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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2003
-----------------
[ ] 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2751350
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
300 Park Marina Circle, Redding, California 96001
---------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 226 2900
--------------
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold was
$88,988,790 as of June 30, 2003.
The number of shares outstanding of common stock as of March 15, 2004, were
6,530,390.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 2004 Annual Meeting
of Shareholders are incorporated by reference in Part III, Items 10, 11, 12, 13
and 14 of this Form 10-K.
TABLE OF CONTENTS
-----------------
Part I
- ------
Item 1 Description of Business 3
Item 2 Description of Properties 26
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 27
Part II
- -------
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6 Selected Financial Data 29
Item 7 Management's Discussion and Analysis of Financial
Condition and Results Of Operations 30
Item 7A Quantitative and Qualitative Disclosures About Market
Risk 42
Item 8 Financial Statements and Supplementary Data 42
Item 9 Changes In and Disagreements With Accountants on
Accounting And Financial Disclosure 43
Item 9A Controls and Procedures 43
Part III
- --------
Item 10 Directors and Executive Officers of the Registrant 44
Item 11 Executive Compensation 44
Item 12 Security Ownership of Certain Beneficial Owners and
Management 44
Item 13 Certain Relationships and Related Transactions 44
Item 14 Principal Accounting Fees and Services 44
Part IV
- -------
Item 15 Exhibits, Financial Statement Schedules and Reports on
Form 8-K 45
Financial Statements 46
Signatures 81
2
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 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; the California power crisis; the U.S. "war on terrorism" and
military action by the U.S. in the Middle East, and changes in the securities
markets. Therefore, the information set forth herein should be carefully
considered when evaluating the business prospects of the Company and its
subsidiaries. See also "Certain Additional Business Risks" on pages 24 through
25 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. On October 11, 2000, the Company completed
its plan of reorganization with Six Rivers National Bank. Unless otherwise
noted, the information contained herein has been restated on a historical basis
as a pooling of interests as if the Company and Six Rivers National Bank had
been combined for all periods presented. On January 2, 2002, Six Rivers National
Bank became a California State chartered bank and in conjunction with this
charter conversion, changed its name to Six Rivers Bank ("SRB"). On January 1,
2004, Six Rivers Bank was merged with and into North Valley Bank with North
Valley Bank as the surviving institution. Former branches of Six Rivers Bank
will continue to operate as Six Rivers Bank, a division of North Valley Bank.
(For purposes herein, "NVB" shall refer to North Valley Bank including the
former branches of SRB and "SRB" will refer to the former branches and
operations of SRB.) The Company wholly owns its principal subsidiaries, North
Valley Bank ("NVB"), North Valley Trading Company ("Trading Company"), which is
inactive, Bank Processing, Inc. ("BPI"), a California corporation, North Valley
Capital Trust 1 and North Valley Capital Trust II. The sole subsidiary of NVB,
which is inactive, is North Valley Basic Securities (the "Securities Company").
At December 31, 2003, the Company had approximately 365 employees, (which
includes 318 full-time equivalent employees). None of the Company's employees
are represented by a union and management believes that relations with employees
are good.
NVB was organized in September 1972, under the laws of the State of
California, and commenced operations in February 1973. NVB 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 state-chartered insured bank, NVB is also
subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and
its deposits are insured by the FDIC up to the legal limits thereupon. NVB does
not offer trust services or international banking services and does not plan to
do so in the near future.
3
NVB (excluding the former branches of SRB) operates fourteen 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, NVB 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, NVB 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, NVB opened its Westwood
Village Office in South Redding. On November 27, 1995, NVB opened a branch
located in Palo Cedro, California. On October 14, 1997, NVB opened a branch
located in Shasta Lake, California. NVB 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, NVB opened a Business Banking Center in
Redding, California, to provide banking services to business and professional
clients. On August 13, 2001, the Business Banking Center, North Valley Bancorp
Securities and the Company's Administrative offices moved to a new location at
300 Park Marina Drive in Redding, California. On August 5, 2002, NVB opened an
Express Banking Center located at 2245 Churn Creek Road in Redding. On September
5, 2003, NVB closed escrow on a property located at 480 Pioneer Avenue,
Woodland, California for the express purpose of constructing a full-service
banking facility on this property.
Six Rivers National Bank was formed in 1989 as a national banking
association. On January 2, 2002, Six Rivers National Bank became a California
state-chartered bank and changed its name to Six Rivers Bank. As mentioned
above, on January 1, 2004, SRB was merged with and into NVB with NVB as the
surviving entity. SRB operates seven full service offices in Eureka (2),
Crescent City, Ferndale, Garberville, McKinleyville and Willits. In 1997, SRB
completed the purchase and conversion of four branches of Bank of America which
increased its presence from its original market of Humboldt and Del Norte
counties into Trinity County to the Northeast and Mendocino County to the South.
During the fourth quarter of 2000, the SRB Weaverville branch was sold which was
a condition to the closing of the plan of reorganization with the Company.
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 was established as a consulting service for
depository institutions and in December 1988, changed its name to Bank
Processing, Inc. BPI 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").
BPI is currently processing daily applications for the Company where
entries are captured and files updated by the "Information Technology, Inc.,
(ITI) banking system," which includes: Demand Deposits (DDA), Savings Deposits
(SAV), Central Information Files (CIF), Mortgage Loans/Installment
Loans/Commercial Loans (LAS), Individual Retirement Accounts (IRA), and
Financial Information Statements, i.e., General Ledger (FMS). These data
processing activities do not involve providing hardware or software to banking
clients.
North Valley Capital Trust I is an unconsolidated Delaware business trust
wholly-owned by the Company and formed in 2001 for the exclusive purpose of
issuing Company obligated mandatorily redeemable cumulative Trust Preferred
Securities of Subsidiary Grantor Trust holding solely junior subordinated
debentures.
North Valley Capital Trust II is an unconsolidated Delaware business trust
wholly-owned by the Company and formed in 2003 for the exclusive purpose of
issuing Company obligated mandatorily redeemable cumulative Trust Preferred
Securities of Subsidiary Grantor Trust holding solely junior subordinated
debentures.
SRB and NVB have signed agreements with Essex National Securities
("Essex") whereby Essex provides brokerage services and standardized investment
advice to SRB customers at SRB's Main office located at 402 F Street, Eureka,
California and to NVB customers at NVB administrative offices located at 300
Park Marina Circle in Redding, California. SRB and NVB share in the fees and
commissions paid to Essex 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 a material adverse effect
on the Company. The Company's business is not seasonal.
4
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 of Financial Condition and Results of
operations and other information contained elsewhere herein. Averages are based
on daily averages.
5
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 (in thousands).
2003 2002 2001
------------------------------- ----------------------------- -----------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- ------- --------- -------- -------
Assets
Federal funds sold $ 55,817 $ 596 1.07% $ 22,504 $ 346 1.54% $ 20,814 $ 674 3.24%
Investments:
Taxable securities 110,264 4,251 3.86% 79,847 4,224 5.29% 73,045 4,762 6.64%
Non-taxable securities(1) 23,054 1,913 8.30% 26,756 2,312 8.64% 27,594 2,468 8.94%
FNMA Preferred Stock (1) 8,639 494 5.71% 395 24 6.08% -- -- 0.00%
Interest bearing deposits
in other financial
institutions 477 16 3.35% 737 43 5.83% 2,072 73 3.52%
--------- -------- ------- --------- -------- ------- --------- -------- -------
Total investments 142,434 6,674 4.69% 107,735 6,603 6.13% 102,711 7,303 7.11%
Total loans and leases (2)(3) 399,217 28,595 7.16% 424,272 32,738 7.72% 378,190 32,671 8.64%
--------- -------- ------- --------- -------- ------- --------- -------- -------
Total interest-earning
Assets/interest income 597,468 $ 35,865 6.00% 554,511 $ 39,687 7.16% 501,715 $ 40,648 8.10%
Non-earning assets 80,622 71,656 66,422
Allowance for loan and
lease losses (6,734) (6,256) (5,335)
--------- --------- ---------
Total assets $ 671,356 $ 619,911 $ 562,802
========= ========= =========
Liabilities and
Stockholders' Equity
Transaction accounts $ 151,390 $ 835 0.55% $ 119,081 $ 1,008 0.85% $ 94,857 $ 1,439 1.52%
Savings and money market 148,315 1,262 0.85% 131,354 1,536 1.17% 108,986 2,650 2.43%
Time deposits 166,206 3,456 2.08% 177,775 5,293 2.98% 202,721 10,463 5.16%
other borrowed funds 34,421 1,974 5.73% 37,852 1,955 5.17% 15,106 923 6.12%
--------- -------- ------- --------- -------- ------- --------- -------- -------
Total interest-bearing
liabilities/interest expense 500,332 7,527 1.50% 466,062 9,792 2.10% 421,670 15,475 3.67%
Non-interest bearing deposits 117,287 100,567 83,226
other liabilities 5,906 6,703 7,056
--------- --------- ---------
Total liabilities 623,525 573,332 511,952
Stockholders' equity 47,831 46,579 50,850
--------- --------- ---------
Total liabilities and
stockholders equity $ 671,356 $ 619,911 $ 562,802
========= ========= =========
Net interest income / spread $ 28,338 4.50% $ 29,895 5.06% $ 25,173 4.43%
======== ======= ======== ======= ======== =======
Net interest margin (4) 4.74% 5.39% 5.02%
======= ======= =======
(1) Tax-equivalent basis; non-taxable securities are exempt from federal
taxation.
(2) Loans on nonaccrual status have been included in the computations of
average balances.
(3) Includes loan fees of $228, $337 and $509 for the years ended December 31,
2003, 2002 and 2001, respectively
(4) Net interest margin is determined by dividing net interest income by total
average interest earning assets.
6
Rate Volume Analysis of changes in Net Interest 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. The change in interest due to both rate and volume has
been allocated to the change in volume (in thousands).
2003 Compared to 2002 2002 Compared to 2001
------------------------------- -------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------- ----------
Interest income
Interest on fed funds sold $ 356 $ (106) $ 250 $ 26 $ (354) $ (328)
Interest on investments:
Taxable securities 1,173 (1,146) 27 360 (898) (538)
Non-taxable securities (307) (92) (399) (72) (84) (156)
FNMA preferred stock 471 (1) 470 24 -- 24
Interest bearing
deposits in other
financial institutions (9) (18) (27) (78) 48 (30)
------- ------- ------- ------- ------- -------
Total investments 1,328 (1,257) 71 234 (934) (700)
Interest on loans and
leases (1,795) (2,348) (4,143) 3,556 (3,489) 67
------- ------- --------- ------- ------- --------
Total interest income $ (111) $(3,711) $(3,822) $ 3,816 $(4,777) $ (961)
------- ------- ------- ------- ------- -------
Interest expense
Transaction accounts $ 178 $ (351) $ (173) $ 205 $ (636) $ (431)
Savings and money market 144 (418) (274) 262 (1,376) (1,114)
Time deposits (241) (1,596) (1,837) (743) (4,427) (5,170)
other borrowed funds (197) 216 19 1,175 (143) 1,032
------- ------- ------- ------- ------- -------
Total interest expense $ (116) $(2,149) $(2,265) $ 899 $(6,582) $(5,683)
------- ------- ------- ------- ------- -------
Total change in net
interest income $ 5 $(1,562) $(1,557) $ 2,917 $ 1,805 $ 4,722
======= ======= ======= ======= ======= =======
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, 2003, 2002, and 2001.
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, within accumulated other comprehensive income, which is a
separate component of stockholders' equity, until realized. 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.
At December 31, the amortized cost of securities and their approximate
fair value were as follows (in thousands):
7
Carrying
Gross Gross Amount
Available for sale securities: Amortized Unrealized Unrealized (Fair
Cost Gains Losses Value)
--------- ---------- ---------- ---------
December 31, 2003
Securities of U.S. government
agencies and corporations $ 12,574 $ 73 $ (14) $ 12,633
obligations of states and
political subdivisions 25,903 1,133 (94) 26,942
Mortgage-backed securities 133,760 424 (1,408) 132,776
Corporate securities 6,027 273 (26) 6,274
Other securities 13,127 27 (734) 12,420
--------- --------- --------- ---------
$ 191,391 $ 1,930 $ (2,276) $ 191,045
========= ========= ========= =========
December 31, 2002
Securities of U.S. government
agencies and corporations $ 11,220 $ 9 $ -- $ 11,229
obligations of states and
political subdivisions 23,580 1,138 (67) 24,651
Mortgage-backed securities 59,915 1,108 (4) 61,019
Corporate securities 8,976 520 -- 9,496
Other securities 4,088 -- (8) 4,080
--------- --------- --------- ---------
$ 107,779 $ 2,775 $ (79) $ 110,475
========= ========= ========= =========
December 31, 2001
Securities of U.S. government
agencies and corporations $ 1,991 $ 78 $ -- $ 2,069
obligations of states and
political subdivisions 28,085 1,074 (254) 28,905
Mortgage-backed securities 70,331 601 (81) 70,851
Corporate securities
9,946 20 (241) 9,725
Other securities 88 -- (12) 76
--------- --------- --------- ---------
$ 110,441 1,773 $ (588) $ 111,626
========= ===== ========= =========
Held to maturity securities: Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized Fair
Cost) Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2003
obligations of states and
political subdivisions $ 1,455 $ 376 $ -- $ 1,831
========= ========= ========= =========
December 31, 2002
obligations of states and
political subdivisions $ 1,455 $ 388 $ -- $ 1,843
========= ========= ========= =========
December 31, 2001
obligations of states and
political subdivisions $ 1,455 $ 486 $ -- $ 1,941
========= ========= ========= =========
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 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.
On January 1, 2001, the Company transferred $25,471,000 of certain
securities from the held to maturity to the available for sale classification at
fair value upon adoption and as allowed by SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities. The unrealized gains on the
securities transferred were $1,115,000. The net unrealized gains and losses are
8
recorded net of tax within accumulated other comprehensive income (loss), which
is a separate component of stockholders' equity.
The following table shows estimated fair value of our investment
securities (other than equity securities with a fair value of approximately
$12,420,000) by year of maturity as of December 31, 2003. Expected maturities,
specifically of mortgage-backed securities, may differ significantly from
contractual maturities because borrowers may have the right to prepay with or
without penalty. Tax-equivalent adjustments have been made in calculating yields
on tax exempt securities.
Contractual Maturity Distribution and Yields of Investment Securities (in
thousands):
After After Five
Within One Through Through After
One Year Five Years Ten Years Ten Years Total
-------- ----------- ---------- --------- ---------
Available for Sale Securities
Securities of U.S. government agencies and
corporations $ 9,700 $ 2,933 $ $ $ 12,633
Mortgage-backed securities 6,118 48,744 10,136 67,779 132,777
Tax-exempt securities 1,503 5,982 1,911 17,546 26,942
Corporate securities 4,062 2,211 6,273
-------- -------- -------- -------- --------
Total securities available for sale $ 21,383 $ 59,870 $ 12,047 $ 85,325 $178,625
======== ======== ======== ======== ========
Weighted average yield 4.80% 4.03% 3.93% 4.10% 4.15%
Held to Maturity Securities
Tax-exempt securities $ 1,831 $ 1,831
======== ========
Weighted average yield 10.03% 10.03%
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 the primary markets in which the Company operates. 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.
9
Major classifications of loans and leases at December 31 are summarized as
follows (in thousands):
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Commercial, financial and agricultural $ 36,997 $ 40,683 $ 49,248 $ 53,617 $ 49,925
Real estate - commercial 163,474 159,946 99,164 90,041 80,681
Real estate - construction 37,566 25,388 9,764 4,794 4,049
Real estate - mortgage(1) 54,588 104,590 109,830 100,937 82,202
Installment 62,609 87,710 113,970 105,393 92,973
Direct financing leases 689 1,795 3,454 5,183 5,395
Other 23,214 24,271 11,588 9,727 15,434
--------- --------- --------- --------- ---------
Total loans and leases receivable 379,137 444,383 397,018 369,692 330,659
Allowance for loan and lease losses (6,493) (6,723) (5,786) (4,964) (4,606)
Deferred loan costs (fees) 16 183 (210) (69) (229)
--------- --------- --------- --------- ---------
Net loans and leases $ 372,660 $ 437,843 $ 391,022 $ 364,659 $ 325,824
========= ========= ========= ========= =========
(1) Includes loans held for sale, as applicable
At December 31, 2003 and 2002, the Company serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold to the
secondary market of approximately $129,485,000 and $100,234,000. respectively.
The Company was contingently liable under letters of credit issued on
behalf of its customers for $4,819,000 and $2,461,000 at December 31, 2003 and
2002, respectively. At December 31, 2003, commercial and consumer lines of
credit, and real estate loans of approximately $26,492,000 and $60,817,000, were
undisbursed. At December 31, 2002, commercial and consumer lines of credit, and
real estate loans of approximately $28,637,000 and $37,938,000, 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
Company'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 and Commitments
- ----------------------------------------------------------------------------
The following table shows the maturity of certain loan categories and
commitments. Excluded categories are residential mortgages of 1-4 family
residences, installment loans and lease financing outstanding as of December 31,
2003. Also provided with respect to such loans and commitments are the amounts
due after one year, classified according to the sensitivity to changes in
interest rates (in thousands):
After
One
Through After
Within Five Five
One Year Years Years Total
-------- ------- ------- -------
Commercial, financial and Agricultural $20,730 $11,291 $ 4,976 $36,997
Real Estate - construction 26,442 10,931 193 37,566
Loans maturing after one year with:
Fixed interest rates $20,286 $ 5,169 $25,455
Variable interest rates 1,936 $ 1,936
10
Certificates of Deposit
- -----------------------
Maturities of time certificates of deposit outstanding of less than
$100,000 and $100,000 or more at December 31, 2003 are summarized as follows (in
thousands):
Remaining maturities: $100,000 Less than
or more $100,000
-------- ---------
Three months or less $ 15,406 $ 44,159
over three through twelve months 31,964 55,953
over one year through three years 4,078 11,736
over three years -- 111
-------- ---------
Total $ 51,448 $ 111,959
======== =========
As of December 31, 2003, the Company did not have any brokered deposits.
In general, it is the Company's policy not to accept brokered deposits.
