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, 2004
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
----------------------- --------------------
Commission file number 0-10652
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NORTH VALLEY BANCORP
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(Exact name of registrant as specified in its charter)
California 94-2751350
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
300 Park Marina Circle, Redding, California 96001
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 226 2900
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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
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(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
$85,636,853 as of June 30, 2004.
The number of shares outstanding of common stock as of March 14, 2005, were
7,344,858.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 2005 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
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CONTENTS
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Part I
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Item 1 Business 3
Item 2 Properties 26
Item 3 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 27
Part II
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Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 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
Item 9B Other Information
Part III
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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 and Related Stockholder Matters 44
Item 13 Certain Relationships and Related Transactions 44
Item 14 Principal Accounting Fees and Services 44
Part IV
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Item 15 Exhibits, Financial Statement Schedules 45
Signatures 81
2
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
Certain statements in this Annual Report on Form 10-K (excluding
statements of fact or historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan and lease 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
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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 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). On August 31, 2004, the Company acquired Yolo Community
Bank ("YCB") in a purchase transaction. The information contained herein
contains the results of operations of YCB from September 1, 2004. The Company
wholly owns its principal subsidiaries, NVB, YCB, North Valley Trading Company
("Trading Company"), which is inactive, Bank Processing, Inc. ("BPI"), a
California corporation, North Valley Capital Trust I, North Valley Capital Trust
II and North Valley Capital Trust III. The sole subsidiary of NVB, which is
inactive, is North Valley Basic Securities (the "Securities Company").
At December 31, 2004, the Company had approximately 390 employees,
(which includes 370 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, and money market rate
deposit accounts and time deposits, and making commercial, real estate and
consumer loans. It also 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 member bank, NVB is also subject to
regulation by the Federal Reserve Bank ("FRB") and its deposits are insured by
the Federal Deposit Insurance Corporation ("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 relocated its branch
in Shasta Lake to a new facility . 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 purchased vacant land located at 480 Pioneer Avenue, Woodland,
California for the purpose of constructing a full-service banking facility on
this property in the future as the need arises. The second quarter of 2005 NVB
plans to open loan production offices in Ukiah and Santa Rosa.
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.
Yolo Community Bank was a privately-held California banking corporation
that commenced operations in 1998 and is headquartered in Woodland, California.
On August 31, 2004, the Company acquired YCB in a purchase transaction.
Consideration paid was a combination of $9.5 million in cash and 741,697 shares
of the Company's common stock. YCB offers primarily commercial banking services
to small and medium sized businesses through their branches in Woodland,
Fairfield, and Roseville, California. On February 11, 2005, the name Yolo
Community Bank was changed to "NVB Business Bank."
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, North Valley Capital Trust II and North
Valley Capital Trust III are unconsolidated Delaware business trusts
wholly-owned by the Company and formed in 2001, 2003 and 2004, respectively, for
the exclusive purpose of issuing Company obligated mandatorily redeemable
cumulative Trust Preferred Securities of the related Subsidiary Grantor Trust
holding solely junior subordinated debentures.
NVB and YCB have signed agreements with Essex National Securities
("Essex") whereby Essex provides brokerage services and standardized investment
advice to NVB customers at NVB administrative offices in Redding, California,
SRB customers at SRB's Main office located in Eureka, California and to YCB's
customers at YCB's main office in Woodland, California. NVB and YCB share in the
fees and commissions paid to Essex on a pre-determined schedule.
4
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.
Selected Statistical Data
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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
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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).
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- --------- ---- --------- --------- ---- --------- --------- ----
Assets
Federal funds sold $ 26,225 $ 323 1.23% $ 55,817 $ 596 1.07% $ 22,504 $ 346 1.54%
Investments:
Taxable securities 187,680 7,080 3.77% 110,264 4,251 3.86% 79,847 4,224 5.29%
Non-taxable securities(1) 28,160 2,152 7.64% 23,054 1,913 8.30% 26,756 2,312 8.64%
FNMA Preferred Stock (1) 12,040 648 5.38% 8,639 494 5.71% 395 24 6.08%
Interest bearing deposits
in other financial
institutions 288 8 2.78% 477 16 3.35% 737 43 5.83%
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total investments 228,168 9,888 4.33% 142,434 6,674 4.69% 107,735 6,603 6.13%
Total loans and leases(2)(3) 438,044 29,602 6.76% 399,217 28,595 7.16% 424,272 32,738 7.72%
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total interest-earning
assets/interest income 692,437 39,813 5.75% 597,468 35,865 6.00% 554,511 39,687 7.16%
--------- --------- ---------
Non-earning assets 91,805 80,622 71,656
Allowance for loan and
lease losses (6,638) (6,734) (6,256)
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Total assets $ 777,604 $ 671,356 $ 619,911
========= ========= =========
Liabilities and
Stockholders' Equity
Transaction accounts $ 179,474 863 0.48% $ 151,390 835 0.55% $ 119,081 1,008 0.85%
Savings and money market 176,745 1,178 0.67% 148,315 1,262 0.85% 131,354 1,536 1.17%
Time deposits 157,522 2,637 1.67% 166,206 3,456 2.08% 177,775 5,293 2.98%
Other borrowed funds 63,966 2,829 4.42% 34,421 1,974 5.73% 37,852 1,955 5.17%
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total interest-bearing
liabilities/interest expense 577,707 7,507 1.50% 500,332 7,527 1.50% 466,062 9,792 2.10%
--------- --------- ---------
Non-interest bearing deposits 139,417 117,287 100,567
Other liabilities 9,825 5,906 6,703
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Total liabilities 726,949 623,525 573,332
Stockholders' equity 50,655 47,831 46,579
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Total liabilities and
stockholders equity $ 777,604 $ 671,356 $ 619,911
========= ========= =========
Net interest income / spread $ 32,306 4.25% $ 28,338 4.50% $ 29,895 5.06%
========= ==== ========= ==== ========= ====
Net interest margin (4) 4.67% 4.74% 5.39%
==== ==== ====
(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 $825, $228 and $337 for the years ended December 31,
2004, 2003 and 2002, 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).
2004 Compared to 2003 2003 Compared to 2002
-------------------------------------- --------------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
Interest income
Interest on fed funds sold $ (364) $ 91 $ (273) $ 356 $ (106) $ 250
Interest on investments:
Taxable securities 2,920 (91) 2,829 1,173 (1,146) 27
Non-taxable securities 390 (151) 239 (307) (92) (399)
FNMA preferred stock 183 (29) 154 471 (1) 470
Interest bearing deposits in other
financial institutions (5) (3) (8) (9) (18) (27)
---------- ---------- ---------- ---------- ---------- ----------
Total investments 3,488 (274) 3,214 1,328 (1,257) 71
Interest on loans and leases 2,617 (1,610) 1,007 (1,795) (2,348) (4,143)
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 5,741 (1,793) 3,948 (111) (3,711) (3,822)
---------- ---------- ---------- ---------- ---------- ----------
Interest expense
Transaction accounts 135 (107) 28 178 (351) (173)
Savings and money market 190 (274) (84) 144 (418) (274)
Time deposits (145) (674) (819) (241) (1,596) (1,837)
Other borrowed funds 1,307 (452) 855 (197) 216 19
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 1,487 (1,507) (20) (116) (2,149) (2,265)
---------- ---------- ---------- ---------- ---------- ----------
Total change in net interest income $ 4,254 $ (286) $ 3,968 $ 5 $ (1,562) $ (1,557)
========== ========== ========== ========== ========== ==========
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, 2004, 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, within accumulated other comprehensive income (loss),
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.
7
At December 31, the amortized cost of securities and their approximate
fair value were as follows (in thousands):
Gross Gross Carrying
Available for sale securities: Amortized Unrealized Unrealized Amount
December 31, 2004 Cost Gains Losses (Fair Value)
------------ ------------ ------------ ------------
Securities of U.S. government agencies
and corporations $ 19,118 $ 17 $ (211) $ 18,924
Obligations of states and political subdivisions 30,147 1,035 (46) 31,136
Mortgage-backed securities 148,160 206 (1,812) 146,554
Corporate securities 7,989 104 8,093
Other securities 15,127 34 (907) 14,254
------------ ------------ ------------ ------------
$ 220,541 $ 1,396 $ (2,976) $ 218,961
============ ============ ============ ============
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
============ ============ ============ ============
Held to maturity securities: Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized
Cost) Gains Losses Fair Value
December 31, 2004 ------------ ------------ ------------ ------------
Obligations of states and political subdivisions $ 133 $ (2) $ 131
============ ============ ============ ============
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
============ ============ ============ ============
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
debt securities until maturity, they are classified as investments held to
maturity, and carried at amortized cost. Debt securities to be held for
indefinite periods of time and not intended to be held to maturity and equity
securities 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.
8
Investment securities are evaluated for other-than-temporary impairment
on at least a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation to determine whether a decline in their
value below amortized cost is other than temporary. Management utilizes criteria
such as the magnitude and duration of the decline and the intent and ability of
the Bank to retain its investment in the issues for a period of time sufficient
to allow for an anticipated recovery in fair value, in addition to the reasons
underlying the decline, to determine whether the loss in value is other than
temporary. The term "other than temporary" is not intended to indicate that the
decline is permanent, but indicates that the prospects for a near-term recovery
of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Once a decline in value is determined to be other than temporary,
the value of the security is reduced and a corresponding charge to earnings is
recognized.
At December 31, 2004, the Company held $161,506,000 of available for
sale investment securities in an unrealized loss position of which $131,818,000
were in a loss position for less than twelve months and $29,688,000 were in a
loss position and had been in a loss position for twelve months or more.
Management periodically evaluates each investment security for other than
temporary impairment, relying primarily on industry analyst reports, observation
of market conditions and interest rate fluctuations. Management believes it will
be able to collect all amounts due according to the contractual terms of the
underlying investment securities and that the noted decline in fair value is
considered temporary and due only to interest rate fluctuations.
Included in the above securities at December 31, 2004 were 100,000
shares of FNMA, Series M perpetual preferred stock. The coupon rate is fixed at
4.75% with a taxable-equivalent yield of 6.33%. The securities are owned at par,
or $50.00 per share, for a total investment of $5,000,000 and an unrealized loss
of $865,000 at December 31, 2004. The securities are callable at par on June 1,
2008. The market value per share as of December 31, 2004 was $41.35 per share.
Management carefully evaluated the FNMA preferred stock to determine
whether the decline in fair value below book value of these securities is
other-than-temporary. Among other items, management reviewed relevant accounting
literature which included SFAS No. 115, Statement of Auditing Standard ("SAS")
92, and Staff Accounting Bulletin ("SAB") No. 59. In conducting this assessment,
management evaluated a number of factors including, but not limited to:
o How far fair value has declined below book value
o How long the decline in fair value has existed
o The financial condition of the issuer
o Rating agency changes on the issuer
o Management's intent and ability to hold the security for a period of
time sufficient to allow for any anticipated recovery in fair value
Based on this evaluation, management concluded that these securities
were deemed to be temporarily impaired. Management's assessment weighed heavily
on the duration of the loss, normal market fluctuations during this holding
period, FNMA's response to its weaker financial condition, analysis of FNMA by
rating agencies and investment bankers and the prospects for changes in
long-term interest rates.
9
The following table shows estimated fair value of our investment
securities (other than equity securities with a fair value of approximately
$14,254,000) by year of maturity as of December 31, 2004. 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):
Within One After One After Five After Ten Total
Year Through Five Through Ten Years
Years Years
------------ ------------ ------------ ------------ ------------
Available for Sale Securities
Securities of U.S. government
agencies and corporations $ 2,488 $ 16,436 $ 18,924
Mortgage-backed
securities 2,385 71,350 $ 65,262 $ 7,557 146,554
Tax-exempt securities 1,029 6,715 5,018 18,374 31,136
Corporate securities 2,105 3,009 2,979 8,093
------------ ------------ ------------ ------------ ------------
Total securities available
for sale $ 5,902 $ 96,606 $ 73,289 $ 28,910 $ 204,707
============ ============ ============ ============ ============
Weighted average yield 3.26% 3.59% 4.11% 4.56% 3.90%
------------ ------------ ------------ ------------ ------------
Held to Maturity Securities
Tax-exempt securities $ 131 $ 131
============ ============ ============ ============ ============
Weighted average yield 4.18% 4.18%
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 and leases 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 or lease 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.
10
Major classifications of loans and leases at December 31 are summarized
as follows (in thousands):
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Commercial, financial and agricultural $ 54,903 $ 36,997 $ 40,683 $ 49,248 $ 53,617
Real estate - commercial 224,476 163,474 159,946 99,164 90,041
Real estate - construction 115,518 37,566 25,388 9,764 4,794
Real estate - mortgage 73,007 54,588 104,590 109,830 100,937
Installment 53,185 62,609 87,710 113,970 105,393
Direct financing leases 3,790 689 1,795 3,454 5,183
Other 29,838 23,214 24,271 11,588 9,727
---------- ---------- ---------- ---------- ----------
Total loans and leases receivable 554,717 379,137 444,383 397,018 369,692
Allowance for loan and lease losses (7,217) (6,493) (6,723) (5,786) (4,964)
Deferred loan and lease (fees) costs (1,372) 16 183 (210) (69)
---------- ---------- ---------- ---------- ----------
Net loans and leases $ 546,128 $ 372,660 $ 437,843 $ 391,022 $ 364,659
========== ========== ========== ========== ==========
At December 31, 2004 and 2003, the Company serviced real estate loans
and loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $105,205,000 and $129,485,000,
respectively.
