHER
-------------------- COMPREHENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT INCOME EARNINGS INCOME TOTAL
Balance, January 1, 1997 3,647,376 $ 9,896 $ 13,327 $ 677 $ 23,900
Comprehensive income:
Net income $ 5,145 5,145 5,145
Other comprehensive income,
net of tax of $297:
Unrealized gain (loss) on available
for sale securities, net of
reclassification adjustment of $180 399 399 399
Minimum pension liability adjustments (359) (359) (359)
-------
Total comprehensive income $ 5,185
=======
Stock options exercised 30,808 133 133
Tax benefit derived from the
exercise of stock options 132 132
Cash dividend paid on common
stock ($.175 per share) (640) (640)
Cash dividend declared on common
stock ($.175 per share) (644) (644)
--------- ------- -------- ------ --------
Balance, December 31, 1997 3,678,184 10,161 17,188 717 28,066
Comprehensive income:
Net income $ 4,085 4,085 4,085
Other comprehensive income,
net of tax of $8:
Unrealized gain (loss) on available
for sale securities, net of
reclassification adjustment $705 (682) (682) (682)
Minimum pension liability adjustments 18 18 18
--------
Total comprehensive income $ 3,421
========
Stock issued and options exercised 12,036 42 42
Tax benefit derived from the
exercise of stock options 34 34
Cash dividend paid on common
stock ($.175 per share) (645) (645)
Cash dividend declared on common
stock ($.20 per share) (738) (738)
--------- ------- -------- ------ --------
Balance, December 31, 1998 3,690,220 10,237 19,890 53 30,180
Comprehensive income:
Net income $ 4,528 4,528 4,528
Other comprehensive income,
net of tax of $129:
Unrealized gain (loss) on available
for sale securities (198) (198) (198)
Minimum pension liability adjustments 28 28 28
--------
Total comprehensive income $ 4,358
========
Stock options exercised 24,198 153 153
Tax benefit derived from the
exercise of stock options 37 37
Cash dividend paid on common
stock ($0.30 per share) (1,111) (1,111)
Cash dividend declared on common
stock ($0.10 per share) (371) (371)
--------- ------- -------- ------ --------
Balance, December 31, 1999 3,714,418 $10,427 $ 22,936 $ (117) $ 33,246
========= ======= ======== ====== ========
See notes to consolidated financial statements.
38
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
- - --------------------------------------------------------------------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,528 $ 4,085 $ 5,145
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 566 526 430
Amortization of premium on securities 3 (70) 4
Provision for loan and lease losses 1,042 1,430 770
Loss on sale/write down of other real estate owned 215 31 185
Gain on sale of premises and equipment (8)
Gain on sale or calls of securities (33) (979) (250)
Loss (gain) on sales of loans 71 (130) (160)
Provision (benefit) for deferred taxes 61 590 (675)
Effect of changes in:
Cash held in trust 591 797 (1,670)
Accrued interest receivable (265) 153 (158)
Other assets (192) (2,687) (129)
Accrued interest and other liabilities (1,566) 1,660 1,066
-------- -------- --------
Net cash provided by operating activities 5,013 5,406 4,558
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of FHLB stock (70) (51) (56)
Purchases of interest in other real estate owned (533)
Proceeds from sale of other real estate owned 4,854 279 1,565
Purchases of available for sale securities (25,699) (22,538) (23,353)
Proceeds from sales of available for sale securities 75 4,418 6,534
Proceeds from maturities or calls of available for sale securities 22,625 21,999 260
Purchases of held to maturity securities (2,082)
Proceeds from maturities or calls of
held to maturity securities 5,789 5,275 2,842
Proceeds from sales of loans 29,729 9,925 9,619
Net increase in loans and leases (52,846) (41,152) (12,646)
Purchases of premises and equipment - net (590) (907) (1,309)
-------- -------- --------
Net cash used in investing activities (16,666) (22,752) (18,626)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits, demand
accounts, and savings accounts 7,620 20,924 5,176
Net increase in time certificates 7,760 435 4,118
Cash dividends paid (1,849) (645) (1,924)
Repurchase of company stock
Cash received for stock options exercised 153 42 133
-------- -------- --------
Net cash provided by financing activities 13,684 20,756 7,503
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,031 3,410 (6,565)
CASH AND CASH EQUIVALENTS:
Beginning of year 25,352 21,942 28,507
-------- -------- --------
End of year $ 27,383 $ 25,352 $ 21,942
======== ======== ========
ADDITIONAL INFORMATION:
Transfer of foreclosed loans from
loans receivable to other real
estate owned $ 4,041 $ 673 $ 1,893
======== ======== ========
Cash payments:
Income tax payments $ 1,600 $ 775 $ 1,849
======== ======== ========
Interest payments $ 8,239 $ 8,600 $ 8,620
======== ======== ========
See notes to consolidated financial statements
39
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - North Valley Bancorp and subsidiaries (Company)
operates 12 branches, which include two supermarket branches, in Shasta and
Trinity Counties in Northern California. The Company operates as one business
segment providing banking services to the Company's clients in Northern
California. The Company's principal business consists of attracting deposits
from the general public and using the funds to originate commercial, real estate
and installment loans to customers, who are predominately small and middle
market businesses and middle income individuals. The Company's primary source of
revenues is interest income from its loan and investment securities portfolios.
The Company is not dependent on any single customer for more than ten percent of
the Company's revenues.
On October 4, 1999, the Company and Six Rivers National Bank (SRNB)
(headquartered in Eureka, California) announced the signing of a proposed merger
agreement and plan of reorganization which, if approved by the stockholders of
the two organizations and by the regulatory authorities, is expected to be
completed in the second quarter of the year 2000 and will result in the merger
of SRNB into the Company with SRNB to be operated as a wholly-owned subsidiary
of the Company. The agreement provides for SRNB stockholders to receive shares
of the Company in exchange for SRNB stock based on a formula which is dependent
on the average closing price of the Company stock in a tax free exchange to be
accounted for as a pooling of interest.
GENERAL - The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to prevailing practices within the
banking industry. The Company follows the accrual method of accounting.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The more significant accounting and reporting policies are discussed below.