Other Borrowed Funds
- --------------------
Other borrowings outstanding as of December 31, 2003 consist of a loan
from the Federal Reserve Bank ("FRB") in the form of Treasury Tax and Loan notes
which are generally required to be repaid within 30 days from the transaction
date as well as Federal Home Loan Bank ("FHLB") advances. The following table
summarizes these borrowings (in thousands):
2003 2002 2001
------- ------- -------
Short-Term borrowings:
FHLB advances $ 7,500 $23,500 $ 7,000
FRB loan 259 89 254
------- ------- -------
Total Short-Term borrowings $ 7,759 $23,589 $ 7,254
======= ======= =======
Long-Term Borrowings:
FHLB advances $ 1,700 $ 9,299 $13,393
------- ------- -------
Total Long-Term borrowings $ 1,700 $ 9,299 $13,393
======= ======= =======
The FHLB advances are collateralized by loans and securities pledged to
the FHLB. The following is a breakdown of rates and maturities (dollars in
thousands):
Short Term Long Term
---------- ---------
Amount $ 7,500 $ 1,700
Maturity 2004 2005
Average Rates 4.208% 4.450%
11
The following table provides information related to the Company's
short-term borrowings under its security repurchase arrangements and lines of
credit for the periods indicated (in thousands):
Short-Term Borrowings
- ---------------------
2003 2002 2001
-------- -------- --------
Average balance during the year $ 19,798 $ 26,108 $ 1,957
Average interest rate for the year 3.41% 2.53% 5.00%
Maximum month-end balance during the year $ 32,792 $ 27,000 $ 18,100
Average rate as of December 31, 4.21% 2.40% 3.31%
Certain Contractual Obligations
- -------------------------------
The following chart summarizes certain contractual obligations of the
company as of December 31, 2003:
(dollars in thousands) Less More
than one 1-3 3-5 than 5
Total year years years years
----- -------- ----- ----- ------
Subordinated Debentures, fixed rate of
10.25% payable on 2031 $10,310 $10,310
Subordinated Debentures, floating rate
of 6.448% payable on 2033 6,186 6,186
FHLB loan, fixed rate of 4.17% payable
on February 22, 2005 1,500 1,500
FHLB loan, fixed rate of 6.55% payable
on October 3, 2005 200 200
Operating lease obligations 2,656 593 1,164 899
Deferred compensation(1) 2,118 110 221 82 1,705
Supplemental retirement plans(1) 2,517 202 395 236 1,684
------- ------- ------- ------- -------
Total $25,487 $ 905 $ 3,480 $ 1,217 $19,885
======= ======= ======= ======= =======
(1) These amounts represent known certain payments to participants under the
company's deferred compensation and supplemental retirement plans. See
Note 13 in the financial statements at Item 15 of this report for
additional information related to the company's deferred compensation and
supplemental retirement plan liabilities.
Subordinated Debentures
- -----------------------
The Company formed North Valley Capital Trust I and North Valley Capital
Trust II (the "Trusts") as special purpose entities ("SPE"). The Trusts are
Delaware business trusts wholly owned by the Company and formed for the purpose
of issuing Company obligated mandatorily redeemable cumulative Trust Preferred
Securities (Trust Preferred Securities). Proceeds from the issuance of the Trust
Preferred Securities were used to invest in junior subordinated debentures of
the Company (Subordinated Debentures). Proceeds from the issuance of the
Subordinated Debentures have been used by the Company for various corporate
matters including stock repurchases. For financial reporting purposes, the
Subordinated Debentures are included in the consolidated balance sheet. Under
applicable regulatory guidelines all of the Trust Preferred Securities currently
qualify as Tier I capital.
During the third quarter of 2001, North Valley Capital Trust I issued
10,000 Trust Preferred Securities with a liquidation value of $1,000 for gross
proceeds of $10,000,000. The entire proceeds of the issuance were invested by
North Valley Capital Trust I in $10,000,000 aggregate principal amount of 10.25%
subordinated debentures due in 2031 (the Subordinated Debentures) issued by the
Company. The Subordinated Debentures represent the sole assets of North Valley
Capital Trust I. The Subordinated Debentures mature in 2031, bear interest at
the rate of 10.25%, payable semi-annually, and are redeemable by the Company at
a premium beginning on or after 2006 based on a percentage of the principal
amount of the Subordinated Debentures stipulated in the Indenture Agreement,
12
plus any accrued and unpaid interest to the redemption date. The Subordinated
Debentures are redeemable at 100 percent of the principal amount plus any
accrued and unpaid interest to the redemption date at any time on or after 2011.
The Trust Preferred Securities are subject to mandatory redemption to the extent
of any early redemption of the Subordinated Debentures and upon maturity of the
Subordinated Debentures on 2031.
Holders of the Trust Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 10.25% of the liquidation amount of $1,000
per security. The Company has the option to defer payment of the distributions
for a period of up to five years, as long as the Company is not in default in
the payment of interest on the Subordinated Debentures. The Company has
guaranteed, on a subordinated basis, distributions and other payments due on the
Trust Preferred Securities (the Guarantee). The Guarantee, when taken together
with the Company's obligations under the Subordinated Debentures, the Indenture
Agreement pursuant to which the Subordinated Debentures were issued and the
Company's obligations under the Trust Agreement governing the subsidiary trust,
provide a full and unconditional guarantee of amounts due on the Trust Preferred
Securities.
During the second quarter of 2003, North Valley Capital Trust II issued
6,000 Trust Preferred Securities with a liquidation value of $1,000 for gross
proceeds of $6,000,000. The entire proceeds of the issuance were invested by
North Valley Capital Trust I in $6,000,000 aggregate principal amount of 6.448%
subordinated debentures due in 2033 (the Subordinated Debentures) issued by the
Company. The Subordinated Debentures represent the sole assets of North Valley
Capital Trust II. The Subordinated Debentures mature in 2033, bear an initial
interest rate of 6.448%, payable semi-annually, and are redeemable by the
Company at par beginning on or after April 10, 2008, plus any accrued and unpaid
interest to the redemption date. The Trust Preferred Securities are subject to
mandatory redemption to the extent of any early redemption of the Subordinated
Debentures and upon maturity of the Subordinated Debentures on 2033.
Holders of the Trust Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 6.448% of the liquidation amount of $1,000
per security. The Company has the option to defer payment of the distributions
for a period of up to five years, as long as the Company is not in default in
the payment of interest on the Subordinated Debentures. The Company has
guaranteed, on a subordinated basis, distributions and other payments due on the
Trust Preferred Securities (the Guarantee). The Guarantee, when taken together
with the Company's obligations under the Subordinated Debentures, the Indenture
Agreement pursuant to which the subordinated Debentures were issued and the
Company's obligations under the Trust Agreement governing the subsidiary trust,
provide a full and unconditional guarantee of amounts due on the Trust Preferred
Securities.
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
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, the filing of annual, quarterly and other current reports with the
Securities and Exchange Commission.
NVB is licensed by the California Commissioner of Financial Institutions
(the "Commissioner"), NVB's deposits are insured by the FDIC, and NVB is a
member of the Federal Reserve System. Consequently, NVB is subject to the
supervision of, and is regularly examined by, the Commissioner and the Board of
Governors of the Federal Reserve System ("FRB" or "Board of Governors). 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. NVB is required to file
reports with the Commissioner and the FRB and provide such additional
information as the Commissioner and the FRB 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
13
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 NVB 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 NVB to affiliates, and (b) on investments by NVB 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.
The Board of Governors, the OCC 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 its banking
subsidiaries 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 its banking subsidiaries
are subject to regulations issued by the Board of Governors, the OCC 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)
14
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, 2003, NVB, SRB and the Company were in compliance with the
risk-based capital and leverage ratios described above. See Item 8, Financial
Statements and Supplementary Data and Note 19 to the Financial Statements
incorporated by reference, therein, for a listing of the Company's risk-based
capital ratios at December 31, 2003 and 2002.
The Board of Governors, the OCC and FDIC have 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
15
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.
Under FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain comprehensive
written real estate lending policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. 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 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 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 each of the Company's subsidiary banks.
The payment of cash dividends and/or management fees by NVB 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 NVB.
16
The Patriot Act
- ---------------
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act prohibits
any insured financial institution such as North Valley Bank from providing
correspondent accounts to foreign banks which do not have a physical presence in
any country (designated as "shell banks"), subject to certain exceptions for
regulated affiliates of foreign banks. Section 313(a) also requires financial
institutions to take reasonable steps to ensure that foreign bank correspondent
accounts are not being used to indirectly provide banking services to foreign
shell banks, and Section 319(b) requires financial institutions to maintain
records of the owners and agent for service of process of any such foreign banks
with whom correspondent accounts have been established.
Effective July 23, 2002, Section 312 of the Patriot Act creates a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Company and its subsidiaries are not currently aware of any account
relationships between the Company and its subsidiaries and any foreign bank or
other person or entity as described above under Sections 313(a) or 312 of the
Patriot Act. The terrorist attacks on September 11, 2001 have realigned national
security priorities of the United States and it is reasonable to anticipate that
the United States Congress may enact additional legislation in the future to
combat terrorism including modifications to existing laws such as the Patriot
Act to expand powers as deemed necessary. The effects which the Patriot Act and
any additional legislation enacted by Congress may have upon financial
institutions is uncertain; however, such legislation would likely increase
compliance costs and thereby potentially have an adverse effect upon the
Company's results of operations.
The Sarbanes-Oxley Act of 2002
- ------------------------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the "Act")
on July 30, 2002, which responds to recent issues in corporate governance and
accountability. Among other matters, key provisions of the Act and rules
promulgated by the Securities and Exchange Commission pursuant to the Act
include the following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of non-audit
services provided to audit clients and to require such services to be
pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes and
increases in the statute of limitations for securities fraud lawsuits.
17
o Disclosure of whether a company has adopted a code of ethics that applies
to the company's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, and disclosure of any amendments or waivers to such code of
ethics. The disclosure obligation becomes effective for fiscal years
ending on or after July 15, 2003. The ethics code must contain written
standards that are reasonably designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
o Full, fair, accurate, timely, and understandable disclosure in reports and
documents that a registrant files with, or submits to, the Securities and
Exchange Commission and in other public communications made by the
registrant;
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an "audit
committee financial expert." The disclosure obligation becomes effective
for fiscal years ending on or after July 15, 2003. To qualify as an "audit
committee financial expert," a person must have:
o An understanding of generally accepted accounting principles and
financial statements;
o The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting
issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the registrant's
financial statements, or experience actively supervising one or more
persons engaged in such activities;
o An understanding of internal controls and procedures for financial
reporting; and
o An understanding of audit committee functions.
o A person must have acquired the above listed attributes to be deemed to
to qualify as an "audit committee financial expert" through any one or
more of the following:
o Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant or auditor or
experience in one or more positions that involve the performance of
similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor or
person performing similar functions;
o Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or
evaluation of financial statements; or
o Other relevant experience.
o The rule contains a specific safe harbor provision to clarify that the
designation of a person as an "audit committee financial expert" does not
cause that person to be deemed to be an "expert" for any purpose under
Section 11 of the Securities Act of 1933, as amended, or impose on such
person any duties, obligations or liability greater that the duties,
obligations and liability imposed on such person as a member of the audit
committee and the board of directors, absent such designation. Such a
designation also does not affect the duties, obligations or liability of
any other member of the audit committee or board of directors.
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, another board
committee or the entire board of directors certain material violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to within
2 business days of the date a transaction triggers an obligation to
report.
18
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to be phased-in over a
four year period reducing the filing deadline for Form 10-K reports from
90 days after the fiscal year end to 60 days and Form 10-Q reports from 45
days after the fiscal quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as soon
as reasonably practicable after such reports and material are filed with
or furnished to the Securities and Exchange Commission.
o Rules requiring national securities exchanges and national securities
associations to prohibit the listing of any security whose issuer does not
meet audit committee standards established pursuant to the Act. These
proposed rules would establish audit committee:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's independent
accountant;
o Responsibility for handling complaints regarding the issuer's
accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside
advisers engaged by the audit committee.
On November 4, 2003, the Securities and Exchange Commission adopted
changes to the standards for the listing of issuer securities by the New York
Stock Exchange and NASDAQ Stock Market. The revised standards for listing
conform to and supplement Rule 10A-3 under the Securities Exchange Act of 1934,
as amended, which the Securities and Exchange Commission adopted in April 2003
pursuant to the Act.
The Company's securities are listed on the NASDAQ Stock Market.
Consequently, in addition to the rules promulgated by the Securities and
Exchange Commission pursuant to the Act, the Company must also comply with
revised listing standards applicable to NASDAQ listed companies. Generally,
listed companies must comply with the revised listing standards by the first
annual meeting of shareholders following January 15, 2004. The revised NASDAQ
listing standards applicable to the Company include the following:
o A majority of directors of a listed company must be "independent", which
excludes:
o Any director who is, or at any time in the past three years was,
employed by a listed company, its parent or a subsidiary;
o Any director or any family member who received payments in excess of
$60,000 in the current year or prior three years from a listed
company, its parent or a subsidiary;
o Any director whose family member is employed or during the last three
years was employed as an executive officer of a listed company, its
parent or a subsidiary;
o Any director or any family member who is a partner, controlling
shareholder or executive officer of an organization to which a listed
company made payments or from which a listed company received
payments, for services or property, in the current year or prior three
years in excess of the greater of $200,000 or 5% of the recipient's
consolidated gross revenues in the year of payment;
o Any director or any family member who is employed as an executive
officer of another organization where during the current year or prior
three years an executive officer of a listed company served on the
compensation committee of such organization; and
o Any director or any family member who is a partner of the outside
auditor of a listed company or was a partner or employee of the listed
company's auditor and worked on the company's audit in the prior three
years.
o Independent directors of a listed company must meet alone in executive
sessions at least two times annually.
19
o Listed companies must certify adoption of a resolution or written charter
dealing with nominations of directors and select nominees for election as
directors either by determination of a majority of independent directors
or by a nominating committee consisting solely of independent directors,
with certain exceptions.
o Compensation of a listed company's chief executive officer must be
determined either by a majority of independent directors or by a
compensation committee consisting solely of independent directors, with
certain exceptions.
o The audit committee of a listed company, subject to certain exceptions,
must comply with requirements that include:
o The committee be comprised of at least three independent directors
who have not participated in the preparation of financial statements
for the company, its parent or subsidiaries during the last three
years;
o Each director must be able to read and understand financial
statements;
o At least one director must meet the "financial sophistication"
criteria which the company must certify;
o The committee must adopt a written charter; and
o The committee is responsible for the review and approval of all
related-party transactions, except those approved by another board
committee comprised of independent directors.
o The adoption or amendment of any equity compensation arrangement
after June 30, 2003, such as a stock option plan, requires shareholder
approval, subject to certain exemptions.
o A code of conduct must be adopted by May 4, 2004 that (i) complies with
the code of ethics requirements of the Act; (ii) covers all directors,
officers and employees; (iii) includes an enforcement mechanism; and (iv)
permits only the board of directors to grant waivers from or changes to
the code of conduct affecting directors and executive officers and
requires prompt disclosure thereof on a Form 8-K filing with the
Securities and Exchange Commission.
The effect of the Act upon the Company is uncertain; however, it is likely
that the Company will incur increased costs to comply with the Act and the rules
and regulations promulgated pursuant to the Act by the Securities and Exchange
Commission and other regulatory agencies having jurisdiction over the Company.
The Company does not currently anticipate, however, that compliance with the Act
and such rules and regulations will have a material adverse effect upon its
financial position or results of its operations or its cash flows.
The California Corporate Disclosure Act
- ---------------------------------------
On September 28, 2002, California Governor Gray Davis signed into law the
California Corporate Disclosure Act (the "CCD Act"), which became effective
January 1, 2003. The CCD Act requires publicly traded corporations incorporated
or qualified to do business in California to disclose information about their
past history, auditors, directors and officers. The CCD Act requires the Company
to disclose:
o The name of the company's independent auditor and a description of
services, if any, performed for the company during the previous 24 months;
o The annual compensation paid to each director and executive officer,
including stock or stock options not otherwise available to other company
employees;
o A description of any loans made to a director at a "preferential" loan
rate during the previous 24 months, including the amount and terms of the
loans;
20
o Whether any bankruptcy was filed by a company or any of its directors or
executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been convicted
of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any securities
or banking provisions of California law during the previous 10 years for
which the company was found liable or fined more than $10,000.
The Company does not currently anticipate that compliance with the CCD Act
will have a material adverse effect upon its financial position or results of
its operations or its cash flows.
Competition
- -----------
At June 30, 2003, commercial and savings banks in competition with the
Company, NVB and SRB, had forty four banking offices in Shasta and Trinity
Counties where NVB operates its fourteen banking offices and there were
fifty-six competing offices of commercial and savings bank offices in Del Norte,
Mendocino and Humboldt Counties where SRB operates its seven banking offices.
Additionally, the Company 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 and international banking which the Company is
not authorized nor prepared to offer currently. The Company has arranged with
correspondent banks and with others to provide some of these services for their
customers. For borrowers requiring loans in excess of each subsidiary bank's
legal lending limit, the Company has offered, and intend to offer in the future,
such loans on a participating basis with correspondent banks and with other
independent banks, retaining the portion of such loans which is within the
applicable lending limits. As of December 31, 2003, NVB's and SRB's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $6,458,000 and $3,236,000 on an unsecured basis and $10,763,000 and
$5,393,000 on a fully secured basis, based on regulatory capital of $43,054,000
and $20,643,000, respectively.
In order to compete with the major financial institutions in its primary
service areas, the Company, through its subsidiary banks, utilizes 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 officers, directors and employees of the
Company. The Company's subsidiary 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 heavily on net interest income. Net
interest income is defined as the difference between the interest rate paid to
obtain deposits and other borrowings and the interest rate received on loans
extended to customers and on securities held in each subsidiary bank's
portfolio. 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 net interest income of the Company, and to a large extent, its
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 Company 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
21
schedule, NVB's current capital ratios and NVB's current levels of deposits, NVB
anticipates no change in the assessment rate applicable during 2004 from that in
2003.
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.
The federal financial institution agencies, especially the 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 or better 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"). The FSMA eliminated most of the
remaining depression-era "firewalls" between banks, securities firms and
insurance companies which was established by 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 through an application process, 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. These regulations will require, in general,
22
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.
The Company, NVB, and SRB have not determined whether they 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
Company and 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 its
subsidiary banks to increased regulation, disclosure and reporting requirements
and increase competition and the Company'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 its
subsidiary banks.
The effect of the Act upon corporations is uncertain; however, it is
likely that compliance costs may increase as corporations modify procedures if
required to conform to the provisions of the Act. The Company does not currently
anticipate that compliance with the Act will have a material effect upon its
financial position or results of its operations or its cash flows.
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 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 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 Company takes reasonable steps to avoid loaning against property that
may be contaminated. In order to identify possible hazards, the Company 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.
23
If the investigation reveals and if certain warning signs are discovered,
but it cannot be easily ascertained, that an actual environmental hazard exists,
the Company 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 Company.
California Power Crisis
- -----------------------
During 2001, the State of California experienced serious periodic electric
power shortages. It is uncertain whether or when these shortages will occur
again. The Company and its subsidiaries could be materially and adversely
affected either directly or indirectly by a severe electric power shortage if
such a shortage caused any of its critical data processing or computer systems
and related equipment to fail, or if the local infrastructure systems such as
telephone systems should fail, or the Company's and its subsidiaries'
significant vendors, suppliers, service providers, customers, borrowers, or
depositors are adversely impacted by their internal systems or those of their
respective customers or suppliers. Material increases in the expenses related to
electric power consumption and the related increase in operating expense could
also have an adverse effect on the Company's future results of operations.
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.
The Company and its subsidiaries are dependent on the successful
recruitment and retention of highly qualified personnel. Business banking, one
of the Company's principal lines of business, is dependent on relationship
banking, in which Company personnel develop professional relationships with
small business owners and officers of larger business customers who are
responsible for the financial management of the companies they represent. If
these employees were to leave the Company and become employed by a local
competing bank, the Company could potentially lose business customers. In
addition, the Company relies on its customer service staff to effectively serve
the needs of its consumer customers. Since overall employment levels are near
their modern-day low, this begins to be a risk to the Company that must be
mitigated. The Company very actively recruits for all open position and
management believes that employee relations are good.
