UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1 to
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 endedDecember 31, 2013
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________________ to ______________.
Commission file number0-10652
NORTH VALLEY BANCORP
NORTH VALLEY BANCORP |
(Exact name of registrant as specified in its charter)
California | 94-2751350 | |
(State or other jurisdiction | (IRS Employer | |
of incorporation or organization) | Identification No.) |
300 Park Marina Circle, Redding, California 96001
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code(530) 226-2900
Securities registered pursuant to Section 12(b) of the Act:
Title of class: | Name of each exchange on which registered: | |
Common Stock, no par value | The NASDAQ Global Select Stock Market |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yeso Nox
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. Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx Noo
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.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filero | Accelerated filerx | |||
Non-accelerated filero | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o Nox
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 $107,379,000 as of June 30, 2013.
The number of shares of common stock outstanding as of March 7,April 10, 2014, were 6,836,463.
DOCUMENTS INCORPORATED BY REFERENCEExplanatory Note
Portions of Registrant’s Definitive Proxy Statement forNorth Valley Bancorp (the “Company” or the 2014 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of“Corporation”) is filing this Amendment No. 1 on Form 10-K.
Table of Contents
Certain matters discussed or incorporated by reference in this10-K/A to its Annual Report on Form 10-K including, but not limitedfor the year ended December 31, 2013 to matters described ininclude Item 7, “Management’s Discussion10, Item 11, Item 12, Item 13, and AnalysisItem 14 of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of Section 21EPart III to Form 10-K. No change is being made to Part I or Part II of the Securities Exchange Act of 1934,Form 10-K, as amended, and Section 27A of the Securities Act of 1933, as amended, and subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,” “would,” and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) the duration of financial and economic volatility and actions taken by the United States Congress and governmental agencies, including the United States Department of the Treasury, to deal with challenges to the U.S. financial system; (2) variances in the actual versus projected growth in assets and return on assets; (3) loan losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company and its subsidiaries including State and local budget issues being addressed in California; (9) changes in the regulatory environment including government intervention in the U.S. financial system; (10) changes in business conditions and inflation; (11) changes in securities markets, public debt markets, and other capital markets; (12) data processing and other operational systems failures or fraud; (13) a further decline in real estate values in the Company’s operating market areas; (14) the effects of uncontrollable events such as terrorism, the threat of terrorism or the impact of the current military conflicts in Afghanistan and Iraq and the conduct of the war on terrorism by the United States and its allies, worsening financial and economic conditions, natural disasters, and disruption of power supplies and communications; and (15) changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations, as well as other factors. The factors set forth under Item 1A, “Risk Factors”, in this report and other cautionary statements and information set forth in this report should be carefully considered and understood as being applicable to all related forward-looking statements contained in this report when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. Actual results and shareholder values in the future may differ significantly from those expressed in forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of the report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, or to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.
General
North Valley Bancorp (the “Company”) is a bank holding company registered with and subject to regulation and supervision by the Board of Governors of the Federal Reserve System (“FRB” or the “Board of Governors”). The Company was incorporated in 1980 in the State of California. The Company owns 100% of its principal subsidiaries, North Valley Bank (“NVB” or the “Bank”), North Valley Trading Company (“Trading Company”), which is inactive, North Valley Capital Trust II, North Valley Capital Trust III, and North Valley Capital Statutory Trust IV.The Company acquired Six Rivers National Bank (based in Eureka, California) in 2000, and Yolo Community Bank (based in Woodland, California) in 2004. Over time, the former branches and operations of Six Rivers National Bank and Yolo Community Bank were combined with the branches and operations of North Valley Bank and the information contained in this report reflects their combined results of operations.
At December 31, 2013 the Company had $917,764,000 in total assets, $509,244,000 in total loans and $787,849,000 in total deposits. 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.
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 Commissioner of the California Department of Business Oversight (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, 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 Board of Governors of the Federal Reserve System (the “Board of Governors”) and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount which is $250,000 per separately insured depositor. FDIC-insured deposits are our primary source of funds. As part of our asset-liability management, we analyze the maturities and interest rates of our retail deposits in order to promote stability in our supply of funds, to the extent feasible under changing market conditions. For more deposit information, seeItem 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Balance Sheet Analysis – Deposits.”
NVB has signed agreements with Essex National Securities, Inc., a registered broker-dealer, (“ENSI”) whereby ENSI provides broker/dealer services and standardized investment advice to NVB customers. NVB shares in the fees and commissions paid to ENSI on a pre-determined schedule. Majority ownership of ENSI is held by Samson Investment Partners, Inc., a private investment firm headquartered in New York City, New York.
Recent Development – Proposed Merger with TriCo BancsharesMarch 12, 2014.
As announced by the Company on January 21, 2014 and reported inon the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 22, 2014 (the “Current Report”), the Company has entered into an Agreement and Plan of Merger and Reorganization dated January 21, 2014 (the “Merger Agreement”), pursuant to which the Company wouldwill merge with and into TriCo Bancshares, a California corporation (“TriCo”), with TriCo being the surviving corporation. Immediately thereafter, the Company’s subsidiary bank, North Valley Bank, would be merged with and into TriCo’s subsidiary bank, Tri Counties Bank. Under the termsA copy of the Merger Agreement (together with certain other information regarding the Company shareholders would receive a fixed exchange ratio of 0.9433 shares of TriCo common stock for each share of Company common stock, providingproposed merger) is provided in the Company shareholders with aggregate ownership on a pro forma basis of approximately 28.6% of the common stock of the combined company. Holders of the Company’s outstanding in-the-money stock options would receive cash, net of applicable taxes withheld, for the value of their unexercised stock options.Current Report. The mergertransaction is expected to qualify as a tax-free exchange for shareholders who receive shares of TriCo common stock. The transactions contemplated by the Merger Agreement are expected to close in the second or third quarter of 2014, pending approvals of the merger by the shareholders of the Company shareholders and the TriCo, shareholders, the receipt of all necessary regulatory approvals, and the satisfaction of other closing conditions which are customary for such transactions. For additional information, reference should be made to the text
As a result of the Merger Agreement, and Planthe Board of Merger and Reorganization, filed as an exhibitDirectors of the Company has decided to postpone its 2014 Annual Meeting of Shareholders. As described in the Current Report, TriCo will file its registration statement on Form S-4 with the SEC containing the joint proxy statement and to other information regarding TriCo andprospectus which the Company and TriCo intend to send to their respective businessesshareholders, seeking shareholder approvals to consummate the transaction. Thus, rather than incorporating portions of the Company’s definitive proxy statement for the 2014 Annual Meeting of Shareholders in Part III of its Annual Report on Form 10-K for the year ended December 31, 2013, the Company is filing this Amendment No. 1 to Form 10-K to include Items 10, 11, 12, 13, and the status of their proposed merger, as reported from time to time in other filings with the Securities and Exchange Commission.14.
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PART III
Markets We ServeITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Listed below are the Directors and Executive Officers of the Company.
Certain information with respect to the nine (9) Directors of the Company is provided below:
Michael J. Cushman (age 59), has been a Director of the Company since February 1999, and is President and Chief Executive Officer of the Company and its subsidiary, North Valley Bank. Mr. Cushman served as Senior Vice President and Chief Business Banking Officer of North Valley Bank from March 1998 to February 1999. From March 1995 through March 1998, he was a self-employed investor. From November of 1994 through March of 1995, Mr. Cushman served as Vice President of Tri-Counties Bank, which acquired Country National Bank in November of 1994 where Mr. Cushman had served as President and Chief Executive Officer since September of 1992.
Dante W. Ghidinelli (age 66), has been a Director of the Company since 1993. He is a Certified Public Accountant. Mr. Ghidinelli was a partner in Nystrom & Company since 1974. In 2012 Nystrom & Company, LLP merged with Matson & Isom. Mr. Ghidinelli retired as a partner from that firm in 2012.
Kevin D. Hartwick (age 52), was a Director of Six Rivers National Bank and became a Director of the Company in October 2000, when North Valley Bank acquired Six Rivers National Bank. Mr. Hartwick has been a Certified Public Accountant and managing partner with Cholwell Benz & Hartwick in Crescent City, California since 1989.
Patrick W. Kilkenny (age 67), has been a Director of the Company since 2011. Formerly, he was the Chairman, President and Chief Executive Officer of the National Bank of the Redwoods and President and Chief Executive Officer of Redwood Empire Bancorp, its holding company. He is currently self-employed as a business consultant in business finance, banking, and capital markets. Mr. Kilkenny received a Bachelor Science of Commerce – Finance from Santa Clara University in 1969, and a Juris Doctorate from Empire College School of Law.
Roger B. Kohlmeier (age 74), was a Director of Yolo Community Bank and became a Director of the Company in August 2004, when North Valley Bank acquired Yolo Community Bank. He was the founding President and Chief Executive Officer of Bank of Woodland which changed its name to Business & Professional Bank, at which time he retired but continued as Director until its sale to U.S. Bank of California in 1997. He is a graduate of California Polytechnic University of San Luis Obispo and is actively involved with the Economic Development Council and Woodland Health Care.