The Company was contingently liable under letters of credit issued on
behalf of its customers for $4,933,000 and $4,819,000 at December 31, 2004 and
2003, respectively. At December 31, 2004, commercial and consumer lines of
credit, and real estate loans of approximately $46,199,000 and $121,471,000,
respectively, were undisbursed. At December 31, 2003, commercial and consumer
lines of credit, and real estate loans of approximately $26,492,000 and
$60,817,000, respectively, were undisbursed. These instruments involve, to
varying degrees, elements of credit and market risk more than the amounts
recognized in the balance sheet. The contractual or notional amounts of these
transactions express the extent of the 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,
2004. 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):
Within After One After
One Year Through Five Years Five Years Total
----------------------------------------------------------
Commercial, financial and
agricultural $ 30,184 $ 18,979 $ 5,740 $ 54,903
Real Estate - construction 72,504 40,611 2,403 115,518
Loans maturing after one year with:
Fixed interest rates $ 20,414 $ 2,530 $ 22,944
Variable interest rates 39,176 5,613 $ 44,789
11
Certificates of Deposit
- -----------------------
Maturities of time certificates of deposit outstanding of less than
$100,000 and $100,000 or more at December 31, 2004 are summarized as follows (in
thousands):
Remaining maturities: $100,000 Less than
or more $100,000
------------ ------------
Three months or less $ 17,823 $ 39,505
Over three through twelve months 26,065 57,540
Over one year through three years 5,509 10,645
Over three years 331 275
------------ ------------
Total $ 49,728 $ 107,965
============ ============
As of December 31, 2004, 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, 2004, 2003 and
2002 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):
2004 2003 2002
---------- ---------- ----------
Short-Term borrowings:
FHLB advances $ 20,094 $ 7,500 $ 23,500
FRB loan 259 89
---------- ---------- ----------
Total Short-Term borrowings $ 20,094 $ 7,759 $ 23,589
========== ========== ==========
Long-Term Borrowings:
FHLB advances $ 37,500 $ 1,700 $ 9,299
---------- ---------- ----------
Total Long-Term borrowings $ 37,500 $ 1,700 $ 9,299
========== ========== ==========
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 $ 20,094 $ 37,500
Maturity 2005 2006-2008
Average Rates 2.18% 2.76%
12
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
2004 2003 2002
---------- ---------- ----------
Average balance during the year $ 4,990 $ 19,798 $ 26,108
Average interest rate for the year 3.23% 3.41% 2.53%
Maximum month-end balance during the year $ 32,000 $ 32,792 $ 27,000
Average rate as of December 31, 2.29% 4.21% 2.40%
Certain Contractual Obligations
The following chart summarizes certain contractual obligations of the
company as of December 31, 2004:
(dollars in thousands) Less than More than
Total one year 1-3 years 3-5 years 5 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
Subordinated Debentures, floating rate of
5.4925% payable on 2034 5,155 5,155
FHLB loan, fixed rate of 2.18% payable on
January 26, 2006 12,500 12,500
FHLB loan, fixed rate of 2.81% payable on
January 26, 2007 12,500 12,500
FHLB loan, fixed rate of 3.30% payable on
January 25, 2008 12,500 12,500
Operating lease obligations 5,251 1,113 2,233 1,315 590
Deferred compensation(1) 2,305 203 330 222 1,550
Supplemental retirement plans(1) 2,758 220 358 277 1,903
------------ ------------ ------------ ------------ ------------
Total $ 69,465 $ 1,536 $ 27,921 $ 14,314 $ 25,694
============ ============ ============ ============ ============
(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.
13
Subordinated Debentures
The Company formed North Valley Capital Trust I, North Valley Capital
Trust II, and North Valley Trust III (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 partial funding of the YCB
acquisition and 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 per
security 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, 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 II 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.
During the second quarter of 2004, North Valley Capital Trust III
issued 5,000 Trust Preferred Securities with a liquidation value of $1,000 for
gross proceeds of $5,000,000. The entire proceeds of the issuance were invested
by North Valley Capital Trust III in $5,000,000 aggregate principal amount of
3.970% subordinated debentures due in 2034 (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 2034, bear an
initial interest rate of 3.97%, payable quarterly, and are redeemable by the
14
Company at par beginning on or after May 5, 2009, 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 2034.
Holders of the Trust Preferred Securities are entitled to cumulative
cash distributions at an annual rate of 3.97% 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.
YCB is licensed by the California Commissioner of Financial
Institutions (the "Commissioner"), YCB's deposits are insured by the FDIC, and
YCB is not a member of the Federal Reserve System. Consequently, YCB is subject
to the supervision of, and is regularly examined by, the Commissioner and the
FDIC. Such supervision and regulation include comprehensive reviews of all major
aspects of the Bank's business and condition, including its capital ratios,
allowance for loan and lease losses and other factors. However, no inference
should be drawn that such authorities have approved any such factors. YCB is
required to file reports with the Commissioner and the FDIC and provide such
additional information as the Commissioner and the FDIC may require.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and its subsidiaries, NVB and YCB, are deemed to be
"affiliates" within the meaning of that term as defined in the Federal Reserve
Act. This means, for example, that there are limitations (a) on loans between
affiliates, and (b) on investments by NVB or YCB 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.
15
The Board of Governors and the FDIC have adopted risk-based capital
guidelines for evaluating the capital adequacy of bank holding companies and
banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, the Company and 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 and the FDIC, which
require maintenance of a certain level of capital. These regulations impose two
capital standards: a risk-based capital standard and a leverage capital
standard.
Assets, commitments to extend credit and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
Under the Board of Governors' risk-based capital guidelines, assets
reported on an institution's balance sheet and certain off-balance sheet items
are assigned to risk categories, each of which has an assigned risk weight.
Capital ratios are calculated by dividing the institution's qualifying capital
by its period-end risk-weighted assets. The guidelines establish two categories
of qualifying capital: Tier 1 capital (defined to include common shareholders'
equity and noncumulative perpetual preferred stock) and Tier 2 capital which
includes, among other items, limited life (and in case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for credit losses. Tier 2 capital may also include up
to 45% of the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if any, of
fair market value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to exclude all or a
portion of the unrealized gains upon a determination that the equity securities
are not prudently valued. Unrealized gains and losses on other types of assets,
such as bank premises and available-for-sale debt securities, are not included
in Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
Under the Board of Governors' leverage capital standard, an institution
is required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. The Board of
Governors and the FDIC have adopted a minimum leverage ratio for bank holding
companies as a supplement to the risk-weighted capital guidelines. The leverage
ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets)
for the highest rated bank holding companies or those that have implemented the
risk-based capital market risk measure. All other bank holding companies must
maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital
ratios required for bank holding companies that have significant financial
and/or operational weakness, a high risk profile, or are undergoing or
anticipating rapid growth.
At December 31, 2004, NVB, YCB 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 18 to the Financial
Statements incorporated by reference, therein, for a listing of the Company's
risk-based capital ratios at December 31, 2004 and 2003.
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
16
than 4%; (4) "Significantly undercapitalized" - consisting of institutions with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without the prior
approval of the FDIC and the FDIC must prohibit a critically undercapitalized
institution from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than in the usual
course of business, including investment expansion, acquisition, sale of assets
or other similar actions; (2) extending credit for any highly leveraged
transaction; (3) amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material change in accounting
methods; (5) engaging in certain affiliate transactions; (6) paying excessive
compensation or bonuses; and (7) paying interest on new or renewed liabilities
at rates which would increase the weighted average costs of funds beyond
prevailing rates in the institution's normal market areas.
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.
17
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. NVB and YCB
currently have a rating of "satisfactory" for CRA compliance.
The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from each of the Company's subsidiary banks.
The payment of cash dividends and/or management fees by NVB and YCB 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.
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.
Section 313(a) of the Patriot Act prohibits any insured financial
institution such as NVB and YCB 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.
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
18
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 banking 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 addressed certain matters of 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.
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 became
effective for fiscal years ending on or after July 15, 2003.
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 became
effective for fiscal years ending on or after July 15, 2003.
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.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers".
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.
19
The Securities and Exchange Commission has 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 were required to 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.
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
20
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
- ---------------------------------------
The California Corporate Disclosure Act (the "CCD Act"), 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;
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, 2004, commercial and savings banks in competition with the
Company had 287 banking offices in the counties of Del Norte, Humboldt,
Mendocino, Placer, Shasta, Solano, Trinity and Yolo where the Company operates.
In those 287 banking offices (which includes the Company's 23) there were $14.3
billion in total deposits of which the Company had an overall share of 4.96%
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 over the Company 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
21
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, 2004, NVB's
and YCB's aggregate legal lending limits to a single borrower and such
borrower's related parties were $9,330,000 and $1,578,000 on an unsecured basis
and $15,550,000 and $2,630,000 on a fully secured basis, based on regulatory
capital of $62,201,000 and $10,521,000, 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 schedule, NVB's and YCB's current capital ratios and NVB's and
YCB's current levels of deposits, NVB and YCB 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.
The Financial Services Modernization Act of 1999 (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 repealed
Section 20 of Glass-Steagall, which prohibited banks from affiliating with
22
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 removeed these restrictions and
substantially eliminated 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 FSMA was 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,
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 YCB 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.
23
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.
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
24
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 7,311,726 were
outstanding at December 31, 2004. Pursuant to its stock option plans, at
December 31, 2004, the Company had outstanding options to purchase 1,057,748
shares of Company Common Stock. As of December 31, 2004, 986,581 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, 2004, real estate served as the principal source of
collateral with respect to approximately 75% 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.
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
- --------------------------------
Other-Than-Temporary Impairment of Securities
- ---------------------------------------------
In June 2004, the Financial Accounting Standards Board (FASB) ratified
Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of
Other-than-Temporary Impairment and Its Application to Certain Investments (EITF
03-1). EITF 03-1 includes additional guidance for evaluating and recording
impairment losses on debt and equity investments, as well as disclosure
requirements for investments that are deemed to be temporarily impaired. The
proposed guidance indicates that an investor must have the intent and ability to
hold an investment until a forecasted recovery of the fair value up to or beyond
the cost of the investment in order to determine that any impairment is
temporary. In September 2004, the FASB delayed the effective date of the
recognition and measurement guidance of EITF 03-1, pending further
deliberations. The disclosures for investments that are deemed temporarily
impaired are included in Note 3 to the consolidated financial statements. Once
the FASB has reached a final decision on the measurement and recognition
provisions, management of the Company will evaluate the impact of the adoption
of EITF 03-1.
25
Share-Based Payments
- --------------------
In December 2004 the FASB issued Statement Number 123 (revised 2004)
(FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. The Company is
required to apply FAS 123 (R) on a modified prospective method. Under this
method, the Company is required to record compensation expense (as previous
awards continue to vest) for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. In addition, the Company may
elect to adopt FAS 123 (R) by restating previously issued financial statements,
basing the expense on that previously reported in their pro forma disclosures
required by FAS 123. FAS 123 (R) is effective for the first reporting period
beginning after June 15, 2005. Management has not completed its evaluation of
the effect that FAS 123 (R) will have, but believes that the effect will be
consistent with its previous pro forma disclosures.
Accounting for Certain Loans or Debt Securities Acquired in a Transfer
- ----------------------------------------------------------------------
In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer
(SOP). This SOP addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor's initial
investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It also
includes such loans acquired in purchase business combinations. This SOP does
not apply to loans originated by the entity. This SOP limits the yield that may
be accreted and requires that the excess of contractual cash flows over cash
flows expected to be collected not be recognized as an adjustment of yield, loss
accrual, or valuation allowance.
This SOP prohibits "carrying over" or creation of valuation allowances
in the initial accounting for loans acquired in a transfer that are within its
scope. The prohibition of the valuation allowance carryover applies to the
purchase of an individual loan, a pool of loans, a group of loans, and loans
acquired in a purchase business combination.
This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004. In management's opinion, the adoption of this
pronouncement will not have a material impact on the Company's financial
position or results of operations.
26
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/ Branch Leased
Park Marina Branch Leased
BPI Data Processing/Administrative Owned
Ukiah Loan Production Office Leased
Santa Rosa Loan Production Office Leased
Eureka Mall Branch Leased
McKinleyville Branch Leased
Crescent City Branch Owned
Eureka Downtown Branch Owned
Ferndale Branch Owned
Garberville Branch Leased
Willits Branch Leased
Yolo Community Bank:
Woodland Administrative/ Branch Leased
Roseville Branch Leased
Fairfield Branch Leased
From time to time, the Company, through NVB and YCB, 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.
27
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.
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, 2004 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 Cash Dividends
Stock Declared
-------------------------------------------
Quarter Ended: High Low
-------- -------
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
March 31, 2004 $ 17.89 $ 14.97 $ 0.10
June 30, 2004 18.22 15.52 0.10
September 30, 2004 17.87 15.80 0.10
December 31, 2004 19.64 17.25 0.10
The Company had approximately 1,005 shareholders of record as of
December 31, 2004.
The Company's primary source of funds for payment of dividends to its
shareholders is the receipt of dividends from NVB and YCB. 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.