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 6,488,073 were
outstanding at December 31, 2003. Pursuant to its stock option plans, at
December 31, 2003, the Company had outstanding options to purchase 997,976
shares of Company Common Stock. As of December 31, 2003, 341,366 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
market could adversely affect the market price of Common Stock.
A large portion of the loan portfolio of the Company is dependent on real
estate. At December 31, 2003, real estate served as the principal source of
collateral with respect to approximately 57% 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.
24
The terrorist actions on September 11, 2001, and thereafter, plus military
actions taken by the United States in Afghanistan, Iraq and elsewhere, have had
significant adverse effects upon the United States economy. Whether terrorist
activities in the future and the actions taken by the United States and its
allies in combating terrorism on a worldwide basis will adversely impact the
Company, and the extent of such impact, is uncertain. However, such events have
had and may continue to have an adverse effect on the economy in the company's
market areas. Such continued economic deterioration could adversely affect the
company's future results of operations by, among other matters, reducing the
demand for loans and other products and services offered by the company,
increasing nonperforming loans and the amounts reserved for loan losses, and
causing a decline in the Company's stock price.
Recent Accounting Pronouncements
- --------------------------------
In December, 2003, the FASB revised FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). This interpretation of
Accounting Research Bulletin No. 51, Consolidated Financial Statements,
addresses consolidation by business enterprises of a variable interest entity
(VIE) that posses certain characteristics. A company that holds variable
interests in an entity will need to consolidate that entity if the company's
interest in the VIE is such that the company will absorb a majority of the VIE's
expected losses and or receive a majority of the VIE's expected residual
returns, if they occur. The Company adopted FIN 46 on December 31, 2003.
Adoption of this standard required the Company to deconsolidate its investment
in North Valley Capital Trust I and North Valley Capital Trust II. The
deconsolidation of the Trusts, formed in connection with the issuance of Trust
Preferred Securities, appears to be an unintended consequence of FIN 46. In
management's opinion, the effect of deconsolidation on the Company's financial
position and results of operations was not material. In addition, management
does not believe that the Company has any VIEs that would be consolidated under
the provisions of FIN 46.
In July 2003, the Board of Governors of the Federal Reserve Systems issued
a supervisory letter instructing bank holding companies to continue to include
Trust Preferred Securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of the accounting changes resulting from FIN
46 and, if necessary or warranted, provide further appropriate guidance. There
can be no assurance that the Federal Reserve will continue to allow institutions
to include Trust Preferred Securities in Tier 1 capital for regulatory capital
purposes.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. For mandatorily redeemable
financial instruments of a nonpublic entity, this Statement shall be effective
for existing or new contracts for fiscal periods beginning after December 15,
2004. The Company adopted the provisions of this Statement on July 1, 2003 and,
in management's opinion, adoption of the Statement did not have a material
effect on the Company's consolidated financial position or results of
operations.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments by providing guidance
related to circumstances under which a contract with a net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. The Statement also
clarifies when a derivative contains a financing component. The Statement is
intended to result in more consistent reporting for derivative contracts and
must be applied prospectively for contracts entered into or modified after June
30, 2003, except for hedging relationships designated after June 30, 2003. In
management's opinion, adoption of this Statement did not have a material impact
on the Company's consolidated financial position or results of operations.
25
ITEM 2. DESCRIPTION OF PROPERTIES
- ----------------------------------
The Company's principal executive and administrative office is located in
a leased building at 300 Park Marina Circle, Redding, Shasta County, California.
The following table sets forth information about the Company's premises:
Description Office Type Owned/Leased
- -------------------------------------------------------------------------
North Valley Bank:
Redding Branch Owned
Westwood Branch Leased
Shasta Lake Branch Owned
Country Club Branch Owned
Weaverville Branch Owned
Hayfork Branch Owned
Buenaventura Supermarket Branch Leased
Anderson Branch Owned
Enterprise Branch Owned
Cottonwood Supermarket Branch Leased
Palo Cedro Branch Leased
Churn Creek Branch Owned
Woodland Land-Future Branch Owned
Redding Warehouse Storage Facility Leased
Park Marina Circle Administrative/Limited Leased
Use Branch
Park Marina Limited Used Branch Leased
BPI Data Processing/Administrative Owned
Six Rivers Bank:
Eureka Mall Branch Leased
McKinleyville Branch Leased
Crescent City Branch Owned
Eureka Downtown Branch Owned
Ferndale Branch Owned
Garberville Branch Leased
Willits Branch Owned
On January 1, 2004, SRB was merged with and into North Valley Bank with
North Valley Bank as the surviving corporation. Effective with such merger, the
branch premises described above as owned or leased by SRB became owned or leased
by North Valley Bank.
From time to time, the Company, through NVB acquires real property through
foreclosure of defaulted loans. The policy of the Company is not to use or
permanently retain any such properties but to resell them when practicable.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are no material legal proceedings pending against the Company or
against any of its property. The Company, 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.
26
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 STOCKHOLDER 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 with the
Nasdaq Stock Market in April 1998.
The following table summarizes the Common Stock high and low trading
prices traded during the two year period ended December 31, 2003 as reported on
the Nasdaq Stock Market and the cash dividends declared on the common stock
during the same period. All per share data has been retroactively restated to
give effect for the three-for-two stock split approved by the Board of Directors
on March 11, 2003 and payable in the form of a stock dividend to shareholders of
record on April 15, 2003.
Price of Common
Stock Cash
----------------------- Dividends
Quarter Ended: High Low Declared
-------- --------- ---------
March 31, 2002 $ 11.07 $ 9.02 $ 0.08
June 30, 2002 11.51 10.54 0.08
September 30, 2002 11.33 10.03 0.08
December 31, 2002 12.07 10.37 0.09
March 31, 2003 $ 13.71 $ 12.14 $ 0.10
June 30, 2003 16.97 13.76 0.10
September 30, 2003 16.25 14.92 0.10
December 31, 2003 16.01 15.15 0.10
The Company had approximately 988 shareholders of record as of March 12,
2004.
The Company's primary source of funds for payment of dividends to its
shareholders is the receipt of dividends from NVB and SRB. The payment of
dividends by a California State chartered bank is subject to various legal and
regulatory restrictions. See "Supervision and Regulation" in Item 1, Description
of Business, for information related to shareholder and dividend matters
including information regarding certain limitations on payment of dividends.
The following tables summarize the fourth quarter stock repurchase
activity for the Company's current Stock Repurchase Program.
Total
Number of Maximum
Shares Number of
Purchased Shares that
Average as Part of May Yet be
Price Publicly Purchased
Total Number Paid per Announced Under the
Period of Shares Share Plans Plan
- ------ ------------ -------- --------- -----------
October 1 thru 31, 2003 0
November 1 thru 30, 2003 81,200 $ 15.97 2,397,521 27,954
December 1 thru 31, 2003 17,500 $ 15.98 2,415,021 10,454
The above repurchase program - announced on July 28, 2003 - is the seventh
such plan announced by the Company since May of 2001. The program calls for the
repurchase of up to 3.0% of the Company's outstanding shares, or 199,154 shares.
27
The repurchases will be made from time to time by the Company in the open market
as conditions allow. All such transactions will be structured to comply with
Securities and Exchange Commission Rule 10b-18 and all shares repurchased under
this program will be retired. The number, price and timing of the repurchases
shall be at the Company's sole discretion and the program may be re-evaluated
depending on market conditions, liquidity needs or other factors. The Board of
Directors, based on such re-evaluations, may suspend, terminate, modify or
cancel the program at any time without notice.
28
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
North Valley Bancorp & Subsidiaries
(dollars in thousands except per share data)
FOR THE YEAR ENDED DECEMBER 31 2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Total interest income $ 35,100 $ 38,902 $ 39,811 $ 39,966 $ 36,279
Total interest expense 7,527 9,792 15,475 16,235 14,029
---------- ---------- ---------- ---------- ----------
Net interest income 27,573 29,110 24,336 23,731 22,250
Provision for loan and lease
losses -- 1,795 1,370 1,670 1,262
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and lease
losses 27,573 27,315 22,966 22,061 20,988
Total non interest income 11,265 9,313 8,852 6,872 5,368
Total non interest expense 27,262 24,728 22,090 24,236 18,281
---------- ---------- ---------- ---------- ----------
Income before provision for income 11,576 11,900 9,728 4,697 8,075
taxes
Provision for income taxes 3,605 3,836 3,062 1,609 2,331
---------- ---------- ---------- ---------- ----------
Net Income $ 7,971 $ 8,064 $ 6,666 $ 3,088 $ 5,744
========== ========== ========== ========== ==========
Performance ratios:
Return on average assets 1.19% 1.30% 1.18% 0.58% 1.13%
Return on average equity 16.66% 17.31% 13.11% 5.82% 11.35%
Capital Ratios:
Risk based capital:
Tier 1 (4% Minimum Ratio) 12.34% 11.33% 11.57% 13.05% 13.37%
Total (8% Minimum Ratio) 13.77% 12.58% 12.82% 14.30% 14.44%
Leverage Ratio 8.49% 8.59% 8.37% 9.73% 9.27%
BALANCE SHEET DATA AT DECEMBER 31
Assets $ 677,693 $ 656,080 $ 594,973 $ 540,221 $ 521,073
Investment securities and
federal funds sold $ 224,010 $ 133,330 $ 132,881 $ 105,235 $ 133,280
Net loans $ 372,660 $ 437,843 $ 391,022 $ 364,659 $ 325,824
Deposits $ 598,314 $ 555,053 $ 514,278 $ 460,291 $ 452,697
Stockholders' equity $ 46,053 $ 50,029 $ 43,678 $ 54,857 $ 51,841
COMMON SHARE DATA
Earnings per share(1)
Basic $ 1.19 $ 1.15 $ 0.84 $ 0.35 $ 0.67
Diluted $ 1.13 $ 1.11 $ 0.82 $ 0.35 $ 0.66
Book value (2) $ 7.10 $ 7.20 $ 6.26 $ 6.30 $ 5.98
Dividend payout ratio 35.40% 28.96% 31.50% 54.86% 25.81%
Shares outstanding 6,488,073 6,951,142 6,976,584 8,708,124 8,671,496
(1) Earnings per share amounts have been adjusted to give effect to a three
for two stock split on May 15, 2003.
(2) Represents stockholders' equity divided by the number of shares of common
stock outstanding at the end of the period indicated.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
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 Banking industry increases significantly; changes in the
interest rate environment reduce margins; general economic conditions, either
nationally or regionally, are less favorable than expected, resulting in, among
other things, a deterioration in credit quality and an increase in the provision
for possible loan losses; changes in the regulatory environment; changes in
business conditions, particularly in the Northern California region; volatility
of rate sensitive deposits; operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; the
California power crises; the U.S. "war on terrorism" and military action by the
U.S. in the Middle East, and changes in the securities markets.
Critical Accounting Policies
- ----------------------------
General
North Valley Bancorp's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within our financial statements is,
to a significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. We use historical loss factors as one factor in determining the
inherent loss that may be present in our loan and lease portfolio. Actual losses
could differ significantly from the historical factors that we use. Other
estimates that we use are related to the expected useful lives of our
depreciable assets. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could
change.
Allowance for Loan and Lease Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accountings Standards
(SFAS) No. 5 "Accounting for Contingencies", which requires that losses be
accrued when they are probable of occurring and estimable; and (2) SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", which requires that losses
be accrued on impaired loans (as defined) based on the differences between the
value of collateral, present value of future cash flows or values that are
observable in the secondary market and the loan balance.
The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risks inherent
in the loan and lease portfolio. In determining levels of risk, management
considers a variety of factors, including, but not limited to, asset
classifications, economic trends, industry experience and trends, geographic
concentrations, estimated collateral values, historical loan and lease loss
experience, and the Company's underwriting policies. The allowance for loan and
lease losses is maintained at an amount management considers adequate to cover
losses in loans and leases receivable, which are considered probable and
estimable. While management uses the best information available to make these
estimates, future adjustments to allowances may be necessary due to economic,
operating, regulatory, and other conditions that may be beyond the Company's
control. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize additions to
the allowance based on judgments different from those of management.
Stock Based Compensation
- ------------------------
At December 31, 2003, the Company has three stock-based compensation
plans: the North Valley Bancorp 1989 Director Stock Option Plan, the 1998
Employee Stock Incentive Plan and the 1999 Director Stock Option Plan, which are
described more fully in Note 14 to the Consolidated Financial Statements
included herein in Item 8 - Financial Statements and Supplementary Data. The
Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No stock-based employee compensation cost is reflected
in net income under the Employee Plan, as all options granted under this plan
had an exercise price equal to the market value of the underlying common stock
on the date of grant. Compensation expense is recognized in the financial
statements for the Director Plans over the vesting period for the difference
between the fair value of the shares at the date of the grant and the exercise
price, which is equal to 85% of the fair value at the date of the grant. For
further information regarding the proforma effect on reported net income and
earnings per share as if the Company had elected to recognize compensation cost
based on the fair value of the options granted at the date of grant as
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" see Note 1
to the Consolidated Financial Statements in Item 8 - Financial Statements and
Supplementary Data.
30
Overview
- --------
North Valley Bancorp (the "Company") is a bank holding company for North
Valley Bank ("NVB"), a state-chartered bank. NVB operates out of its main office
located at 300 Park Marina Circle, Redding, CA 96001, with twenty-one branches,
which includes the former branches of SRB and two supermarket branches in
Northern California. The Company operates as three business segments; North
Valley Bank, (the former branches of) Six Rivers Bank and other. Management
analyzes the operations of NVB, SRB and Other separately. Other consists of
Bancorp and BPI, both of which provide services to NVB and SRB. Management
allocates the costs of Bancorp and BPI to NVB and SRB based primarily on usage
through a variety of statistical data. The Company's principal business consists
of attracting deposits from the general public and using the funds to originate
commercial, real estate and installment loans to customers, who are
predominately small and middle market businesses and middle income individuals.
The Company's primary source of revenues is interest income from its loan and
investment securities portfolios. The Company is not dependent on any single
customer for more than ten percent of its revenues.
Earnings Summary
- ----------------
For the year ended December 31,
(in thousands except per share 2003 2002 2001
amounts) -------- -------- --------
Net interest income $ 27,573 $ 29,110 $ 24,336
Provision for loan and
lease losses -- (1,795) (1,370)
Noninterest income 11,265 9,313 8,852
Noninterest expense (27,262) (24,728) (22,090)
Provision for income taxes (3,605) (3,836) (3,062)
-------- -------- --------
Net income $ 7,971 $ 8,064 $ 6,666
======== ======== ========
Earnings Per Share
Basic $ 1.19 $ 1.15 $ 0.84
======== ======== ========
Diluted $ 1.13 $ 1.11 $ 0.82
======== ======== ========
Return on Average Assets 1.19% 1.30% 1.18%
Return on Average Equity 16.66% 17.31% 13.11%
For the year ended December 31, 2003, the Company recorded net income of
$7,971,000 as compared to $8,064,000 for the same period in 2002 and $6,666,000
in 2001. On a per share basis, diluted earnings per share was $1.13 for the year
ended December 31, 2003 compared to $1.11 the same period in 2002 and $0.82 for
the same period in 2001.
The decrease in net income for the year ended December 31, 2003 from 2002
was due to a decrease in net interest income of $1,537,000, an increase in
noninterest expense of $2,534,000 partially offset by a decrease in the
provision for loan losses of $1,795,000 and an increase in noninterest income of
$1,952,000. The decrease in net interest income was due primarily to a strategic
decision to sell all new fixed-rate mortgages into the secondary market rather
than hold them in the portfolio which had the effect of decreasing the Company's
loan portfolio, which decreased the Company's net interest margin.
For the year ended December 31, 2003, the Company paid or declared
quarterly dividends totaling $2,669,000 to stockholders of the Company. The
Company's return on average total assets and average stockholders' equity were
1.19% and 16.66% for the period ended December 31, 2003, compared with 1.30% and
17.31% for the same period in 2002 and 1.18% and 13.11% for the same period in
2001.
31
Segment Information
- -------------------
The Company operates as three business segments: North Valley Bank, Six
Rivers Bank and Other. Management analyzes the operations of NVB, SRB and Other
separately. Other consists of Bancorp and BPI, both of which provide services to
NVB and SRB. Other also includes all eliminating entries for inter-company
revenue and expense items required for consolidation. For the year ended
December 31, 2003, total revenues and net income slightly increased at both NVB
and SRB but decreased in the Other segment. The increase in revenues and net
income at NVB and SRB was primarily due to an increase in noninterest income
partially offset by a decrease in net interest income. The increase was
primarily due to sale of loans and is nonrecurring. Total assets increased at
all three segments for the year ended December 31, 2003.
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the years
ended December 31, follows (in thousands):
NVB SRB Other Total
--------- --------- --------- ---------
Year ended December 31, 2003:
Total revenues $ 28,684 $ 11,146 $ (992) $ 38,838
Net income (loss) $ 7,520 $ 1,603 $ (1,152) $ 7,971
Interest income $ 24,574 $ 10,518 $ 8 $ 35,100
Interest expense $ 3,770 $ 2,457 $ 1,300 $ 7,527
Depreciation and amortization $ 1,994 $ 838 $ 170 $ 3,002
Provision for loan and lease
losses $ -- $ -- $ -- $ --
Total assets $ 458,542 $ 217,049 $ 2,102 $ 677,693
Year ended December 31, 2002:
Total revenues $ 28,084 $ 10,928 $ (589) $ 38,423
Net income (loss) $ 7,295 $ 1,496 $ (727) $ 8,064
Interest income $ 26,897 $ 12,003 $ 2 $ 38,902
Interest expense $ 5,456 $ 3,319 $ 1,017 $ 9,792
Depreciation and amortization $ 1,020 $ 1,062 $ 85 $ 2,167
Provision for loan and lease
losses $ 1,575 $ 220 $ -- $ 1,795
Total assets $ 443,642 $ 211,920 $ 518 $ 656,080
Year ended December 31, 2001:
Total revenues $ 22,497 $ 10,473 $ 218 $ 33,188
Net income (loss) $ 5,878 $ 1,427 $ (639) $ 6,666
Interest income $ 26,369 $ 13,403 $ 39 $ 39,811
Interest expense $ 9,656 $ 5,352 $ 467 $ 15,475
Depreciation and amortization $ 765 $ 813 $ 20 $ 1,598
Provision for loan and lease
losses $ 1,010 $ 360 $ -- $ 1,370
Total assets $ 394,110 $ 199,166 $ 1,697 $ 594,973
Net Interest Income
- -------------------
Net interest income is the difference between interest earned on loans and
investments and interest paid on deposits and borrowings, and is the primary
revenue source for the Company. For the year ended December 31, 2003, net
interest income was $27,573,000 compared to $29,110,000 for 2002 and $24,336,000
for 2001. The decrease in net interest income in 2003 of $1,537,000 was
primarily due to a decrease in interest income of $3,802,000 which outpaced the
decrease in interest expense of $2,265,000. Because of the historically low
interest rate environment that began in late 2002, the Company began selling
nearly all fixed-rate 30- and 15-year mortgages that were originated. The
purpose of this tactic was to ensure that the Company did not take on too much
interest rate risk and to keep the duration of the loan portfolio relatively
32
short. This will allow the Company's earnings to grow in a rising-rate
environment.