CONSOLIDATION - The consolidated financial statements include North Valley
Bancorp and its wholly owned subsidiaries, Bank Processing, Inc., North Valley
Trading Company, and North Valley Bank (the Bank) and its wholly-owned
subsidiary, North Valley Basic Securities. North Valley Trading Company and
North Valley Basic Securities did not have any activity in 1998. All material
intercompany accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For the purposes of the statements of cash
flows, cash and cash equivalents have been defined as cash, demand deposits with
correspondent banks, cash items and settlements in transit, and federal funds
sold. Generally, federal funds are sold for one-day periods. Cash equivalents
have remaining terms to maturity of three months or less from the date of
acquisition.
INVESTMENTS - The Company's policy with regard to investments is as follows:
TRADING SECURITIES ARE CARRIED AT FAIR VALUE. Changes in fair value
are included in other operating income. The Company did not have any
securities classified as trading at December 31, 1999 and 1998.
AVAILABLE FOR SALE SECURITIES are carried at fair value and
represent securities not classified as trading securities nor as held
to maturity securities. Unrealized gains and losses resulting from
changes in fair value are recorded, net of tax, as a net amount within
40
accumulated other comprehensive income, which is a separate component
of stockholders' equity. Gains or losses on disposition are recorded in
other operating income based on the net proceeds received and the
carrying amount of the securities sold, using the specific
identification method.
HELD TO MATURITY SECURITIES are carried at cost adjusted for
amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income. The Company's policy of
carrying such investment securities at amortized cost is based upon its
ability and management's intent to hold such securities to maturity.
LOANS AND LEASES - Loans and leases are reported at the principal amount
outstanding, net of unearned income, including deferred loan fees and the
allowance for loan and lease losses.
Interest on loans is calculated by using the simple interest method on the
daily balance of the principal amount outstanding.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full and timely collection of interest or
principal, or when a loan becomes contractually past due by 90 days or more with
respect to interest or principal. When a loan is placed on nonaccrual status,
all interest previously accrued but not collected is reversed against current
period interest income. Income on such loans is then recognized only to the
extent that cash is received and where the future collection of principal is
probable. Interest accruals are resumed on such loans when, in the judgment of
management, the loans are estimated to be fully collectible as to both principal
and interest.
Direct financing leases are carried net of unearned income. Income from
leases is recognized by a method that approximates a level yield on the
outstanding net investment in the lease.
DEFERRED LOAN FEES - Loan fees and certain related direct costs to originate
loans are deferred and amortized to income by a method that approximates a level
yield over the contractual life of the underlying loans.
ALLOWANCE FOR LOAN AND LEASE LOSSES - The allowance for loan and lease
losses is established through a provision for loan and lease losses charged to
operations. Loans and leases are charged against the allowance for loan and
lease losses when management believes that the collectibility of the principal
is unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. Management attributes general reserves to
different types of loans using percentages which are based upon perceived risk
associated with the portfolio and underlying collateral, historical loss
experience, and vulnerability to changing economic conditions which may affect
the collectibility of the loans. Specific reserves are allocated for impaired
loans and leases, for loans and leases which have experienced a decline in
internal grading, and when management believes additional loss exposure exists.
Although the allowance for loan and lease losses is allocated to various
portfolio segments, it is general in nature and is available for the loan and
lease portfolio in its entirety. The allowance is an amount that management
believes will be adequate to absorb losses inherent in existing loans and leases
commitments to extend credit. Actual amounts could differ from those estimates.
The Company considers a loan or lease impaired if, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
and leases is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all
collateral-dependent loans and leases are measured for impairment based on the
fair value of the collateral.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation, which is computed principally on the straight-line
method over the estimated useful lives of the respective assets. Leasehold
improvements are amortized on the straight-line method over the shorter of the
estimated useful lives of the improvements or the terms of the respective
leases.
OTHER REAL ESTATE OWNED - Real estate acquired through, or in lieu of, loan
foreclosures is expected to be sold and is recorded at the date of foreclosure
at the lower of the recorded investment in the property or its fair value less
estimated costs to sell (fair value) establishing a new cost basis through a
41
charge to allowance for loan losses, if necessary. After foreclosure, valuations
are periodically performed by management with any subsequent write-downs
recorded as a valuation allowance and charged against operating expenses.
Operating expenses of such properties, net of related income are included in
other expenses and gains and losses on their disposition are included in other
income and other expenses.
INCOME TAXES - The Company applies an asset and liability method in
accounting for deferred 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 a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) No. 25, Accounting for Stock Issued to Employees. The
Company presents the required pro forma disclosures of the effect of stock-based
compensation on net income and earnings per share using the fair value method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE - North Valley Bancorp's only
significant operating unit is North Valley Bank, a commercial bank, which offers
similar products and services to customers located in Shasta and Trinity
Counties in Northern California. The Company does not have any single customer
that accounts for more than 10% of its revenue. Accordingly, management
evaluates the Company's performance as a single business segment and does not
allocate resources based on the performance of different lending or transaction
activities.
COMPREHENSIVE INCOME - Comprehensive income includes net income and other
comprehensive income which represents the change in its net assets during the
period from nonowner sources. The components of other comprehensive income for
the Company include the unrealized gain or loss on available-for-sale securities
and adjustments to minimum pension liability and are presented net of tax.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. SFAS No. 133 requires that derivative instruments used to hedge be
identified specifically to assets, liabilities, firm commitments or anticipated
transactions and measured as effective and ineffective when hedging changes in
fair value or cash flows. Derivative instruments that do not qualify as either a
fair value or cash flow hedge will be valued at fair value with the resultant
gain or loss recognized in current earnings. Changes in the effective portion of
fair value hedges will be recognized in current earnings along with the change
in fair value of the hedged item. Changes in the effective portion of the fair
value of cash flow hedges will be recognized in other comprehensive income until
realization of the cash flows of the hedged through current earnings. Any
ineffective portion of hedges will be recognized in current earnings. In June
1999, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 137, "Accounting For Derivative Instruments and
Hedging Activities" - Deferral of the Effective Date of FASB Statement No. 133.
This statement defers the effective date of Statement No. 133 for all entities,
which have not yet adopted the Statement, to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. The adoption of SFAS No. 133 and No. 137 is not expected
to significantly impact the Company's earnings or financial position.