28
The following tables summarize the fourth quarter stock repurchase
activity for the Company's current Stock Repurchase Program.
Period Total Number Average Price Number of Maximum
------ of Shares Paid per Share Shares number of
Purchased -------------- Purchased as Shares that
--------- Part of Publicly May Yet Be
Announced Purchased
Plans or Under the
Programs Plans or
-------- Programs
---------
October 1 thru December 31, 2004 0 0 0 10,454
The above repurchase program - announced on July 28, 2003 and still in
effect, 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. 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. No
shares were repurchased during 2004.
29
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
North Valley Bancorp & Subsidiaries
(dollars in thousands except per share data)
FOR THE YEAR ENDED DECEMBER 31 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Total interest income $ 38,937 $ 35,100 $ 38,902 $ 39,811 $ 39,966
Total interest expense 7,507 7,527 9,792 15,475 16,235
---------- ---------- ---------- ---------- ----------
Net interest income 31,430 27,573 29,110 24,336 23,731
Provision for loan and lease losses 271 -- 1,795 1,370 1,670
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and lease losses 31,159 27,573 27,315 22,966 22,061
Total non interest income 9,456 11,265 9,313 8,852 6,872
Total non interest expense 28,658 27,262 24,728 22,090 24,236
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 11,957 11,576 11,900 9,728 4,697
Provision for income taxes 3,578 3,605 3,836 3,062 1,609
---------- ---------- ---------- ---------- ----------
Net Income $ 8,379 $ 7,971 $ 8,064 $ 6,666 $ 3,088
========== ========== ========== ========== ==========
Performance ratios:
Return on average assets 1.08% 1.19% 1.30% 1.18% 0.58%
Return on average equity 16.54% 16.66% 17.31% 13.11% 5.82%
Capital Ratios:
Risk based capital:
Tier 1 (4% Minimum Ratio) 10.60% 12.34% 11.33% 11.57% 13.05%
Total (8% Minimum Ratio) 11.73% 13.77% 12.58% 12.82% 14.30%
Leverage Ratio 7.89% 8.49% 8.59% 8.37% 9.73%
BALANCE SHEET DATA AT DECEMBER 31
Assets $ 866,231 $ 677,693 $ 656,080 $ 594,973 $ 540,221
Investment securities and
federal funds sold $ 219,734 $ 224,010 $ 133,330 $ 132,881 $ 105,235
Net loans $ 546,128 $ 372,660 $ 437,843 $ 391,022 $ 364,659
Deposits $ 711,654 $ 598,314 $ 555,053 $ 514,278 $ 460,291
Stockholders' equity $ 65,448 $ 46,053 $ 50,029 $ 43,678 $ 54,857
COMMON SHARE DATA
Earnings per share(1)
Basic $ 1.24 $ 1.19 $ 1.15 $ 0.84 $ 0.35
Diluted $ 1.17 $ 1.13 $ 1.11 $ 0.82 $ 0.35
Book value (2) $ 8.95 $ 7.10 $ 7.20 $ 6.26 $ 6.30
Dividend payout ratio 34.2% 35.40% 28.96% 31.50% 54.86%
Shares outstanding 7,311,726 6,488,073 6,951,142 6,976,584 8,708,124
(1) All share and 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.
30
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 the Banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions, particularly in 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 crisis; 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 the accounting for
such transactions could change.
A summary of the Company's most significant accounting policies and
accounting estimates is contained in Note 1 to the consolidated financial
statements. An accounting estimate recognized in the financial statements is a
critical accounting estimate if the accounting estimate requires management to
make assumptions about matters that are highly uncertain at the time the
accounting estimate is made and different estimates that management could
reasonably have used in the current period, or changes in the accounting
estimate that are reasonably likely to occur from period to period, would have a
material impact on the presentation of the Company's financial condition,
changes in financial condition, or results of operations. Management considers
the Company's allowance for loan losses, pro forma costs related to the
Company's share-based payments programs, and management's assessment of goodwill
and investment impairment to be critical accounting policies.
Allowance for Loan and Lease Losses
The allowance for loan and lease 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
31
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.
Share Based Payments
At December 31, 2004, 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 15 - 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 15 - Financial Statements and
Supplementary Data.
In December 2004, the FASB issued Statement Number 123 (revised 2004)
(FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. The Company is
required to apply FAS 123 (R) on a modified prospective method. Under this
method, the Company is required to record compensation expense (as previous
awards continue to vest) for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. In addition, the Company may
elect to adopt FAS 123 (R) by restating previously issued financial statements,
basing the expense on that previously reported in their pro forma disclosures
required by FAS 123. FAS 123 (R) is effective for the first reporting period
beginning after June 15, 2005. Management has not completed its evaluation of
the effect that FAS 123 (R) will have, but believes that the effect will be
consistent with its previous pro forma disclosures referred to above.
Critical assumptions that are assessed in computing the fair value of
share-based payments include stock price volatility, expected dividend rates,
forfeiture rates and the expected lives of such options.
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise may give rise to goodwill.
Goodwill represents the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed in transactions
accounted for under the purchase method of accounting. Goodwill of $15,281,000
was recorded in the Company's acquisition of YCB. The value of goodwill is
ultimately derived from the Company's ability to generate net earnings after the
acquisition. A decline in net earnings could be indicative of a decline in the
fair value of goodwill and result in impairment. For that reason, goodwill will
be assessed for impairment at a reporting unit level at least annually.
Management will conduct its first assessment of impairment during the third
quarter of 2005 or earlier if events and circumstances warrant such an
assessment.
Impairment of Investment Securities
Investment securities are evaluated for other-than-temporary impairment on at
least a quarterly basis and more frequently when economic or market conditions
warrant such an evaluation to determine whether a decline in their value below
amortized cost is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, the financial condition of the issuer,
rating agency changes related to the issuer's securities and the intent and
ability of the Bank to retain its investment in the issues for a period of time
sufficient to allow for an anticipated recovery in fair value, in addition to
the reasons underlying the decline, to determine whether the loss in value is
other than temporary. The term "other than temporary" is not intended to
indicate that the decline is permanent, but indicates that the prospects for a
near-term recovery of value is not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
32
carrying value of the investment. Once a decline in value is determined to be
other than temporary, the value of the security is reduced and a corresponding
charge to earnings equal is recognized.
Overview
North Valley Bancorp (the "Company") is a bank holding company for
North Valley Bank ("NVB"), a state-chartered, Federal Reserve Member bank and
Yolo Community Bank ("YCB"), 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 include the former branches of SRB and two
supermarket branches in Northern California. YCB operates out of its main office
located at 200 Main Street, Woodland, California, with branches also in
Roseville and Fairfield, California. The Company's principal business consists
of attracting deposits from the general public and using the funds to originate
commercial, real estate and installment loans to customers, who are
predominately small and middle market businesses and middle income individuals.
The Company's primary source of revenues is interest income from its loan and
investment securities portfolios. The Company is not dependent on any single
customer for more than ten percent of its revenues.
The acquisition of YCB on August 31, 2004 was accounted for under the
purchase method of accounting. Under this method, the results of operations of
the Company only include the results of operations of YCB since the acquisition
date.
Earnings Summary
- ----------------
For the year ended December 31,
(in thousands except per share 2004 2003 2002
amounts) ---------- ---------- ----------
Net interest income $ 31,430 $ 27,573 $ 29,110
Provision for loan and lease losses (271) -- (1,795)
Noninterest income 9,456 11,265 9,313
Noninterest expense (28,658) (27,262) (24,728)
Provision for income taxes (3,578) (3,605) (3,836)
---------- ---------- ----------
Net income $ 8,379 $ 7,971 $ 8,064
========== ========== ==========
Earnings Per Share
Basic $ 1.24 $ 1.19 $ 1.15
========== ========== ==========
Diluted $ 1.17 $ 1.13 $ 1.11
========== ========== ==========
Return on Average Assets 1.08% 1.19% 1.30%
Return on Average Equity 16.54% 16.66% 17.31%
For the year ended December 31, 2004, the Company recorded net income
of $8,379,000 as compared to $7,971,000 in 2003 and $8,064,000 in 2002. On a per
share basis, diluted earnings per share was $1.17 for the year ended December
31, 2004 compared to $1.13 in 2003 and $1.11 for the same period in 2002.
The increase in net income for the year ended December 31, 2004 from
2003 was due to an increase in net interest income of $3,857,000 partially
offset by a decrease in non-interest income of $1,809,000 and an increase in
non-interest expense of $1,396,000. The increase in net interest income was due
to growth in total average loans of $38,827,000 in 2004 compared to 2003 of
which $25,835,000 was due to the acquisition of YCB and the remainder was
organic growth primarily in Commercial Real Estate and Construction Loans. The
decrease in non-interest income is due to gains on sales of mortgage loans
recorded in 2003 of $1,917,000 compared to $20,000 in 2004. The gains in 2003
were the result of a strategic decision in early 2003 to sell all new fixed-rate
mortgages into the secondary market due to the record low interest rate
environment rather than hold them in the portfolio as is the Company's normal
practice. The Company reverted back to holding these mortgages in the portfolio
in early 2004 and will continually analyze this strategy as an effective tool in
asset/liability management.
33
For the year ended December 31, 2004, the Company paid or declared
quarterly dividends totaling $2,771,000 to stockholders of the Company. The
Company's return on average total assets and average stockholders' equity were
1.08% and 16.54% for the period ended December 31, 2004, compared with 1.19% and
16.66% for the same period in 2003 and 1.30% and 17.31% for the same period in
2002.
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, 2004, net
interest income was $31,430,000 compared to $27,573,000 for 2003 and $29,110,000
for 2002. The increase in net interest income in 2004 of $3,857,000 was
primarily due to an increase in interest income of $3,837,000 coupled with a
small decrease in interest expense of $20,000.
During 2004, average interest-earning assets increased by $94,969,000
from 2003 but the average yield on those assets, on a tax equivalent basis,
decreased from 6.00% in 2003 to 5.75% in 2004. Of this increase in average
interest-earning assets, $34,284,000 was due to the August 31, 2004 acquisition
of YCB--the full impact of YCB's assets will be felt in 2005 when the Company
completes its first full year of operations including YCB. Average
interest-bearing liabilities also increased, from $500,332,000 in 2002 to
$577,707,000 in 2004. 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 1.50% in 2003 to 1.30%
in 2004 resulting in the slight reduction in interest expense. The decrease in
net interest income from 2002 to 2003 of $1,537,000 was primarily due to a
decrease in interest income of $3,802,000 partially offset by a decrease in
interest expense $2,265,000 due to yields on earning assets decreasing at a
faster rate than rates paid on interest-bearing liabilities.
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, 2004 was 4.67%
as compared to 4.74% for 2003 and 5.39% in 2002. The decrease in the NIM in 2004
was a result of a decrease in average yields on interest-earning assets of 0.25%
partially offset by a decrease in the average rate paid on interest bearing
liabilities of 0.20%.
Noninterest Income
- ------------------
Total noninterest income decreased $1,809,000 to $9,456,000 for the
year ended December 31, 2004 from $11,265,000 for the same period in 2003 and
$9,313,000 in 2002. This decrease in 2004 is mainly the result of gains on loan
sales recorded in 2003 of $1,917,000 compared to $20,000 in 2004 (in 2003, the
Company was selling nearly all fixed rate 30- and 15- mortgages to reduce
interest rate risk and keep the duration of the loan portfolio relatively short
during the historically low interest rate environment in 2003). In addition, in
2004 earnings on the cash surrender value of life insurance decreased by
$201,000 (due to lower earnings rates) , gains on sales and calls of securities
decreased $191,000 (due to lower volume of calls) and other income decreased
$115,000. Service charge income and other fee income for 2004 increased by
$415,000 and $180,000, respectively, compared to 2003. The increases in service
charge income and other fee income was due to normal deposit growth during 2004.
The increase in non-interest income in 2003 was primarily the result of an
increase of $1,461,000 in gains on loan sales and an increase in earnings on
cash surrender value of life insurance policies of $257,000.
34
Noninterest Expense
- -------------------
The following table is a summary of the Company's noninterest expense for the
periods indicated (in thousands):
2004 2003 2002
---------- ---------- ----------
Salaries & employee benefits $ 14,741 $ 13,504 $ 12,480
Equipment expense 2,199 2,614 1,873
Occupancy expense 1,966 1,720 1,554
Professional services 1,002 952 886
ATM & online banking expense 718 1,007 906
Printing & supplies 569 508 640
Postage 486 513 535
Messenger expense 449 336 403
Data processing expense 1,093 161 192
Merger & integration expense 121 -- --
Other 5,314 5,947 5,259
---------- ---------- ----------
Total noninterest expense $ 28,658 $ 27,262 $ 24,728
========== ========== ==========
Total noninterest expense increased $1,396,000 to $28,658,000 for the
year ended December 31, 2004, from $27,262,000 for the same period in 2003 and
24,728,000 in 2002. The increase in 2004 was primarily a result of a $1,237,000
increase in salaries and benefits of which $811,000 was due to YCB and the
inclusion of YCB operations for the last four months of 2004. Excluding YCB,
salaries and benefits increased by $426,000 over 2003, a 3.2% increase.
Occupancy expense increased in 2004 due to the leasing of additional
administrative facilities during 2004 and $141,000 was attributable to YCB.