During 2003, average interest-earning assets increased by $42,957,000 from
2002 but the average yield on those assets, on a tax equivalent basis, decreased
from 7.16% in 2002 to 6.00% in 2003. The decrease in yields was primarily driven
by Management's strategy of selling the fixed-rate mortgage production. Average
interest-bearing liabilities also increased, from $466,602,000 in 2002 to
$500,332,000 in 2003. This increase in interest-bearing liabilities added to
interest expense but was more than offset by the reduction in the average rate
paid on interest-bearing liabilities which decreased from 2.10% in 2002 to 1.50%
in 2003 resulting in the overall reduction in interest expense of $2,265,000.
The increase in net interest income (tax-equivalent basis) from 2001 to 2002 of
$4,722,000 was primarily due to a decrease in interest income of $961,000
coupled with a larger decrease in interest expense of $5,683,000 due to rates
paid on deposits decreasing at a much faster pace than the decrease in yields on
interest-earning assets.
The net interest margin ("NIM") is calculated by dividing net interest
income by average interest-earning assets and is calculated using a fully
taxable equivalent basis. The NIM for the year ended December 31, 2003 was 4.74%
as compared to 5.39% for 2002 and 5.02% in 2001. The decrease in the NIM in 2003
was a result of a decrease in average yields on interest-earning assets of 1.16%
partially offset by with a decrease in the average rate paid on interest bearing
liabilities of 0.60%.
Noninterest Income
- ------------------
Total noninterest income increased $1,952,000 to $11,265,000 for the year
ended December 31, 2003 from $9,313,000 for the same period in 2002 and
$8,852,000 in 2001. This increase in 2003 is mainly the result of an increase in
gains on sales of loans of $1,461,000 and an increase in the earnings on cash
surrender value of life insurance of $257,000. In addition, other income
increased in 2003 by $181,000 over 2002. Service charge income and other fee
income were relatively flat with 2002 levels. The increase in 2002 was primarily
the result of an increase of $938,000 in other fees and charges and an increase
of $265,000 in earnings on cash surrender value of life insurance policies
partially offset by a decrease in service charges on deposit accounts of
$901,000, gains on sales of loans of $452,000 in 2002, gains on sales and calls
of securities of $202,000 in 2002 and other income which decreased by $495,000.
Other income decreased from $1,255,000 in 2001 to $760,000 in 2002.
Included in other income for 2001 is a $447,000 gain on sale of SRB's
Weaverville, California branch. This branch divestiture was a requirement by
regulators to effect the merger with SRB in 2000.
Noninterest Expense
- -------------------
The following table is a summary of the Company's noninterest expense for
the periods indicated (in thousands):
2003 2002 2001
------- ------- -------
Salaries & employee benefits $13,504 $12,480 $11,394
Equipment expense 2,614 1,873 1,483
Occupancy expense 1,720 1,554 1,274
Professional services 952 886 786
ATM & online banking expense 1,007 906 626
Printing & supplies 508 640 570
Postage 513 535 491
Messenger expense 336 403 338
Data processing expense 161 192 292
Merger & integration expense 358
Other 5,947 5,259 4,478
------- ------- -------
Total noninterest expense $27,262 $24,728 $22,090
======= ======= =======
Total noninterest expense increased $2,534,000 to $27,262,000 for the year
ended December 31, 2003, from $24,728,000 for the same period in 2002 and
33
22,090,000 in 2001. The increase in 2003 was primarily a result of a $1,024,000
increase in salaries and benefits, an increase in equipment expense of $741,000
and an increase in other expense of $688,000. The increase in salaries and
benefits was due to normal organic growth and merit increases for existing
employees. The increase in equipment expense was mainly the result of the
Company's new core processing system which was installed in November of 2002.
Printing and supplies and postage expense decreased from 2002 to 2003 due to the
efficiencies gained with the new core processing system, namely, imaging of
statements and checks for checking account customers. ATM and online banking
expense increased in 2003 due to increased transaction activity. Other expense
increased due to an increase in loan origination expense and an increase in
overdraft losses primarily associated with the Company's free checking account
program.
In 2002, total noninterest expense increased $2,638,000 to $24,728,000
from $22,090,000 for the same period in 2001. The increase in 2002 was primarily
a result of a $1,086,000 increase in salaries and benefits, an increase in
occupancy expense associated with the new administrative facility in Redding and
NVB's new Churn Creek Branch. ATM and online banking expense increased in 2002
due to increased transaction activity. Other expense increased due mainly to an
increase in amortization of intangibles at SRB of $282,000 and increased levels
of operational and overdraft losses primarily associated with the Company's free
checking account program.
Income Taxes
- ------------
The provision for income taxes for the year ended December 31, 2003 was
$3,605,000 as compared to $3,836,000 for the same period in 2002 and $3,062,000
for 2001. The effective income tax rate for state and federal income taxes was
31.1%, for the year ended December 31, 2003 compared to 32.2% for the same
period in 2002 and 31.5% for the same period in 2001. The difference in the
effective tax rate compared to the statutory tax rate (42.05%) is primarily the
result of the Company's investment in municipal securities and the earnings from
the cash surrender value of life insurance policies. Interest earned on
municipal securities and earnings on life insurance policies are both exempt
from federal income tax and therefore lower the Company's effective tax rate.
Impaired, Nonaccrual, Past Due and Restructured Loans and Leases, and Other Non
performing Assets
- -------------------------------------------------------------------------------
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 or lease 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.
At December 31, 2003 and 2002, the recorded investment in loans and leases
for which impairment has been recognized was approximately $1,636,000 and
$1,452,000. Of the 2003 balance, approximately $535,000 has a related valuation
allowance of $267,000. Of the 2002 balance, approximately $730,000 has a related
valuation allowance of $365,000. For the years ended December 31, 2003, 2002 and
2001, the average recorded investment in loans and leases for which impairment
has been recognized was approximately $1,515,000, $948,000 and $613,000. During
the portion of the year that the loans and leases were impaired, the Company
recognized interest income of approximately $51,000, $63,000 and $76,000 for
cash payments received in 2003, 2002 and 2001.
Loans and leases on which the accrual of interest has been discontinued
are designated as nonaccrual loans and leases. 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 or lease 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 or lease is placed on nonaccrual status, all
interest previously accrued but not collected is reversed against current period
interest income. Income on such loans and leases 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 and leases when, in the
judgment of management, the loans and leases are estimated to be fully
collectible as to both principal and interest.
Nonperforming assets at December 31 are summarized as follows (in
thousands):
34
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Nonaccrual loans and leases $1,615 $1,452 $ 867 $ 780 $2,145
Loans and leases 90 days past due
but still accruing interest 1,395 864 848 561 223
Restructured loans 601
other real estate owned -- 55 287 341 699
------ ------ ------ ------ ------
Total nonperforming assets $3,101 $2,371 $2,002 $1,682 $3,668
====== ====== ====== ====== ======
If interest on nonaccrual loans and leases had been accrued, such income
would have approximated $50,000 in 2003, $81,000 in 2002 and $69,000 in 2001.
Interest income of $51,000 in 2003, $63,000 in 2002 and $76,000 in 2001 was
recorded when it was received on the nonaccrual loans and leases.
Based on its review of impaired, past due and nonaccrual loans and leases
and other information known to management at the date of this report, in
addition to the nonperforming loans and leases 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 and leases might subsequently be classified as
nonperforming.
At December 31, 2003, there were no commitments to lend additional funds
to borrowers whose loans or leases were classified as nonaccrual.
35
Allowance for Loan and Lease Losses
- -----------------------------------
The following table summarizes the Company's loan and lease loss
experience for the years ended December 31 (dollars in thousands):
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Average loans and leases
outstanding $399,217 $424,272 $378,190 $342,831 $313,169
Allowance for loan and lease losses
at beginning of period 6,723 5,786 4,964 4,606 4,704
Loans and leases charged off:
Commercial, financial and
agricultural 63 271 213 1,276 1,105
Real Estate - construction -- -- -- -- --
Real Estate - mortgage 2 7 27 53 105
Installment 715 924 610 269 788
Other 139 22 72 79 67
-------- -------- -------- -------- --------
Total loans and leases charged off 919 1,224 922 1,677 2,065
Recoveries of loans and leases
previously charged off:
Commercial, financial and
agricultural 527 209 194 262 244
Real Estate - construction
Real Estate - mortgage 16 1 1 -- 32
Installment 138 156 169 89 422
Other 8 -- 10 14 7
-------- -------- -------- -------- --------
Total recoveries of loans and leases
Previously charged off 689 366 374 365 705
-------- -------- -------- -------- --------
Net loans and leases charged off 230 858 548 1,312 1,360
Provisions for loan and lease lossees -- 1,795 1,370 1,670 1,262
-------- -------- -------- -------- --------
Balance of allowance for loan
and lease losses at end of period $ 6,493 $ 6,723 $ 5,786 $ 4,964 $ 4,606
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans and leases
outstanding 0.06% 0.20% 0.15% 0.38% 0.43%
Allowance for loan and lease
losses to total loans and leases 1.71% 1.51% 1.46% 1.34% 1.39%
The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risks inherent
in the loan and lease portfolio. In determining levels of risk, management
considers a variety of factors, including, but not limited to, asset
classifications, economic trends, industry experience and trends, geographic
concentrations, estimated collateral values, historical loan and lease loss
experience, and the Company's underwriting policies. The allowance for loan and
lease losses is maintained at an amount management considers adequate to cover
losses in loans and leases receivable, which are considered probable and
estimable. While management uses the best information available to make these
estimates, future adjustments to allowances may be necessary due to economic,
operating, regulatory, and other conditions that may be beyond the Company's
control. The Company also engages a third party credit review consultant to
analyze the Company's loan and lease loss adequacy. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to recognize additions to the allowance based
on judgments different from those of management.
36
The allowance for loan and lease losses is comprised of two primary types
of allowances:
1. Formula Allowance
Formula allowances are based upon loan and lease loss factors that
reflect management's estimate of the inherent loss in various segments
of pools within the loan and lease portfolio. The loss factor is
multiplied by the portfolio segment (e.g. multifamily permanent
mortgages) balance to derive the formula allowance amount. The loss
factors are updated periodically by the Company to reflect current
information that has an effect on the amount of loss inherent in each
segment.
The formula allowance is adjusted for qualitative factors that are
based upon management's evaluation of conditions that are not directly
measured in the determination of the formula and specific allowances.
The evaluation of inherent loss with respect to these conditions is
subject to a higher degree of uncertainty because they are not
identified with specific problem credits or historical performance of
loan and lease portfolio segments. The conditions evaluated in
connection with the unallocated allowance at September 30, 2003
included the following, which existed at the balance sheet date:
o General business and economic conditions effecting the Company's
key lending areas
o Real estate values in Northern California
o Loan volumes and concentrations, including trends in past due and
nonperforming loans
o Seasoning of the loan portfolio
o Status of the current business cycle
o Specific industry or market conditions within portfolio segments
o Model imprecision
2. Specific Allowance
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to an
individually impaired credit. In other words, these allowances are
specific to the loss inherent in a particular loan. The amount for a
specific allowance is calculated in accordance with SFAS No. 114,
"Accounting By Creditors For Impairment Of A Loan."
The $6,493,000 in formula and specific allowances reflects management's
estimate of the inherent loss in various pools or segments in the portfolio and
individual loans and leases, and includes adjustments for general economic
conditions, trends in the portfolio and changes in the mix of the portfolio. The
level of formula allowance is consistent from 2002 to 2003.
Management anticipates that as the Company continues to implement its
strategic plan the Company will:
o generate further growth in loans receivable held for investment
o emphasize the origination and purchase of income property real estate
loans
o continue expansion of commercial business lending
37
As a result, future provisions will be required and the ratio of the
allowance for loan and lease losses to loans and leases outstanding may
increase. Experience across the financial services industry indicates that
commercial business and income property loans may present greater risks than
residential real estate loans, and therefore should be accompanied by suitably
higher levels of reserves.
The following table shows the allocation of the Company's Allowance and
the percent of loans in each category to the total loans at December 31 (dollars
in thousands).
2003 2002 2001
------------------------ ---------------------- -----------------------
Allowance % Allowance % Allowance %
For Of For Of For Of
Losses Loans Losses Loans Losses Loans
---------- ----- --------- ----- --------- -----
Loan and Lease Categories:
Commercial, Financial
Agricultural $3,387 53.3% $3,070 45.2% $2,141 37.4%
Real Estate-construction 530 10.0% 325 5.7% 165 2.5%
Real Estate-mortgage 212 14.5% 390 23.5% 238 27.7%
Installment 1,107 16.1% 1,608 19.7% 1,922 28.7%
Other 64 6.1% 232 5.9% 104 3.7%
Unallocated 1,193 --% 1,098 --% 1,216 --%
------ ----- ------ ----- ------ -----
Total $6,493 100.0% $6,723 100.0% $5,786 100.0%
====== ===== ====== ===== ====== =====
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 pay-downs 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 $23,000,000 as of December 31, 2003 were available to provide
liquidity. The Company has a committed, revolving unsecured line of credit for
$3,000,000 with a correspondent bank as of December 31, 2003. In addition, NVB
is a member of the Federal Home Loan Bank ("FHLB") providing an additional line
of credit of $32,825,000 secured by first deeds of trust on eligible 1-4 unit
residential loans and qualifying investment securities. The Company also had a
line of credit with the Federal Reserve Bank ("FRB") of $4,187,000 secured by
first deeds of trust on eligible commercial real estate loans. As of December
31, 2003, borrowings of $9,459,000 were outstanding with the FHLB, and
$16,000,000 was outstanding in the form of Subordinated Debentures.
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 $252,146,000 and
$167,747,000 (or 37.2% and 25.6% of total assets) at December 31, 2003 and
December 31, 2002, respectively. Total liquid assets for December 31, 2003 and
December 31, 2002 include investment securities of $1,455,000 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 $546,866,000 and $506,162,000 at December 31,
2003 and December 31, 2002, respectively.
38
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.
Interest Rate Sensitivity
- -------------------------
The Company constantly monitors earning asset and deposit levels,
developments and trends in interest rates, liquidity, capital adequacy and
marketplace opportunities. Management responds to all of these to protect and
possibly enhance net interest income while managing risks within acceptable
levels as set forth in the Company's policies. In addition, alternative business
plans and contemplated transactions are also analyzed for their impact. This
process, known as asset/liability management is carried out by changing the
maturities and relative proportions of the various types of loans, investments,
deposits and other borrowings in the ways prescribed above.
The tool used to manage and analyze the interest rate sensitivity of a
financial institution is known as a simulation model and is performed with
specialized software built for this specific purpose for financial institutions.
This model allows management to analyze three specific types of risks; market
risk, mismatch risk, and basis risk.
Market Risk
- -----------
Market risk results from the fact that the market values of assets or
liabilities on which the interest rate is fixed will increase or decrease with
changes in market interest rates. If the Company invests in a fixed-rate, long
term security and then interest rates rise, the security is worth less than a
comparable security just issued because the older security pays less interest
than the newly issued security. If the security had to be sold before maturity,
then the Company would incur a loss on the sale. Conversely, if interest rates
fall after a fixed-rate security is purchased, its value increases, because it
is paying at a higher rate than newly issued securities. The fixed rate
liabilities of the Company, like certificates of deposit and fixed-rate
borrowings, also change in value with changes in interest rates. As rates drop,
they become more valuable to the depositor and hence more costly to the Company.
As rates rise, they become more valuable to the Company. Therefore, while the
value changes when rates move in either direction, the adverse impacts of market
risk to the Company's fixed-rate assets are due to rising rates and for the
Company's fixed-rate liabilities, they are due to falling rates. In general, the
change in market value due to changes in interest rates is greater in financial
instruments that have longer remaining maturities. Therefore, the exposure to
market risk of assets is lessened by managing the amount of fixed-rate assets
and by keeping maturities relatively short. These steps, however, must be
balanced against the need for adequate interest income because variable-rate and
shorter-term assets generally yield less interest than longer-term or fixed-rate
assets.
Mismatch Risk
- -------------
The second interest-related risk, mismatched risk, arises from the fact
that when interest rates change, the changes do not occur equally in the rates
of interest earned and paid because of differences in the contractual terms of
the assets and liabilities held. A difference in the contractual terms, a
mismatch, can cause adverse impacts on net interest income.
The Company has a certain portion of its loan and lease portfolio tied to
the national prime rate. If these rates are lowered because of general market
conditions, e.g., the prime rate decreases in response to a rate decrease by the
Federal Reserve Open Market Committee ("FOMC"), these loans will be repriced. If
the Company were at the same time to have a large proportion of its deposits in
long-term fixed-rate certificates, interest earned on loans would decline while
interest paid on the certificates would remain at higher levels for a period of
time until they mature. Therefore, net interest income would decrease
immediately. A decrease in net interest income could also occur with rising
interest rates if the Company had a large portfolio of fixed-rate loans and
leases and securities that was funded by deposit accounts on which the rate is
steadily rising.
39
This exposure to mismatch risk is managed by attempting to match the
maturities and repricing opportunities of assets and liabilities. This may be
done by varying the terms and conditions of the products that are offered to
depositors and borrowers. For example, if many depositors want shorter-term
certificates while most borrowers are requesting longer-term fixed rate loans,
the Company will adjust the interest rates on the certificates and loans to try
to match up demand for similar maturities. The Company can then partially fill
in mismatches by purchasing securities or borrowing funds from the FHLB with the
appropriate maturity or repricing characteristics.
Basis Risk
- ----------
The third interest-related risk, basis risk, arises from the fact that
interest rates rarely change in a parallel or equal manner. The interest rates
associated with the various assets and liabilities differ in how often they
change, the extent to which they change, and whether they change sooner or later
than other interest rates. For example, while the repricing of a specific asset
and a specific liability may occur at roughly the same time, the interest rate
on the liability may rise one percent in response to rising market rates while
the asset increases only one-half percent. While the Company would appear to be
evenly matched with respect to mismatch risk, it would suffer a decrease in net
interest income. This exposure to basis risk is the type of interest risk least
able to be managed, but is also the least dramatic. Avoiding concentration in
only a few types of assets or liabilities is the best means of increasing the
chance that the average interest received and paid will move in tandem. The
wider diversification means that many different rates, each with their own
volatility characteristics, will come into play.
Net Interest Income and Net Economic Value Simulations
- ------------------------------------------------------
To quantify the extent of all of these risks both in its current position
and in transactions it might make in the future, the Company uses computer
modeling to simulate the impact of different interest rate scenarios on net
interest income and on net economic value. Net economic value or the market
value of portfolio equity is defined as the difference between the market value
of financial assets and liabilities. These hypothetical scenarios include both
sudden and gradual interest rate changes, and interest rate changes in both
directions. This modeling is the primary means the Company uses for interest
rate risk management decisions.
The hypothetical impact of sudden interest rate shocks applied to the
Company's asset and liability balances are modeled quarterly. The results of
this modeling indicate how much of the Company's net interest income and net
economic value are "at risk" (deviation from the base level) from various sudden
rate changes. Although interest rates normally would not change in this sudden
manner, this exercise is valuable in identifying risk exposures. The results for
the Company's December 31, 2003 balances indicates unusual results for changes
in net economic value over a one-year period given the same interest rate
shocks. These results indicate that net economic value will be higher over the
next twelve-month period whether or not interest rates rise or fall. The change
in net interest income is positive in the rising rate scenario and lower in the
declining interest rate scenario, indicating asset sensitivity. This is exactly
the result that Management was looking for as a result of the strategy of
selling the fixed-rate mortgage production during 2003. By shortening the
duration of the loan portfolio, the balance sheet is in a strong position to
take advantage of a flat or rising rate scenario.