Timothy R. Magill (age 64), has been a Director of the Company since 2011. He was a founding Director of Yolo Community Bank with its main office in Woodland, California. In 2004, Yolo Community Bank was acquired and operated as a subsidiary of the Company and Mr. Magill continued as a Director of the subsidiary bank, which did business as Yolo Community Bank, and subsequently as North Valley Business Bank, and in 2006 was merged into North Valley Bank. Prior to that, Mr. Magill was a Director of Bank of Woodland. Mr. Magill holds an MBA degree from California State University at Sacramento. Since 1987, Mr. Magill has worked in various capacities, including General Manager, Division President, District Manager, and Marketing and Planning Development Manager for Waste Management, Inc. Mr. Magill retired from Waste Management, Inc. in 2012 and remains an outside consultant to that firm.
Martin A. Mariani (age 57), was a Director of Yolo Community Bank and became a Director of the Company in August 2004, when North Valley Bank acquired Yolo Community Bank. He is a partner in Mariani Nut Company of Winters, California. He graduated from the University of California, Davis in 1978.
Dolores M. Vellutini (age 76), was a Director of Six Rivers National Bank and became a Director of the Company in October 2000, when North Valley Bank acquired Six Rivers National Bank. She is a developer and the owner of Vellutini Properties in Eureka, California.
J. M. (“Mike”) Wells, Jr. (age 73), is Chairman and a founding member of the Board of Directors of the Company. Mr. Wells was formerly a member of the law firm of Wells, Small, Selke & Graham, a Law Corporation, located in Redding, California. Mr. Wells practiced law with that firm starting in 1972 and retired in 2004. Mr. Wells received a Bachelor of Arts in Economics from Stanford University and a Juris Doctorate from Hastings College of the Law.
Certain information with respect to the current Executive Officers of the Company and North Valley Bank (other than Michael J. Cushman, listed above as a Director) is provided below:
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Kevin R. Watson (age 48), has served as Executive Vice President and Chief Financial Officer of the Company and its subsidiary since March 2006. Prior to that, he served as Chief Financial Officer at Calnet Business Bank in Sacramento from January 2004 to March 2006. Prior to Calnet Business Bank, his experience includes serving as the Chief Financial Officer of California Independent Bancorp and Feather River State Bank from April 2001 to January 2004.
Scott R. Louis (age 64), has served as Executive Vice President and Chief Operations Officer of the Company and its subsidiary since October 2005. Prior to that, he served as Senior Vice President and Chief Operating Officer since joining the Company in April 2005. Prior to joining the Company, Mr. Louis served as First Vice President at Farmers and Merchants Bank in Lodi, California. Mr. Louis began his financial services career with Bank of America in 1971.
Roger D. Nash (age 66), has served as Executive Vice President and Chief Credit Officer of the Company and its subsidiary since September 2006. Prior to that, he served as Chief Lending Officer of the Company and its subsidiary since joining the Company in October 2005. Prior to that, he served 35 years at Bank of America, most recently as Senior Vice President/Senior Client Manager in Visalia, California. While at Bank of America, he also served as Senior Vice President/Credit Risk Manager and as Senior Vice President in Business Lending.
Gary S. Litzsinger(age 58), has served as Executive Vice President and Chief Risk Officer of the Company and its subsidiary since October 2005. Prior to that, he served as Senior Vice President and Chief Risk Officer since joining the Company in July, 2004. Prior to joining the Company, Mr. Litzsinger served as Director of Audit and Risk Management for Humboldt Bancorp and Audit Manager for California Federal Savings Bank in Sacramento. He began his audit career in 1990 and obtained his California CPA license in 1994.
Leo J. Graham(age 63), has served as Corporate Secretary and General Counsel of the Company and its subsidiary since January 2004. Mr. Graham was formerly a member of the law firm of Wells, Small, Selke & Graham, a Law Corporation, located in Redding, California. Mr. Graham practiced law with that firm starting in 1978. Mr. Graham received a Bachelor of Arts in Political Science from the University of California, Berkeley and a Juris Doctor from the University of Santa Clara School of Law.
None of the directors were selected pursuant to any arrangement or understanding other than with the directors and executive officers of the Company acting within their capacities as such. There are no family relationships among any two or more of the Company’s executive officers or directors.
No director or officer of the Company currently serves, or within the last five years has served, as a director of any public company, including any company which has a class of securities registered under, or which is subject to the periodic reporting requirements of, the Securities Exchange Act of 1934, or of any company registered as an investment company under the Investment Company Act of 1940. No director or officer of the Company was subject to any legal, judicial or administrative proceedings involving or based on violations of federal or state securities, commodities, banking or insurance laws and regulations or settlements thereof, involvement in mail or wire fraud or fraud in connection with any business entity, any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization, convictions in a criminal proceeding (excluding traffic violations and minor offenses) or had a petition under bankruptcy laws filed against themselves or an affiliate, in each case within the last ten years.
GOVERNANCE OF THE COMPANY
Code of Business Conduct and Ethics
The Bank’s head office is located at 300 Park Marina Circle, Redding, California 96001. AsBoard of December 31, 2013,Directors of North Valley Bancorp believes the Bank had branch offices in Shasta County (ten branches), Trinity County (two branches), Humboldt County (five branches), Del Norte County (one branch), Yolo County (one branch), Sonoma County (one branch), Placer County (one branch)cornerstones of our business are honesty, truthfulness, integrity and Mendocino County (one branch). The Company views its service area as having four distinct markets:ethics.
In keeping with this belief, the Board of Directors has adopted a Code of Business Conduct and Ethics, which applies to the Board of Directors and the officers and employees of the Company and North Valley Bank. The North Valley Bancorp Code of Business Conduct and Ethics is available through the Shareholders Relations link on the Company’s website at http://www.novb.com/shareholderrelations.aspx. A copy of the Code of Business Conduct and Ethics may be obtained without charge by submitting a request to the Corporate Secretary, P.O. Box 994630, Redding, CA 96099-4630.
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Risk Oversight
Risk management is the responsibility of management and risk oversight is the responsibility of the Board of Directors. The Board administers its risk oversight function principally through a division of responsibility within its committee structure, with each committee of the Board of Directors being responsible for overseeing risk within its area of responsibility. The responsibilities of the Board committees are discussed under each committee below. Some significant risk oversight matters are reported directly to the Board, including matters not falling within the area of the responsibility of any committee. Types of risks with the potential to adversely affect the Company include credit, interest rate, liquidity, and compliance risks, and risks relating to our operations and reputation. Management regularly provides the Board of Directors and its various committees with a significant amount of information regarding a wide variety of matters affecting the Company. Matters presented to the Board and Board committees generally include information with respect to risk, including input from Gary S. Litzsinger, Executive Vice President and Chief Risk Officer. The Board and its committees consider the risk aspects of such information and often request additional information with respect to issues that involve risks to the Company. The Board and its committees also raise risk issues on their own initiative.
Subordinated DebenturesReview of Risk Associated with Compensation Plans
The Company ownsdevelops and implements compensation plans that provide strategic direction to the common stockplan participants and engage them in the Company’s success, thereby contributing to shareholder value. The Board of three business trustsDirectors believes that have issued an aggregateits approach to goal setting, performance evaluation and discretion in the payout of $21.0 million in trust preferred securities fully and unconditionally guaranteed by the Company. The entire proceeds of each respective issuance of trust preferred securities were invested by the separate business trusts into junior subordinated debentures issued byincentives help to mitigate excessive risk-taking that could harm the Company or reward poor judgment by senior officers. The Company’s pay programs are designed to reward outstanding individual and team performance while mitigating risk-taking behavior that might affect financial results. The Compensation Committee met with identical maturity, repricingsenior officers, including the General Counsel and payment terms as the respective issuanceCorporate Secretary of trust preferred securities. The aggregate amount of junior subordinated debentures issued by the Company, is $21.7 million, withto review the maturity dates for2013 incentive compensation plans and concluded that, based on the respective debentures ranging from 2033 through 2036. Subjectcontrols described above and elsewhere in this Proxy Statement, that such plans do not present risks that are reasonably likely to regulatory approval,have a material adverse affect on the Company may redeem the respective junior subordinated debentures earlier than the maturity date, with certain of the debentures being redeemable beginning in April 2008, July 2009 and March 2011.Company.
On November 9, 2009,Committees of the Company elected to defer the paymentBoard of interest on these securities. The Company is allowed to defer the payment of interest for up to 20 consecutive quarterly periods without triggering an event of default. The obligation to pay interest is cumulative and continues to accrue. On May 29, 2012, the Company received approval from the Federal Reserve Bank of San Francisco and on May 9, 2012, the Company received approval from the California Department of Financial Institutions to pay all deferred interest on its junior subordinated notes underlying its trust preferred securities in the amount of $5,854,000 and to fully redeem its North Valley Capital Trust I notes in the amount of $10,310,000, bearing an interest rate of 10.25%. On July 23, 2012, the Company paid all deferred interest on its junior subordinated notes and on July 25, 2012, it redeemed, in full, the notes associated with North Valley Capital Trust I. Since then, the Company has continued to pay interest on the remaining notes when and as due. For more information about the trust preferred securities and the debentures and certain regulatory restrictions on the payment of interest, seeNotes 10 and16 to the Consolidated Financial Statements.
Supervision and RegulationDirectors
The common stockBoard of Directors of the Company is subject tohas established the registration requirementsfollowing committees of the SecuritiesBoard: Audit, Nominating, Compensation and Executive/Corporate Governance.