RECLASSIFICATIONS - Certain amounts in 1998 and 1997 have been reclassified
to conform with the 1999 financial statement presentation.
2. RESTRICTED CASH BALANCES
The Bank is subject to regulation by the Federal Reserve Board. The
regulations required the Bank to maintain average cash reserve balances on hand
or at the Federal Reserve Bank of $1,256,000 and $1,009,000 at December 31, 1999
and 1998. As compensation for check-clearing services, additional compensating
balances of $1,000,000 are required to be maintained with the Federal Reserve
Bank.
42
3. SECURITIES
At December 31, the amortized cost of securities and their approximate fair
value were as follows (in thousands):
GROSS GROSS CARRYING
AMORTIZED UNREALIZED UNREALIZED AMOUNT
AVAILABLE FOR SALE SECURITIES: COST GAINS LOSSES (FAIR VALUE)
DECEMBER 31, 1999
Securities of U.S. government
agencies and corporations $ 18,697 $ (172) $ 18,525
Mortgage backed securities 6,988 (64) 6,924
Other securities 139 $ 6 (25) 120
-------- -------- -------- --------
$ 25,824 $ 6 $ (261) $ 25,569
======== ======== ======== ========
DECEMBER 31, 1998
Securities of U.S. government
agencies and corporations $ 21,976 $ 62 $ (13) $ 22,025
Obligation of states and political
subdivisions 625 5 630
Other securities 215 5 (33) 187
-------- -------- -------- --------
$ 22,816 $ 72 $ (46) $ 22,842
======== ======== ======== ========
CARRYING
AMOUNT GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
AVAILABLE FOR SALE SECURITIES: COST GAINS LOSSES FAIR VALUE
DECEMBER 31, 1999
Obligation of states and political
subdivisions $ 28,146 $ 843 $ (14) $ 28,975
======== ======== ======== ========
DECEMBER 31, 1998
Obligation of states and political
subdivisions $ 33,914 $ 2,025 $ 35,939
======== ======== ======== ========
Gross realized gains on sales or calls of securities categorized as
available for sale securities were $979,000 and $250,000 in 1998 and 1997. There
were no gross realized gains on sales of available for sale securities in 1999.
There were no gross realized losses on sale of available for sale securities in
1999, 1998 or 1997.
Gross realized gains on calls of securities categorized as held to maturity
securities were $33,000, in 1999. There were no gross realized gains on calls of
held to maturity securities in 1998 and 1997. There were no gross realized
losses on calls of held to maturity securities in 1999, 1998 or 1997.
Scheduled maturities of held to maturity and available for sale securities
(other than equity securities with an amortized cost of approximately $139,000
and a fair value of approximately $120,000) at December 31, 1999, are shown
below (in thousands). Expected maturities may differ from contractual maturities
because borrowers may have the right to prepay with or without penalty.
43
HELD TO MATURITY SECURITIES AVAILABLE FOR SALE SECURITIES
--------------------------- -----------------------------
AMORTIZED
COST FAIR VALUE
(CARRYING AMORTIZED (CARRYING
AMOUNT) FAIR VALUE COST AMOUNT)
Due in 1 year or less $ 2,457 $ 2,491 $ 8,000 $ 7,950
Due after 1 year through 5 years 9,810 10,077 10,697 10,575
Due after 5 years through 10 years 9,188 9,539 3,985 3,954
Due after 10 years 6,691 6,868 3,003 2,970
------- ------- ------- -------
$28,146 $28,975 $25,685 $25,449
======= ======= ======= =======
At December 31, 1999 and 1998, securities having fair value amounts of
approximately $17,568,000 and $16,448,000 were pledged to secure public deposits
and short-term borrowings and for other purposes required by law or contract.
4. LOANS AND LEASES
The Company originates loans for business, consumer and real estate
activities and leases for equipment purchases. Such loans and leases are
concentrated in Shasta and Trinity Counties and neighboring communities.
Substantially all loans are collateralized. Generally, real estate loans are
secured by real property. Commercial and other loans are secured by bank
deposits or business or personal assets. Leases are generally secured by
equipment. The Company's policy for requiring collateral reflects the Company's
analysis of the borrower, the borrower's industry and the economic environment
in which the loan would be granted. The loans and leases are expected to be
repaid from cash flows or proceeds from the sale of selected assets of the
borrower.
Major classifications of loans and leases at December 31 were as follows (in
thousands):
1999 1998
Commercial $ 89,954 $ 66,517
Real estate - construction 2,675 4,177
Real estate - mortgage 32,718 52,909
Installment 71,676 56,686
Direct financing leases 5,395 5,585
Other 15,433 13,904
--------- ---------
Total loans and leases receivable 217,851 199,778
Less:
Allowance for loan and lease losses 2,260 1,902
Deferred loan fees 194 442
--------- ---------
Net loans and leases $ 215,397 $ 197,434
========= =========
At December 31, 1999 and 1998, the Bank serviced real estate loans and loans
guaranteed by the Small Business Administration which it had sold to the
secondary market of approximately $106,862,000 and $78,568,000.
44
The components of the Bank's leases receivable as of December 31 are
summarized below (in thousands):
1999 1998
Future minimum lease payments $ 5,505 $ 5,585
Initial direct costs 26
Unearned income (136)
--------
$ 5,395 $ 5,585
======== =======
Future minimum lease payments receivable are as follows (in thousands):
2000 $ 1,236
2001 1,182
2002 934
2003 676
2004 and thereafter 1,477
-------
Total $ 5,505
=======
There are no contingent rental payments included in income for 1999, 1998
and 1997.