Shocked by -2% Shocked by +2%
-------------- --------------
Net interest income -9.2% 12.4%
Net economic value 13.5% 13.7%
For the modeling, the Company has made certain assumptions about the
duration of its non-maturity deposits that are important to determining net
economic value at risk. The Company has compared its assumptions with those used
by other financial institutions.
40
Financial Condition as of December 31, 2003 as Compared to December 31, 2002
- ----------------------------------------------------------------------------
Total assets at December 31, 2003, were $677,693,000 compared to December
31, 2002 assets of $656,080,000. An increase in average total deposits of
$54,421,000 and decrease of $25,055,000 in average loans was used to fund a
$34,699,000 increase in average total investment securities and federal funds
sold of $33,313,000.
Investment securities and federal funds sold increased $90,680,000 from
2002 to 2003 and totaled $224,010,000 at December 31, 2003, compared to
$133,330,000 at December 31, 2002.
During 2003, net loans decreased 14.9% to $372,660,000 from $437,843,000
at December 31, 2002. Loans are the Company's largest component of earning
assets. The Company's average loan to deposit ratio decreased to 68.5% in 2003
compared to 80.2% in 2001.
During 2003, total deposits increased 7.8% to $598,314,000 compared to
$555,053,000 at December 31, 2002. Non-interest bearing demand, interest-bearing
demand and savings deposits increased $51,962,000 or 13.6% while certificates of
deposits decreased $8,701,000 or 5.1%. The increase in demand deposits was due
to a significant number of new accounts opened during 2003, which is attributed
to the continued success of our "High Performance Checking Program".
Capital Resources
- -----------------
The Company maintains capital to support future growth and dividend
payouts while trying to effectively manage the capital on hand. From the
depositor standpoint, a greater amount of capital on hand relative to total
assets is generally viewed as positive. At the same time, from the standpoint of
the shareholder, a greater amount of capital on hand may not be viewed as
positive because it limits the Company's ability to earn a high rate of return
on shareholders' equity (ROE). Stockholders' equity decreased to $46,053,000 as
of December 31, 2003, as compared to $50,029,000 at December 31, 2002. The
decrease was primarily as a result of net income of $7,971,000 partially offset
by the payment of cash dividends of $2,669,000 and the payment of $8,235,000
used to repurchase the Company's common stock. Under the Company's Stock
Repurchase Plans, 537,618 shares were repurchased in 2003 at an average price of
$15.31 and 63,102 shares of common stock were repurchased in 2002 at an average
price of $16.72. At December 31, 2003, there were 10,000 shares remaining to
repurchase under the Plans. Under current regulations, management believes that
the Company meets all capital adequacy requirements. The following table
displays the Company's capital ratios at December 31, 2003 (dollars in
thousands).
Minimum For
Capital
Adequacy
Capital Ratio Purposes
------- ----- -----------
Company:
Tier 1 capital
(to average assets) $58,310 8.49% 4.00%
Tier 1 capital
(to risk weighted assets) $58,310 12.34% 4.00%
Total capital
(to risk weighted assets) $65,059 13.77% 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 monetarily based items.
The relatively low proportion of the Company's fixed assets (approximately 1.9%
at December 31, 2003) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values.
41
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 or embedded features. The Company currently has not entered into
any freestanding derivative contracts and did not identify any embedded
derivatives requiring bifurcation at December 31, 2003 or 2002. 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. Please see "Interest Rate Sensitivity" on previous pages
for a more detailed description.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Financial Statements required by this item are set forth following
Item 15 of this Form 10-K, and are incorporated herein by reference.
The following table discloses the Company's condensed selected quarterly
financial data for each of the quarters in the two-year period ended December
31, 2003. Earnings per share data has been retroactively restated to give effect
to the three-for-two split approved by the Board of Directors on March 11, 2003,
and paid in the form of a stock dividend on May 15, 2003 to shareholders of
record on April 15, 2003.
For the Quarter Ended
--------------------------------------------------------------------------------
March June September December March June September December
(in thousands) 2003 2003 2003 2003 2002 2002 2002 2002
------ ------ --------- -------- ------ ------ --------- --------
Interest income $9,192 $8,852 $ 8,550 $ 8,506 $9,491 $9,895 $ 9,853 $ 9,663
Interest expense 2,080 1,944 1,821 1,682 2,774 2,488 2,259 2,271
------ ------ --------- -------- ------ ------ --------- --------
Net interest income 7,112 6,908 6,729 6,824 6,717 7,407 7,594 7,392
Provision for loan and
lease losses -- -- -- -- 420 575 380 420
Noninterest income 2,720 3,154 2,667 2,724 2,270 2,162 2,217 2,664
Noninterest expense 6,696 6,949 6,899 6,718 6,036 6,066 6,154 6,472
------ ------ --------- -------- ------ ------ --------- --------
Income before
provision for
income taxes 3,136 3,113 2,497 2,830 2,531 2,928 3,277 3,164
Provision for
income taxes 1,039 977 680 909 783 1,020 1,151 882
------ ------ --------- -------- ------ ------ --------- --------
Net income $2,097 $2,136 $ 1,817 $ 1,921 $1,748 $1,908 $ 2,126 $ 2,282
====== ====== ========= ======== ====== ====== ========= ========
Earnings Per Share
Basic $ 0.31 $ 0.31 $ 0.28 $ 0.29 $ 0.25 $ 0.27 $ 0.31 $ 0.32
====== ====== ========= ======== ====== ====== ========= ========
Diluted $ 0.29 $ 0.30 $ 0.26 $ 0.28 $ 0.24 $ 0.27 $ 0.29 $ 0.31
====== ====== ========= ======== ====== ====== ========= ========
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
The firm of Deloitte & Touche LLP served the registrant, North Valley
Bancorp (the Company") as independent public accountants for the 2001 fiscal
year. On June 6, 2002, the Board of Directors of the Company approved the
recommendation of the Audit Committee of the Board of Directors to change the
Company's certifying accountant from Deloitte & Touche, LLP to Perry-Smith LLP.
The Company engaged Perry-Smith LLP as the Company's independent public
accountants for the fiscal year 2002, effective as of June 6, 2002.
Deloitte & Touche LLP was notified on June 6, 2002 that they were
dismissed as the Company's independent public accountants effective June 6,
2002. The audit reports of Deloitte & Touche LLP on the consolidated financial
statements of the Company and its subsidiaries as of and for the fiscal years
ended December 31, 2001 and 2000 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles.
During the Company's two fiscal years in the period ended December 31,
2001, and any subsequent interim period through June 6, 2002, there were no
disagreements between the Company and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche LLP, would have caused it to make reference to the subject
matter of the disagreement in connection with its reports.
During the fiscal years ending December 31, 2001 and 2000, and the interim
period between December 31, 2001, and June 6, 2002, the Company did not consult
with Perry-Smith LLP regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K. The Company also engaged Perry-Smith
LLP as the Company's independent public accountants for the fiscal year 2003.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
Disclosure Controls and Procedures. Disclosure controls and procedures are
designed with the objective of ensuring that information required to be
disclosed in reports filed by the Company under the Exchange Act, such as this
Annual Report, is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures are also designed with the
objective of ensuring that such information is accumulated and communicated to
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures and Internal Control over
Financial Reporting. The Company's management, including the Chief Executive
Officer and the Chief Financial Officer, evaluated the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of December 31, 2003. Based on this evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There was no change in the Company's internal control
over financial reporting that occurred during the quarter ended December 31,
2003 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
43
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 2004 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
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 2004 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 2004 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 and "Securities Authorized for Issuance Under Equity
Compensation Plan".
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 2004 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Certain
Relationships and Related Transactions".
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- ------------------------------------------------
The information required by this item is incorporated by reference from
the section of the Company's Definitive Proxy Statement for the 2004 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Principal
Accounting Fees and Services".
44
ITEM 15. 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 74.
(b) Reports on Form 8-K during the quarter ended December 31, 2003
Filed October 17, 2003 - Press release - Earnings for the quarter
ended September 30, 2003.
Filed November 6, 2003 -Plan of Reorganization merger of Six Rivers
Bank and North Valley Bank
Filed December 1, 2003 - Press release - Declaration of cash
dividend of $0.10 per share
(c) Exhibits
See Index to Exhibits at page 74 of this Annual Report on Form 10-K,
which is incorporated herein by reference.
(d) Financial Statement Schedules
Not applicable.
45
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
North Valley Bancorp and Subsidiaries
We have audited the accompanying consolidated balance sheet of North Valley
Bancorp and subsidiaries (the "Company") as of December 31, 2003 and 2002 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
Valley Bancorp and subsidiaries as of December 31, 2003 and 2002 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Perry-Smith LLP
-------------------
Perry-Smith LLP
Sacramento, California
January 21, 2004
46
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
North Valley Bancorp
Redding, California
We have audited the accompanying consolidated statements of income and cash
flows of North Valley Bancorp and subsidiaries for the year ended December 31,
2001. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of North Valley
Bancorp and subsidiaries for the year ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
--------------------------------------------
Deloitte & Touche LLP
Sacramento, California
January 31, 2004
47
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(In thousands except share amounts)
- --------------------------------------------------------------------------------------------------------------
ASSETS 2003 2002
--------- ---------
Cash and cash equivalents:
Cash and due from banks $ 28,013 $ 33,900
Federal funds sold 31,510 21,400
--------- ---------
Total cash and cash equivalents 59,523 55,300
Interest bearing deposits in other financial 123 517
institutions
Investment securities:
Available for sale, at fair value 191,045 110,475
Held to maturity, at amortized cost 1,455 1,455
Loans and leases, net of allowance for loan and lease losses of
$6,493 and $6,723 at December 31, 2003 and 2002 372,660 437,843
Premises and equipment, net 12,699 13,156
Other real estate owned 55
FHLB and FRB stock and other securities 2,991 3,258
Core deposit intangibles, net 2,272 2,772
Accrued interest receivable 2,696 2,589
Other assets 32,229 28,660
--------- ---------
TOTAL ASSETS $ 677,693 $ 656,080
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 118,678 $ 108,140
Interest-bearing:
Demand deposits 159,123 142,432
Savings 157,106 132,373
Time certificates 163,407 172,108
--------- ---------
Total deposits 598,314 555,053
Other borrowed funds 9,459 32,888
Accrued interest payable and other liabilities 7,371 7,800
Subordinated debentures 16,496 10,310
--------- ---------
Total liabilities 631,640 606,051
--------- ---------
Commitments and Contingencies (Note 16)
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
6,488,073 and 6,951,142 at December 31, 2003 and 2002 23,406 25,112
Retained earnings 22,795 23,260
Accumulated other comprehensive (loss) income, net of tax (148) 1,657
--------- ---------
Total stockholders' equity 46,053 50,029
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 677,693 $ 656,080
========= =========
See notes to consolidated financial statements
48
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------- ------- -------
INTEREST INCOME:
Loans including fees $28,387 $32,575 $32,326
Lease financing 208 163 345
Securities:
Taxable 4,627 4,292 4,835
Exempt from federal taxes 1,282 1,526 1,631
Federal funds sold and repurchase agreements 596 346 674
------- ------- -------
Total interest income 35,100 38,902 39,811
------- ------- -------
INTEREST EXPENSE:
Deposits 5,553 7,837 14,551
Subordinated debentures 1,306 1,028 467
Other borrowings 668 927 457
------- ------- -------
Total interest expense 7,527 9,792 15,475
------- ------- -------
NET INTEREST INCOME 27,573 29,110 24,336
PROVISION FOR LOAN AND LEASE LOSSES 1,795 1,370
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 27,573 27,315 22,966
------- ------- -------
NONINTEREST INCOME:
Service charges on deposit accounts 4,768 4,726 4,657
Other fees and charges 2,084 2,065 2,097
Earnings on cash surrender value of life insurance policies 1,342 1,085 820
Gain on sale of loans 1,917 456 4
Gain on sale or calls of securities 213 221 19
Other 941 760 1,255
------- ------- -------
Total noninterest income 11,265 9,313 8,852
------- ------- -------
NONINTEREST EXPENSES:
Salaries and employee benefits 13,504 12,480 11,394
Equipment expense 2,614 1,873 1,483
Occupancy expense 1,720 1,554 1,274
Merger and integration expense 358
Other 9,424 8,821 7,581
------- ------- -------
Total noninterest expenses 27,262 24,728 22,090
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 11,576 11,900 9,728
PROVISION FOR INCOME TAXES 3,605 3,836 3,062
------- ------- -------
NET INCOME $ 7,971 $ 8,064 $ 6,666
======= ======= =======
=======
EARNINGS PER SHARE:
Basic $ 1.19 $ 1.15 $ 0.84
======= ======= =======
Diluted $ 1.13 $ 1.11 $ 0.82
======= ======= =======
See notes to consolidated financial statements
49
NORTH VALLEY BANCORP AND SUSBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands except share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
--------- ---------- ---------- ------------- ----------
Balance, January 1, 2001 8,708,125 $ 30,301 $ 24,729 $ (173) $ 54,857
Comprehensive income:
Net income 6,666 6,666
Other comprehensive income, net of tax
of $604:
Unrealized gain on available for sale
securities, net of reclassification
adjustment of $13 930 930
----------
Total comprehensive income 7,596
----------
Stock options exercised 51,210 251 251
Stock-based compensation expense 189 189
Repurchase of common shares (1,782,750) (6,203) (10,912) (17,115)
Cash dividends on common stock (2,100) (2,100)
--------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 6,976,585 24,538 18,383 757 43,678
Comprehensive income:
Net income 8,064 8,064
Other comprehensive income, net of tax of $612:
Unrealized gain on available for sale
securities, net of reclassification
adjustment of $153 900 900
----------
Total comprehensive income 8,964
----------
Stock options exercised 69,210 339 339
Stock-based compensation expense 378 378
Tax benefit derived from the exercise of stock
options 60 60
Repurchase of common shares (94,653) (203) (852) (1,055)
Cash dividends on common stock (2,335) (2,335)
--------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 6,951,142 25,112 23,260 1,657 50,029
Comprehensive income:
Net income 7,971 7,971
Other comprehensive loss, net of tax of $(577)
Unrealized loss on available for sale
securities, net of reclassification
adjustment of $153 (1,805) (1,805)
----------
Total comprehensive income 6,166
----------
Stock grants and options exercised (net of related
tax benefit) 74,683 396 396
Stock-based compensation expense 241 241
Tax benefit derived from the exercise of stock
options 127 127
Repurchase of common shares (537,618) (2,468) (5,767) (8,235)
Fractional Shares (134) (2) (2)
Cash dividends on common stock (2,669) (2,669)
--------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 6,488,073 $ 23,406 $ 22,795 $ (148) $ 46,053
========= ========== ========== ========== ==========
See notes to consolidated financial statements
50
NORTH VALLEY BANCORP & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands)
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,971 $ 8,064 $ 6,666
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,197 1,476 1,268
Amortization of premium on securities 761 211 131
Amortization of core deposit intangible 500 480 199
Provision for loan and lease losses 1,795 1,370
Gain on sale or calls of securities (213) (221) (19)
Gain on sale of loans (1,917) (456) (4)
Gain on sale of premises and equipment (22)
Deferred tax provision (benefit) 566 (1,325) (544)
Stock-based compensation expense 241 378 189
Effect of changes in:
Accrued interest receivable (107) 595 554
Other assets (2,898) (4,657) (1,507)
Accrued interest payable and other liabilities (299) 1,304 (1,576)
--------- --------- ---------
Net cash provided by operating activities 6,780 7,644 6,727
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of other real estate owned 55 300 328
Purchases of available for sale securities (150,033) (60,707) (75,888)
Proceeds from sales of available for sale securities 18,719 21,633 20,845
Proceeds from maturities/calls of available for sale securities 47,873 41,560 47,365
Net change in FHLB and FRB stock and other securities (452) (860) (58)
Net change in interest bearing deposits in other financial institutions 394 1,772 (583)
Proceeds from sales of loans 78,373 49,129 219
Net increase in loans and leases (11,273) (97,357) (28,222)
Proceeds from sales of premises and equipment 57
Purchases of premises and equipment- net (1,775) (4,338) (1,939)
--------- --------- ---------
Net cash used in investing activities (18,062) (48,868) (37,933)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 43,261 40,775 53,987
Proceeds from issuance of subordinated debentures 6,186 10,310
Net change in other borrowed funds (23,429) 12,241 3,646
Cash dividends paid (2,672) (2,151) (2,226)
Repurchase of common shares (8,235) (1,055) (17,115)
Cash received for stock options exercised 396 339 251
Cash paid in lieu of fractional shares (2)
--------- --------- ---------
Net cash provided by financing activities 15,505 50,149 48,853
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,223 8,925 17,647
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 55,300 46,375 28,728
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 59,523 $ 55,300 $ 46,375
========= ========= =========
Interest $ 7,727 $ 9,895 $ 15,310
========= ========= =========
Income taxes $ 2,440 $ 4,990 $ 3,431
========= ========= =========
Noncash investing and financing activities:
Net change in unrealized (loss) gain on
available for sale investment securities $ (2,382) $ 1,512 $ 1,534
Transfer from loans to other real estate owned $ 68 $ 274
Transfer of investment securities from held
to maturity to available for sale $ 25,471
Cash dividends declared $ 649 $ 652 $ 468
See notes to consolidated financial statements
51
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - North Valley Bancorp is a multi-bank holding company
registered with and subject to regulation and supervision by the Board of
Governors of the Federal Reserve System. North Valley Bancorp was
incorporated in 1980 in the State of California for the purpose of acquiring
North Valley Bank ("NVB") in a one-bank holding company reorganization. NVB
was organized in 1972 as a California state-chartered bank. On October 11,
2000, the Company completed its plan of reorganization with Six Rivers
National Bank ("SRNB"), which then became a wholly-owned subsidiary of North
Valley Bancorp. This reorganization was completed under the
pooling-of-interests method of accounting for business combinations. In
January 2002, SRNB converted from a national association to a California
state-chartered bank and changed its name to Six Rivers Bank ("SRB"). During
2001, the Company formed North Valley Capital Trust I and during 2003, the
Company formed North Valley Capital Trust II (collectively, the Trusts)
which are both Delaware statutory business trusts formed for the exclusive
purpose of issuing and selling Trust Preferred Securities. Bank Processing,
Inc., a wholly-owned subsidiary of North Valley Bancorp, currently provides
data processing services to the Company.
North Valley Bancorp and subsidiaries (the "Company") operates as three
business segments defined as the Company's two wholly owned banking
subsidiaries, North Valley Bank and Six Rivers Bank providing banking
services to the Company's clients in Northern California, and all other
activities, which primarily consist of the Holding Company and Bank
Processing, Inc. On January 1, 2004, Six Rivers Bank was merged with and
into North Valley Bank with North Valley Bank as the surviving institution.
Former branches of Six Rivers Bank continue to operate as Six Rivers Bank, a
division of North Valley Bank. (For purposes herein, "NVB" shall refer to
North Valley Bank including the former branches of SRB and "SRB" will refer
to the former branches and operations of SRB.) 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. Collectively, NVB and SRB operate 18 branches,
including two supermarket branches, in Northern California.