The current members of the Board and the Committees of the Board on which they serve are as follows:
Director | Audit Committee | Nominating Committee | Compensation Committee | Executive Committee | Governance Committee | |||||
Michael J. Cushman(2) | * | * | ||||||||
Dante W. Ghidinelli | ** | * | * | |||||||
Kevin D. Hartwick(1)(2) | * | |||||||||
Patrick W. Kilkenny(2) | * | |||||||||
Roger B. Kohlmeier | * | * | * | * | ||||||
Timothy R. Magill | * | * | ||||||||
Martin A. Mariani | ** | ** | ||||||||
Dolores M. Vellutini(2) | * | |||||||||
J. M. (“Mike”) Wells, Jr.(2)(3) | * | * | * | ** | ** |
* Member
** Chairman
(1) | Mr. Hartwick is the Chairman of the Director’s Loan Committee of North Valley Bank. |
(2) | These Directors serve on the Director’s Loan Committee of North Valley Bank. |
(3) | Mr. Wells as Chairman of the Board of Directors serves on all Board Committees. |
Audit Committee
The functions of the Audit Committee are more particularly described in the Audit Committee Charter, which can be found at http://www.novb.com. The Board of Directors has determined that Chairman Dante W. Ghidinelli and Director Kevin D. Hartwick each qualify as a result of their accounting backgrounds as an Audit Committee Financial Expert as defined under the Sarbanes-Oxley 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 current reports with the Securities and Exchange Commission.
NVB is licensed by the California Department of Business Oversight, and subject to the2002 (“SOX”), SEC rules and regulations and NASDAQ listing standards. The Audit Committee met seven (7) times in 2013. For more information, see the “Report of 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. Such supervision and regulation includes comprehensive reviews of all major aspects of the Bank’s business and condition, including its capital ratios, allowance for loan 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 Board of Governors and provide such additional information as the Commissioner and the Board of Governors may require.Audit Committee”on page 28.
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NVB was originally charteredNominating Committee
The Board of Directors has adopted a Nominating Committee Charter and appoints the members of the Nominating Committee. All of the members are “independent” within the requirements of SOX, SEC rules and regulations, and NASDAQ listing standards. The Nominating Committee held one (1) meeting in 2013. The functions of the Nominating Committee are more particularly described in the Nominating Committee Charter, which can be found at http://www.novb.com.
The Nominating Committee Charter includes a policy for consideration of candidates proposed by shareholders. Any recommendations by shareholders will be evaluated by the California Department of Financial Institutions. On July 3, 2012,Nominating Committee in the California Legislature approvedsame manner as any other recommendation and adopted a reorganization plan proposed by Governor Jerry Brown to restructure the California governmentin each case in accordance with the goal of achieving a more efficient, streamlined and cost-effective state government. As partNominating Committee Charter. Shareholders that desire to recommend candidates for consideration by the Nominating Committee should mail or deliver written recommendations to the Nominating Committee addressed as follows: North Valley Bancorp Nominating Committee, P.O. Box 994630, Redding, CA 96099-4630. Each recommendation should include the experience of the reorganization plan,candidate that qualifies the Departmentcandidate for consideration as a potential director for evaluation by the Nominating Committee. Shareholders who wish to nominate a candidate for election to the Company’s Board of Financial Institutions (“DFI”)Directors, as opposed to recommending a potential nominee for consideration by the Nominating Committee, are required to comply with the advance notice and the Department of Corporations (“DOC”) were merged into a newly created California Department of Business Oversight (“DBO”) with a single commissioner in chargeany other requirements of the DBO. Effective July 1, 2013,Company’s Bylaws, applicable laws and regulations.
Compensation Committee
The Board of Directors has formed a Compensation Committee and appoints the former DFImembers of the Compensation Committee, comprised solely of independent Directors. This Committee reviews and DOC becamerecommends to the DivisionBoard of Financial InstitutionsDirectors the salaries, performance-based incentives, both annual and long term, and other matters relating to compensation of the DivisionExecutive Officers.
The Compensation Committee also reviews and approves various other compensation policies and matters. The Compensation Committee held two (2) meetings in 2013. For more information, see the “Report of Corporations, respectively, under the DBO. It is uncertain what effect this reorganization may have uponCompensation Committee” onpage 18. The functions of the regulation of NVBCompensation Committee are more particularly described in the future.Compensation Committee Charter, which can be found at http://www.novb.com.
Executive/Corporate Governance Committee
The Company is a bank holding company withinhas an Executive/Corporate Governance Committee which functions to review, evaluate and make decisions on actions that are required between 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 supervisionregular meetings of the Board of Governors.Directors. In addition, this Committee functions to review and recommend to the Board of Directors principles, policies and procedures affecting the Board of Directors and its operation and effectiveness. The Company is required to obtainCommittee further oversees the approvalevaluation of the Board of Governors before it may acquire all or substantially allDirectors and its effectiveness. The Committee did not meet in 2013.
Meetings of the assetsBoard of any bank, or ownership or controlDirectors
During 2013, the Board of Directors held four (4) regularly scheduled meetings and 14 special meetings and each Director attended at least 75% 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%aggregate of the voting sharestotal number of such bank. The Bank Holding Company Act prohibits the Company from acquiring any voting shares of, or interest in, all or substantially allmeetings of the assetsBoard of Directors (held during the period for which he or she was a bank located outsideDirector) and the Statetotal number of California unless such an acquisition is specifically authorized by the lawsmeetings of Committees of the state inBoard of Directors on which such bank is located. Any such interstate acquisition is also subject toDirector served (during the provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.periods that he or she served).
The Company andencourages the members of its subsidiary, NVB, are deemedBoard of Directors to be “affiliates” withinattend the meaningCompany’s annual meeting of that term as definedshareholders each year. All of the Directors, except one, attended the Company’s Annual Meeting of Shareholders held in the Federal Reserve Act. This means, for example, that there are limitations (a) on loans between affiliates, and (b) on investments by NVB in affiliates’ stock as collateral for loans to any borrower. The Company and its subsidiaries are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.2013.
Capital Adequacy. 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 designedShareholder Communications with Directors
A shareholder who wishes 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% of its assets and commitments to extend credit, weighted by risk, of which at least 4% 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 NVB are subject to regulations issued bycommunicate directly with the Board of GovernorsDirectors, a Committee of the Board or an individual Director should send correspondence to:
Board of Directors (or Committee Name or Director’s Name)
c/o Corporate Secretary
North Valley Bancorp
P.O. Box 994630
Redding, California 96099-4630
The Corporate Secretary has been instructed to forward such correspondence to the Board Committee or individual as addressed as soon as practicable. If it is marked “Personal and Confidential”, it will only be forwarded to the FDIC, which require maintenanceaddressee. The Board has instructed the Corporate Secretary, prior to forwarding any correspondence, to review such correspondence and, in his discretion, not to forward certain items if they are deemed 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 stockholders’ 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 loan 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 allfrivolous nature 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)otherwise inappropriate 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.Board’s consideration.
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AtSection 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s Directors and Executive Officers and persons who own more than 10% of a registered class of the Company’s equity securities to file with the Securities and Exchange Commission (the “SEC”) initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, Directors and greater than 10% shareholders are required by the SEC to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely on a review of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 2013, the Companyall Section 16(a) filing requirements applicable to its Officers, Directors and the Bank10% shareholders were in compliancecomplied with the risk-based capital and leverage ratios described above. SeeItem 8, “Financial Statements and Supplementary Data”, and Note 16 to the Consolidated Financial Statements incorporated by reference therein, foron a listing of the Company’s and the Bank’s risk-based capital ratios at December 31, 2013 and 2012.timely basis.
ITEM 11. EXECUTIVE COMPENSATION
FDICIA. The Board of Governors, the Comptroller of the Currency (“OCC”) and the FDIC have adopted regulations implementing a system of prompt corrective action for insured financial institutions pursuant to Section 38 of the Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). These 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 any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure; (2) “Adequately capitalized” - consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a “well capitalized” institution; (3) “Undercapitalized” - consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 4%; (4) “Significantly undercapitalized” - consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; and (5) “Critically undercapitalized” - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%. NVB is considered “well capitalized” under the framework for prompt corrective action.COMPENSATION DISCUSSION AND ANALYSIS
Introduction
The regulations established procedures for classificationBoard of financial institutions withinDirectors of North Valley Bancorp strives to ensure that its compensation programs are consistent with the capital categories, filingstrategic goals 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 oneobjectives of the three “undercapitalized” categories,Company and maintains the standards of good corporate governance.
Philosophy
All elements of the Company’s compensation program are designed to attract and retain key employees, motivating them to achieve and rewarding them for superior performance. Different programs are geared to short and longer-term performance with the goal of increasing shareholder value over the long term. Executive compensation programs impact all employees by setting general levels of compensation and helping to create an environment of goals, rewards and expectations. North Valley Bancorp believes the performance of every employee is important to its success and recognizes the importance of executive compensation and incentive programs to achieve improved performance.