Changes in the allowance for loan and lease losses for the years ended
December 31, were as follows (in thousands):
1999 1998 1997
Balance, beginning of year $ 1,902 $ 1,702 $ 1,254
Provision charged to operations 1,042 1,430 770
Loans charged off (1,210) (1,360) (362)
Recoveries 526 130 40
-------- ------- -------
Balance, end of year $ 2,260 $ 1,902 $ 1,702
======== ======= =======
5. IMPAIRED AND NONPERFORMING LOANS AND LEASES
At December 31, 1999 and 1998, the recorded investment in loans and leases
for which impairment has been recognized was approximately $374,000 and
$2,871,000. Of the 1999 balance, approximately $120,000 has a related valuation
allowance of $43,000. The remaining $254,000 did not require a valuation
allowance. Of the 1998 balance approximately $2,269,000 has a related valuation
allowance of $227,000. The remaining $602,000 did not require a valuation
allowance. For the years ended December 31, 1999, 1998 and 1997, the average
recorded investment in loans and leases for which impairment has been recognized
was approximately $1,411,000, $3,201,000 and $3,455,000. During the portion of
the year that the loans and leases were impaired the Company recognized interest
income of approximately $193,000, $232,000 and $153,000 for cash payments
received in 1999, 1998 and 1997.
Nonperforming loans and leases at December 31 were as follows (in
thousands):
1999 1998
Nonaccrual loans and leases $ 346 $ 2,307
Loans and leases 90 days past due
but still accruing interest 223 364
------- -------
Total nonaccrual and 90 days
past due loans and leases $ 569 $ 2,671
======= =======
If interest on nonaccrual loans and leases had been accrued, such income
would have approximated $28,000 in 1999, $132,000 in 1998 and $32,000 in 1997.
Interest income of $14,000 in 1999, $33,000 in 1998, and $28,000 in 1997 was
recorded when it was received on the nonaccrual loans and leases.
45
At December 31, 1999, there were no commitments to lend additional funds to
borrowers whose loans and leases were classified as nonaccrual.
6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows (in thousands):
1999 1998
Land $ 1,169 $ 1,080
Buildings and improvements 4,139 4,075
Furniture, fixtures and equipment 5,329 4,902
Leasehold improvements 432 422
------- -------
11,069 10,479
Accumulated depreciation and amortization (6,009) (5,451)
------- -------
$ 5,060 $ 5,028
======= =======
Building and equipment rental expense was approximately $162,000 for the
year ended December 31, 1999 and $90,000 and $77,000 for the years ended
December 31, 1998 and 1997.
7. OTHER ASSETS
Major classifications of other assets at December 31 were as follows (in
thousands):
1999 1998
Cash surrender value of life insurance policies $ 4,650 $ 3,850
Deferred taxes 1,603 1,580
Prepaid expenses 990 781
Other 704 1,522
------- -------
Total $ 7,947 $ 7,733
======= =======
8. DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $23,753,000 and $18,469,000 at December 31, 1999 and 1998.
Interest expense incurred on such time certificates of deposit was $1,009,000,
$713,000, and $925,000, for the years ended December 31, 1999, 1998 and 1997.
At December 31, 1999, the scheduled maturities of all time deposits was as
follows (in thousands):
YEARS AMOUNT
2000 $ 121,791
2001 4,008
2002 467
2003 57
2004 and thereafter 31
---------
$ 126,354
=========
46
9. LINES OF CREDIT
At December 31, 1999, the Bank had the following lines of credit with
correspondent banks to purchase federal funds (in thousands):
TYPE AMOUNT EXPIRATION
Unsecured $ 3,000 May 30, 2001
Unsecured $ 7,500 July 31, 2000
Secured:
First deeds of trust on eligible
1-4 unit residential loans $ 9,903 Quarterly
First deeds of trust on eligible
commercial real estate loans $15,332 February 12, 2000
10. INCOME TAXES
The provision for income taxes for the years ended December 31, was as
follows (in thousands):
1999 1998 1997
Currently payable:
Federal $ 1,188 $ 459 $ 1,185
State 224 530 490
------- ------- -------
Total 1,412 989 1,675
------- ------- -------
Deferred taxes (benefits):
Federal 26 565 (539)
State 35 25 (136)
------- ------- -------
Total 61 590 (675)
------- ------- -------
Total $ 1,473 $ 1,579 $ 1,000
======= ======= =======
The effective federal tax rate for the years ended December 31, differs from
the statutory tax rate as follows:
1999 1998 1997
Federal income tax at statutory rates 35.0% 35.0% 35.0%
State income taxes net of federal
income tax benefit 2.9 6.5 3.8
Tax exempt income (11.5) (13.7) (13.6)
Officer's life insurance proceeds (6.3)
Other (1.8) 0.1 (2.6)
------- ------- -------
24.6% 27.9% 16.3%
======= ======= =======
47
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax asset at December 31, are as follows (in
thousands):
1999 1998
Deferred tax assets:
Accrued pension obligation $ 735 $ 673
Allowance for loan losses 653 522
Deferred compensation 622 635
Alternative minimum tax credit 141
Deferred loan fee income 96 201
Accrued severance 62
Unrealized loss on securities available for sale 76
California franchise tax 3
------- -------
Total deferred tax assets 2,326 2,093
------- -------
Deferred tax liabilities:
Other (197) (342)
Tax depreciation in excess of book depreciation (160) (133)
Mark to market adjustment (130) (23)
OMSR adjustment (138)
FHLB stock dividend (98)
Unrealized gain on securities available for sale (8)
California franchise tax (7)
------- -------
Total deferred tax liabilities (723) (513)
------- -------
Net deferred tax asset $ 1,603 $ 1,580
======= =======
The Company believes that it is more likely than not that it will realize
the above deferred tax assets in the future periods; therefore, no valuation
allowance has been provided against its deferred tax assets.
11. RETIREMENT AND DEFERRED COMPENSATION PLANS
Substantially all employees with at least one year of service participate in
a Company-sponsored employee stock ownership plan (ESOP). The Company made
contributions to the ESOP of $60,000 in 1999, 1998 and 1997, respectively. At
December 31, 1999, the ESOP owned approximately 167,000 shares of the Company's
stock.
The Company maintains a 401(k) plan covering employees who have completed
1,000 hours of service during a 12-month period and are aged 21 or older.
Voluntary employee contributions are partially matched by the Company. The
Company made contributions to the Plan for the years ended December 31, 1999,
1998, and 1997 of $34,000, $26,000, and $20,000, respectively.
The Company has a nonqualified executive deferred compensation plan for key
executives and directors. Under this plan, participants voluntarily elect to
defer a portion of their salary, bonus or fees and the Company is required to
credit these deferrals with interest. The Company's deferred compensation
obligation of $1,424,000 and $1,415,000 as of December 31, 1999 and 1998,
respectively, is included in accrued interest and other liabilities.