General - The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America and
to prevailing practices within the banking industry.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 and Basis of Presentation- The consolidated financial
statements include North Valley Bancorp and its wholly owned subsidiaries:
North Valley Bank ("NVB") and its wholly owned subsidiary, North Valley
Basic Securities; Six Rivers Bank ("SRB"); Bank Processing, Inc. ("BPI");
and North Valley Trading Company. North Valley Trading Company and North
Valley Basic Securities did not have any activity in 2003, 2002 and 2001.
All material intercompany accounts and transactions have been eliminated in
consolidation.
For financial reporting purposes, the Company's investments in the Trusts
(see Note 11) are not consolidated and are included in other assets on the
consolidated balance sheet. The subordinated debentures issued and
guaranteed by the Company and held by the Trusts are reflected on the
Company's consolidated balance sheet in accordance with provisions of
Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities.
52
Cash and Cash Equivalents - For the purposes of the consolidated statement
of cash flows, cash and cash equivalents have been defined as cash, demand
deposits with correspondent banks, cash items, settlements in transit, and
federal funds sold and repurchase agreements. Generally, federal funds are
sold for one-day periods and repurchase agreements are sold for eight to
fourteen-day periods. Cash equivalents have remaining terms to maturity of
three months or less from the date of acquisition.
Investment Securities - The Company accounts for its investment securities
as follows:
Trading securities are carried at fair value. Changes in fair value are
included in noninterest income. The Company did not have any securities
classified as trading at December 31, 2003 and 2002.
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 accumulated other
comprehensive income, which is a separate component of stockholders'
equity.
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.
Gains or losses on disposition are recorded in noninterest income based on
the net proceeds received and the carrying amount of the securities sold,
using the specific identification method.
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 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
formula 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 which have
experienced a decline in internal grading, and when management believes
additional loss exposure exists. The unallocated allowance is based upon
management's evaluation of various conditions that are not directly measured
in the determination of the formula and specific allowances. The evaluation
of inherent losses with respect to these conditions is subject to a higher
degree of uncertainty because they are not identified with specific problem
credits or portfolio segments. 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. 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 or lease agreement. The measurement of
53
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 charge to allowance for loan or lease 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.
FHLB and FRB stock and Other Securities - The Company purchases restricted
stock in the Federal Home Loan Bank of San Francisco (FHLB), the Federal
Reserve Bank (FRB) and others as required to participate in various programs
offered by these institutions. These investments are carried at historical
cost and may be redeemed at par with certain restrictions.
Core Deposit Intangibles - These assets represent the excess of the purchase
price over the fair value of the tangible net assets acquired from a branch
acquisition by SRB and are being amortized by the straight-line method.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - The Company originates and sells residential
mortgage loans to the Federal National Mortgage Association ("FNMA") and
others. The Company retains the servicing on all loans sold. Deferred
origination fees and expenses are recognized at the time of sale in the
determination of the gain or loss. Upon the sale of these loans, the
Company's investment in each loan is allocated between the servicing
retained and the loan, based on the relative fair value of each portion. The
gain (loss) is recognized at the time of sale based on the difference
between the sale proceeds and the allocated carrying value of the related
loans sold. The fair value of the contractual servicing is reflected as a
servicing asset, which is amortized over the period of estimated net
servicing income using a method approximating the interest method. The
servicing asset is included in other assets on the balance sheet, and is
evaluated for impairment on a periodic basis.
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.
Merger and Integration Expenses - Merger and integration expenses represent
incremental direct costs associated with the merger with SRB and consist
primarily of transaction costs for professional services including
investment banking, legal and accounting.
Stock-Based Compensation - At December 31, 2003, the Company has three
stock-based compensation plans: the North Valley Bancorp 1989 Director Stock
Option Plan, the 1998 Employee Stock Incentive Plan and the 1999 Director
Stock Option Plan, which are described more fully in Note 14. The Company
accounts for these plan under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in
net income under the Employee Plan, as all options granted under this plan
had an exercise price equal to the market value of the underlying common
stock on the date of grant. Compensation expense is recognized in the
financial statements for the Director Plans over the vesting period for the
difference between the fair value of the shares at the date of the grant and
the exercise price which is equal to 85% of the fair value.
54
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation. Pro forma adjustments to the Company's
net earnings and earnings per share are disclosed during the years in which
the options become vested.
2003 2002 2001
--------- --------- ---------
Net income:
As reported $ 7,971 $ 8,064 $ 6,666
Add: total stock-based compensation expense included in net
income, net of tax 141 176 73
Deduct: total stock-based employee compensation expense
determined under the fair value based method for all awards, net
of related tax effects (426) (397) (239)
--------- --------- ---------
Pro forma $ 7,686 $ 7,843 $ 6,500
========= ========= =========
Basic earnings per common share:
As reported $ 1.19 $ 1.15 $ .84
Pro forma $ 1.14 $ 1.11 $ .81
Diluted earnings per common and equivalent share:
As reported $ 1.13 $ 1.11 $ .82
Pro forma $ 1.09 $ 1.08 $ .80
Weighted average fair value of options
Granted during the year $ 2.68 $ 2.31 $ 2.50
----------------------------------------------------------------------------
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following assumptions:
2003 2002 2001
------- ------- -------
Dividend yield 3.59% 2.83% 2.50%
Expected volatility 19.29% 20.99% 22.03%
Risk-Free interest rate 5.00% 5.00% 5.00%
Expected option life 7 years 7 years 7 years
----------------------------------------------------------------------------
Disclosures About Segments of an Enterprise - The Company uses the
"management approach" for reporting business segment information. The
management approach is based on the segments within a company used by the
chief operating decision-maker for making operating decisions and assessing
performance. Reportable segments are to based on such factors as products
and services, geography, legal structure or any other manner by which a
company's management distinguishes major operating units. Utilizing this
approach, management has determined that the Company has three reportable
segments: NVB, SRB and Other.
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 the minimum pension
liability and are presented net of tax.
Derivative Instruments And Hedging Activities - Effective January 1, 2001,
the Company adopted Statement of Financial Accounting Standards ("SFAS") No
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments
and hedging activities. Upon adoption, the Company transferred certain
securities from the held to maturity to the available for sale
classification at fair value. The adoption of this statement did not have
any other impact on the Company's consolidated financial position or results
of operations or cash flows. The Company did not enter into freestanding
derivative contracts during 2003 and did not identify any embedded
derivatives requiring bifurcation and separate valuation at December 31,
2003 and 2002.
55
New Accounting Pronouncements - In December, 2003, the FASB revised FASB
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).
This interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of a
variable interest entity (VIE) that posses certain characteristics. A
company that holds variable interests in an entity will need to consolidate
that entity if the company's interest in the VIE is such that the company
will absorb a majority of the VIE's expected losses and or receive a
majority of the VIE's expected residual returns, if they occur. The Company
adopted FIN 46 on December 31, 2003. Adoption of this standard required the
Company to deconsolidate its investment in North Valley Capital Trust I and
North Valley Capital Trust II. The deconsolidation of the Trusts, formed in
connection with the issuance of Trust Preferred Securities, appears to be an
unintended consequence of FIN 46. In management's opinion, the effect of
deconsolidation on the Company's financial position and results of
operations was not material. In addition, management does not believe that
the Company has any VIEs that would be consolidated under the provisions of
FIN 46.
In July 2003, the Board of Governors of the Federal Reserve Systems issued a
supervisory letter instructing bank holding companies to continue to include
Trust Preferred Securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends
to review the regulatory implications of the accounting changes resulting
from FIN 46 and, if necessary or warranted, provide further appropriate
guidance. There can be no assurance that the Federal Reserve will continue
to allow institutions to include Trust Preferred Securities in Tier 1
capital for regulatory capital purposes.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company adopted the
provisions of this Statement retroactively on July 1, 2003 and, in
management's opinion, adoption of the Statement did not have a material
effect on the Company's consolidated financial position or results of
operations.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments by providing guidance
related to circumstances under which a contract with a net investment meets
the characteristics of a derivative as discussed in SFAS No. 133. The
Statement also clarifies when a derivative contains a financing component.
The Statement is intended to result in more consistent reporting for
derivative contracts and must be applied prospectively for contracts entered
into or modified after June 30, 2003, except for hedging relationships
designated after June 30, 2003. In management's opinion, adoption of this
Statement did not have a material impact on the Company's consolidated
financial position or results of operations.
Reclassifications - Certain amounts in 2002 and 2001 have been reclassified
to conform with the 2003 financial statement presentation.
2. RESTRICTED CASH BALANCES
The Company is subject to regulation by the Federal Reserve Board. The
regulations required the Company to maintain certain cash reserve balances
on hand or at the Federal Reserve Bank. At December 31, 2003 and 2002, the
Company had reserves of $4,558,000 and $8,319,000. As compensation for
check-clearing services, additional compensating balances of $2,500,000 at
December 31, 2003 were maintained with the Federal Reserve Bank.
56
3. INVESTMENT SECURITIES
At December 31, the amortized cost of investment 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, 2003
Securities of U.S. government
agencies and corporations $ 12,574 $ 73 $ (14) $ 12,633
Obligations of states and political
subdivisions 25,903 1,133 (94) 26,942
Mortgage-backed securities 133,760 424 (1,408) 132,776
Corporate securities 6,027 273 (26) 6,274
Other securities 13,127 27 (734) 12,420
--------- --------- --------- ---------
$ 191,391 $ 1,930 $ (2,276) $ 191,045
========= ========= ========= =========
December 31, 2002
Securities of U.S. government
agencies and corporations $ 11,220 $ 9 $ $ 11,229
Obligations of states and political
subdivisions 23,580 1,138 (67) 24,651
Mortgage-backed securities 59,915 1,108 (4) 61,019
Corporate securities 8,976 520 9,496
Other securities 4,088 (8) 4,080
--------- --------- --------- ---------
$ 107,779 $ 2,775 $ (79) $ 110,475
========= ========= ========= =========
Gross Gross Carrying
(Amortized Unrealized Unrealized Amount
Held to maturity securities: Cost) Gains Losses Fair Value
--------- --------- ---------- ----------
December 31, 2003
Obligation of states and political
subdivisions $ 1,455 $ 376 $ 1,831
========= ========= ========== =========
December 31, 2002
Obligation of states and political
subdivisions $ 1,455 $ 388 $ 1,843
========= ========= ========== =========
Gross realized gains on sales or calls of securities categorized as
available for sale securities were $257,000, $266,000 and $70,000 in 2003,
2002 and 2001. Gross realized losses on sales or calls of securities
categorized as available for sale securities were $44,000, $45,000 and
$51,000 in 2003, 2002 and 2001.
There were no gross realized gains or losses on calls of held to maturity
securities in 2003, 2002 and 2001.
57
The following table shows gross unrealized losses and fair value on
investment securities, aggregated by investment category for investment
securities that are in a an unrealized loss position at December 31, 2003
(in thousands). All investment securities with gross unrealized losses were
in a continuous unrealized loss position for less than one year.
Amount
(Fair Unrealized
Description of Securities Value) Losses
-------- ----------
Securities of U.S. government
agencies and corporations $ 2,933 $ (14)
Obligations of states and
political subdivisions 4,310 (94)
Mortgage-backed securities 99,467 (1,408)
Corporate securities 1,474 (26)
Other securities 7,394 (734)
-------- --------
Total temporarily impaired securities $115,578 $ (2,276)
======== ========
In management's opinion, the credit risk in the investment portfolio remains
substantially unchanged from the date of purchase of such securities and the
unrealized losses at December 31, 2003 are principally the result of
increasing market rates that have negatively impacted the fair value of the
Company's investment portfolio.
On January 1, 2001, the Company transferred $25,471,000 of certain
securities from the held to maturity to the available for sale
classification at fair value upon adoption and as allowed by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The unrealized
gains on the securities transferred were $1,115,000. The net unrealized
gains and losses are recorded, net of tax, within accumulated other
comprehensive income, which is a separate component of stockholders' equity.
Contractual maturities of held to maturity and available for sale securities
(other than equity securities with an amortized cost of approximately
$13,127,000 and a fair value of approximately $12,420,000) at December 31,
2003, are shown below (in thousands). The Company invests in collateralized
mortgage obligations ("CMOs") issued by the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation and Government
National Mortgage Association. Actual maturities of CMOs and other
securities may differ from contractual maturities because borrowers have the
right to prepay mortgages without penalty or call obligations with or
without call penalties. The Company uses the "Wall Street" consensus average
life at the time the security is purchased to schedule maturities of these
CMOs and adjusts scheduled maturities periodically based upon changes in the
Wall Street estimates.
Held to Maturity Available for Sale
Securities Securities
----------------------- -----------------------
Amortized
Cost Fair Value
(Carrying Amortized (Carrying
Amount) Fair Value Cost Amount)
--------- ---------- --------- ----------
Due in 1 year or less $ 21,136 $ 21,383
Due after 1 year through 5 years 59,793 59,870
Due after 5 years through 10 years 12,030 12,047
Due after 10 years $ 1,455 $ 1,831 85,305 85,325
------- ---------- --------- ---------
$ 1,455 $ 1,831 $ 178,264 $ 178,625
======= ========== ========= =========
At December 31, 2003 and 2002, securities having fair value amounts of
approximately $65,031,000 and $65,052,000 were pledged to secure public
deposits, short-term borrowings, treasury tax and loan balances and for
other purposes required by law or contract.
58
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, Humboldt, Mendocino, Trinity and Del Norte 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, real estate 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):
2003 2002
---------- ---------
Commercial $ 36,997 $ 40,683
Real estate - commercial 163,474 159,946
Real estate - construction 37,566 25,388
Real estate - mortgage 54,588 104,590
Installment 62,609 87,710
Direct financing leases 689 1,795
Other 23,214 24,271
---------- ---------
Total loans and leases 379,137 444,383
Allowance for loan and lease losses (6,493) (6,723)
Deferred loan costs (fees) 16 183
---------- ---------
Net loans and leases $ 372,660 $ 437,843
========== =========
At December 31, 2003 and 2002, the Company serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $129,485,000 and $100,234,000.
Certain real estate loans receivable are pledged as collateral for available
borrowings with the FHLB and FRB. Pledged loans totaled $52,923,000 and
$102,299,000 at December 31, 2003 and 2002.
The components of the Company's direct financing leases as of December 31
are summarized below (in thousands):
2003 2002
Future minimum lease payments $ 718 $ 1,884
Residual interests 97 136
Initial direct costs 10 (24)
Unearned income (136) (201)
-------- --------
$ 689 $ 1,795
======== ========
Future minimum lease payments are as follows (in thousands):
2004 $ 356
2005 188
2006 49
2007 29
2008 31
Thereafter 65
--------
Total $ 718
========
There are no contingent rental payments included in income for 2003, 2002
and 2001.
59
Changes in the allowance for loan and lease losses for the years ended
December 31, were as follows (in thousands):
2003 2002 2001
-------- -------- ---------
Balance, beginning of year $ 6,723 $ 5,786 $ 4,964
Provision charged to operations 1,795 1,370
Loans charged off (919) (1,224) (922)
Recoveries 689 366 374
-------- -------- ---------
Balance, end of year $ 6,493 $ 6,723 $ 5,786
======== ======== =========
5. IMPAIRED AND NONPERFORMING LOANS AND LEASES
At December 31, 2003 and 2002, the recorded investment in impaired loans and
leases was approximately $1,636,000 and $1,452,000. Of the 2003 balance,
approximately $535,000 has a related valuation allowance of $267,000. Of the
2002 balance, approximately $730,000 has a related valuation allowance of
$365,000. For the years ended December 31, 2003, 2002 and 2001, the average
recorded investment in impaired loans and leases was approximately
$1,515,000, $948,000 and $613,000. During the portion of the year that the
loans and leases were impaired, the Company recognized interest income of
approximately $51,000, $63,000 and $76,000 for cash payments received in
2003, 2002 and 2001.
Nonperforming loans and leases include all such loans that are either in
nonaccrual status or are 90 days past due as to principal or interest but
still accrue interest because such loans are well-secured or in the process
of collection. Nonperforming loans and leases at December 31 are summarized
as follows (in thousands):
2003 2002
------- -------
Nonaccrual loans and leases $ 1,615 $ 1,452
Loans 90 days past due but still accruing interest 1,395 864
------- -------
Total nonperforming loans $ 3,101 $ 2,316
======= =======
Interest income forgone on nonaccrual loans and leases approximated $50,000
in 2003, $81,000 in 2002 and $69,000 in 2001.
At December 31, 2003, there were no commitments to lend additional funds to
borrowers whose loans or leases were classified as nonaccrual.
6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows (in thousands):
2003 2002
-------- --------
Land $ 3,165 $ 2,559
Buildings and improvements 8,099 7,448
Furniture, fixtures and equipment 12,520 12,262
Leasehold improvements 571 552
Construction in progress 278 238
-------- --------
24,633 23,059
Accumulated depreciation and amortization (11,934) (9,903)
-------- --------
$ 12,699 $ 13,156
======== ========
60
7. OTHER ASSETS
Major classifications of other assets at December 31 were as follows (in
thousands):
2003 2002
-------- --------
Cash surrender value of life insurance policies $ 24,863 $ 21,383
Deferred taxes 3,549 2,995
Prepaid expenses 1,483 927
Other 2,334 3,355
-------- --------
Total $ 32,229 $ 28,660
======== =========
8. DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $51,448,000 and $48,891,000 at December 31, 2003 and
2002. Interest expense incurred on such time certificates of deposit was
$1,029,000, $1,335,000 and $2,606,000 for the years ended December 31, 2003,
2002 and 2001. At December 31, 2003, the scheduled maturities of all time
deposits was as follows (in thousands):
Years Amount
----- ---------
2004 $ 147,442
2005 11,733
2006 4,084
2007 31
2008 117
---------
$ 163,407
=========
9. LINES OF CREDIT
At December 31, 2003, the Company had the following lines of credit with
correspondent banks to purchase federal funds (in thousands):
Type Amount Expiration
---- ------ -------------
Unsecured $ 13,000 July 31, 2004
Unsecured 13,000 Annually
Secured:
First deeds of trust on eligible
1- 4 unit residential loans 32,825 Monthly
First deeds of trust on eligible
commercial real estate loans 4,187 Monthly
61
10. BORROWING ARRANGEMENTS
Other borrowings outstanding as of December 31, 2003 consist of a loan from
the FRB in the form of Treasury Tax and Loan notes which are generally
required to be repaid within 30 days from the transaction date as well as
FHLB advances. The following table summarizes these borrowings at December
31 (in thousands):
2003 2002
-------- --------
Short-term borrowings:
FHLB advances $ 7,500 $ 23,500
FRB loan 259 89
-------- --------
Total short-term borrowings $ 7,759 $ 23,589
======== ========
Long-term borrowings:
FHLB advances $ 1,700 $ 9,299
-------- --------
Total long-term borrowings $ 1,700 $ 9,299
======== ========
Total borrowed funds $ 9,459 $ 32,888
======== ========
The FHLB advances are collateralized by loans and securities pledged to the
FHLB. The following is a breakdown of rates and maturities (dollars in
thousands):
Short
Term Long Term
-------- --------
Amount $ 7,500 $ 1,700
Maturity 2004 2005
Average Rate 4.208% 4.450%
11. SUBORDINATED DEBENTURES
The Company formed North Valley Capital Trust I and North Valley Capital
Trust II (the "Trusts") as special purpose entities ("SPE"). The Trusts are
unconsolidated Delaware business trusts wholly owned by the Company and
formed for the purpose of issuing Company obligated mandatorily redeemable
cumulative Trust Preferred Securities of Subsidiary Grantor Trust holding
solely junior subordinated debentures.