North Valley Bancorp believes that the compensation of its executives should reflect their success as a management team, rather than individuals, in attaining key operating objectives, such as declarationgrowth of dividendsdeposits, loans, maintaining credit quality, growth of operating earnings and earnings per share and growth or other capital distributions or paymentmaintenance of management fees, if followingmarket share and long-term competitive advantage, and ultimately, in attaining an increased market price for its stock. North Valley Bancorp believes that the distribution or payment the institution would be classified within oneperformance of the “undercapitalized” categories. In addition, institutions which are classifiedexecutives in onemanaging the Company, considered in light of general economic and specific company, industry and competitive conditions, should be the basis for determining their overall compensation. North Valley Bancorp also believes that their compensation should not be based on the short-term performance of the three “undercapitalized” categories are subject to certain mandatory and discretionary supervisory actions. Mandatory supervisory actions include (1) increased monitoring and review byCompany stock, whether favorable or unfavorable, but rather that 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 approvalprice 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 activitiesCompany stock will, in the long-term, reflect its operating performance, and interest rates paid; (4) replacement of senior executive officers and directors; (5) restrictions upon activitiesultimately, the management of the institution andCompany by its affiliates; (6) requiring divestiture or saleexecutives. North Valley Bancorp seeks to have the long-term performance of the institution;Company stock reflected in executive compensation through stock option awards.
Compensation Committee Interlocks and (7) any other supervisory action thatInsider Participation
During the appropriate federal banking agency determines is necessary to further the purposesfiscal year 2013, Michael J. Cushman participated in deliberations of the regulations. Further, the federal banking agencies may not acceptCompany’s Board of Directors concerning Executive Officer compensation for all Executive Officers, excluding himself.
Overview of Compensation and Process
Elements of compensation for corporate executives include: salary, bonus, stock option awards, deferred compensation plans, salary continuation plan, health, disability and life insurance, and perquisites. Base salaries for Executive Officers are reviewed and considered for adjustment at 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 liabilitymeeting 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 depositsCompensation Committee usually held in the particular institution’s normal market areas or infirst quarter of each year. At this meeting, 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 isCompensation Committee also determined that some other course of action would better servereviews and recommends the purposes ofmanagement incentive plan for the regulations. Critically undercapitalized institutions are also prohibited from making (but not accruing) any payment of principal or interest on subordinated debt withoutfiscal year (the “Executive Discretionary Incentive Plan”) and recommends stock option awards for the prior approval of the FDICCompany’s Executive Officers 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.eligible employees.
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Under FDICIA,At the federal financial institution agencies have adopted regulations which require institutionsstart of each fiscal year, it has been the practice of the Compensation Committee to establishmeet and maintain comprehensive written real estate lending policies which address certain lending considerations, including loan-to-value limits, loan administrative policies, portfolio diversification standards,review the history of all the elements of each Executive Officer’s total compensation over previous years and documentation, approvalcompare the compensation of the Executive Officers with that of the executive officers in an appropriate market place and reporting requirements. FDICIAindustry comparison group. Typically, the Chief Executive Officer makes compensation recommendations to the Compensation Committee with respect to the Executive Officers who report to him. Such Executive Officers are not present at the time of these deliberations. The Chairman of the Board then makes compensation recommendations to the Compensation Committee with respect to the Chief Executive Officer, who is absent from that meeting. The Compensation Committee may accept or adjust such recommendations.
The Compensation Committee has the authority to directly engage outside consultants and in the fall of 2012, the Committee engaged EW Partners, Inc. to assist in evaluating the Company’s compensation practices and to provide advice concerning Director and Executive compensation. Specifically, the Compensation Committee asked EW Partners, Inc. to conduct a compensation review of the Independent Directors of the Company and the Bank and of the six named Executive Officers. As further generally prohibits an insured state bank from engagingdiscussed below, EW Partners, Inc.’s review consisted of a market data assessment and competitive review and analysis of base salary, incentive plans, and benefits/perquisites. EW Partners, Inc. reported directly to the Chairman of the Compensation Committee and, in the performance of its duties, EW Partners, Inc. interacted with the Chief Executive Officer, Chief Financial Officer, and Executive Officers as it deemed appropriate in order to gather information necessary for its evaluation. EW Partners, Inc. is not affiliated with North Valley Bancorp nor did it provide any other services for the Company in 2013.
North Valley Bancorp chooses to pay each element of compensation as a principal in any activity thatmeans to attract and retain the necessary executive talent, reward annual performance and provide incentive for their balanced focus on long-term strategic goals as well as short-term performance. The amount of each element of compensation is impermissibledetermined by or under the direction of the Compensation Committee, which uses the following factors to determine the amount of salary and other benefits to pay each Executive Officer:
● | Performance against corporate and individual objectives for the previous year; |
● | Value of their unique skills and capabilities to support long-term performance of the Company; |
● | Achievement of strategic objectives; |
● | Earnings per share; |
● | Deposits and/or loan growth; and |
● | Any of the above measures compared to peer or other companies. |
These elements fit into our overall compensation objectives by helping to secure the future potential of our operations, facilitating our strategic plan, providing proper compliance and regulatory compliance, and helping to create a cohesive team. Actual performance measures for a national bank, absentthe Executive Officers are set by the Compensation Committee. During 2013, an FDIC determination thatoutside benefits attorney was engaged by the activity would not pose a significant riskCompany to review non-qualified deferred compensation plans and to recommend changes to those plans to make them conform with IRS regulations and regulatory requirements and, further, to advise with regard to best practices concerning the structure and implementation of those plans.
At the Company’s annual meeting of shareholders held on May 31, 2013, the shareholders approved, on an advisory basis, the compensation paid to the Deposit Insurance Fund,Company’s executive officers. The favorable outcome of that “Say on Pay” proposal was taken into account by the Board of Directors and that the bank is,Compensation Committee in determining the Company’s annual compensation policies 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.
Effective January 1, 2015, the risk-based capital regulations and prompt corrective regulations, described above under “Capital Adequacy” and “FDICIA,” respectively, have been amended to the extent described below under “Basel III Capital.”decisions.
Basel III Capital. In July 2013, the federal bank regulatory agencies issued interim final rules that revise and replace the current risk-based capital requirements. These rules implement the “Basel III” regulatory capital reforms released by the Basel Committee on Banking Supervision and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Basel III reforms reflected in the final rules include an increase in the risk-based capital requirements and certain changes to capital components and the calculation of risk-weighted assets.EXECUTIVE COMPENSATION
Effective January 1, 2015, banking organizations likeAt the meeting held in December 2013, the Compensation Committee evaluated the performance of the Chief Executive Officer and the other members of the Executive Team. The Compensation Committee determined the Executive Team succeeded in meeting the strategic goals set for the Company during 2013. The Compensation Committee did a thorough review of the data prepared by outside consultants with regard to peer bank information. This market study conducted by the independent consultants, along with a study done by the California Bankers Association, which provided peer bank information as to both director compensation and executive compensation, was used by the Compensation Committee to determine whether the Executive Team’s base salary and total compensation was consistent with its peer group and current market factors. This information was used to award the Executive Officers incentives under the Executive Incentive Plan. Based on a review of the information provided to the Compensation Committee and because of the over-all improvement of the financial condition of the Company and NVB must comply with new minimum capital ratio requirementsthe Bank, the Compensation Committee recommended to the Board of Directors that incentive bonus payments be phasedawarded to the Executive Team in between January 1, 2015December 2013, as set forth in the “Summary Compensation Table” on page 10 and January 1, 2019, which would consistthe “Report of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.Compensation Committee” on page 18.
In addition, a “capital conservation buffer,” is established which when fully phased-in will require maintenanceAlso at the meeting held in December 2013, due to ongoing strategic planning discussions (which ultimately resulted in the Merger Agreement signed with TriCo on January 21, 2014), the Compensation Committee determined, after discussions with the Chief Executive Officer, the General Counsel, outside legal counsel and other consultants, to postpone indefinitely any adjustments to the base salaries of the executive officers and the grant of any stock options, pending the announcement of a minimumpossible business combination transaction and the impact, if any, the terms and conditions of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer would increase the minimum capital ratios to (i)such a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%,transaction might have on future director and (iii) a total capital ratio of 10.5%. The new buffer requirement would be phased in between January 2016 and January 2019. An institution would be subject to limitations or prohibition from paying dividends, engaging in share repurchases, discretionary payments under Tier 1 instruments, and paying discretionary bonuses if its capital ratio level fell below the buffer amount.
The federal bank regulatory agencies have also proposed changes to the prompt corrective action framework (described above under “FDICIA”) which is designed to place restrictions on insured depository institutions if their capital ratios begin to show signs of weakness. These changes will take effect January 1, 2015 and will require insured depository institutions to meet the following increased capital ratio requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
Assuming the Basel III interim final rules were in effect at December 31, 2013, and based upon the Company’s capital position at December 31, 2013, management believes that the Company and NVB would be in compliance with the minimum capital requirements,executive officer compensation decisions, including the fully phased-in capital conservation buffer requirement,award of the interim final rules.
Rating System. 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.stock options.
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CRA Compliance. 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.Base Salary
Regulatory Compliance.NVBIt is subjectthe goal of the Company’s Compensation Committee to periodic regulatory examinations inestablish salary compensation for its Executive Officers based on the ordinary course of business which are conducted byCompany’s operating performance relative to comparable peer companies over a three-year to five-year period. The Compensation Committee believes this provides an opportunity to attract and retain talented managerial employees, both at the Federal Reserve Bank of San Franciscosenior executive level and below. In January, 2013, the California Department of Business Oversight (“DBO”). A supervisory agreement signed in 2010 by and among North Valley Bancorp, NVB and the Federal Reserve Bank of San Francisco to address certain examination issues was terminated effective as of April 16, 2012. Resolutions adopted by the NVB Board of Directors, atacting upon the requestrecommendation of the DBO (formerlyCompensation Committee, approved base salary adjustments for the California DFI) for similar reasons were also terminatedExecutive Officers in 2012. Duringrecognition of the quarter ended September 30, 2013, in accordance withoverall improved performance of the terms of an agreement reached with the Federal ReserveCompany and Bank of San Francisco, NVB disbursed a total of $1,260,000 to certain affected parties, as agreed, to resolve criticisms raised in connection with a compliance examination conducted in 2010, and NVB remains in compliance with that agreement.