Equipment expense decreased by $415,000 due to additional costs incurred in 2003
due to of the Company's new core processing system which was installed in
November of 2002. ATM and online banking expense decreased in 2004 due to
reduced ATM processing costs. Data processing costs increased due to the
outsourcing of the administration of the Company's local area network and wide
area networks (LAN/WAN). This outsourcing resulted in a decrease of four full
time employees and the elimination of certain other vendors. Messenger expense
increased in 2004 due to higher fuel costs and the inclusion of YCB ($51,000).
Other expense decreased due to lower marketing expenses and a decrease in
overdraft losses primarily associated with the Company's free checking account
program.
In 2003, total noninterest expense increased $2,534,000 to $27,262,000
from $24,728,000 for the same period in 2002. The increase 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.
Income Taxes
- ------------
The provision for income taxes for the year ended December 31, 2004 was
$3,578,000 as compared to $3,605,000 for the same period in 2003 and $3,836,000
for 2002. The effective income tax rate for state and federal income taxes was
29.9%, for the year ended December 31, 2004 compared to 31.1% for the same
period in 2003 and 32.2% for the same period in 2002. 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 other equity
securities that qualify for the dividend received deduction and the earnings
from the cash surrender value of life insurance policies. Interest earned on
municipal securities, and the dividends received deduction are exempt from
federal income tax. Earnings on life insurance policies are exempt from both
federal income and California franchise tax. As such, all of these investment
strategies 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
35
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, 2004 and 2003, the recorded investment in loans and
leases for which impairment has been recognized was approximately $1,202,000 and
$1,636,000. Of the 2004 balance, approximately $403,000 has a related valuation
allowance of $202,000. Of the 2003 balance, approximately $535,000 has a related
valuation allowance of $267,000. For the years ended December 31, 2004, 2003 and
2002, the average recorded investment in loans and leases for which impairment
has been recognized was approximately $1,136,000, $1,515,000 and $948,000.
During the portion of the year that the loans and leases were impaired, the
Company recognized interest income of approximately $18,000, $51,000 and $63,000
for cash payments received in 2004, 2003 and 2002.
Loans and leases on which the accrual of interest has been discontinued
are designated as nonaccrual loans and leases. Accrual of interest on loans and
leases 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):
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Nonaccrual loans and leases $ 1,155 $ 1,615 $ 1,452 $ 867 $ 780
Loans and leases 90 days past due but still
accruing interest 1,015 1,395 864 848 561
Restructured loans
Other real estate owned -- -- 55 287 341
-------- -------- -------- -------- --------
Total nonperforming assets $ 2,170 $ 3,010 $ 2,371 $ 2,002 $ 1,682
======== ======== ======== ======== ========
If interest on nonaccrual loans and leases had been accrued, such
income would have approximated $20,000 in 2004, $50,000 in 2003 and $81,000 in
2002. Interest income of $18,000 in 2004, $51,000 in 2003 and $63,000 in 2002
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, 2004, there were no commitments to lend additional
funds to borrowers whose loans or leases were classified as nonaccrual.
36
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):
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Average loans and leases outstanding $ 438,044 $ 399,217 $ 424,272 $ 378,190 $ 342,831
Allowance for loan and lease losses
at beginning of period 6,493 6,723 5,786 4,964 4,606
Loans and leases charged off:
Commercial, financial and agricultural 219 63 271 213 1,276
Real Estate - construction -- -- -- -- --
Real Estate - mortgage 53 2 7 27 53
Installment 609 715 924 610 269
Other 9 139 22 72 79
---------- ---------- ---------- ---------- ----------
Total loans and leases charged off 890 919 1,224 922 1,677
Recoveries of loans and leases previously
charged off:
Commercial, financial and agricultural 128 527 209 194 262
Real Estate - construction
Real Estate - mortgage 5 16 1 1 --
Installment 175 138 156 169 89
Other 16 8 -- 10 14
---------- ---------- ---------- ---------- ----------
Total recoveries of loans and leases
previously charged off 324 689 366 374 365
---------- ---------- ---------- ---------- ----------
Net loans and leases charged off 566 230 858 548 1,312
Provisions for loan and lease losses 271 -- 1,795 1,370 1,670
Allowance acquired (YCB) 1,019
---------- ---------- ---------- ---------- ----------
Balance of allowance for loan and lease
losses at end of period $ 7,217 $ 6,493 $ 6,723 $ 5,786 $ 4,964
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.13% 0.06% 0.20% 0.15% 0.38%
Allowance for loan and lease losses to
total loans and leases 1.30% 1.71% 1.51% 1.46% 1.34%
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.
37
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 December 31, 2004 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 $7,217,000 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 2003 to 2004.
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
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.
38
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).
2004 2003 2002
----------------------- ----------------------- -----------------------
Allowance % Allowance % Allowance %
For Of For of For Of
Losses Loans and Losses Loans and Losses Loans and
Leases Leases Leases
---------- ---------- ---------- ---------- ---------- ----------
Loan and Lease
Categories:
Commercial, financial
agricultural $ 4,282 50.3% $ 3,387 52.9% $ 3,070 45.2%
Real Estate-construction 1,106 20.8% 530 9.9% 325 5.7%
Real Estate-mortgage 181 13.2% 212 14.4% 390 23.5%
Installment 729 9.6% 1,107 16.5% 1,608 19.7%
Other 442 6.1% 64 6.3% 232 5.9%
Unallocated 477 --% 1,193 --% 1,098 --%
---------- ---------- ---------- ---------- ---------- ----------
Total $ 7,217 100.0% $ 6,493 100.0% $ 6,723 100.0%
========== ========== ========== ========== ========== ==========
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 $26,000,000 as of December 31, 2004 were available to provide
liquidity. In addition, NVB is a member of the Federal Home Loan Bank ("FHLB")
providing an additional line of credit of $97,356,000 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 $3,128,000 secured by first deeds of trust on eligible commercial
real estate loans. As of December 31, 2004, borrowings of $57,594,000 were
outstanding with the FHLB, and $21,000,000 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 $243,809,000 and
$252,146,000 (or 28.2% and 37.2% of total assets) at December 31, 2004 and
December 31, 2003, respectively. Total liquid assets for December 31, 2004 and
December 31, 2003 include investment securities of $133,000 and $1,455,000
respectively, classified as held to maturity based on the Company's intent and
ability to hold such securities to maturity.
Core deposits, defined as demand deposits, interest bearing demand
deposits, regular savings, money market deposit accounts and time deposits of
less than $100,000, continue to provide a relatively stable and low cost source
of funds. Core deposits totaled $661,926,000 and $546,866,000 at December 31,
2004 and December 31, 2003, respectively.
In assessing liquidity, historical information such as seasonal loan
demand, local economic cycles and the economy in general are considered along
with current ratios, management goals and unique characteristics of the Company.
Management believes the Company is in compliance with its policies relating to
liquidity.
39
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.
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.
40
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 concentrations 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, 2004 analysis indicates fairly typical results for
changes in net economic value and changes in net interest income over a one-year
period given the same interest rate shocks. This is also where Management wants
to position the balance sheet at this time given the current state of the
economy. Management believes that short and medium term interest rates will
continue to increase slowly and this interest rate risk position will allow the
Company to take advantage of future changes in interest rates.
Shocked by -2% Shocked by +2%
-------------- --------------
Net interest income -8.8% 4.4%
Net economic value 13.3% -4.5%
For the modeling, the Company has made certain assumptions about the
duration of its non-maturity deposits that is based on an analysis performed on
the Company's database to determine average length of deposit accounts. This
assumption is important to determining net economic value at risk. The Company
has compared its assumptions with those used by other financial institutions.
Financial Condition as of December 31, 2004 as Compared to December 31, 2003
- ----------------------------------------------------------------------------
Total assets at December 31, 2004, were $866,231,000 compared to
December 31, 2003 assets of $677,693,000. The acquisition of YCB provided an
additional $83.3 million in total loans and $96.4 million in total deposits.
Investment securities and federal funds sold decreased $4,276,000 from
2003 to 2004 and totaled $219,734,000 at December 31, 2004, compared to
$224,010,000 at December 31, 2003.
During 2004, net loans increased 46.5% to $546,128,000 from
$372,660,000 at December 31, 2003. Of this increase, $81,922,000 or 47.2% was
attributable to the acquisition of YCB. Loans are the Company's largest
component of earning assets. The Company's average loan to deposit ratio
decreased to 67.1% in 2004 compared to 68.5% in 2003. The loan to deposit ratio
as of December 31, 2004 was 76.7% compared to 62.3% as of December 31, 2003.
41
During 2004, total deposits increased 18.9% to $711,654,000 compared to
$598,314,000 at December 31, 2003. Of this $113,340,000 increase, $96,359,000 or
85.0% was attributable to the YCB acquisition. Excluding the effect of the YCB
acquisition, non-interest bearing demand, interest-bearing demand and savings
deposits increased $48,038,000 while certificates of deposits decreased
$31,057,000. The increase in demand deposits was due to a significant number of
new accounts opened during 2004, which is attributed to the continued success of
the Company's "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 increased to $65,448,000 as
of December 31, 2004, as compared to $46,053,000 at December 31, 2003. The
increase was primarily the result of the issuance of 741,697 shares of the
Company's common stock as partial consideration for the YCB acquisition which
increased capital stock by $12,676,000, net income of $8,379,000 partially
offset by cash dividends of $2,771,000. 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, 2004 (dollars in
thousands).
Minimum For
Capital Adequacy
Capital Ratio Purposes
----------------------------------------
Company:
Tier 1 capital
(to average assets) $ 67,642 7.89% 4.00%
Tier 1 capital
(to risk weighted assets) $ 67,642 10.60% 4.00%
Total capital
(to risk weighted assets) $ 74,859 11.73% 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 1.6%
at December 31, 2004) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values.
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, 2004 or 2003. 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.
42
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, 2004. 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) 2004 2004 2004 2004 2003 2003 2003 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest income $ 8,846 $ 9,075 $ 9,719 $ 11,297 $ 9,192 $ 8,852 $ 8,550 $ 8,506
Interest expense 1,802 1,821 1,918 1,966 2,080 1,944 1,821 1,682
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 7,044 7,254 7,801 9,331 7,112 6,908 6,729 6,824
Provision for loan and
lease losses -- -- 216 55 -- -- -- --
Noninterest income 2,461 2,250 2,399 2,346 2,720 3,154 2,667 2,724
Noninterest expense 6,590 6,660 7,004 8,404 6,696 6,949 6,899 6,718
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes 2,915 2,844 2,980 3,218 3,136 3,113 2,497 2,830
Provision for income
taxes 841 862 912 963 1,039 977 680 909
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 2,074 $ 1,982 $ 2,068 $ 2,255 $ 2,097 $ 2,136 $ 1,817 $ 1,921
========== ========== ========== ========== ========== ========== ========== ==========
Earnings Per Share
Basic $ 0.32 $ 0.30 $ 0.28 $ 0.31 $ 0.31 $ 0.31 $ 0.28 $ 0.29
========== ========== ========== ========== ========== ========== ========== ==========
Diluted $ 0.30 $ 0.29 $ 0.26 $ 0.29 $ 0.29 $ 0.30 $ 0.26 $ 0.28
========== ========== ========== ========== ========== ========== ========== ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None
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. 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, 2004. Based on this
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
43
Internal Control over Financial Reporting. Management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Management's statement as to the framework
used to evaluate the effectiveness of, and management's assessment of the
effectiveness of, the Company's internal control over financial reporting as of
December 31, 2004, appears in this report at page 46 and is incorporated by this
reference. The Company's registered public accounting firm has issued a report
on management's assessment of the Company's internal control over financial
reporting which appears on page 47 of this report and is incorporated here by
this reference. There was no change in the Company's internal control over
financial reporting that occurred during the quarter ended December 31, 2004
that has materially affected or is reasonable likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
- ---------------------------
None.
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 2005 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 2005 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 2005 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 2005 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Certain
Relationships and Related Transactions".
44
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 2005 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Principal
Accounting Fees and Services".
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
- -------------------------------------------------
(a) The following documents are filed as part of the report:
1. Financial Statements.
2. Schedules: see (c) below
3. Exhibits: See Index to Exhibits at page 81.
(b) Exhibits
See Index to Exhibits at page of this Annual Report on Form
10-K, which is incorporated herein by reference.
(c) Financial Statement Schedules
Not applicable.
45
Report of Management on Internal Control Over Financial Reporting
-----------------------------------------------------------------
Financial Statements
Management of North Valley Bancorp and its subsidiaries (the Company) is
responsible for the preparation, integrity and fair presentation of its
published consolidated financial statements as of December 31, 2004, and for the
year then ended. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America and, as such, include amounts based on informed judgments and estimates
made by management.
The consolidated financial statements have been audited by an independent
accounting firm, which was given unrestricted access to all financial records
and related data, including minutes of all meetings of the board of directors
and committees of the board. Management believes that all representations made
to the independent auditors during their audit were valid and appropriate.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate
internal control over financial reporting for the Company, as such term is
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
The Company's management, including the chief executive officer and chief
financial officer, has assessed the effectiveness of the Company's internal
control over financial reporting presented in conformity with accounting
principles generally accepted in the United States of America. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control -
Integrated Framework. Based on this assessment, management believes that, as of
December 31, 2004, the Company's internal control over financial reporting is
effective based on those criteria.