The Company has a supplemental retirement plan for directors and a
supplemental executive retirement plan covering key executives. These plans are
nonqualified defined benefit plans and are unsecured and unfunded. The Company
has purchased insurance on the lives of the participants and intends to use the
cash values of these policies ($4,650,000 and $3,850,000 at December 31, 1999
and 1998, respectively) to pay the retirement obligations. The accrued pension
48
obligation of $2,108,000 and $2,325,000 as of December 31, 1999 and 1998,
respectively, is included in accrued interest and other liabilities.
The following table sets forth the plans' status at December 31 (in
thousands):
1999 1998
Change in projected benefit obligation
Projected benefit obligation at beginning of year $(2,605) $(2,525)
Service cost (61) (38)
Interest cost (164) (153)
Benefits paid 219 114
Actuarial gain (loss) 267 (3)
Plan amendments (18)
------- -------
Projected benefit obligation at end of year (2,362) (2,605)
------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year -- --
Fair value of plan assets at end of year -- --
FUNDING
Funded (unfunded) status (2,362) (2,605)
Unrecognized transitional amount 150 175
Unrecognized prior service cost 426 439
Unrecognized net actuarial (gain) loss (77) 193
------- -------
Net amount recognized (accrued pension cost) $(1,863) $(1,798)
======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.36% 6.41%
Rate of compensation increase (supplemental 6.00% 6.00%
executive retirement plan only)
Expected return on plan assets N/A N/A
The elements of pension costs for the unqualified defined benefit pension
plans at December 31 are as follows (in thousands):
1999 1998 1997
COMPONENTS OF NET PERIODIC BENEFITS COST
Service cost $ 61 $ 38
Interest cost 164 153 $140
Amortization of net obligation at transition 25 25 31
Amortization of prior service cost 31 31
Recognized net actuarial loss 4 5 17
---- ---- ----
Net periodic benefit cost $285 $252 $188
==== ==== ====
THE NET PERIODIC PENSION COST WAS DETERMINED
USING THE FOLLOWING ASSUMPTIONS
Discount rate 7.36% 6.41% 6.11%
Rate of compensation increase (supplemental executive
retirement plan only) 6.00% 6.00% 6.00%
Expected return on plan assets N/A N/A N/A
49
12. STOCK BASED COMPENSATION
During 1999 and 1998, each director was awarded 600 shares of common stock,
resulting in an additional 4,200 shares being issued each year.
Under the Company's stock option plans as of December 31, 1999, 636,347
shares of the Company's common stock remained available for grants to directors
and employees of the Bank. Under the Director Plan, options may not be granted
at a price less than 85% of fair market value at the date of the grant. Under
the Employee Plan, options may not be granted at a price less than the fair
market value at the date of the grant. Under both plans, options may be
exercised over a ten year term and vest ratably over four years from the date of
the grant. A summary of stock options follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
Outstanding, January 1, 1997 75,776 $ 4.78
39,618 exercisable at weighted average price of $3.56
Granted 14,000 9.32
Exercised (30,808) 4.32
Expired or canceled (9,040) 7.33
--------
Outstanding, December 31, 1997 49,928 5.69
27,288 exercisable at weighted average price of $4.36
Granted 61,000 15.10
Exercised (7,836) 5.31
Expired or canceled (1,600) 12.75
--------
Outstanding, December 31, 1998 101,492 11.34
41,372 exercisable at weighted average price of $7.94
Granted 406,000 11.23
Exercised (19,998) 7.63
Expired or canceled (10,500) 12.20
--------
Outstanding, December 31, 1999
119,994 exercisable at weighted average price of $10.86 476,994 $ 11.38
======== =========
Information about stock options outstanding at December 31, 1999 is
summarized as follows:
Weighted Weighted
Average Average
Average Exercise Exercise
Range of Remaining Price of Price of
Exercise Options Contractual Options Options Options
Prices Outstanding Life (Years) Outstanding Exercisable Exercisable
------ ----------- ------------ ----------- ----------- -----------
$2.69-$3.35 7,096 2 $ 3.00 7,096 $ 3.00
$5.10-$6.09 12,000 5 $ 5.60 12,000 $ 5.60
$8.29-$9.14 11,000 7 $ 8.77 6,200 $ 8.70
$10.20-$10.88 39,400 9 $ 10.18 2,600 $ 10.72
$10.31 210,000 9 $ 10.31 42,000 $ 10.31
$12.75 10,998 8 $ 12.75 3,798 $ 12.75
$12.88 141,500 9 $ 12.88 28,300 $ 12.88
$15.94 45,000 8 $ 15.94 18,000 $ 15.94
50
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plan. Under the intrinsic value method no compensation cost
has been recognized for its stock option grants. SFAS No. 123, Accounting for
Stock-Based Compensation requires disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of 1995. Had compensation cost for the grants been determined based
upon the fair value method, the Company's net income and earnings per share
would have been adjusted to the pro forma amounts indicated below.
1999 1998 1997
Net income:
As reported $ 4,528 $ 4,085 $ 5,145
Pro forma $ 4,289 $ 4,011 $ 5,122
Basic earnings per common share:
As reported $ 1.22 $ 1.11 $ 1.41
Pro forma $ 1.16 $ 1.09 $ 1.40
Diluted earnings per common and equivalent share:
As reported $ 1.21 $ 1.10 $ 1.39
Pro forma $ 1.15 $ 1.08 $ 1.38
The fair value of the options granted during 1999, 1998 and 1997 is
estimated as $985,000, $311,000, and $45,000 on the date of grant using a
binomial option-pricing model with the following assumptions: $0.40 annual
dividend, volatility of 22.31%, 21.89% and 15.19%, risk-free interest rate of
5.00%, 5.40% and 6.36%, assumed forfeiture rate of zero, and an expected life of
seven years in 1999 and six years in 1998 and 1997. The weighted average per
share fair value of the 1999, 1998 and 1997 awards was $2.43, $5.10, and $3.22.
The impact of outstanding nonvested stock options granted prior to 1995 has been
excluded from the pro forma calculations; accordingly the 1996 - 1999 pro forma
adjustments are not indicative of future pro forma adjustments when the
calculation will apply to all applicable stock options.
13. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options or other contracts
to issue common stock were exercised and converted into common stock.
There was no difference in the numerator used in the calculation of basic
earnings per share and diluted earnings per share. The denominator used in the
calculation of basic earnings per share and diluted earnings per share for each
of the years ended December 31 is reconciled as follows:
1999 1998 1997
CALCULATION OF BASIC EARNINGS PER SHARE
Numerator - net income $4,528 $4,085 $5,145
Denominator - weighted average common shares outstanding 3,703 3,684 3,658
------ ------ ------
Basic earnings per share $ 1.22 $ 1.11 $ 1.41
====== ====== ======
CALCULATION OF DILUTED EARNINGS PER SHARE
Numerator - net income $4,528 $4,085 $5,145
Denominator:
Weighted average common shares outstanding 3,703 3,684 3,658
Dilutive effect of outstanding options 41 36 44
------ ------ ------
Weighted average common shares outstanding -
diluted 3,744 3,720 3,702
------ ------ ------
Diluted earnings per share $ 1.21 $ 1.10 $ 1.39
====== ====== ======
51
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in a number of legal actions arising from normal
business activities. Management, based upon the advice of legal counsel,
believes that the ultimate resolution of all pending legal actions will not have
a material effect on the financial statements.
The Bank was contingently liable under letters of credit issued on behalf of
its customers in the amount of $2,366,000 and $485,000 at December 31, 1999 and
1998. At December 31, 1999, commercial and consumer lines of credit, and real
estate loans of approximately $24,014,000 and $3,381,000 were undisbursed. At
December 31, 1998, commercial and consumer lines of credit, and real estate
loans of approximately $23,975,000 and $2,191,000 were undisbursed.
Loan commitments are typically contingent upon the borrower meeting certain
financial and other covenants and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments are
expected to expire without being drawn upon, the total commitments do not
necessarily represent future cash requirements. The Company evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits or business or
personal assets.
Standby letters of credit are conditional commitments written by the Company
to guarantee the performance of a customer to a third party. These guarantees
are issued primarily relating to inventory purchases by the Company's commercial
customers and such guarantees are typically short term. Credit risk is similar
to that involved in extending loan commitments to customers and the Company,
accordingly, uses evaluation and collateral requirements similar to those for
loan commitments. Virtually all of such commitments are collateralized.
These instruments involve, to varying degrees, elements of credit and market
risk in excess of the amounts recognized in the balance sheet and do not
necessarily represent the actual amount subject to credit loss.
15. RELATED PARTY TRANSACTIONS
At December 31, 1999 and 1998, certain officers and directors and their
associates were indebted to the Bank for loans made on substantially the same
terms, including interest rates and collateral, as comparable transactions with
unaffiliated parties.
A summary of activity for the years ended December 31, 1999 and 1998 is as
follows (in thousands; renewals are not reflected as either new loans or
repayments):
1999 1998
Beginning balance $ 1,750 $ 2,885
Borrowings 626 679
Repayments (219) (1,707)
Directors or officers no longer
associated with the Company (34) (107)
-------- --------
Ending balance $ 2,123 $ 1,750
======== ========
16. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and, possibly, additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts and the
Bank's prompt corrective action classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
52
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
The most recent notifications from the Federal Deposit Insurance Corporation
for the Bank as of December 31, 1999 and 1998, categorized the Bank as well
capitalized under the regulatory framework for prompt correction action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the Bank's category.
The Company's and the Bank's actual capital amounts (in thousands) and
ratios are also presented, respectively, in the following tables.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- ------------------------ ------------------------
MINIMUM MINIMUM MINIMUM MINIMUM
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
COMPANY
As of December 31, 1999:
Total capital
(to risk weighted assets) $ 35,398 15.10 % $ 18,758 8.00 % N/A N/A
Tier I capital
(to risk weighted assets) $ 33,138 14.13 % $ 9,379 4.00 % N/A N/A
Tier I capital
(to average assets) $ 33,138 10.47 % $ 12,659 4.00 % N/A N/A
As of December 31, 1998:
Total capital
(to risk weighted assets) $ 31,490 15.05 % $ 16,739 8.00 % N/A N/A
Tier I capital
(to risk weighted assets) $ 29,588 14.14 % $ 8,369 4.00 % N/A N/A
Tier I capital
(to average assets) $ 29,588 10.18 % $ 11,626 4.00 % N/A N/A
BANK
As of December 31, 1999:
Total capital
(to risk weighted assets) $ 34,477 14.70 % $ 18,759 8.00 % $ 23,449 10.00 %
Tier I capital
(to risk weighted assets) $ 32,217 13.74 % $ 9,379 4.00 % $ 14,069 6.00 %
Tier I capital
(to average assets) $ 32,217 10.20 % $ 12,640 4.00 % $ 15,800 5.00 %
As of December 31, 1998:
Total capital
(to risk weighted assets) $ 29,380 14.08 % $ 16,697 8.00 % $ 20,871 10.00 %
Tier I capital
(to risk weighted assets) $ 27,478 13.17 % $ 8,349 4.00 % $ 12,523 6.00 %
Tier I capital
(to average assets) $ 27,478 9.49 % $ 11,583 4.00 % $ 14,478 5.00 %
Under federal and California state banking laws, dividends paid by the Bank
to the Company in any calendar year may not exceed certain limitations without
the prior written approval of the appropriate bank regulatory agency. At
53
December 31, 1999, the amount available for such dividends without prior written
approval was approximately $9,609,000. Similar restrictions apply to the amounts
and terms of loans, advances and other transfers of funds from the Bank to the
Company.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by using available
market information and appropriate valuation methodologies. Although management
uses its best judgment in assessing fair value, there are inherent weaknesses in
any estimating technique that may be reflected in the fair values disclosed. The
fair value estimates are made at a discrete point in time based on relevant
market data, information about the financial instruments, and other factors.
Estimates of fair value of instruments without quoted market prices are
subjective in nature and involve various assumptions and estimates that are
matters of judgment. Changes in the assumptions used could significantly affect
these estimates. Fair value has not been adjusted to reflect changes in market
conditions subsequent to December 31, 1999, therefore, estimates presented
herein are not necessarily indicative of amounts which could be realized in a
current transaction.