Dividends. The Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law. Funds“Report of the Compensation Committee” on page 18. As noted above, those base salaries remained in effect for paymentthe remainder of any cash dividends by the Company would be obtained from its investments as well as dividends from NVB. The ability of NVB2013 and will continue to pay cash dividends is subject to restrictions set forthremain unchanged and in the California Financial Code as well as restrictions established by the FDIC and the FRB. SeeItems 1A, “Risk Factors” and5, “Marketeffect for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” below for further information regarding the payment of cash dividends by the Company and NVB.2014.
Bonus
The Executive Discretionary Incentive Plan set annually by the Compensation Committee is designed to reward the Company’s Executives for the achievement of short-term financial goals, including increases in performance against peer banks, the achievement of short-term and long-term strategic goals, and overall financial performance of the Company. It is the Company’s general philosophy that management be rewarded for their performance as a team in the attainment of these goals, rather than individually. North Valley Bancorp believes that this is important to aligning our Executive Officers and promoting teamwork among them. Bonus percentages for Executive Officers were initially suggested by a compensation consultant based on an analysis of peer banks and industry sector considerations. Those basic percentages, which are discretionary with the Compensation Committee, have generally been followed in recent years. Those percentages are as follows: for Executive Officers other than the Chief Executive Officer, the range is 10% - 40% of base salary; and for the Chief Executive Officer, the range is 10% - 50% of base salary. Similarly, Executive Officers are eligible for discretionary incentive stock option awards based on the following percentages: for Executive Officers other than the Chief Executive Officer, the range is 0% - 5% of base salary as the number of options considered for award; and for the Chief Executive Officer, the range is 0% - 6% of base salary as the number of options considered for award.
Although each Executive Officer is eligible to receive a bonus award at the discretion of the Compensation Committee, the granting of the award as to any individual, officer or as a group, is first at the discretion of the Chief Executive Officer and then, based on his recommendation, at the discretion of the Compensation Committee and the entire Board of DirectorsDirectors. The Compensation Committee may choose whether to award a bonus and decides on the actual level of the Company decides whether to declare and pay dividendsaward in light of all relevant factors after considerationcompletion of the Company’s earnings, financial condition, future capital needs, regulatory requirements and other factors asapplicable fiscal year. At the meeting of the Board of Directors may deem relevant. The Company suspended indefinitely the payment of quarterly cash dividends on its common stock beginning in 2009. This Board decision was made to strengthen and preserve the Company’s capital base in these challenging economic times. The payment of cash dividends remains suspended at present and the payment of dividends in the future will be determined byDecember 2013, the Board of Directors after considerationawarded the Chief Executive Officer and the Executive Officers bonuses for the 2013 fiscal year effective immediately. The bonuses to the Chief Executive Officer and the Executive Officers for the 2013 fiscal year were awarded on the basis of the Company’soverall improved financial performance of the Company and the Bank, the meeting of strategic goals, including reduction in non-performing assets, overall improvement in credit quality, and improvements in quarter after quarter earnings financial condition, future capital funds, regulatory requirementsof the Company and other factors as the Board of Directors may deem relevant.Bank.
The Company relies upon distributions from NVB infollowing Summary Compensation Table sets forth the form of cash dividends in order to pay dividends to its shareholders. The Board of Governorscompensation of the Federal Reserve System generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure onPresident and Chief Executive Officer (Principal Executive Officer) and the capital of a subsidiary bank or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. The Federal Reserve Board policy is that a bank holding company should not pay cash dividends on its common stock unless its net income is sufficient to fully fund each dividendExecutive Vice President and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition.
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 SecretaryChief Financial Officer (Principal Financial Officer) of the Treasury. Title IIICompany and all of the Patriot Act entitled, “International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001” includes amendmentsother Executive Officers for services in all capacities provided 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 launderingCompany and terrorism financing activities through designated correspondent and private banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act prohibits any insured financial institution such as North Valley Bank from providing correspondent accounts to foreign banks which do not have a physical presence in any country (designated as “shell banks”), subject to certain exceptions for regulated affiliates of foreign banks. Section 313(a) also requires financial institutions to take reasonable steps to ensure that foreign bank correspondent accounts are not being used to indirectly provide banking services to foreign shell banks,during 2013, 2012, and Section 319(b) requires financial institutions to maintain records of the owners and agent for service of process of any such foreign banks with whom correspondent accounts have been established.
Effective July 23, 2002, Section 312 of the Patriot Act created a requirement for special due diligence for correspondent accounts and private banking accounts. Under Section 312, each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and record instances of money laundering through those accounts.2011:
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Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||||||||||
Name and Principal Position | Year | (1)($) | (2)($) | ($) | (3)($) | ($) | (4)($) | (5)($) | ($) | |||||||||||||||||||||||||||
Michael J. Cushman | 2013 | $ | 323,512 | $ | 139,000 | $ | — | $ | 150,571 | $ | — | $ | 352,256 | $ | 8,127 | $ | 973,466 | |||||||||||||||||||
President and Chief | 2012 | $ | 316,031 | $ | 134,313 | $ | — | $ | 57,334 | $ | — | $ | 251,821 | $ | 7,397 | $ | 766,896 | |||||||||||||||||||
Executive Officer | 2011 | $ | 300,982 | $ | 90,294 | $ | — | $ | 30,435 | $ | — | $ | 239,313 | $ | 5,827 | $ | 666,851 | |||||||||||||||||||
Kevin R. Watson | 2013 | $ | 212,580 | $ | 72,000 | $ | — | $ | 78,668 | $ | — | $ | 268,563 | $ | 16,984 | $ | 648,795 | |||||||||||||||||||
Executive Vice President | 2012 | $ | 206,388 | $ | 67,076 | $ | — | $ | 24,962 | $ | — | $ | 172,986 | $ | 15,544 | $ | 486,956 | |||||||||||||||||||
and Chief Financial Officer | 2011 | $ | 196,560 | $ | 68,787 | $ | — | $ | 30,435 | $ | — | $ | 146,276 | $ | 12,196 | $ | 454,254 | |||||||||||||||||||
Scott R. Louis | 2013 | $ | 174,879 | $ | 60,000 | $ | — | $ | 64,709 | $ | — | $ | 102,497 | $ | 12,301 | $ | 414,385 | |||||||||||||||||||
Executive Vice President | 2012 | $ | 169,785 | $ | 55,180 | $ | — | $ | 20,536 | $ | — | $ | 86,518 | $ | 10,876 | $ | 342,895 | |||||||||||||||||||
and Chief Operating Officer | 2011 | $ | 161,700 | $ | 56,595 | $ | — | $ | 30,435 | $ | — | $ | 74,776 | $ | 6,645 | $ | 330,151 | |||||||||||||||||||
Roger D. Nash | 2013 | $ | 174,879 | $ | 70,000 | $ | — | $ | 64,709 | $ | — | $ | 41,717 | $ | 10,150 | $ | 361,454 | |||||||||||||||||||
Executive Vice President | 2012 | $ | 169,785 | $ | 55,180 | $ | — | $ | 20,536 | $ | — | $ | 106,530 | $ | 10,420 | $ | 362,451 | |||||||||||||||||||
and Chief Credit Officer | 2011 | $ | 161,700 | $ | 56,595 | $ | — | $ | 30,435 | $ | — | $ | 93,761 | $ | 6,829 | $ | 349,320 | |||||||||||||||||||
Gary S. Litzsinger | 2013 | $ | 149,940 | $ | 55,000 | $ | — | $ | 53,360 | $ | — | $ | 52,381 | $ | 9,345 | $ | 320,027 | |||||||||||||||||||
Executive Vice President | 2012 | $ | 140,000 | $ | 45,500 | $ | — | $ | 15,240 | $ | — | $ | 42,874 | $ | 6,286 | $ | 249,900 | |||||||||||||||||||
and Chief Risk Officer | 2011 | $ | 120,000 | $ | 42,000 | $ | — | $ | 30,435 | $ | — | $ | 35,369 | $ | 2,253 | $ | 230,057 | |||||||||||||||||||
Leo J. Graham | 2013 | $ | 193,597 | $ | 70,000 | $ | — | $ | 71,636 | $ | — | $ | 255,119 | $ | 11,325 | $ | 601,677 | |||||||||||||||||||
General Counsel and | 2012 | $ | 187,958 | $ | 61,087 | $ | — | $ | 22,733 | $ | — | $ | 180,491 | $ | 10,367 | $ | 462,636 | |||||||||||||||||||
Corporate Secretary | 2011 | $ | 179,000 | $ | 62,664 | $ | — | $ | 30,435 | $ | — | $ | 173,996 | $ | 6,182 | $ | 452,277 |
(1) Base salary includes 401(k) Plan and Executive Deferred Compensation Plan (“EDCP”) contributions made by the named officers.