During the third quarter of 2001, North Valley Capital Trust I issued 10,000
Trust Preferred Securities with a liquidation value of $1,000 for gross
proceeds of $10,000,000. The entire proceeds of the issuance were invested
by North Valley Capital Trust I in $10,000,000 aggregate principal amount of
10.25% subordinated debentures due in 2031 (the Subordinated Debentures)
issued by the Company. The Subordinated Debentures represent the sole assets
of North Valley Capital Trust I. The Subordinated Debentures mature in 2031,
pay interest semi-annually, and are redeemable by the Company at a premium
beginning in or after 2006 based on a percentage of the principal amount of
the Subordinated Debentures stipulated in the Indenture Agreement, plus any
accrued and unpaid interest to the redemption date. The Subordinated
Debentures are redeemable at 100 percent of the principal amount plus any
accrued and unpaid interest to the redemption date at any time on or after
2011. The Trust Preferred Securities are subject to mandatory redemption to
the extent of any early redemption of the Subordinated Debentures and upon
maturity of the Subordinated Debentures in 2031.
Holders of the trust preferred securities are entitled to cumulative cash
distributions at an annual rate of 10.25% of the liquidation amount of
$1,000 per security. The Company has the option to defer payment of the
distributions for a period of up to five years, as long as the Company is
not in default in the payment of interest on the Subordinated Debentures.
The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the Trust Preferred Securities (the Guarantee). The
Guarantee, when taken together with the Company's obligations under the
Subordinated Debentures, the Indenture Agreement pursuant to which the
Subordinated Debentures were issued and the Company's obligations under the
Trust Agreement governing the subsidiary trust, provides a full and
unconditional guarantee of amounts due on the Trust Preferred Securities.
During the first quarter of 2003, North Valley Capital Trust II issued 6,000
Trust Preferred Securities with a liquidation value of $1,000 for gross
62
proceeds of $6,000,000. The entire proceeds of the issuance were invested by
North Valley Capital Trust II in $6,000,000 aggregate principal amount of
6.448% subordinated debentures due in 2033 (the Subordinated Debentures II)
issued by the Company. The Subordinated Debentures II represent the sole
assets of North Valley Capital Trust II. The Subordinated Debentures II
mature in 2033, bear an initial interest rate of 6.448%, payable
semi-annually, and are redeemable by the Company at par beginning on or
after April 10, 2008, plus any accrued and unpaid interest to the redemption
date. The Trust Preferred Securities are subject to mandatory redemption to
the extent of any early redemption of the Subordinated Debentures and upon
maturity of the Subordinated Debentures II on 2033.
Holders of the Trust Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 6.448% of the liquidation amount of
$1,000 per security. The Company has the option to defer payment of the
distributions for a period of up to five years, as long as the Company is
not in default in the payment of interest on the Subordinated Debentures II.
The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the Trust Preferred Securities (the Guarantee). The
Guarantee, when taken together with the Company's obligations under the
Subordinated Debentures II, the Indenture Agreement pursuant to which the
Subordinated Debentures II were issued and the Company's obligations under
the Trust Agreement governing the subsidiary trust, provide a full and
unconditional guarantee of amounts due on the Trust Preferred Securities.
Under applicable regulatory guidelines, substantially all of the Trust
Preferred Securities currently qualify as Tier I capital. Deferred costs
related to the Subordinated Debentures, which are included in other assets
in the accompanying consolidated balance sheet, totaled $489,000 and
$316,000 at December 31, 2003 and 2002, respectively. Amortization of the
deferred costs was $15,000, $11,000 and $6,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
12. INCOME TAXES
The provision for income taxes for the years ended December 31, was as
follows (in thousands):
2003 2002 2001
------- ------- -------
Current:
Federal $ 2,279 $ 4,022 $ 2,852
State 760 1,139 754
------- ------- -------
Total 3,039 5,161 3,606
------- ------- -------
Deferred tax (benefit):
Federal 344 (881) (437)
State 222 (444) (107)
------- ------- -------
Total 566 (1,325) (544)
------- ------- -------
Total provision for income taxes $ 3,605 $ 3,836 $ 3,062
======= ======= =======
The effective federal tax rate for the years ended December 31, differs from
the statutory tax rate as follows:
2003 2002 2001
------- ------- -------
Federal income tax at statutory rates 35.0% 35.0% 35.0%
State income taxes net of federal
income tax benefit 5.4% 4.0% 4.4%
Tax exempt income (7.6%) (7.1%) (6.1%)
Other (1.7%) .3% (1.8%)
------- ------- -------
31.1% 32.2% 31.5%
======= ======= =======
63
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):
2003 2002
------- -------
Deferred tax assets:
Allowance for loan losses $ 2,595 $ 2,460
Accrued pension obligation 955 898
Deferred compensation 1,118 841
Mark to market adjustment 610
Unrealized loss on securities available for sale 142
Stock-based compensation 246 240
California franchise tax 4
------- -------
Total deferred tax assets 5,056 5,053
======= =======
Deferred tax liabilities:
Tax depreciation in excess of book depreciation 536 407
Unrealized gain on securities available for sale 978
FHLB stock dividend 322 243
Originated mortgage servicing rights 339 199
Mark to market adjustment 147
California franchise tax 134
Other 29 231
------- -------
Total deferred tax liabilities 1,507 2,058
------- -------
Net deferred tax asset $ 3,549 $ 2,995
======= =======
The Company believes that it is more likely than not that it will realize
the above deferred tax assets in future periods; therefore, no valuation
allowance has been provided against its deferred tax assets.
13. 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 for the years ended December 31, 2003, 2002 and
2001 of $192,000, $104,000 and $60,000. At December 31, 2003, the ESOP owned
approximately 219,736 shares of the Company's common 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 age 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,
2003, 2002 and 2001 of $77,000, $74,000 and $45,000, 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 $2,118,000 and $1,982,000 as of December 31, 2003 and 2002,
respectively, is included in accrued interest payable and other liabilities.
64
The Company has a supplemental retirement plan for key executives and a
supplemental retirement plan for certain retired key executives and
directors. 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
($24,863,000 and $21,383,000 at December 31, 2003 and 2002, respectively) to
pay the retirement obligations. The accrued pension obligation of $2,517,000
and $2,327,000 as of December 31, 2003 and 2002, respectively, is included
in accrued interest payable and other liabilities.
The following tables set forth the status of the nonqualified supplemental
retirement defined benefit pension plans status at or for the year ended
December 31 (in thousands):
2003 2002
--------- ---------
Change in projected benefit obligation
Projected benefit obligation at beginning of year $ (2,290) $ (2,159)
Service cost (197) (184)
Interest cost (164) (154)
Actuarial (loss) gain (153) 1
Benefits paid 217 206
--------- ---------
Projected benefit obligation at end of year $ (2,587) $ (2,290)
========= =========
Change in plan assets
Fair value of plan assets at beginning of year
Employer contribution $ 217 $ 206
Benefits paid (217) (206)
--------- ---------
Fair value of plan assets at end of year $ $
========= =========
Funding
Unfunded status $ (2,587) $ (2,290)
Unrecognized actuarial gain (248) (411)
Unrecognized prior service cost 268 299
Unrecognized net transition obligation 50 75
--------- ---------
Net amount recognized (accrued pension cost) $ (2,517) $ (2,327)
========= =========
Assumptions used in computing the unfunded status
and net periodic benefit costs were:
Discount rate 7.00% 7.50%
Expected return on assets N/A N/A
Rate of compensation increase (supplemental
executive retirement plan only) 8.00% 6.00%
2003 2002 2001
------ ------ -------
Components of net periodic benefits cost
Service cost $ 197 $ 184 $ 70
Interest cost 164 154 178
Amortization of net obligation at transition 25 25 25
Prior service amortization 31 31 31
Recognized net actuarial (gain) loss (10) (11) (32)
------ ------ -------
Net periodic benefit cost $ 407 $ 383 $ 272
======= ====== =======
65
14. STOCK-BASED COMPENSATION
During 2003, 2002 and 2001, each director was awarded 900 shares of common
stock, resulting in an additional 8,100, 5,400 and 5,400 shares being
issued. Compensation cost related to these awards was recognized based on
the fair value of the shares at the date of award.
Under the Company's stock option plans as of December 31, 2003, 341,366
shares of the Company's common stock are available for future grants to
directors and employees of the Company. Under the Director Plans, 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
EXERCISE
OPTIONS PRICE
--------- --------
Outstanding, January 1, 2001 856,101 7.25
(471,351 exercisable at weighted average
price of $6.95)
Granted 172,052 8.18
Exercised (51,210) 5.95
Expired or canceled (39,080) 8.15
--------- --------
Outstanding, December 31, 2001 937,863 7.40
(604,412 exercisable at weighted average
price of $7.24)
Granted 147,119 9.49
Exercised (69,210) 5.01
Expired or canceled (474) 4.13
--------- --------
Outstanding, December 31, 2002 1,015,298 $ 7.90
(676,406 exercisable at weighted average
price of $7.56)
Granted 73,200 13.34
Exercised (74,683) 8.22
Expired or canceled (15,839) 7.46
--------- --------
Outstanding, December 31, 2003
(797,202 exercisable at weighted average
price of $7.80) 997,976 $ 8.28
========= ========
Information about stock options outstanding at December 31, 2003 is
summarized as follows:
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
------------- ----------- ------------ ----------- ----------- -----------
$ 3.40-4.44 35,123 1 $ 4.14 35,123 $ 4.14
$ 5.53-5.63 8,772 2 $ 5.56 8,772 $ 5.56
$ 6.09 6,000 3 $ 6.09 6,000 $ 6.09
$ 5.36-10.63 125,594 4 $ 9.24 125,594 $ 9.24
$ 6.59-8.58 458,515 5 $ 7.32 458,515 $ 7.32
$ 6.67-7.24 15,000 6 $ 6.95 12,000 $ 6.95
$ 7.58-8.92 149,052 7 $ 8.09 84,430 $ 8.05
$ 9.40-10.24 134,820 8 $ 10.04 53,748 $ 10.04
$ 13.06 65,100 9 $ 13.06 13,020 $ 13.06
66
15. 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 (in
thousands):
2003 2002 2001
------ ------ ------
Calculation of Basic Earnings Per Share
Numerator - net income $7,971 $8,064 $6,666
Denominator - weighted average common 6,715 7,041 7,983
shares outstanding ------ ------ ------
Basic earnings per share $ 1.19 $ 1.15 $ .84
====== ====== ======
Calculation of Diluted Earnings Per Share
Numerator - net income $7,971 $8,064 $6,666
Denominator:
Weighted average common shares
outstanding 6,715 7,041 7,983
Dilutive effect of outstanding options 364 204 167
------ ------ ------
Weighted average common shares
outstanding - Diluted 7,079 7,245 8,150
------ ------ ------
Diluted earnings per share $ 1.13 $ 1.11 $ .82
====== ====== ======
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in 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 Company's financial position or results of its
operations or its cash flows.
The Company has operating leases for certain premises and equipment. Rent
expense for such leases for the years ended December 31, 2003, 2002 and 2001
was $627,000, $577,000 and $365,000.
The following schedule represents the Company's noncancelable future minimum
scheduled lease payments at December 31, 2003 (in thousands):
2004 $ 593
2005 589
2006 575
2007 513
2008 386
--------
Total $ 2,656
========
The Company was contingently liable under letters of credit issued on behalf
of its customers in the amount of $4,819,000 and $2,461,000 at December 31,
2003 and 2002. At December 31, 2003, commercial and consumer lines of
credit, and real estate loans of approximately $26,492,000 and $60,817,000
were undisbursed. At December 31, 2002, commercial and consumer lines of
credit, and real estate loans of approximately $28,637,000 and $37,938,000
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.
67
Collateral varies, but may include real property, bank deposits, debt
securities, equity securities 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 and technology division 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. However, at
December 31, 2003 and 2002, no losses are anticipated as a result of these
commitments.
In management's opinion, a concentration exists in real estate-related loans
which represent approximately 68% and 65% of the Company's loan portfolio at
December 31, 2003 and 2002, respectively. Although management believes such
concentrations to have no more than the normal risk of collectibility, a
substantial decline in the economy in general, or a decline in real estate
values in the Company's primary market areas in particular, could have an
adverse impact on collectibility of these loans. However, personal and
business income represents the primary source of repayment for a majority of
these loans.
17. RELATED PARTY TRANSACTIONS
At December 31, 2003 and 2002, certain officers, directors and their
associates and principal shareholders were indebted to the Company 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, 2003 and 2002 is as
follows (in thousands; renewals are not reflected as either new loans or
repayments):
2003 2002
-------- --------
Beginning balance $ 3,563 $ 4,316
Borrowings 2,223 1,502
Repayments (1,969) (2,255)
-------- --------
Ending balance $ 3,817 $ 3,563
======== ========
68
18. REGULATORY MATTERS
The Company, NVB and SRB 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, NVB and SRB must meet specific
capital guidelines that involve quantitative measures of the Company's,
NVB's and SRB's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's, NVB's and
SRB's capital amounts and NVB's and SRB's prompt corrective action
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company, NVB and SRB to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December
31, 2003, that the Company, NVB and SRB meet all capital adequacy
requirements to which they are subject.
The most recent notifications from the Federal Deposit Insurance Corporation
for NVB and SRB as of December 31, 2003 and 2002, categorized NVB and SRB as
well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized NVB and SRB must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as
set forth in the table below. There are no conditions or events since that
notification that management believes have changed NVB's or SRB's category.
69
The Company's, NVB's and SRB'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, 2003:
Total capital
(to risk weighted assets) $65,059 13.77% $37,797 8.00% N/A N/A
Tier 1 capital
(to risk weighted assets) $58,310 12.34% $18,899 4.00% N/A N/A
Tier 1 capital
(to average assets) $58,310 8.49% $27,471 4.00% N/A N/A
As of December 31, 2002:
Total capital
(to risk weighted assets) $61,581 12.58% $39,157 8.00% N/A N/A
Tier 1 capital
(to risk weighted assets) $55,455 11.33% $19,578 4.00% N/A N/A
Tier 1 capital
(to average assets) $55,455 8.59% $25,815 4.00% N/A N/A
North Valley Bank
As of December 31, 2003:
Total capital
(to risk weighted assets) $43,054 12.85% $26,805 8.00% $33,506 10.00%
Tier 1 capital
(to risk weighted assets) $39,181 11.69% $13,402 4.00% $20,104 6.00%
Tier 1 capital
(to average assets) $39,181 8.36% $18,746 4.00% $23,433 5.00%
As of December 31, 2002:
Total capital
(to risk weighted assets) $41,380 12.12% $27,316 8.00% $34,146 10.00%
Tier 1 capital
(to risk weighted assets) $37,192 10.89% $13,658 4.00% $20,487 6.00%
Tier 1 capital
(to average assets) $37,192 8.61% $17,279 4.00% $21,598 5.00%
Six Rivers Bank
As of December 31, 2003:
Total capital
(to risk weighted assets) $20,640 15.41% $10,718 8.00% $13,398 10.00%
Tier 1 capital
(to risk weighted assets) $18,954 14.15% $ 5,359 4.00% $ 8,039 6.00%
Tier 1 capital
(to average assets) $18,954 8.80% $ 8,613 4.00% $10,766 5.00%
As of December 31, 2002:
Total capital
(to risk weighted assets) $18,958 13.03% $11,641 8.00% $14,551 10.00%
Tier 1 capital
(to risk weighted assets) $17,130 11.77% $ 5,821 4.00% $ 8,731 6.00%
Tier 1 capital
(to average assets) $17,130 8.24% $ 8,316 4.00% $10,394 5.00%
70
Under federal and California state banking laws, dividends paid by NVB and
SRB to the Company in any calendar year may not exceed certain limitations
without the prior written approval of the appropriate bank regulatory
agency. At December 31, 2003, the amount not restricted for payment of
dividends without prior written approval was approximately $7,510,000.
19. OTHER NONINTEREST EXPENSES
The major classifications of other noninterest expenses for the years ended
December 31 were as follows (in thousands):
2003 2002 2001
-------- -------- ---------
Professional services $ 952 $ 886 $ 786
ATM & on-line banking expense 1,007 906 626
Printing, supplies and postage 1,021 1,175 1,061
Marketing expense 946 1,058 1,108
Operations expense 729 571 451
Loan expense 828 741 587
Amortization of intangibles 501 525 243
Other 3,440 2,959 2,719
-------- -------- ---------
$ 9,424 $ 8,821 $ 7,581
======== ======== =========
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has 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 estimation 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 financial
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.
Estimates of fair value have not been adjusted to reflect changes in market
conditions subsequent to December 31, 2003; therefore, estimates presented
herein are not necessarily indicative of amounts which could be realized in
a current transaction.
The following assumptions were used as of December 31, 2003 and 2002 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) Interest Bearing Deposits in Other Financial Institutions - The carrying
amount represents a reasonable estimate of fair value.
(c) Securities - The fair value of 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. The carrying value of FHLB, FRB, and other securities represents
a reasonable estimate of fair value.
(d) 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 is estimated by
discounting estimated future cash flows using current interest rates
with an additional risk adjustment reflecting the individual
characteristics of the loans.
71
(e) Cash Surrender Value of Life Insurance - The carrying amount represents
a reasonable estimate of fair value.
(f) Deposit Liabilities - Noninterest-bearing and interest-bearing demand
deposits and savings accounts are payable on demand and their carrying
values are assumed to be at fair value. The fair value of the core
deposit intangible has not been included as a component of the fair
value estimate. The fair value of time deposits is 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.
(g) Other Borrowed Funds - The fair value of other borrowed funds is
estimated by discounting the contractual cash flows using the current
interest rate at which similar borrowings for the same remaining
maturities could be made.
(h) Subordinated Debentures - The fair value of the subordinated debentures
is estimated by discounting the contractual cash flows using the current
interest rate at which similar securities with the same remaining
maturity could be made.
(j) 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.
2003 2002
------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- ---------- ---------
FINANCIAL ASSETS
Cash and cash equivalents $ 59,523 $ 59,523 $ 55,300 $ 55,300
FHLB, FRB and other
securities $ 2,991 $ 2,991 $ 3,258 $ 3,258
Interest bearing
deposits in other
financial institutions $ 123 $ 123 $ 517 $ 517
Securities:
Available for sale $ 191,045 $ 191,045 $ 110,475 $ 110,475
Held to maturity $ 1,455 $ 1,831 $ 1,455 $ 1,843
Loans and leases $ 372,660 $ 370,544 $ 437,843 $ 439,199
Cash surrender value of
life Insurance $ 24,863 $ 24,863 $ 21,383 $ 21,383
FINANCIAL LIABILITIES
Deposits $ 598,314 $ 594,988 $ 555,053 $ 550,715
Other borrowed funds $ 9,459 $ 9,565 $ 32,888 $ 33,185
Subordinated debentures $ 16,496 $ 16,801 $ 10,310 $ 11,110
21. SEGMENT REPORTING
The Company operates as three business segments: North Valley Bank, Six
Rivers Bank and Other. Management analyzes the operations of NVB, SRB and
Other separately. Other consists of Bancorp and BPI, both of which provide
services to NVB and SRB. Other also includes all eliminating entries for
inter-company revenue and expense items required for consolidation.