The following estimates and assumptions were used as of December 31, 1999
and 1998 to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value.
(a) CASH AND CASH EQUIVALENTS - The carrying amount represents a
reasonable estimate of fair value.
(b) SECURITIES - Held to maturity securities are based on quoted market
prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities. Available for sale securities are carried at fair value.
(c) LOANS AND LEASES - Commercial loans, residential mortgages,
construction loans and direct financing leases, are segmented by
fixed and adjustable rate interest terms, by maturity, and by
performing and nonperforming categories.
The fair value of performing loans and leases is estimated by
discounting contractual cash flows using the current interest rates
at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. Assumptions regarding
credit risk, cash flow, and discount rates are judgmentally
determined using available market information.
The fair value of nonperforming loans and leases and loans and
leases delinquent more than 30 days is estimated by discounting
estimated future cash flows using current interest rates with an
additional risk adjustment reflecting the individual characteristics
of the loans.
(d) CASH SURRENDER VALUE OF LIFE INSURANCE - The carrying amount
represents a reasonable estimate of fair value.
(e) DEPOSIT LIABILITIES - Noninterest bearing and interest bearing
demand deposits and savings accounts are payable on demand and are
assumed to be at fair value. Time deposits are based on the
discounted value of contractual cash flows. The discount rate is
based on rates currently offered for deposits of similar size and
remaining maturities.
(f) COMMITMENTS TO FUND LOANS/STANDBY LETTERS OF CREDIT - The fair
values of commitments are estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. The differences between the carrying value of
commitments to fund loans or stand by letters of credit and their
fair value is not significant and therefore not included in the
following table.
54
The estimated fair values of the Company's financial instruments as of
December 31, are as follows (in thousands):
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
FINANCIAL ASSETS
Cash and cash equivalents $ 27,383 $ 27,383 $ 25,352 $ 25,352
Securities:
Available for sale $ 25,569 $ 25,569 $ 22,842 $ 22,842
Held to maturity $ 28,146 $ 28,975 $ 33,914 $ 35,939
Loans and leases $215,397 $212,189 $197,434 $200,639
Cash surrender value of life insurance $ 4,650 $ 4,650 $ 3,850 $ 3,850
FINANCIAL LIABILITIES
Deposits $275,261 $275,455 $259,881 $260,238
18. PARENT COMPANY ONLY - CONDENSED FINANCIAL INFORMATION
The condensed financial statements of North Valley Bancorp are presented
below (in thousands except share amounts):
NORTH VALLEY BANCORP
CONDENSED BALANCE SHEETS
DECMEBER 31, 1999 AND 1998
- - --------------------------------------------------------------------------------
ASSETS 1999 1998
Cash and cash equivalents $ 455 $ 2,332
Available for sale securities at fair value 120 187
Investments in subsidiaries 32,555 28,326
Dividend receivable 372
Other assets 115 208
------- -------
Total $33,617 $31,053
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividend payable $ 371 $ 738
Other liabilities 135
Stockholders' equity 33,246 30,180
------- -------
Total $33,617 $31,053
======= =======
55
NORTH VALLEY BANCORP
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- - ------------------------------------------------------------------------------------
1999 1998 1997
INCOME:
Dividends from subsidiaries $ 372 $ 645 $ 2,024
Other income 14 963 489
------- ------- -------
Total income 386 1,608 2,513
EXPENSE:
Legal and accounting 102 112 74
Other 81 101 251
Merger and acquisition expense 149
Taxes (67) 210
------- ------- -------
Total expense 265 423 325
------- ------- -------
Income (loss) before equity in undistributed income
of subsidiaries 121 1,185 2,188
Equity in undistributed income of subsidiaries 4,407 2,900 2,957
------- ------- -------
Net income 4,528 4,085 5,145
Other comprehensive income, net of tax (170) (664) 40
------- ------- -------
Total comprehensive income $ 4,358 $ 3,421 $ 5,185
======= ======= =======
56
NORTH VALLEY BANCORP
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- - -----------------------------------------------------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,528 $ 4,085 $ 5,145
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries (4,407) (2,900) (2,957)
Gain on sale of available for sale securities (913) (187)
Effect of changes in:
Other assets 130 (38)
Other liabilities (135) 139
Dividends receivable (372) 650
------- ------- -------
Net cash provided by (used in) operating activities (256) 373 2,651
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities (582) (871)
Proceeds from sale of available for sale securities 75 2,590 297
------- ------- -------
Net cash provided by (used in)
investing activitities 75 2,008 (574)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (1,849) (645) (1,924)
Stock options exercised 153 42 133
------- ------- -------
Net cash used in financing activities (1,696) (603) (1,791)
------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,877) 1,778 286
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,332 554 268
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 455 $ 2,332 $ 554
======= ======= =======
*****
57
INDEX OF EXHIBITS
SEQUENTIAL
EXHIBIT NO. EXHIBIT NAME PAGE NO.
- - ----------- ------------ ----------
2 Agreement and Plan of Reorganization and Merger, *
dated as of October 3, 1999 (incorporated by
reference from Exhibit 2.1 to the Company's Current
Report on Form 8-K filed with the Commission on
October 12, 1999).
3(a) Articles of incorporation, as amended and restated. *
Incorporated by reference from Exhibit 3(i) to the
Company's Quarterly Report on Form 10-Q for the
quarter end June 30, 1998,filed with the Commission
(hereinafter, "June 30, 1998 10-Q").
3(b) By-laws of the Registrant, as amended and restated. *
Incorporated by reference from Exhibit 3(ii) to the
Company's June 30, 1998 10Q.
10(a) Shareholder Protection Rights Agreement, dated *
September 9, 1999 (incorporated by reference from
Exhibit 4 to the Company's Current Report on Form 8-K
filed with the Commission on September 23, 1999).
10(b) By-laws of the Registrant, as amended and restated. *
Incorporated by reference from Exhibit 3(ii) to the
Company's June 30, 1998 10Q.
10(c) North Valley Bancorp 1989 Employee Stock Option Plan, *
as amended. Incorporated by reference from Exhibit
4.5 to Post-Effective Amendment No. One to the
Company's Registration Statement on Form S-8 (No.