(2) These bonus amounts were paid in 2013 and 2012 attributable to 2013, 2012 and 2011 performance, respectively.
(3) The Patriot Act contains various provisionsamount reported in additionthis column is the dollar amount recognized for financial statement reporting purposes as the grant date fair value for 2013 in accordance with FAS ASC Topic 718. The assumptions used to Sections 313(a)calculate the grant date fair value are described in the footnotes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
(4) The amounts in this column represent the increase in the actuarial net present value of all future retirement benefits under the individual’s salary continuation plan and 312 that affect the operations of financial institutionsabove-market or preferential earnings on any nonqualified deferred compensation. The above-market rate is determined by encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. The Company and North Valley Bank are not currently aware of any account relationships between North Valley Bank and any foreign bank or other person or entity as describedusing the amount above under Sections 313(a) or 312120% of the Patriot Act. Certain surveillance provisions ofFederal long-term rate. For 2013, the Patriot Act were scheduled to expire on December 31, 2005, and actions to restrict the use of the Patriot Act surveillance provisions were filed by the ACLU and other organizations. On March 9, 2006, after temporary extensions of the Patriot Act, President Bush signed the “USA Patriot Improvement and Reauthorization Act of 2005”interest rate paid was 8.00% and the “USA Patriot Act Additional Reauthorizing Amendments Actabove-market rate was determined to be 3.42%. For 2012, the interest rate paid was 8.00% and the above-market rate was determined to be 2.97%. For 2011, the interest rate paid was 8.00%, and the above-market rate was determined to be 4.38%.
(5) Included in this column are taxable economic benefits of 2006,” which reauthorized all expiring provisions of the Patriot Act$9,170, $7,804, and extended certain provisions related$6,107, imputed to surveillance and production of business records until December 31, 2009. The extended deadlineMr. Cushman for those provisions was subsequently further extended at various times during 20102013, 2012, and 2011, and on May 26, 2011, President Obama signed a further four-year extensionrespectively, under the terms of his split dollar (life insurance) agreement. Also included in this column are the surveillance provisions.
The effects whichperquisites described below in the Patriot Act and any additional legislation enacted by Congress may have upon financial institutions is uncertain; however, such legislation could increase compliance costs and thereby potentially may have an adverse effect upontable under the Company’s results of operations.heading “Perquisites.”
The Sarbanes-Oxley Act of 2002Perquisites
On July 30, 2002, President George W. Bush signed into lawExecutive Officers who participated in the Sarbanes-Oxley Act of 2002 (the “Act”), legislation designed to address certain issues of corporate governance and accountability. The key provisionsNorth Valley Bancorp 401(k) Plan received matching funds, as did all employees of the ActCompany who participated in the Plan. All of the Company’s employees and Executive Officers named in the rules promulgated bySummary Compensation Table above are eligible to participate in the SEC pursuantCompany’s ESOP Plan. Executive Officers, in addition, are eligible to receive the Act includesame health and insurance benefits as made available to all other employees of the following:Company. In addition, Executive Officers are eligible to participate in executive and key employee deferred compensation plans as discussed hereafter. Executive Officers also have certain 2013, 2012, and 2011 perquisites as follows:
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Auto | Club Memberships | 401K Matching | ||||||||||||||||||||||
Allowance | & Dues | Contribution | ESOP | Total | ||||||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||
Michael J. Cushman | 2013 | $ | 2,350 | $ | 4,220 | $ | — | $ | 1,557 | $ | 8,127 | |||||||||||||
President and Chief | 2012 | $ | 1,773 | $ | 4,020 | $ | — | $ | 1,604 | $ | 7,397 | |||||||||||||
Executive Officer | 2011 | $ | 620 | $ | 4,330 | $ | — | $ | 877 | $ | 5,827 | |||||||||||||
Kevin R. Watson | 2013 | $ | 6,000 | $ | 4,160 | $ | 5,267 | $ | 1,557 | $ | 16,984 | |||||||||||||
Executive Vice President | 2012 | $ | 6,000 | $ | 3,960 | $ | 3,980 | $ | 1,604 | $ | 15,544 | |||||||||||||
and Chief Financial Officer | 2011 | $ | 6,000 | $ | 4,120 | $ | 1,351 | $ | 725 | $ | 12,196 | |||||||||||||
Scott R. Louis | 2013 | $ | 731 | $ | 4,220 | $ | 5,793 | $ | 1,557 | $ | 12,301 | |||||||||||||
Executive Vice President | 2012 | $ | 731 | $ | 4,330 | $ | 4,366 | $ | 1,449 | $ | 10,876 | |||||||||||||
and Chief Operating Officer | 2011 | $ | 731 | $ | 3,850 | $ | 1,482 | $ | 582 | $ | 6,645 | |||||||||||||
Roger D. Nash | 2013 | $ | 586 | $ | 4,220 | $ | 3,787 | $ | 1,557 | $ | 10,150 | |||||||||||||
Executive Vice President | 2012 | $ | 586 | $ | 4,020 | $ | 4,366 | $ | 1,448 | $ | 10,420 | |||||||||||||
and Chief Credit Officer | 2011 | $ | 586 | $ | 4,180 | $ | 1,482 | $ | 581 | $ | 6,829 | |||||||||||||
Gary S. Litzsinger | 2013 | $ | 1,555 | $ | 1,265 | $ | 4,992 | $ | 1,533 | $ | 9,345 | |||||||||||||
Executive Vice President | 2012 | $ | 1,281 | $ | 1,495 | $ | 2,378 | $ | 1,132 | $ | 6,286 | |||||||||||||
and Chief Risk Officer | 2011 | $ | 372 | $ | 900 | $ | 550 | $ | 431 | $ | 2,253 | |||||||||||||
Leo J. Graham | 2013 | $ | — | $ | 3,560 | $ | 6,208 | $ | 1,557 | $ | 11,325 | |||||||||||||
General Counsel and | 2012 | $ | — | $ | 3,935 | $ | 4,833 | $ | 1,599 | $ | 10,367 | |||||||||||||
Corporate Secretary | 2011 | $ | — | $ | 3,900 | $ | 1,641 | $ | 641 | $ | 6,182 |
Stock Option Awards
North Valley Bancorp intends that its stock option award program be the primary vehicle for offering long-term incentives and rewarding its Executive Officers and key employees. The Company also regards its stock option award program as a key retention tool. This is a very important factor in its determination of the type of option award to grant and the number of underlying shares that are granted in connection with that award. Because of the direct relationship between the value of an option and the market price of the Company’s securitiesCommon Stock, North Valley Bancorp has always believed that granting stock options is the best method of motivating the Executive Officers to manage the Company in a manner that is consistent with the interests of the Company and its shareholders.
Timing of Grants
Stock options awarded to the Company’s Executive Officers and other key employees are listedtypically granted annually in conjunction with a review of the individual performance of its Executive Officers. This review typically takes place at the meeting of the Compensation Committee held in conjunction with the quarterly meeting of the Board in January following the fiscal year under consideration. Grants to newly hired employees are effective on the date of grant as consideration for the hiring of the new employee. The exercise price of all stock options is set at the closing price of Common Stock as reported on the NASDAQ Global Select Market. Consequently, in addition to the rules promulgated by the SEC pursuant to the Act, the Company must also comply with the listing standards applicable to all NASDAQ listed companies. The NASDAQ listing standards applicable to the Company include standards related to (i) director independence, (ii) executive session meetings of the board, (iii) requirements for audit, nominating and compensation committee charters, membership qualifications and procedures, (iv) shareholder approval of equity compensation arrangements, and (v) code of conduct requirements.
The Company has incurred and it is anticipated that it will continue to incur increased costs to comply with the Act and the rules and regulations promulgated pursuant to the Act by the Securities and Exchange Commission, NASDAQ and other regulatory agencies having jurisdiction over the Company or the issuance and listing of its securities. The Company does not currently anticipate 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. Management is required to reportMarket on the effectivenessdate of internal control over financial reporting, and an external attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting is required for the years ended December 31, 2013 and 2012 but was not required for the year ended December 31, 2011. SeeItem 9A, “Controls and Procedures,” below.
The California Corporate Disclosure Act
Effective January 1, 2003, the California Corporate Disclosure Act (the “CCD Act”) required publicly traded corporations incorporated or qualified to do business in California to disclose information about their past history, auditors, directors and officers. Effective September 28, 2004, the CCD Act, as currently in effect and codified at California Corporations Code Section 1502.1, requires the Company to file with the California Secretary of State and disclose within 150 days after the end of its fiscal year certain information including the following:
Compliance with the CCD Act did not have a material adverse effect upon its financial position or results of its operations or its cash flows.
Competition
At June 30, 2013, commercial and savings banks in competition with the Company had 396 banking offices in the counties of Del Norte, Humboldt, Mendocino, Placer, Shasta, Sonoma, Trinity and Yolo where the Company operates. In those 396 banking offices (which include the Company’s 22), there were $28.9 billion in total deposits of which the Company had an overall share of 2.7%. 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. As of December 31, 2013, NVB’s lending limit to any one borrower is $29,278,000 on a fully secured basis and $17,567,000 on an unsecured basis. These limits are adequate in most instances to compete for lending relationships within the markets we currently serve.grant.