Perry-Smith LLP, the registered public accounting firm that audited the
consolidated financial statements included in this Annual Report under Item 8,
"Financial Statements and Supplementary Data" has issued a report with respect
to management's assessment of the effectiveness of the Company's internal
control over financial reporting. This report follows.
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors
North Valley Bancorp
We have audited management's assessment, included in the accompanying
Report of Management on Internal Control Over Financial Reporting, that North
Valley Bancorp and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("the COSO criteria"). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
(Continued)
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that North Valley Bancorp and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on the
COSO criteria. Also in our opinion, North Valley Bancorp and subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of North Valley Bancorp and subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2004 and our report dated March 4, 2005 expressed an unqualified
opinion thereon.
/s/ PERRY-SMITH LLP
Sacramento, California
March 4, 2005
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
North Valley Bancorp
We have audited the accompanying consolidated balance sheet of North Valley
Bancorp and subsidiaries (the "Company") as of December 31, 2004 and 2003 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003 and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of North Valley
Bancorp and subsidiaries' internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 4, 2005 expressed an unqualified opinion
thereon.
/s/ PERRY-SMITH LLP
Sacramento, California
March 4, 2005
49
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In thousands except share amounts)
- ----------------------------------------------------------------------------------------------------------
2004 2003
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 23,575 $ 28,013
Federal funds sold 640 31,510
------------ ------------
Total cash and cash equivalents 24,215 59,523
Interest bearing deposits in other financial institutions 500 123
Investment securities:
Available for sale, at fair value 218,961 191,045
Held to maturity, at amortized cost 133 1,455
Loans and leases, net of allowance for loan and lease losses of
$7,217 and $6,493 at December 31, 2004 and 2003 546,128 372,660
Premises and equipment, net 13,927 12,699
Other real estate owned
FHLB and FRB stock and other securities 4,826 2,991
Accrued interest receivable 3,163 2,696
Cash surrender of life insurance 27,541 24,863
Core deposit intangibles, net 3,188 2,272
Goodwill 15,281
Other assets 8,368 7,366
------------ ------------
TOTAL ASSETS $ 866,231 $ 677,693
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 165,595 $ 118,678
Interest-bearing:
Demand deposits 187,738 159,123
Savings 200,628 157,106
Time certificates 157,693 163,407
------------ ------------
Total deposits 711,654 598,314
Other borrowed funds 57,594 9,459
Accrued interest payable and other liabilities 9,884 7,371
Subordinated debentures 21,651 16,496
------------ ------------
Total liabilities 800,783 631,640
------------ ------------
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
7,311,726 and 6,488,073 at December 31, 2004 and 2003 37,917 23,406
Retained earnings 28,403 22,795
Accumulated other comprehensive loss, net of tax (872) (148)
------------ ------------
Total stockholders' equity 65,448 46,053
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 866,231 $ 677,693
============ ============
The accompanying notes are an integral part of these consolidated financial statements
50
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
2004 2003 2002
INTEREST INCOME:
Loans including fees $ 29,469 $ 28,387 $ 32,575
Lease financing 133 208 163
Securities:
Taxable 7,570 4,627 4,292
Exempt from federal taxes 1,442 1,282 1,526
Federal funds sold and repurchase agreements 323 596 346
----------- ----------- -----------
Total interest income 38,937 35,100 38,902
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 4,677 5,553 7,837
Subordinated debentures 1,564 1,306 1,028
Other borrowings 1,266 668 927
----------- ----------- -----------
Total interest expense 7,507 7,527 9,792
----------- ----------- -----------
NET INTEREST INCOME 31,430 27,573 29,110
PROVISION FOR LOAN AND LEASE LOSSES 271 1,795
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 31,159 27,573 27,315
----------- ----------- -----------
NONINTEREST INCOME:
Service charges on deposit accounts 5,183 4,768 4,726
Other fees and charges 2,264 2,084 2,065
Earnings on cash surrender value of life insurance policies 1,141 1,342 1,085
Gain on sale of loans 20 1,917 456
Gain on sales or calls of securities 22 213 221
Other 826 941 760
----------- ----------- -----------
Total noninterest income 9,456 11,265 9,313
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 14,741 13,504 12,480
Equipment expense 2,199 2,614 1,873
Occupancy expense 1,966 1,720 1,554
Other 9,752 9,424 8,821
----------- ----------- -----------
Total noninterest expenses 28,658 27,262 24,728
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 11,957 11,576 11,900
PROVISION FOR INCOME TAXES 3,578 3,605 3,836
----------- ----------- -----------
NET INCOME $ 8,379 $ 7,971 $ 8,064
=========== =========== ===========
EARNINGS PER SHARE:
Basic $ 1.24 $ 1.19 $ 1.15
=========== =========== ===========
Diluted $ 1.17 $ 1.13 $ 1.11
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements
51
NORTH VALLEY BANCORP AND SUSBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands except share amounts)
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other
Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
----------- ----------- ----------- ------------- -----------
Balance, January 1, 2002 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 reclass-
ification adjustment of $153 900 900
-----------
Total comprehensive income 8,964
-----------
Stock options exercised 61,110 339 339
Stock-based compensation expense 8,100 378 378
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 $(1,151)
Unrealized loss on available
for sale securities, net of reclass-
ification adjustment of $126 (1,805) (1,805)
-----------
Total comprehensive income 6,166
-----------
Stock options exercised 66,583 396 396
Stock-based compensation expense 8,100 241 241
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
Comprehensive income:
Net income 8,379 8,379
Other comprehensive loss, net of tax
of $(500)
Unrealized loss on available
for sale securities, net of reclass-
ification adjustment of $13 (724) (724)
-----------
Total comprehensive income 7,655
-----------
Stock options exercised net of shares tendered 75,656 521 521
Stock-based compensation expense 6,300 126 126
Compensation expense on acquired stock options 1,008 1,008
Tax benefit derived from the exercise of stock
Options 180 180
Stock issued in Yolo Community Bank
acquisition, net of stock issuance costs 741,697 12,676 12,676
Cash dividends on common stock (2,771) (2,771)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 7,311,726 $ 37,917 $ 28,403 $ (872) $ 65,448
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements
52
NORTH VALLEY BANCORP & SUBSIDIARIES
CONSOLDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (in thousands)
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,379 $ 7,971 $ 8,064
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,991 2,197 1,476
Amortization of premium on securities 140 761 211
Amortization of goodwill and core deposit intangible 534 500 480
Provision for loan and lease losses 271 1,795
Gain on sale or calls of securities (22) (213) (221)
Gain on sale of loans (20) (1,917) (456)
Loss (gain) on sale of premises and equipment 12 (22)
Deferred tax (benefit) provision (156) 566 (1,325)
Stock-based compensation expense 126 241 378
Effect of changes in:
Accrued interest receivable (467) (107) 595
Other assets (1,087) (2,898) (4,657)
Accrued interest payable and other liabilities 2,144 (299) 1,304
----------- ----------- -----------
Net cash provided by operating activities 11,845 6,780 7,644
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in acquisition (4,441)
Proceeds from sales of other real estate owned 465 55 300
Purchases of available for sale securities (60,233) (150,033) (60,707)
Proceeds from sales of available for sale securities 18,719 21,633
Proceeds from maturities/calls of available for sale securities 54,292 47,873 41,560
Proceeds from maturities/calls of held to maturity securities 1,455
Net change in FHLB and FRB stock and other securities (1,191) (452) (860)
Net change in interest bearing deposits in other financial institutions (377) 394 1,772
Proceeds from sales of loans 78,373 49,129
Net increase in loans and leases (92,262) (11,273) (97,357)
Proceeds from sales of premises and equipment 10 57
Purchases of premises and equipment (2,792) (1,775) (4,338)
----------- ----------- -----------
Net cash used in investing activities (105,074) (18,062) (48,868)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 16,981 43,261 40,775
Proceeds from issuance of subordinated debentures 5,155 6,186
Net change in other borrowed funds 38,035 (23,429) 12,241
Cash dividends paid (2,771) (2,672) (2,151)
Repurchase of common shares (8,235) (1,055)
Cash received for stock options exercised 521 396 339
Cash paid in lieu of fractional shares (2)
----------- ----------- -----------
Net cash provided by financing activities 57,921 15,505 50,149
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (35,308) 4,223 8,925
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 59,523 55,300 46,375
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 24,215 $ 59,523 $ 55,300
=========== =========== ===========
Interest $ 6,970 $ 7,727 $ 9,895
=========== =========== ===========
Income taxes $ 2,025 $ 2,440 $ 4,990
=========== =========== ===========
Noncash investing and financing activities:
Net change in unrealized (loss) gain on available for sale investment securities $ (1,234) $ (2,382) $ 1,512
Transfer from loans to other real estate owned $ 465 $ 68
Cash dividends declared $ 2,025 $ 649 $ 652
Supplemental schedule related to acquisition
Deposits $ 96,359
Overnight borrowings 10,100
Other liabilities 549
Available-for-sale investment securities (23,316)
Held-to-maturity investment securities (144)
Loans, net (81,922)
FHLB stock (644)
Premises and equipment, net (449)
Intangibles (16,731)
Other assets (1,927)
Compensation expense on stock options 1,008
Stock issued 12,676
-----------
$ (4,441)
-----------
The accompanying notes are an integral part of these consolidated financial statements
53
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"). On
January 1, 2004, SRB was merged into NVB in a transaction between entities
under common control accounted for similar to a pooling of interests.
Former branches of SRB continue to operate as Six Rivers Bank, a division
of North Valley Bank. From 2001 to 2004, the Company formed North Valley
Capital Trust I, North Valley Capital Trust II and North Valley Capital
Trust III (collectively, the Trusts) which are 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. During 2004, the Company also acquired 100% of the outstanding
stock of Yolo Community Bank ("YCB") in a transaction accounted for under
the purchase method of business combinations (see Note 2). YCB has been a
wholly-owned subsidiary of the Company since August 31, 2004.
North Valley Bancorp and subsidiaries (the "Company") operates as a single
business segment. 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 YCB operate 24 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 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:
NVB and its wholly owned subsidiary, North Valley Basic Securities; YCB;
Bank Processing, Inc. ("BPI"); and North Valley Trading Company. North
Valley Trading Company and North Valley Basic Securities did not have any
activity in 2004, 2003 and 2002. 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.
54
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.
Reserve Requirements. The Company is subject to regulation by the Federal
Reserve Board. The regulations require the Company to maintain certain cash
reserve balances on hand or at the Federal Reserve Bank (FRB). At December
31, 2004 and 2003, the Company had reserves of $441,000 and $4,558,000. As
compensation for check-clearing services, additional compensating balances
of $1,000,000 at December 31, 2004 were maintained with the Federal Reserve
Bank.
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, 2004 and 2003.
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 (loss), 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.
Investment securities are evaluated for other-than-temporary impairment on
at least a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation to determine whether a decline in
their value below amortized cost is other than temporary. Management
utilizes criteria such as the magnitude and duration of the decline and the
intent and ability of the Company to retain its investment in the issues
for a period of time sufficient to allow for an anticipated recovery in
fair value, in addition to the reasons underlying the decline, to determine
whether the loss in value is other than temporary. The term "other than
temporary" is not intended to indicate that the decline is permanent, but
indicates that the prospects for a near-term recovery of value is not
necessarily favorable, or that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the
investment. Once a decline in value is determined to be other than
temporary, the value of the security is reduced and a corresponding charge
to earnings is recognized.
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.
55
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
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. The Company evaluates premises and
equipment for financial impairment as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully
recoverable.
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 the estimated fair value of the deposit
relationships acquired in the acquisition of YCB and are being amortized by
the straight-line method. The branch acquisition intangible is being
amortized at $505,000 per year with a remaining amortizing period of three
and one-half years. The YCB core deposit intangible has an estimated life
of ten years.
Goodwill - Business combinations involving the Company's acquisition of the
equity interests or net assets of another enterprise may give rise to
goodwill. Goodwill represents the excess of the cost of an acquired entity
over the net of the amounts assigned to assets acquired and liabilities
assumed in transactions accounted for under the purchase method of
accounting. Goodwill of $15,281,000 was recorded in the Company's
acquisition of YCB. The value of goodwill is ultimately derived from the
Company's ability to generate net earnings after the acquisition. A decline
in net earnings could be indicative of a decline in the fair value of
goodwill and result in impairment. For that reason, goodwill will be
56
assessed for impairment at a reporting unit level at least annually.
Management will conduct its first assessment of impairment during the third
quarter of 2005 or earlier if events and circumstances warrant such an
assessment.
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 consolidated 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.
Earnings per Share - Basic earnings per share (EPS), which excludes
dilution, is computed by dividing income available to common shareholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock, such as stock options, result in
the issuance of common stock which shares in the earnings of the Company.
The treasury stock method has been applied to determine the dilutive effect
of stock options in computing diluted EPS. Earnings per share is
retroactively adjusted for stock dividends and stock splits for all periods
presented.
Stock-Based Compensation - At December 31, 2004, 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.
57
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.