33-32787) filed with the Commission on December 26,
1989 (hereinafter, the "1989 S-8 Amendment").
10(d) North Valley Bancorp 1989 Employee Nonstatutory Stock *
Option Agreement. Incorporated by reference from
Exhibit 4.3 to the 1989 S-8 Amendment.
10(e) North Valley Bancorp 1989 Director Stock Option Plan, *
as amended. Incorporated by reference from Exhibit
4.5 to Post-Effective Amendment No. One to the
Company's Registration Statement on Form S-8 (No.
33-32787) filed with the Commission on December 26,
1989 (hereinafter, the "1989 S-8 Amendment").
10(f) North Valley Bancorp 1989 Director Nonstatutory Stock *
Option Agreement. Incorporated by reference from
Exhibit 4.4 to the 1989 S-8 Amendment.
10(g) Employee Stock Ownership Plan, as amended and *
restated as of January 1, 1987. Incorporated by
reference from Exhibit 10(x) to the Company's 1993
10-K.
10(h) Amendment No. 3 to the Employee Stock Ownership Plan. *
Incorporated by reference from Exhibit 10(ee) to the
Company's 1994 10-KSB.
10(i) Amendment No. 4 to the Employee Stock Ownership Plan, *
dated August 19, 1997. Incorporated by reference from
Exhibit 10 (kk) to the Company's 1997 10-KSB.
58
SEQUENTIAL
EXHIBIT NO. EXHIBIT NAME PAGE NO.
- - ----------- ------------ ----------
10(j) Management Incentive Plan. Incorporated by reference *
from Exhibit 10(c) to the Company's 984 10K.
10(k) Supplemental Executive Retirement Plan. Incorporated *
by reference from Exhibit 10(I) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988 (hereinafter, the "1988 10-K").
10(l) Executive Deferred Compensation Plan. Incorporated by *
reference from Exhibit 10(j) to the Company's 1988
10-K.
10(m) Supplemental Retirement Plan for Directors. *
Incorporated by reference from Exhibit 10(k) to the
Company's 1988 10-K.
10(n) Legal Services Agreement with Wells, Wingate, Small & *
Graham. Incorporated by reference from Exhibit 10(q)
to the Company's 1987 10-K.
10(o) Employment Agreement of Martin R. Sorensen dated *
February 2, 1998. Incorporated by reference from
Exhibit 0(x) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998,
filed with the Commission (hereinafter "1998 10-K").
10(p) Sales Agreement with Federated Securities Corp. *
Incorporated by reference from Exhibit 10(gg) to the
Company's 1995 10-KSB.
10(q) Linsco/Private Ledger, Inc. Full Service Brokerage *
Agreement. Incorporated by reference from Exhibit
10(hh) to the Company's 1995 10-KSB.
10(r) Executive Deferred Compensation Plan, effective *
1-1-89, restated 4-1-95. Incorporated by reference
from Exhibit 10(dd) to the Company's 1997 10-KSB.
10(s) Directors' Deferred Compensation Plan, effective *
4-1-95. Incorporated by reference from Exhibit 10(ee)
to the Company's 1997 10-KSB.
10(t) Umbrella TrustTM for Directors, effective 4-1-95. *
Incorporated by reference from Exhibit 10(ff) to the
Company's 1997 10-KSB.
10(u) Umbrella TrustTM for Directors, effective 4-1-95. *
Incorporated by reference from Exhibit 10(ff) to the
Company's 1997 10-KSB.
10(v) Umbrella TrustTM for Executives, effective 4-1-95. *
Incorporated by reference from Exhibit 10(gg) to the
Company's 1997 10-KSB.
10(w) Indemnification Agreement. Incorporated by reference *
from Exhibit 10 to the Company's June 30, 1998 10Q.
59
SEQUENTIAL
EXHIBIT NO. EXHIBIT NAME PAGE NO.
- - ----------- ------------ ----------
10(x) North Valley Bancorp 1998 Employee Stock Incentive *
Plan as amended through September 9, 1999.
Incorporated by reference from Exhibit 10 to the
Company's current report on Form 8-K filed with the
Commission on September 23, 1999.
10(y) North Valley Bancorp 1999 director Stock Option Plan *
(incorporated by reference from Annex A to the
Company's Definitive Proxy Statement filed with the
Commission on April 23, 1999).
10(z) Amendment No. Two to the North Valley Bancorp 1989 *
Director Stock Option Plan. Incorporated by reference
from Exhibit 10(v) to the Company's December 31, 1998
10K.
21 List of Subsidiaries. 63
23 Consent of Deloitte & Touche, L.L.P. 64
27 Financial Data Schedule. 65
- - ------------
* Previously filed.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH VALLEY BANCORP
By: /s/ Michael J. Cushman
-------------------------------------------
Michael J. Cushman
President and Chief Executive Officer
/s/ Sharon L. Benson
- - -----------------------------------------------
Sharon L. Benson
Senior Vice President & Chief Financial Officer
/s/ Jack R. Richter
- - -----------------------------------------------
Jack R. Richter
Senior Vice President & Chief Operating Officer
DATE: March 29, 2000
61
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.
NAME AND SIGNATURE TITLE DATE
- - ------------------ ----- ----
/s/ Michael J. Cushman Director March 29, 2000
- - ----------------------- --------
Michael J. Cushman
/s/ Rudy V. Balma Director March 29, 2000
- - ----------------------- --------
Rudy V. Balma
/s/ William W. Cox Director March 29, 2000
- - ----------------------- --------
William W. Cox
/s/ Royce L. Friesen Director March 29, 2000
- - ---------------------- --------
Royce L. Friesen
/s/ Dan W. Ghidinelli Director March 29, 2000
- - ----------------------- --------
Dan W. Ghidinelli
/s/ Thomas J. Ludden Director March 29, 2000
- - ----------------------- --------
Thomas J. Ludden
/s/ Douglas M. Treadway Director March 29, 2000
- - ----------------------- --------
Douglas M. Treadway
/s/ J. M. Wells, Jr Director March 29, 2000
- - ----------------------- --------
J. M. Wells, Jr.
62