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In order to compete with the major financial institutions in its primary service areas, the Company, through NVB, utilizes to the fullest extent possible, the flexibility which is accorded by its independent status. This includes an emphasis on specialized services, local promotional activity, and personal contacts by the officers, directors and employees of the Company. NVB also seeks to provide special services and programs for individuals in its primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture, tools of the trade or expansion of practices or businesses.
2013 GRANTS OF PLAN-BASED AWARDS TABLE
All Other | All Other | |||||||||||||||||||||||||||||||||||||||||
Stock | Option | |||||||||||||||||||||||||||||||||||||||||
Awards: | Awards: | |||||||||||||||||||||||||||||||||||||||||
Number of | Number of | Exercise or | Grant Date | |||||||||||||||||||||||||||||||||||||||
Estimated Future Payouts Under | Estimated Future Payouts Under | Shares of | Securities | Base Price | Fair Value of | |||||||||||||||||||||||||||||||||||||
Non-Equity Incentive Plan Awards | Equity Incentive Plan Awards | Stock or | Underlying | of Option | Stock and | |||||||||||||||||||||||||||||||||||||
Threshold | Target | Maximum | Threshold | Target | Maximum | Units | Options | Awards | Option Awards | |||||||||||||||||||||||||||||||||
Name | Grant Date | ($) | ($) | ($) | (#) | (#) | (#) | (#) | (#) | ($ / Sh) | ($) | |||||||||||||||||||||||||||||||
Michael J. Cushman | 1/31/2013 | — | — | — | — | — | — | — | 15,802 | $ | 16.80 | $ | 150,571 | |||||||||||||||||||||||||||||
Kevin R. Watson | 1/31/2013 | — | — | — | — | — | — | — | 8,256 | $ | 16.80 | $ | 78,668 | |||||||||||||||||||||||||||||
Scott R. Louis | 1/31/2013 | — | — | — | — | — | — | — | 6,791 | $ | 16.80 | $ | 64,709 | |||||||||||||||||||||||||||||
Roger D. Nash | 1/31/2013 | — | — | — | — | — | — | — | 6,791 | $ | 16.80 | $ | 64,709 | |||||||||||||||||||||||||||||
Gary S. Litzsinger | 1/31/2013 | — | — | — | — | — | — | — | 5,600 | $ | 16.80 | $ | 53,360 | |||||||||||||||||||||||||||||
Leo J. Graham | 1/31/2013 | — | — | — | — | — | — | — | 7,518 | $ | 16.80 | $ | 71,636 |
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 the Bank’s investment 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.
Monetary andOutstanding Equity Awards At Fiscal PoliciesYear-End
The net interest income offollowing table summarizes information about the Company,options, warrants 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 Board of Governors of the Federal Reserve System. The Board of Governors 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 banksrights and other financial institutions are required to maintain, and adjustments toequity compensation under the discount rates applicable to borrowing by banks from the Federal Reserve System. These activities influence the growthCompany’s equity plans as 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.
Deposit Insurance
The FDIC is an independent federal agency that insures deposits of federally insured banks (such as North Valley Bank) and savings institutions up to prescribed limits through the Deposit Insurance Fund (“DIF”). The Emergency Economic Stabilization Act of 2008 (“EESA”) temporarily raised the limit on federal deposit insurance coverage provided by the FDIC from $100,000 to $250,000 per depositor. The Dodd-Frank Act (described in more detail below) made the $250,000 amount permanent.
In addition, on November 9, 2010, the FDIC issued a final rule (implementing the Dodd-Frank Act) which provided unlimited deposit insurance coverage for non-interest bearing transaction accounts until December 31, 2012. This Transaction Account Guarantee (“TAG”) program was not extended and expired December 31, 2012.
The amount of FDIC assessments paid by each DIF member institution is based on its risk profile as measured by regulatory capital ratios and other supervisory factors. Under the assessment rate system established in 2006, the FDIC increased the assessment rates (effective January 1, 2007) for most institutions from $0.05 to $0.07 per $100 of insured deposits and established a Designated Reserve Ratio (“DRR”) for the DIF during 2007 at 1.25% of insured deposits. Since 2008, due to higher levels of bank failures and the need to maintain a strong DIF, the FDIC has increased the assessment rates of insured institutions and may continue to do so in the future. On November 17, 2009, the FDIC amended its regulations and required all insured financial institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 unless they were notified they were exempt from the prepayment. The FDIC exempted North Valley Bank from the requirement to prepay.
As required by the Dodd-Frank Act, the FDIC revised the assessment rates, effective April 1, 2011, and the deposit insurance assessment base used to calculate premiums paid to DIF, substituting the average consolidated total assets less average tangible equity of an institution in place of deposits. Also pursuant to the Dodd-Frank Act, the FDIC increased the DRR to 2.0 percent, effective January 1, 2011. For the year ended December 31, 2013, the assessment rate for North Valley Bank averaged $0.09 per $100 in assessable deposits, compared to $0.11 per $100 in assessable deposits for the year ended December 31, 2012. If economic conditions continue to impact financial institutions and there are additional bank and other financial institution failures, or if the FDIC otherwise determines, North Valley Bank may be required to pay higher FDIC premiums than the recently increased levels, which could have a material and adverse effect on the earningseach of the Company.Executive Officers.
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Interstate BankingOUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
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 Dodd-Frank Act authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch.
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Equity Incentive | Market | Equity Incentive | Equity Incentive | |||||||||||||||||||||||||||||||||
Number of | Number of | Plan Awards: | Number of | Value of | Plan Awards: | Plan Awards: | ||||||||||||||||||||||||||||||
Securities | Securities | Number of | Shares or | Shares or | Number of | Market or Payout | ||||||||||||||||||||||||||||||
Underlying | Underlying | Securities | Units of | Units of | Unearned Shares, | Value of Unearned | ||||||||||||||||||||||||||||||
Unexercised | Unexercised | Underlying | Option | Option | Stock That | Stock That | Units or Other | Shares, Units or | ||||||||||||||||||||||||||||
Options (#) | Options (#) | Unexercised | Exercise | Expiration | Have Not | Have Not | Rights that Have | Other Rights That | ||||||||||||||||||||||||||||
Unearned Options | Price | Date | Vested | Vested | Not Vested | Have Not Vested | ||||||||||||||||||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | (#) | ($) | (#) | ($) | ||||||||||||||||||||||||||||
Michael J. Cushman | 2,400 | (1) | — | — | $ | 78.60 | 1/20/2014 | — | — | — | — | |||||||||||||||||||||||||
2,992 | (3) | — | — | $ | 99.30 | 1/20/2015 | — | — | — | — | ||||||||||||||||||||||||||
2,991 | (6) | — | — | $ | 89.75 | 2/3/2016 | — | — | — | — | ||||||||||||||||||||||||||
2,992 | (8) | — | — | $ | 100.15 | 1/25/2017 | — | — | — | — | ||||||||||||||||||||||||||
3,611 | (9) | — | — | $ | 65.05 | 1/24/2018 | — | — | — | — | ||||||||||||||||||||||||||
11,766 | (10) | — | — | $ | 23.95 | 11/20/2018 | — | — | — | — | ||||||||||||||||||||||||||
2,000 | (11) | 3,000 | (11) | — | $ | 10.40 | 7/28/2021 | — | — | — | — | |||||||||||||||||||||||||
1,805 | (12) | 7,224 | (12) | — | $ | 11.25 | 3/8/2022 | — | — | — | — | |||||||||||||||||||||||||
— | (13) | 15,802 | (13) | — | $ | 16.80 | 1/31/2023 | — | — | — | — | |||||||||||||||||||||||||
Kevin R. Watson | 2,000 | (7) | — | — | $ | 81.90 | 4/27/2016 | — | — | — | — | |||||||||||||||||||||||||
1,440 | (8) | — | — | $ | 100.15 | 1/25/2017 | — | — | — | — | ||||||||||||||||||||||||||
1,872 | (9) | — | — | $ | 65.05 | 1/24/2018 | — | — | — | — | ||||||||||||||||||||||||||
1,859 | (10) | — | — | $ | 23.95 | 11/20/2018 | — | — | — | — | ||||||||||||||||||||||||||
2,000 | (11) | 3,000 | (11) | — | $ | 10.40 | 7/28/2021 | — | — | — | — | |||||||||||||||||||||||||
786 | (12) | 3,145 | (12) | — | $ | 11.25 | 3/8/2022 | — | — | — | — | |||||||||||||||||||||||||
— | (13) | 8,256 | (13) | — | $ | 16.80 | 1/31/2023 | — | — | — | — | |||||||||||||||||||||||||
Scott R. Louis | 500 | (4) | — | — | $ | 88.15 | 4/28/2015 | — | — | — | — | |||||||||||||||||||||||||
1,120 | (8) | — | $ | 100.15 | 1/25/2017 | |||||||||||||||||||||||||||||||
1,540 | (9) | — | $ | 65.05 | 1/24/2018 | |||||||||||||||||||||||||||||||
1,106 | (10) | — | $ | 23.95 | 11/20/2018 | |||||||||||||||||||||||||||||||
2,000 | (11) | 3,000 | (11) | $ | 10.40 | 7/28/2021 | — | — | — | — | ||||||||||||||||||||||||||
646 | (12) | 2,588 | (12) | $ | 11.25 | 3/8/2022 | — | — | — | — | ||||||||||||||||||||||||||
— | (13) | 6,791 | (13) | — | $ | 16.80 | 1/31/2023 | — | — | — | — | |||||||||||||||||||||||||
Roger D. Nash | 2,000 | (5) | — | — | $ | 85.00 | 10/20/2015 | — | — | — | — | |||||||||||||||||||||||||