2004 2003 2002
---- ---- ----
Net income:
As reported $ 8,379 $ 7,971 $ 8,064
Add: total stock-based compensation expense included in net
income, net of tax 74 141 176
Deduct: total stock-based compensation expense
determined under the fair value based method for all awards, net
of related tax effects (260) (426) (397)
----------- ----------- -----------
Pro forma $ 8,193 $ 7,686 $ 7,843
=========== =========== ===========
Basic earnings per common share:
As reported $ 1.24 $ 1.19 $ 1.15
Pro forma $ 1.21 $ 1.14 $ 1.11
Diluted earnings per common and equivalent share:
As reported $ 1.17 $ 1.13 $ 1.11
Pro forma $ 1.15 $ 1.09 $ 1.08
Weighted average fair value of options
Granted during the year $ 3.02 $ 2.68 $ 2.31
---------------------------------------------------------------------------
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following assumptions:
2004 2003 2002
---- ---- ----
Dividend yield 2.47%-2.74% 3.59% 2.83%
Expected volatility 16% 19.29% 20.99%
Risk-Free interest rate 3.58%-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 only one
reportable segment.
Comprehensive Income - Comprehensive income includes net income and other
comprehensive income or loss, which represents the change in its net assets
during the period from nonowner sources. The components of other
comprehensive income or loss 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. Comprehensive income is
reported on the consolidated statement of changes in stockholders' equity.
58
New Accounting Pronoucements - In June 2004, the Financial Accounting
Standards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue
03-1, The Meaning of Other-than-Temporary Impairment and Its Application to
Certain Investments (EITF 03-1). EITF 03-1 includes additional guidance for
evaluating and recording impairment losses on debt and equity investments,
as well as disclosure requirements for investments that are deemed to be
temporarily impaired. The proposed guidance indicates that an investor must
have the intent and ability to hold an investment until a forecasted
recovery of the fair value up to or beyond the cost of the investment in
order to determine that any impairment is temporary. In September 2004, the
FASB delayed the effective date of the recognition and measurement guidance
of EITF 03-1, pending further deliberations. The disclosures for
investments that are deemed temporarily impaired are included in Note 3 to
the consolidated financial statements. Once the FASB has reached a final
decision on the measurement and recognition provisions, management of the
Company will evaluate the impact of the adoption of EITF 03-1.
In December 2004, the FASB issued Statement Number 123 (revised 2004) (FAS
123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. The
Company is required to apply FAS 123 (R) on a modified prospective method.
Under this method, the Company is required to record compensation expense
(as previous awards continue to vest) for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
In addition, the Company may elect to adopt FAS 123 (R) by restating
previously issued financial statements, basing the expense on that
previously reported in their pro forma disclosures required by FAS 123. FAS
123 (R) is effective for the first reporting period beginning after June
15, 2005. Management has not completed its evaluation of the effect that
FAS 123 (R) will have, but believes that the effect will be consistent with
its previous pro forma disclosures.
In December 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in
a Transfer (SOP). This SOP addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities (loans) acquired
in a transfer if those differences are attributable, at least in part, to
credit quality. It also includes such loans acquired in purchase business
combinations. This SOP does not apply to loans originated by the entity.
This SOP limits the yield that may be accreted and requires that the excess
of contractual cash flows over cash flows expected to be collected not be
recognized as an adjustment of yield, loss accrual, or valuation allowance.
This SOP prohibits "carrying over" or creation of valuation allowances in
the initial accounting for loans acquired in a transfer that are within its
scope. The prohibition of the valuation allowance carryover applies to the
purchase of an individual loan, a pool of loans, a group of loans, and
loans acquired in a purchase business combination.
This SOP is effective for loans acquired in fiscal years beginning after
December 15, 2004. In management's opinion, the adoption of this
pronouncement will not have a material impact on the Company's financial
position or results of operations.
Reclassifications - Certain amounts in 2003 and 2002 have been reclassified
to conform with the 2004 financial statement presentation.
2. ACQUISITION
On August 31, 2004, pursuant to the Agreement and Plan of Reorganization
dated April 23, 2004, the Company completed its acquisition of Woodland,
California-based YCB through a merger and tax-free reorganization whereby
YCB became a wholly-owned subsidiary. Under the terms of the agreement, YCB
shareholders received a combination of $9.5 million in cash and 741,697
shares of NOVB common stock in exchange for their YCB shares. This
acquisition was sought by Management as a method to gain entry into
higher-growth markets that were relatively contiguous to its existing
footprint. Entry into these markets via acquisition was deemed to be a more
cost-effective method for achieving growth than de novo branch expansion.
59
The estimated fair value of assets acquired and liabilities assumed in the
YCB acquisition are as follows:
August 31, 2004
----------------
Cash and due from banks $ 5,601,000
Investment securities 24,104,000
Loans, net 81,922,000
Premises and equipment 449,000
Other assets 18,658,000
----------------
Total assets acquired 130,734,000
----------------
Total Deposits 96,359,000
Borrowed funds 10,100,000
Other liabilities 549,000
----------------
Total liabilities assumed 107,008,000
----------------
Purchase price $ 23,726,000
================
The excess of the purchase price over the estimated fair value of the net
assets acquired was $15.3 million, which was recorded as goodwill. Goodwill
is non deductible for tax purposes. Assets acquired also included a core
deposit intangible of $1.45 million. This asset is being amortized over ten
years and will result in amortization expense of $145,000 in each of the
next five years. Other estimated fair value adjustments were not
significant. The Company is awaiting final valuations and the amounts above
are subject to change. However, in management's opinion, such amounts will
not change materially. The consolidated financial statements of the Company
include the accounts of YCB since September 1, 2004.
The following supplemental pro forma information discloses selected
financial information for the years indicated as though the YCB merger had
been completed as of the beginning of each of the years being reported.
There are no material nonrecurring items included in the pro forma
information. Dollars are in thousands except per share data.
Year ended December 31,
2004 2003
----------- -----------
Revenue $ 52,575 $ 52,530
Net income $ 8,676 $ 8,505
Diluted earnings per share $ 1.10 $ 1.09
60
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, 2004
Securities of U.S. government
agencies and corporations $ 19,118 $ 17 $ (211) $ 18,924
Obligations of states and political
subdivisions 30,147 1,035 (46) 31,136
Mortgage-backed securities 148,160 206 (1,812) 146,554
Corporate debt securities 7,989 104 8,093
Equity securities 15,127 34 (907) 14,254
------------ ------------ ------------ ------------
$ 220,541 $ 1,396 $ (2,976) $ 218,961
============ ============ ============ ============
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 debt securities 6,027 273 (26) 6,274
Equity securities 13,127 27 (734) 12,420
------------ ------------ ------------ ------------
$ 191,391 $ 1,930 $ (2,276) $ 191,045
============ ============ ============ ============
Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized
Held to maturity securities: Cost) Gains Losses Fair Value
------------ ------------ ------------ ------------
December 31, 2004
Mortgage-backed securities $ 133 $ (2) $ 131
============ ============ ============ ============
December 31, 2003
Obligations of states and political
subdivisions $ 1,455 $ 376 $ 1,831
============ ============ ============ ============
Gross realized gains on sales or calls of securities categorized as
available for sale securities were $22,000, $257,000 and $266,000 in 2004,
2003 and 2002. Gross realized gains recorded in 2004 are solely
attributable to calls of investment securities. There were no gross
realized losses on sales or calls of available for sale securities in 2004.
Gross realized losses on sales or calls of securities categorized as
available for sale securities were $44,000 and $45,000 in 2003 and 2002.
There were no sales or gross realized gains or losses on calls of held to
maturity securities in 2004, 2003 and 2002.
61
The following table shows gross unrealized losses and the estimated fair
value of available for sale investment securities, aggregated by investment
category, for investment securities that are in an unrealized loss position
at December 31, 2004 (in thousands). Unrealized losses for held to maturity
investment securities totaled $2,000 and are not included in the following
table.
Less than 12 months 12 months or Longer Total
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Description of Securities Fair Value Losses Fair Value Losses Fair Value Losses
------------ ------------ ------------ ------------ ------------ ------------
Securities of U.S. government
agencies and corporations $ 10,546 $ (95) $ 6,350 $ (116) $ 16,896 $ (211)
Obligations of states and
political subdivisions 4,312 (25) 425 (21) 4,737 (46)
Mortgage-backed securities 113,978 (1,198) 15,763 (614) 129,741 (1,812)
Other securities 2,982 (17) 7,150 (890) 10,132 (907)
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired
securities $ 131,818 $ (1,335) $ 29,688 $ (1,641) $ 161,506 $ (2,976)
============ ============ ============ ============ ============ ============
Management periodically evaluates each investment security for other than
temporary impairment, relying primarily on industry analyst reports,
observation of market conditions and interest rate fluctuations. Management
believes it will be able to collect all amounts due according to the
contractual terms of the underlying investment securities and that the
noted decline in fair value is considered temporary and due principally to
interest rate fluctuations.
Contractual maturities of held to maturity and available for sale
securities (other than other securities (all of which are equity
securities) with an amortized cost of approximately $15,127,000 and a fair
value of approximately $14,254,000) at December 31, 2004, 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 $ 5,908 $ 5,902
Due after 1 year through 5 years $ 133 $ 131 97,376 96,606
Due after 5 years through 10 years 73,737 73,289
Due after 10 years 28,393 28,910
---------- ---------- ---------- ----------
$ 133 $ 131 $ 205,414 $ 204,707
========== ========== ========== ==========
At December 31, 2004 and 2003, securities having fair value amounts of
approximately $100,973,000 and $65,031,000 were pledged to secure public
deposits, short-term borrowings, treasury tax and loan balances and for
other purposes required by law or contract.
62
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):
2004 2003
---------- ----------
Commercial $ 54,903 $ 36,997
Real estate - commercial 224,476 163,474
Real estate - construction 115,518 37,566
Real estate - mortgage 73,007 54,588
Installment 53,185 62,609
Direct financing leases 3,790 689
Other 29,838 23,214
---------- ----------
Total loans and leases 554,717 379,137
Allowance for loan and lease losses (7,217) (6,493)
Deferred loan (fees) costs (1,372) 16
---------- ----------
Net loans and leases $ 546,128 $ 372,660
========== ==========
At December 31, 2004 and 2003, the Company serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $105,205,000 and $129,485,000.
Certain real estate loans receivable are pledged as collateral for
available borrowings with the FHLB and FRB. Pledged loans totaled
$72,467,000 and $52,923,000 at December 31, 2004 and 2003.
The components of the Company's direct financing leases as of December 31
are summarized below (in thousands):
2004 2003
---------- ----------
Future minimum lease payments $ 3,774 $ 718
Residual interests 93 97
Initial direct costs 9 10
Unearned income (86) (136)
---------- ----------
$ 3,790 $ 689
========== ==========
Future minimum lease payments are as follows (in thousands):
2005 $ 423
2006 128
2007 1,009
2008 78
2009 545
Thereafter 1,591
----------
Total $ 3,774
==========
63
Changes in the allowance for loan and lease losses for the years ended
December 31 were as follows (in thousands):
2004 2003 2002
-------- -------- --------
Balance, beginning of year $ 6,493 $ 6,723 $ 5,786
Allowance acquired in YCB transaction 1,019
Provision charged to operations 271 1,795
Loans charged off (890) (919) (1,224)
Recoveries 324 689 366
-------- -------- --------
Balance, end of year $ 7,217 $ 6,493 $ 6,723
======== ======== ========
5. IMPAIRED AND NONPERFORMING LOANS AND LEASES
At December 31, 2004 and 2003, the recorded investment in impaired loans
and leases was approximately $1,202,000 and $1,636,000. Of the 2004
balance, approximately $403,000 has a related valuation allowance of
$202,000. Of the 2003 balance, approximately $535,000 has a related
valuation allowance of $267,000. For the years ended December 31, 2004,
2003 and 2002, the average recorded investment in impaired loans and leases
was approximately $1,136,000, $1,515,000 and $948,000. During the portion
of the year that the loans and leases were impaired, the Company recognized
interest income of approximately $18,000, $51,000 and $63,000 for cash
payments received in 2004, 2003 and 2002.
Nonperforming loans and leases include all such loans and leases that are
either on 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):
2004 2003
---------- ----------
Nonaccrual loans and leases $ 1,155 $ 1,615
Loans and leases 90 days past due but
still accruing interest 1,015 1,395
---------- ----------
Total nonperforming loans and leases $ 2,170 $ 3,010
========== ==========
Interest income forgone on nonaccrual loans and leases approximated $20,000
in 2004, $50,000 in 2003 and $81,000 in 2002.