Management allocates the costs of Bancorp and BPI to NVB and SRB based
primarily on usage through a variety of statistical data. NVB and SRB are
separately chartered institutions each with its own Board of Directors and
regulated independently of each other.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes not
including nonrecurring gains or losses.
The Company derives a majority of its revenues from interest income and the
chief operating decision maker relies primarily on net interest revenue to
assess the performance of the segments and make decisions about resources to
be allocated to the segment. Therefore, the segments are reported below
using net interest income for all periods presented. Other revenue
72
represents noninterest income, exclusive of the net gain (loss) on sales of
available-for-sale securities, which is not allocated to the segments.
The Company does not have operating segments other than those reported.
Parent company financial information is included in the Other category in
the disclosures below, along with the activity of BPI, and represents the
Company's Other operating segment.
The Company does not have a single external customer from which it derives
10 percent or more of its revenues and operates in one geographical area.
Information about reportable segments, and the reconciliation of such
information to the consolidated financial statements as of and for the years
ended December 31, follows (in thousands):
NVB SRB Other Total
--------- --------- -------- ---------
Year ended December 31, 2003:
Total revenues $ 28,684 $ 11,146 $ (992) $ 38,838
Net income (loss) $ 7,520 $ 1,603 $ (1,152) $ 7,971
Interest income $ 24,574 $ 10,518 $ 8 $ 35,100
Interest expense $ 3,770 $ 2,457 $ 1,300 $ 7,527
Depreciation and amortization $ 1,994 $ 838 $ 171 $ 3,003
Provision for loan and lease
losses $ $ $ $ --
Total assets $ 458,542 $ 217,049 $ 2,102 $ 677,693
Year ended December 31, 2002:
Total revenues $ 28,084 $ 10,928 $ (589) $ 38,423
Net income (loss) $ 7,295 $ 1,496 $ (727) $ 8,064
Interest income $ 26,897 $ 12,003 $ 2 $ 38,902
Interest expense $ 5,456 $ 3,319 $ 1,017 $ 9,792
Depreciation and amortization $ 1,020 $ 1,062 $ 85 $ 2,167
Provision for loan and lease
losses $ 1,575 $ 220 $ $ 1,795
Total assets $ 443,642 $ 221,920 $ 518 $ 656,080
Year ended December 31, 2001:
Total revenues $ 22,497 $ 10,473 $ 218 $ 33,188
Net income (loss) $ 5,878 $ 1,427 $ (639) $ 6,666
Interest income $ 26,369 $ 13,403 $ 39 $ 39,811
Interest expense $ 9,656 $ 5,352 $ 467 $ 15,475
Depreciation and amortization $ 765 $ 813 $ 20 $ 1,598
Provision for loan and lease
losses $ 1,010 $ 360 $ $ 1,370
Total assets $ 394,110 $ 199,166 $ 2,007 $ 595,283
73
22. PARENT COMPANY ONLY - CONDENSED FINANCIAL INFORMATION
The condensed financial statements of North Valley Bancorp are presented
below (in thousands):
CONDENSED BALANCE SHEET
DECEMBER 31, 2003 AND 2002
----------------------------------------------------------------------------
ASSETS 2003 2002
---------- ----------
Cash and cash equivalents $ 527 $ 1,032
Available for sale securities at fair value 59 80
Investments in subsidiaries 61,410 59,329
Investment in unconsolidated subsidiary grantor
trusts 496 310
Other assets 2,845 2,161
----------------------
Total assets $ 65,337 $ 62,912
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividend payable $ 649 $ 652
Subordinated debentures 16,496 10,310
Other liabilities 2,139 1,921
Stockholders' equity 46,053 50,029
---------- ----------
Total liabilities and stockholders' equity $ 65,337 $ 62,912
========== ==========
CONDENSED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001
----------------------------------------------------------------------------
2003 2002 2001
-------- --------- ---------
INCOME:
Dividends from subsidiaries $ 5,200 $ 3,400 $ 9,200
Other income 8,685 8,019 5,351
-------- --------- ---------
Total income 13,885 11,419 14,551
EXPENSE:
Interest on subordinated debentures 1,306 1,028 467
Salaries and employee benefits 5,657 5,307 4,353
Legal and accounting 952 677 609
Other 2,638 2,212 1,107
Merger and acquisition expense 85
Tax benefit (766) (490) (528)
-------- --------- ---------
Total expense 9,787 8,734 6,093
-------- --------- ---------
Income before equity in undistributed
income of subsidiaries 4,098 2,685 8,458
Equity in undistributed income (loss)
of subsidiaries 3,873 5,379 (1,792)
subsidiaries
-----------------------------
Net income 7,971 8,064 6,666
Other comprehensive (loss) income, net
of tax (1,805) 900 930
-------- --------- ---------
Total comprehensive income $ 6,166 $ 8,964 $ 7,596
======== ========= =========
74
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001
----------------------------------------------------------------------------
2003 2002 2001
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,971 $ 8,064 $ 6,666
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed income of
subsidiaries (3,873) (5,379) 1,792
Stock-based compensation expense 241 378 189
Effect of changes in:
Other assets (684) (445) (1,114)
Other liabilities 353 107 1,792
-------- --------- ---------
Net cash provided by operating
activities 4,008 2,725 9,325
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale
securities 18,700
Proceeds from sale of available for sale
securities (18,700)
Investment in unconsolidated subsidiary
grantor trusts (186) (310)
-------- --------- ---------
Net cash used in investing
activities (186) (310)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,672) (2,151) (2,226)
Proceeds from issuance of subordinated
debentures 6,186 10,310
Repurchase of common shares (8,235) (1,055) (17,115)
Stock options exercised 396 339 251
Cash paid for fractional shares (2)
-------- --------- ---------
Net cash used in financing
activities (4,327) (2,867) (8,780)
-------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (505) (142) 235
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,032 1,174 939
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 527 $ 1,032 $ 1,174
======== ========= =========
75
INDEX OF EXHIBITS
Exhibit Sequential
No. Exhibit Name Page No
- ------- ------------ ----------
2(a) 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).
2(b) Addendum to Agreement and Plan of Reorganization and Merger *
dated as of September 25, 2000 (incorporated by reference
from Exhibit 2.7 to the Company's Current Report on Form 8-K
filed with the Commission on September 29, 2000).
3(a) Amended and Restated Articles of Incorporation of North *
Valley Bancorp (incorporated by reference from Exhibit 3(i)
to the Company's Quarterly Report on Form 10-Q filed with the
Commission for the period ended June 30, 1998).
3(b) Certificate of Amendment of Amended and Restated Articles of *
Incorporation of North Valley Bancorp (incorporated by
reference from Exhibit 3(b) to the Company's Annual Report on
Form 10-K filed with the Commission for the year ended
December 31, 2001.)
3(c) By-laws of North Valley Bancorp, as amended and restated *
(incorporated by reference from Exhibit 3(ii) to the
Company's Quarterly Report on Form 10-Q filed with the
Commission for the period ended June 30, 1998).
4(a) Amended and Restated Declaration of Trust (North Valley *
Capital Trust I) dated July 16, 2001 (incorporated by
reference from Exhibit 4(a) to the Company's Annual Report on
Form 10-K filed with the Commission for the year ended
December 31, 2001.)
4(b) Indenture dated July 16, 2001 (incorporated by reference from *
Exhibit 4(b) to the Company's Annual Report on Form 10-K
filed with the Commission for the year ended December 31,
2001.)
4(c) Junior Subordinated Debt security of North Valley Bancorp *
(incorporated by reference from Exhibit 4(c) to the Company's
Annual Report on Form 10-K filed with the Commission for the
year ended December 31, 2001.)
4(d) Guarantee Agreement (North Valley Bancorp) dated July 16, *
2001 (incorporated by reference from Exhibit 4(d) to the
Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001.)
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) North Valley Bancorp 1989 Employee Stock Option Plan, as *
amended (incorporated by reference from Exhibit 4.1 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). **
10(c) North Valley Bancorp 1989 Employee Nonstatutory Stock Option *
Agreement (incorporated by reference from Exhibit 4.3 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). **
76
Exhibit Sequential
No. Exhibit Name Page No
- ------- ------------ ----------
10(d) North Valley Bancorp 1989 Director Stock Option Plan, as *
amended (incorporated by reference from Exhibit 4.2 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). **
10(e) North Valley Bancorp 1989 Director Nonstatutory Stock Option *
Agreement (incorporated by reference from Exhibit 4.4 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). **
10(f) Employee Stock Ownership Plan, as amended and restated as of *
January 1, 1987 (incorporated by reference from Exhibit 10(x)
to the company's Annual Report on Form 10-K filed with the
commission for the year ended December 31, 1993).**
10(g) Amendment No. 3 to Employee Stock Ownership Plan *
(incorporated by reference from Exhibit 10(ee) to the
Company's Annual Report on Form 10-KSB filed with the
Commission for the year ended December 31, 1994). **
10(h) Amendment No. 4 to Employee Stock Ownership Plan, dated *
August 19, 1997 (incorporated by reference from Exhibit 10
(kk) to the Company's Annual Report on Form 10-KSB filed with
the Commission for the year ended December 31, 1997). **
10(i) Supplemental Executive Retirement Plan (incorporated by *
reference from Exhibit 10(i) to the Company's Annual Report
on Form 10-K filed with the Commission for the year ended
December 31, 1988). **
10(j) Executive Deferred Compensation Plan (incorporated by *
reference from Exhibit 10(j) to the Company's Annual Report
on Form 10-K filed with the Commission for the year ended
December 31, 1988). **
10(k) Supplemental Retirement Plan for Directors (incorporated by *
reference from Exhibit 10(k) to the Company's Annual Report
on Form 10-K filed with the Commission for the year ended
December 31, 1988). **
10(l) Legal Services Agreement dated as of January 1, 2001, between *
North Valley Bancorp and J. M. Wells, Jr., Attorney at Law
(incorporated by reference from Exhibit 10(m) to the
Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2002.)
10(m) Executive Deferred Compensation Plan, effective January 1, *
1989, restated April 1, 1995 (incorporated by reference from
Exhibit 10(dd) to the Company's Annual Report on Form 10-KSB
filed with the Commission for the year ended December 31,
1997). **
10(n) Directors' Deferred Compensation Plan, effective April 1, *
1995 (incorporated by reference from Exhibit 10(ee) to the
Company's Annual Report on Form 10-KSB filed with the
Commission for the year ended December 31, 1997). **
10(o) Umbrella TrustTM for Directors, effective April 1, 1995 *
(incorporated by reference from Exhibit 10(ff) to the
Company's Annual Report on Form 10-KSB filed with the
Commission for the year ended December 31 1997). **
77
Exhibit Sequential
No. Exhibit Name Page No
- ------- ------------ ----------
10(p) Umbrella TrustTM for Executives, effective April 1, 1995 *
(incorporated by reference from Exhibit 10(gg) to the
Company's Annual Report on Form 10-KSB filed with the
Commission for the year ended December 31, 1997). **
10(q) Indemnification Agreement (incorporated by reference from *
Exhibit 10 to the Company's Quarterly Report filed with the
Commission for the period ended June 30, 1998).
10(r) North Valley Bancorp 1998 Employee Stock Incentive Plan, as *
amended through July 26, 2001 (incorporated by reference from
Exhibit 99.1 to the Company's Registration Statement on Form
S-8 (No. 333-65950) filed with the Commission on July 26,
2001. **
10(s) North Valley Bancorp 1999 Director Stock Option Plan *
(incorporated by reference from Exhibit 99.1 to the Company's
Registration Statement on Form S-8 (No. 333-65948) filed with
the Commission on July 26, 2001. **
10(t) Amendment No. Two to the North Valley Bancorp 1989 Director *
Stock Option Plan (incorporated by reference from Exhibit
10(v) to the Company's Annual Report on Form 10-K filed with
the Commission for the year ended December 31, 1998). **
10(u) Branch Purchase and Assumption Agreement dated as of *
September 15, 2000, between North Valley Bancorp and Scott
Valley Bank (incorporated by reference from Exhibit 99.19 to
the Company's Current Report on Form 8-K filed with the
Commission on September 29, 2000).
10(v) Form of Executive Deferred Compensation Agreement executed in *
December 2000 between North Valley Bank and each of Michael
J. Cushman, Sharon L. Benson, Jack R. Richter and Eric J.
Woodstrom. (incorporated by reference from Exhibit 10(y) to
the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001). **
10(w) Form of Director Deferred Fee Agreement executed in December *
2000 between North Valley Bank and each of Rudy V. Balma,
William W. Cox, Royce L. Friesen, Dan W. Ghidinelli, Thomas
J. Ludden, Douglas M. Treadway and J.M. Wells, Jr.
(incorporated by reference from Exhibit 10aa) to the
Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001). **
10(x) Form of Director Deferred Fee Agreement executed in December *
2000 between Six Rivers Bank and each of Kevin D. Hartwick,
William T. Kay, Jr., J. Michael McGowan, Warren L. Murphy and
Dolores M. Vellutini. (incorporated by reference from Exhibit
10(bb) to the Company's Annual Report on Form 10-K filed with
the Commission for the year ended December 31, 2001). **
10(y) Form of Employment Agreement executed in January 2001 between *
North Valley Bancorp and each of Michael J. Cushman, Jack R.
Richter, Eric J. Woodstrom, Edward J. Czajka and Sharon L.
Benson (incorporated by reference from Exhibit 10(cc) to the
Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001.) **
10(z) Employment Agreement executed in May 2001 between Six Rivers *
National Bank and Russell Harris (incorporated by reference
from Exhibit 10(dd) to the Company's Annual Report on Form
10-K filed with the Commission for the year ended December
31, 2001.) **
78
Exhibit Sequential
No. Exhibit Name Page No
- ------- ------------ ----------
10(aa) Form of Salary Continuation Agreement executed in October *
2001 between North Valley Bancorp and each of Michael J.
Cushman, Jack R. Richter, Eric J. Woodstrom, Edward J. Czajka
and Sharon L. Benson (incorporated by reference from Exhibit
10(ee) to the Company's Annual Report on Form 10-K filed with
the Commission for the year ended December 31, 2001.) **
10(bb) Park Marina Lease dated July 23, 2001, between The McConnell *
Foundation and North Valley Bancorp for 300 Park Marina
Circle, Redding, California 96001 (incorporated by reference
from Exhibit 10(ff) to the Company's Annual Report on Form
10-K filed with the Commission for the year ended December
31, 2001.)
10(cc) Form of Salary Continuation Agreement executed in October *
2001 between Six Rivers National Bank and each of Russell
Harris and Margie L. Plum (incorporated by reference from
Exhibit 10(gg) to the Company's Annual Report on Form 10-K
filed with the Commission for the year ended December 31,
2001.) **
10(dd) Form of Executive Deferred Compensation Agreement executed in *
January 2001 between North Valley Bank and Edward J. Czajka
(incorporated by reference from Exhibit 10(hh) to the
Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001.) **
10(ee) Form of Executive Deferred Compensation Agreement executed *
December 2001 between North Valley Bank and each of Michael
J. Cushman, Sharon L. Benson, Jack R. Richter, Edward J.
Czajka and Eric J. Woodstrom. Section 3.1.2 amended on all
agreements (incorporated by reference from Exhibit 10(ii) to
the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001.) **
10(ff) Form of Executive Deferred Compensation Agreement executed *
January 2002, between Six Rivers National Bank and Russell
Harris. Agreement includes amended Section 3.1.2.
(incorporated by reference from Exhibit 10(jj) to the
Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001.) **
10(gg) Form of Director Deferred Fee Agreement executed December *
2001, between North Valley Bank and each of Rudy V. Balma,
William W. Cox, Royce L. Friesen, Dan W. Ghidinelli, Thomas
J. Ludden, Douglas M. Treadway and J.M. Wells, Jr. Section
3.1.2 amended on all agreements (incorporated by reference
from Exhibit 10(kk) to the Company's Annual Report on Form
10-K filed with the Commission for the year ended December
31, 2001.) **
10(hh) Director Deferred Fee Agreement executed December 2001, *
between Six Rivers National Bank and each of Kevin D.
Hartwick, William T. Kay, Jr., John J. Gierek, Jr., Warren
L. Murphy and Dolores M. Vellutini. Section 3.1.2 amended on
all agreements (incorporated by reference from Exhibit 10(ll)
to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001.) **
10(ii) Information services contract with Information Technology, *
Inc., dated June 17, 2002. (incorporated by reference from
Exhibit 10(mm) to the Company's Annual Report on Form 10-K
filed with the Commission for the year ended December 31,
2002) **
10(jj) Form of Employment Agreement executed in March 2004 between 82
North Valley Bancorp and Russell Harris. **
10(kk) Amendment No. 1 dated July 24, 2003 to Park Marina lease, 94
between The McConnell Foundation and North Valley Bank for
1828-1852 Park Marina Drive.
79
Exhibit Sequential
No. Exhibit Name Page No
- ------- ------------ ----------
10(ll) Sublease extension dated August 7, 2003, between North 95
State Grocery, Inc. and North Valley Bank for
Cottonwood Branch lease.
10(mm) Westwood Branch lease dated December 1, 2003, between 96
Daha Investments and North Valley Bank.
21 List of Subsidiaries. 99
23.1 Consent of Perry-Smith LLP 100
23.2 Consent of Deloitte & Touche LLP 101
31 Rule 13a-14(a)/15d-14(a) Certifications. 102
32 Section 1350 Certifications. 104
- ---------------------------
* Previously filed.
** Indicates management contract or compensatory plan or arrangement.
80
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/ Edward J. Czajka
- --------------------------------------------------
Edward J. Czajka
Executive Vice President & Chief Financial Officer
DATE: March 15, 2004
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/ Rudy V. Balma Director March 12, 2004
- ------------------------ --------
Rudy V. Balma
/s/ Michael J. Cushman Director, President and March 12, 2004
- ------------------------ ----------------------------
Michael J. Cushman Chief Executive Officer
----------------------------
(principal executive officer)
----------------------------
/s/ William W. Cox Director March 12, 2004
- ------------------------ --------
William W. Cox
/s/ Royce L. Friesen Director March 12, 2004
- ------------------------ --------
Royce L. Friesen
/s/ Dan W. Ghidinelli Director March 12, 2004
- ------------------------ --------
Dan W. Ghidinelli
/s/ Thomas J. Ludden Director March 12, 2004
- ------------------------ --------
Thomas J. Ludden
/s/ Kevin D. Hartwick Director March 12, 2004
- ------------------------ --------
Kevin D. Hartwick
/s/ Dolores M. Vellutini Director March 12, 2004
- ------------------------ --------
Dolores M. Vellutini
/s/ J. M. Wells, Jr. Director March 12, 2004
- ------------------------ --------
J. M. Wells, Jr.
/s/ Edward J. Czajka Executive Vice President and March 12, 2004
- ------------------------ -----------------------------
Edward J. Czajka Chief Financial Officer
-----------------------------
(principal financial officer)
-----------------------------
/s/ Sharon L. Benson Senior Vice President and March 12, 2004
- ------------------------ -------------------------
Sharon L. Benson Controller (principal
-------------------------
accounting officer)
-------------------------
81