At December 31, 2004, 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):
2004 2003
---------- ----------
Land $ 3,165 $ 3,165
Buildings and improvements 8,361 8,099
Furniture, fixtures and equipment 14,650 12,520
Leasehold improvements 635 571
Construction in progress 1,845 278
---------- ----------
28,656 24,633
Accumulated depreciation and amortization (14,729) (11,934)
---------- ----------
$ 13,927 $ 12,699
========== ==========
64
7. OTHER ASSETS
Major classifications of other assets at December 31 were as follows (in
thousands):
2004 2003
--------- ---------
Deferred taxes $ 4,121 $ 3,549
Prepaid expenses 1,587 1,483
Other 2,660 2,334
--------- ---------
Total $ 8,368 $ 7,366
========= =========
8. DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $49,728,000 and $51,448,000 at December 31, 2004 and
2003. Interest expense incurred on such time certificates of deposit was
$835,000, $1,029,000 and $1,335,000 for the years ended December 31, 2004,
2003 and 2002. At December 31, 2004, the scheduled maturities of all time
deposits was as follows (in thousands):
Years Amount
2005 $ 140,933
2006 14,993
2007 1,161
2008 606
---------
$ 157,693
=========
9. LINES OF CREDIT
At December 31, 2004, the Company had the following lines of credit with
correspondent banks to purchase federal funds (in thousands):
Type Amount Expiration
Unsecured $ 10,000 Annually
Unsecured 10,000 7/31/2005
Unsecured 3,000 6/30/2005
Unsecured 3,000 Annually
Secured:
First deeds of trust on eligible
1- 4 unit residential loans 48,885 Monthly
First deeds of trust on eligible
commercial real estate loans 3,128 Monthly
Securities Backed Credit Program 48,471 Monthly
65
10. BORROWING ARRANGEMENTS
Other borrowed funds include FHLB advances and an FRB loan. These borrowed
funds are generally required to be repaid within 30 days from the
transaction date. The following table summarizes these borrowings at
December 31 (in thousands):
2004 2003
--------- ---------
Short-term borrowings:
FHLB advances $ 20,094 $ 7,500
FRB loan 259
--------- ---------
Total short-term borrowings $ 20,094 $ 7,759
========= =========
Long-term borrowings:
FHLB advances $ 37,500 $ 1,700
--------- ---------
Total long-term borrowings $ 37,500 $ 1,700
========= =========
Total borrowed funds $ 57,594 $ 9,459
========= =========
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 $20,094 $37,500
Maturity 2005 2006-2008
Average Rate 2.18% 2.76%
11. SUBORDINATED DEBENTURES
The Company formed North Valley Capital Trust I, North Valley Capital Trust
II and North Valley Capital Trust III (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 and
holding solely subordinated debentures of the Company. The trusts were
formed by the Company with capital of $310,000, $186,000 and $155,000,
respectively.
During the third quarter of 2001, North Valley Capital Trust I issued
10,000 Trust Preferred Securities with a liquidation value of $1,000 per
security for gross proceeds of $10,000,000. Capital of the trust and the
entire proceeds of the issuance were invested by North Valley Capital Trust
I in $10,310,000 aggregate principal amount of 10.25% subordinated
debentures due in 2031 (the Subordinated Debentures) issued by the Company.
The Subordinated Debenture 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.
66
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 second quarter of 2003, North Valley Capital Trust II issued
6,000 Trust Preferred Securities with a liquidation value of $1,000 per
security for gross proceeds of $6,000,000. Capital of the trust and the
entire proceeds of the issuance were invested by North Valley Capital Trust
II in $6,186,000 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 in 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.
During the second quarter of 2004, the Company, through its newly formed
subsidiary, North Valley Capital Trust III, issued 5,000 Trust Preferred
Securities with a liquidation value of $1,000 per security for gross
proceeds of $5,000,000. Capital of the trust and the entire proceeds of the
issuance were invested by North Valley Capital Trust III in $5,155,000
aggregate principal amount of 3.97% subordinated debentures due in 2034
(the Subordinated Debentures III) issued by the Company. The Subordinated
Debentures III mature in 2034, float with LIBOR and bear a current interest
rate of 5.49%, payable quarterly, and are redeemable by the Company at par
beginning on or after May 5, 2009, plus any accrued and unpaid interest to
the redemption date.
Holders of the Trust Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 3.97% 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
III. 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 III, the Indenture Agreement pursuant to which the
Subordinated Debentures III 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 $556,000 and
$489,000 at December 31, 2004 and 2003, respectively. Amortization of the
deferred costs was $52,000, $15,000 and $11,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
67
12. INCOME TAXES
The provision for income taxes for the years ended December 31, was as
follows (in thousands):
2004 2003 2002
--------- --------- ---------
Current:
Federal $ 3,412 $ 2,279 $ 4,022
State 322 760 1,139
--------- --------- ---------
Total 3,734 3,039 5,161
--------- --------- ---------
Deferred tax (benefit):
Federal (299) 344 (881)
State 143 222 (444)
--------- --------- ---------
Total (156) 566 (1,325)
--------- --------- ---------
Total provision for income taxes $ 3,578 $ 3,605 $ 3,836
========= ========= =========
The effective federal tax rate for the years ended December 31, differs
from the statutory tax rate as follows:
2004 2003 2002
--------- --------- ---------
Federal income tax at statutory rates 35.0% 35.0% 35.0%
State income taxes net of federal
income tax benefit 4.7% 5.4% 4.0%
Tax exempt income (8.5%) (7.6%) (7.1%)
Other (1.3%) (1.7%) .3%
--------- --------- ---------
29.9% 31.1% 32.2%
========= ========= =========
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):
2004 2003
--------- ---------
Deferred tax assets:
Allowance for loan losses $ 3,309 $ 2,595
Accrued pension obligation 1,087 955
Deferred compensation 1,105 1,118
Deferred loan fees and costs 342
Discount on acquired loans 320
Unrealized loss on available for sale securities 648 142
Stock-based compensation 323 246
--------- ---------
Total deferred tax assets 7,134 5,056
--------- ---------
Deferred tax liabilities:
Tax depreciation in excess of book depreciation 941 536
Unrealized gain on available for sale securities
FHLB stock dividend 182 322
Originated mortgage servicing rights 306 339
Mark to market adjustment 826 147
California franchise tax 86 134
Core deposit intangibles 496
Other 176 29
--------- ---------
Total deferred tax liabilities 3,013 1,507
--------- ---------
Net deferred tax asset $ 4,121 $ 3,549
========= =========
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.
68
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, 2004, 2003
and 2002 of $192,000, $192,000 and $104,000. At December 31, 2004, the ESOP
owned approximately 227,540 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,
2004, 2003 and 2002 of $97,000, $77,000 and $74,000, 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 $2,305,000 and $2,118,000 as of December 31,
2004 and 2003, respectively, is included in accrued interest payable and
other liabilities.
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 holds policies with cash surrender values of
$27,541,000 and $24,863,000 at December 31, 2004 and 2003, respectively.
The accrued pension obligation of $2,758,000 and $2,517,000 as of December
31, 2004 and 2003, 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):
2004 2003
---------- ----------
Change in projected benefit obligation
--------------------------------------
Projected benefit obligation at beginning of year $ (2,587) $ (2,290)
Service cost (235) (197)
Interest cost (173) (164)
Actuarial loss (139) (153)
Benefits paid 218 217
---------- ----------
Projected benefit obligation at end of year $ (2,916) $ (2,587)
========== ==========
Change in plan assets
---------------------
Fair value of plan assets at beginning of year
Employer contribution $ 218 $ 217
Benefits paid (218) (217)
---------- ----------
Fair value of plan assets at end of year $ $
========== ==========
Funding
-------
Unfunded status $ (2,916) $ (2,587)
Unrecognized actuarial gain (104) (248)
Unrecognized prior service cost 237 268
Unrecognized net transition obligation 25 50
---------- ----------
Net amount recognized (accrued pension cost) $ (2,758) $ (2,517)
========== ==========
69
Assumptions used in computing the unfunded status and net periodic benefit
costs were:
Discount rate 6.50% 7.00%
Expected return on assets N/A N/A
Rate of compensation increase (supplemental executive
retirement plan only) 8.00% 8.00%
2004 2003 2002
--------- --------- ---------
Components of net periodic benefits cost
Service cost $ 235 $ 197 $ 184
Interest cost 173 164 154
Amortization of net obligation at transition 25 25 25
Prior service amortization 31 31 31
Recognized net actuarial gain (10) (11)
--------- --------- ---------
Net periodic benefit cost $ 464 $ 407 $ 383
========= ========= =========
70
14. STOCK-BASED COMPENSATION
During 2004, 2003 and 2002, each director was awarded 900 shares of common
stock, resulting in an additional 6,300, 8,100 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, 2004, 986,581
shares of the Company's common stock are available for future grants to
directors and employees of the Company. Under the Director Plan, options
may not be granted at a price less than 85% of fair market value at the
date of the grant. Under the Employee Plan, options may not be granted at a
price less than the fair market value at the date of the grant. Under all
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, 2002 937,863 7.40
(604,412 exercisable at weighted average price of $7.24)
Granted 139,019 9.49
Exercised (61,110) 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 65,100 13.06
Exercised (66,583) 7.34
Expired or canceled (15,839) 7.46
------------ ------------
Outstanding, December 31, 2003 997,976 $ 8.28
(797,202 exercisable at weighted average price of $7.80)
Granted 55,652 15.85
Options assumed in merger 114,759 5.96
Exercised (76,814) 6.98
Expired or canceled (33,825) 7.24
------------ ------------
Outstanding, December 31, 2004 1,057,748 $ 8.55
============ ============
(890,283 exercisable at weighted average price of $7.92)
Information about stock options outstanding at December 31, 2004 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
$ 4.06-5.63 30,366 1 $ 4.58 30,366 $ 4.27
$ 6.09 6,000 2 $ 6.09 6,000 $ 6.09
$ 5.36-10.63 150,233 3 $ 8.27 150,233 $ 8.27
$ 6.59-8.58 383,265 4 $ 7.36 383,265 $ 7.36
$ 5.36-7.24 26,160 5 $ 5.73 26,160 $ 5.73
$ 5.36-8.92 161,247 6 $ 7.85 129,537 $ 7.68
$ 6.70-10.24 180,450 7 $ 10.09 128,052 $ 10.12
$ 13.06 64,375 8 $ 13.06 25,540 $ 13.06
$ 15.72-16.20 55,652 9 $ 15.85 11,130 $ 15.85
71
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):
2004 2003 2002
------ ------ ------
Calculation of Basic Earnings Per Share
Numerator - net income $8,379 $7,971 $8,064
Denominator - weighted average common shares outstanding 6,780 6,715 7,041
------ ------ ------
Basic earnings per share $ 1.24 $ 1.19 $ 1.15
====== ====== ======
Calculation of Diluted Earnings Per Share
Numerator - net income $8,379 $7,971 $8,064
Denominator:
Weighted average common shares outstanding 6,780 6,715 7,041
Dilutive effect of outstanding options 384 364 204
------ ------ ------
Weighted average common shares outstanding -
Diluted and common stock equivalents 7,164 7,079 7,245
------ ------ ------
Diluted earnings per share $ 1.17 $ 1.13 $ 1.11
====== ====== ======
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, 2004, 2003 and
2002 was $968,000, $627,000 and $577,000.
The following schedule represents the Company's noncancelable future
minimum scheduled lease payments at December 31, 2004 (in thousands):
2005 $ 1,113
2006 1,127
2007 1,106
2008 839
2009 476
thereafter 590
---------
Total $ 5,251
=========
72
The Company was contingently liable under letters of credit issued on
behalf of its customers in the amount of $4,933,000 and $4,819,000 at
December 31, 2004 and 2003. At December 31, 2004, commercial and consumer
lines of credit, and real estate loans of approximately $46,199,000 and
$121,471,000 were undisbursed. 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.
Loan commitments are typically contingent upon the borrower meeting certain
financial and other covenants and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments
are expected to expire without being drawn upon, the total commitments do
not necessarily represent future cash requirements. The Company evaluates
each potential borrower and the necessary collateral on an individual
basis. Collateral varies, but may include real property, bank deposits,
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.
Loan commitments and standby letters of credit 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, 2004 and 2003, 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 75% and 68% of the Company's loan
portfolio at December 31, 2004 and 2003, 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, 2004 and 2003, 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, 2004 and 2003 is as
follows (in thousands; renewals are not reflected as either new loans or
repayments):
2004 2003
--------- ---------
Beginning balance $ 3,817 $ 3,563
Borrowings 3,713 2,223
Repayments (2,210) (1,969)
--------- ---------
Ending balance $ 5,320 $ 3,817
========= =========
73
18. REGULATORY MATTERS
The Company, NVB, YCB and, prior to January 1, 2004, 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
YCB must meet specific capital guidelines that involve quantitative
measures of the Company's, NVB's and YSB's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company's, NVB's and YCB's capital amounts and NVB's and
YCB'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 YCB 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, 2004, that the Company, NVB and YCB meet all capital adequacy
requirements to which they are subject.
The most recent notifications from the Federal Deposit Insurance
Corporation for NVB and YCB as of December 31, 2004 categorized NVB and YCB
as well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized NVB and YCB 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 YCB's category.
74
The Company's, NVB's, YCB's and SRB's actual capital amounts (in thousands)
and ratios are also presented, respectively, in the following tables. YCB's
actual capital amounts and ratios are only presented at December 31, 2004
following its acquisition by the Company. SRB's actual capital amounts and
ratios are only presented at December 31, 2003 because of its combination
with NVB on January 1, 2004.
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, 2004:
Total capital
(to risk weighted assets) $ 74,859 11.73% $ 51,036 8.00% N/A N/A
Tier 1 capital
(to risk weighted assets) $ 67,642 10.60% $ 25,518 4.00% N/A N/A
Tier 1 capital
(to average assets) $ 67,642 7.89% $ 34,274 4.00% N/A N/A
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
North Valley Bank
As of December 31, 2004:
Total capital
(to risk weighted assets) $ 62,201 11.59% $ 42,942 8.00% $ 53,678 10.00%
Tier 1 capital
(to risk weighted assets) $ 56,074 10.45% $ 21,471 4.00% $ 32,207 6.00%
Tier 1 capital
(to average assets) $ 56,074 7.49% $ 29,953 4.00% $ 37,442 5.00%
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%
Yolo Community Bank
As of December 31, 2004:
Total capital
(to risk weighted assets) $ 10,521 10.38% $ 8,108 8.00% $ 10,134 10.00%
Tier 1 capital
(to risk weighted assets) $ 9,431 9.31% $ 4,054 4.00% $ 6,081 6.00%
Tier 1 capital
(to average assets) $ 9,431 8.73% $ 4,321 4.00% $ 5,401 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%
75
Under federal and California state banking laws, dividends paid by NVB and
YCB 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, 2004, the amount not restricted for payment of
dividends without prior written approval was approximately $6,893,000.
76
19. OTHER NONINTEREST EXPENSES
The major classifications of other noninterest expenses for the years ended
December 31 were as follows (in thousands):
2004 2003 2002
--------- --------- ---------
Professional services $ 1,002 $ 952 $ 886
ATM and on-line banking expense 718 1,007 906
Printing, supplies and postage 569 1,021 1,175
Marketing expense 726 946 1,058
Operations expense 778 729 571
Loan expense 544 828 741
Amortization of intangibles 541 501 525
Other 4,874 3,440 2,959
--------- --------- ---------
$ 9,752 $ 9,424 $ 8,821
========= ========= =========
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, 2004; 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, 2004 and 2003 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) Investment 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 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.
77
(e) Cash Surrender Value of Life Insurance - The carrying amount
represents a reasonable estimate of fair value.
(f) Deposits - 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.
2004 2003
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
FINANCIAL ASSETS
Cash and cash equivalents $ 24,215 $ 24,215 $ 59,523 $ 59,523
FHLB, FRB and other securities $ 4,826 $ 4,826 $ 2,991 $ 2,991
Interest bearing deposits in other
financial institutions $ 500 $ 500 $ 123 $ 123
Securities:
Available for sale $ 218,961 $ 218,961 $ 191,045 $ 191,045
Held to maturity $ 133 $ 131 $ 1,455 $ 1,831
Loans and leases $ 546,128 $ 546,850 $ 372,660 $ 370,544
Cash surrender value of life
Insurance $ 27,541 $ 27,541 $ 24,863 $ 24,863
FINANCIAL LIABILITIES
Deposits $ 711,654 $ 711,295 $ 598,314 $ 599,011
Other borrowed funds $ 57,954 $ 57,108 $ 9,459 $ 9,565
Subordinated debentures $ 21,651 $ 24,321 $ 16,496 $ 16,801
78
21. PARENT COMPANY ONLY - CONDENSED FINANCIAL INFORMATION
The condensed financial statements of North Valley Bancorp are presented
below (in thousands):
CONDENSED BALANCE SHEET
DECEMBER 31, 2004 AND 2003
--------------------------------------------------------------------------------------
2004 2003
--------- ---------
ASSETS
Cash and cash equivalents $ 162 $ 527
Available for sale securities at fair value 96 59
Investments in subsidiaries 84,661 61,410
Investment in unconsolidated subsidiary grantor trusts 651 496
Other assets 2,993 2,845
--------- ---------
Total assets $ 88,563 $ 65,337
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividend payable $ $ 649
Subordinated debentures 21,651 16,496
Other liabilities 1,464 2,139
Stockholders' equity 65,448 46,053
--------- ---------
Total liabilities and stockholders' equity $ 88,563 $ 65,337
========= =========
CONDENSED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
-------------------------------------------------------------------------------------------------
2004 2003 2002
---------- ---------- ----------
INCOME:
Dividends from subsidiaries $ 12,600 $ 5,200 $ 3,400
Other income 7,501 8,685 8,019
---------- ---------- ----------
Total income 20,101 13,885 11,419
EXPENSE:
Interest on subordinated debentures 1,563 1,306 1,028
Salaries and employee benefits 6,259 5,657 5,307
Legal and accounting 801 952 677
Other 2,246 2,638 2,212
Merger and acquisition expense 38
Tax benefit (1,424) (766) (490)
---------- ---------- ----------
Total expense 9,483 9,787 8,734
---------- ---------- ----------
Income before equity in undistributed income
of subsidiaries 10,618 4,098 2,685
Equity in undistributed (loss) income of subsidiaries (2,239) 3,873 5,379
---------- ---------- ----------
Net income 8,379 7,971 8,064
Other comprehensive (loss) income, net of tax (724) (1,805) 900
---------- ---------- ----------
Total comprehensive income $ 7,655 $ 6,166 $ 8,964
========== ========== ==========
79
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
-----------------------------------------------------------------------------------------------------------
2004 2003 2002
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,379 $ 7,971 $ 8,064
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (loss) income of subsidiaries 2,239 (3,873) (5,379)
Stock-based compensation expense 126 241 378
Effect of changes in:
Other assets (162) (684) (445)
Other liabilities (1,144) 353 107
---------- ---------- ----------
Net cash provided by operating activities 9,438 4,008 2,725
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities (3,997) (18,700)
Proceeds from maturities of available for sale securities 3,997 18,700
Investment in and acquisition of subsidiary (12,553)
Investment in unconsolidated subsidiary grantor trusts (155) (186)
---------- ---------- ----------
Net cash used in investing activities (12,708) (186)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,771) (2,672) (2,151)
Proceeds from issuance of subordinated debentures 5,155 6,186
Repurchase of common shares (8,235) (1,055)
Stock options exercised 521 396 339
Cash paid for fractional shares (2)
---------- ---------- ----------
Net cash used in financing activities 2,905 (4,327) (2,867)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (365) (505) (142)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 527 1,032 1,174
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 162 $ 527 $ 1,032
========== ========== ==========
80
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).
2(c) Agreement and Plan of Merger, dated April 23, 2004, by and *
between North Valley Bancorp and Yolo Community Bank
(incorporated by reference from Exhibit 99.54 to the
Company's Current Report on Form 8-K filed with the
Commission on April 26, 2004).
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(c) to the
Company's Quarterly Report on Form 10-Q filed with the
Commission for the period ended June 30, 2004).
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 (North Valley Capital Trust I) 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 for North Valley Capital Trust I *
(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).
4(e) Amended and Restated Declaration of Trust (North Valley *
Capital Trust II) dated April 10, 2003 (incorporated by
reference from Exhibit 4(e) to the Company's Quarterly
Report on Form 10-Q filed with the Commission for the
period ended March 31, 2004).
4(f) Indenture (North Valley Capital Trust II) dated April 10, *
2003 (incorporated by reference from Exhibit 4(f) to the
Company's Quarterly Report on Form 10-Q filed with the
Commission for the period ended March 31, 2004).
4(g) Guarantee Agreement for North Valley Capital Trust II *
(North Valley Bancorp) dated April 10, 2003 (incorporated
by reference from Exhibit 4(g) to the Company's Quarterly
Report on Form 10-Q filed with the Commission for the
period ended March 31, 2004).
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).
81
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). **
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) North Valley Bancorp Employee Stock Ownership Plan,
amended and restated as of January 1, 1999.
10(g) First Amendment to North Valley Bancorp Employee Stock
Ownership Plan, dated October 24, 2002.
10(h) Second Amendment to North Valley Bancorp Employee Stock
Ownership Plan, dated November 17, 2003.
10(i) Third Amendment to North Valley Bancorp Employee Stock
Ownership Plan, effective September 1, 2004.
10(j) 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(k) 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(l) 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(m) 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(n) 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). **
82
10(o) 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(p) 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). **
10(q) 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(r) 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(s) 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(t) 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(u) 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(v) 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(w) 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(x) 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 10(aa)
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 Director Deferred Fee Agreement executed in *
December 2000 between Six Rivers National 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(z) 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(aa) 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).**
83
10(bb) 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(cc) 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(dd) 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(ee) 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(ff) Form of Executive Deferred Compensation Agreement executed *
in 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 (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(gg) Form of Executive Deferred Compensation Agreement executed *
in January 2002 between Six Rivers National Bank and
Russell Harris (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(hh) Form of Director Deferred Fee Agreement executed in *
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 W. Treadway and J.M.
Wells, Jr. (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(ii) Director Deferred Fee Agreement executed in 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 (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(jj) 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(kk) Form of Employment Agreement executed in March 2004 *
between North Valley Bancorp and Russell Harris
(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, 2003).**
10(ll) Form of Employment Agreement dated August 31, 2004 between *
North Valley Bancorp and Yolo Community Bank and John A.
DiMichele (incorporated by reference from Exhibit 99.71 to
the Company's Quarterly Report on Form 10-Q filed with the
Commission for the period ended September 30, 2004).**
10(mm) Executive Deferred Compensation Agreement dated December *
31, 2004 between North Valley Bancorp and John A.
DiMichele (incorporated by reference from Exhibit 10(nn)
to the Company's Current Report on Form 8-K filed with the
Commission on January 4, 2005).**
84
10(nn) Severance and Release Agreement (effective as of February *
4, 2005) between John A. DiMichele and North Valley
Bancorp and NVB Business Bank, formerly named Yolo
Community Bank (incorporated by reference from Exhibit
99.78 to the Company's Current Report on Form 8-K filed
with the Commission on March 9, 2005).**
10(oo) Executive Deferred Compensation Agreement dated December *
31, 2004 between North Valley Bancorp and Leo J. Graham
(incorporated by reference from Exhibit 10(oo) to the
Company's Current Report on Form 8-K filed with the
Commission on January 4, 2005).**
10(pp) Director Deferred Fee Agreement dated December 31, 2004 *
between North Valley Bancorp and Martin Mariani
(incorporated by refernce from Exhibit 10(pp) to the
Company's Current Report on Form 8-K filed with the
Commission on January 4, 2005).**
10(qq) Amendment No. 1 to Park Marina Lease, dated July 24, 2003, *
between The McConnell Foundation and North Valley Bancorp
(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, 2003).
10(rr) Cottonwood Branch sublease extension agreement dated *
August 7, 2003, between North Valley Bank and North State
Grocery, Inc. (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, 2003).
10(ss) Westwood Branch lease agreement dated December 1, 2003, *
between North Valley Bank and Daha Investments
(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, 2003).
10(tt) Lease Agreement for 618 Main Street, Woodland, California,
dated February 26, 2004, between Yolo Community Bank and
Thomas and Margaret Stallard.
10(uu) Lease Agreement for 626, 628 Main Street, 400 Second
Street, Woodland, California, dated February 26, 2004,
between Yolo Community Bank and Thomas and Margaret
Stallard.
10(vv) Lease for 100 B Street, Suite 110, Santa Rosa, California,
dated October 19, 2004, between North Valley Bank and
Sonja Valentina LLC.
10(ww) Lease for 375 North Sunrise Blvd., Suite 100, Roseville,
California, dated January 7, 2005, between Yolo Community
Bank and MW Investments.
10(xx) Office Building Lease for 101 North State Street, Suite A,
Ukiah, California, dated November 3, 2004, between North
Valley Bank and Southport Land & Commercial Company, Inc.
10(yy) Lease for 711 Jefferson Street, Suite A, Fairfield, California,
dated September 30, 2004, between Yolo Community Bank and JLC
Contracting, Inc.
10(zz) North Valley Bancorp 401(k) Plan, amended and restated
effective September 1, 2004.
14 North Valley Bancorp Corporate Governance Code of Ethics *
(incorporated by reference from Exhibit 14 to the
Company's Quarterly Report on Form 10-Q filed with the
Commission for the period ended March 31, 2004).
21 List of Subsidiaries.
23 Consent of Perry-Smith LLP
31 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
- -----------------------
* Previously filed.
** Indicates management contract or compensatory plan or arrangement.
85
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 16, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
/s/ MICHAEL J. CUSHMAN Director, President and March 16, 2005
- ----------------------- Chief Executive Officer
Michael J. Cushman (principal executive officer)
/s/ WILLIAM W. COX Director March 16, 2005
- ------------------
William W. Cox
/s/ ROYCE L. FRIESEN Director March 16, 2005
- -------------------
Royce L. Friesen
/s/ DAN W. GHIDINELLI Director March 16, 2005
- ---------------------
Dan W. Ghidinelli
/s/ THOMAS J. LUDDEN Director March 16, 2005
- --------------------
Thomas J. Ludden
/s/ KEVIN D. HARTWICK Director March 16, 2005
- ---------------------
Kevin D. Hartwick
/s/ DOLORES M. VELLUTINI Director March 16, 2005
- ------------------------
Dolores M. Vellutini
/s/ J. M. WELLS, JR. Director March 16, 2005
- --------------------
J. M. Wells, Jr.
/s/ ROGER B. KOHLMEIER Director March 16, 2005
- ----------------------
Roger B. Kohlmeier
/s/ MARTIN A. MARIANI Director March 16, 2005
- ---------------------
Martin A. Mariani
/s/ EDWARD J. CZAJKA Executive Vice President and March 16, 2005
- -------------------- Chief Financial Officer
Edward J. Czajka (principal financial officer)
/s/ SHARON L. BENSON Senior Vice President and March 16, 2005
- -------------------- Controller (principal
Sharon L. Benson accounting officer)
86