1,120 | (8) | — | — | $ | 100.15 | 1/25/2017 | — | — | — | — | ||||||||||||||||||||||||||
1,540 | (9) | — | $ | 65.05 | 1/24/2018 | |||||||||||||||||||||||||||||||
1,631 | (10) | — | $ | 23.95 | 11/20/2018 | |||||||||||||||||||||||||||||||
2,000 | (11) | 3,000 | (11) | $ | 10.40 | 7/28/2021 | — | — | — | — | ||||||||||||||||||||||||||
646 | (12) | 2,588 | (12) | $ | 11.25 | 3/8/2022 | — | — | — | — | ||||||||||||||||||||||||||
— | (13) | 6,791 | (13) | — | $ | 16.80 | 1/31/2023 | — | — | — | — | |||||||||||||||||||||||||
Gary S. Litzsinger | 800 | (2) | — | — | $ | 80.90 | 8/5/2014 | — | — | — | — | |||||||||||||||||||||||||
400 | (3) | — | — | $ | 99.30 | 1/20/2015 | — | — | — | — | ||||||||||||||||||||||||||
571 | (6) | — | — | $ | 89.75 | 2/3/2016 | — | — | — | — | ||||||||||||||||||||||||||
838 | (8) | — | — | $ | 100.15 | 1/25/2017 | — | — | — | — | ||||||||||||||||||||||||||
1,111 | (9) | — | $ | 65.05 | 1/24/2018 | |||||||||||||||||||||||||||||||
1,302 | (10) | — | $ | 23.95 | 11/20/2018 | |||||||||||||||||||||||||||||||
2,000 | (11) | 3,000 | (11) | $ | 10.40 | 7/28/2021 | — | — | — | — | ||||||||||||||||||||||||||
480 | (12) | 1,920 | (12) | $ | 11.25 | 3/8/2022 | — | — | — | — | ||||||||||||||||||||||||||
— | (13) | 5,600 | (13) | — | $ | 16.80 | 1/31/2023 | — | — | — | — | |||||||||||||||||||||||||
Leo J. Graham | 1,000 | (1) | — | — | $ | 78.60 | 1/20/2014 | — | — | — | — | |||||||||||||||||||||||||
600 | (3) | — | — | $ | 99.30 | 1/20/2015 | — | — | — | — | ||||||||||||||||||||||||||
840 | (6) | — | — | $ | 89.75 | 2/3/2016 | — | — | — | — | ||||||||||||||||||||||||||
1,311 | (8) | — | — | $ | 100.15 | 1/25/2017 | — | — | — | — | ||||||||||||||||||||||||||
1,705 | (9) | — | $ | 65.05 | 1/24/2018 | |||||||||||||||||||||||||||||||
1,909 | (10) | — | $ | 23.95 | 11/20/2018 | |||||||||||||||||||||||||||||||
2,000 | (11) | 3,000 | (11) | $ | 10.40 | 7/28/2021 | — | — | — | — | ||||||||||||||||||||||||||
716 | (12) | 2,864 | (12) | $ | 11.25 | 3/8/2022 | — | — | — | — | ||||||||||||||||||||||||||
— | (13) | 7,518 | (13) | — | $ | 16.80 | 1/31/2023 | — | — | — | — |
Glass-Steagall Act
The Gramm-Leach Bliley Act, also known as 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 the Banking Act of 1933, also known as the Glass-Steagall Act (“Glass-Steagall). Glass-Steagall sought to insulate banks as depository institutions from the perceived risks of securities dealing and underwriting, and related activities. The FSMA repealed Section 20 of Glass-Steagall, which prohibited banks from affiliating with securities firms. Bank holding companies that can qualify as “financial holding companies” can now acquire securities firms or create them as subsidiaries, and securities firms can now acquire banks or start banking activities through a financial holding company. The FSMA includes provisions which permit national banks to conduct financial activities through a subsidiary that are permissible for a national bank to engage in directly, as well as certain activities authorized by statute, or that are financial in nature or incidental to financial activities to the same extent as permitted to a “financial holding company” or its affiliates. This liberalization of United States banking and financial services regulation applies both to domestic institutions and foreign institutions conducting business in the United States. Consequently, the common ownership of banks, securities firms and insurance firms is now possible, as is the conduct of commercial banking, merchant banking, investment management, securities underwriting and insurance within a single financial institution using a “financial holding company” structure authorized by the FSMA.
Prior to the FSMA, significant restrictions existed on the affiliation of banks with securities firms and on the direct conduct by banks of securities dealing and underwriting and related securities activities. Banks were also (with minor exceptions) prohibited from engaging in insurance activities or affiliating with insurers. The FSMA removed 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 to date have defined the permissible activities of bank holding companies under the Bank Holding Company Act. The Company has not determined whether (or when) to seek qualification as a financial holding company.
Volker Rule. On December 10, 2013, the federal banking agencies jointly issued a final rule implementing the so-called “Volker Rule” (set forth in Section 619 of the Dodd-Frank Act). The Volker Rule prohibits depository institutions, companies that control such institutions, bank holding companies, and the affiliates and subsidiaries of such banking entities, from engaging as principal for the trading account of the banking entity in any purchase or sale of one or more covered financial instruments (so-called “proprietary trading”) and imposes limitations upon retaining ownership interests in, sponsoring, investing in and transacting with certain investment funds, including hedge funds and private equity funds. Certain activities involving underwriting, risk mitigation hedging, and transactions on behalf of customers as a fiduciary or riskless principal are not prohibited proprietary trading, including purchases and sales of financial instruments which are either obligations of or issued or guaranteed by (i) the United States or agencies thereof; (ii) a State or political subdivision including municipal securities; or (iii) the FDIC. Notwithstanding these permissible activities, no such activities are permitted if they would (i) involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties; (ii) result, directly or indirectly, in a material exposure by the banking entity to a high-risk asset or a high-risk trading strategy; or (iii) pose a threat to the safety and soundness of the banking entity or to the financial stability of the United States. The effective date of the final rule is delayed to July 21, 2015 in order to provide a transitional period for banking entities to conform their activities and policies to the final rule. Neither the Company nor NVB engages in activities prohibited by the Volker Rule and management does not expect the Volker Rule to have a material impact upon the Company or NVB.
(1) | These stock options were vested at 100% on January 20, 2008. |
(2) | These stock options were vested at 100% on August 5, 2008. |
(3) | These stock options were vested at 100% on January 20, 2009. |
(4) | These stock options were vested at 100% on April 28, 2009. |
(5) | These stock options were vested at 100% on October 20, 2009. |
(6) | These stock options were vested at 100% on February 3, 2010. |
(7) | These stock options were vested at 100% on April 27, 2010. |
(8) | These stock options were vested at 100% on January 25, 2011. |
(9) | These stock options were vested at 100% on January 24, 2012. |
(10) | These stock options were vested at 100% on November 20, 2013. |
(11) | These stock options vest 20% per year over five years; 40% were vested at December 31, 2013 with the remaining vesting to occur on July 28, 2014, 2015 and 2016. |
(12) | These stock options vest 20% per year over five years; 20% were vested at December 31, 2013 with the remaining vesting to occur on March 8, 2014, 2015, 2016 and 2017. |
(13) | These stock options vest 20% per year over five years; 0% were vested at December 31, 2013 with the remaining vesting to occur on January 31, 2014, 2015, 2016, 2017 and 2018. |
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One further effect of FSMA was to require that federal financial institution
Options Exercised 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.
Discharge of Materials into the EnvironmentStock Vested
ComplianceThe following table summarizes information with federal, staterespect to stock option awards exercised and local regulations regarding the discharge of materials into the environment may have a substantial effect on the capital expenditure, earningsrestricted stock and competitive positionrestricted stock unit awards vested during fiscal year 2013 for each 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.”Executive Officers.
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.
OPTION EXERCISES AND STOCK VESTED TABLE
Option Awards | Stock Awards | |||||||||||||||
Number of Shares | ||||||||||||||||
Acquired on | Value Realized On | Number of Shares | Value Realized On | |||||||||||||
Exercise | Exercise | Acquired on Vesting | Vesting | |||||||||||||
Name | (#) | ($) | (#) | ($) | ||||||||||||
Michael J. Cushman | — | — | — | — | ||||||||||||
Kevin R. Watson | — | — | — | — | ||||||||||||
Scott R. Louis | — | — | — | — | ||||||||||||
Roger D. Nash | — | — | — | — | ||||||||||||
Gary S. Litzsinger | — | — | — | — | ||||||||||||
Leo J. Graham | — | — | — | — |
Employment Agreements
The Company takes reasonable stepsentered into an Employment Agreement with Michael J. Cushman in 2001, revised in 2012. The Company entered into an Employment Agreement with Leo J. Graham in 2004, revised in 2006 and in 2012. The Company entered into Employment Agreements with Gary S. Litzsinger, Scott R. Louis and Roger D. Nash during 2005, revised in 2012. The Company entered into an Employment Agreement with Kevin R. Watson in 2006, revised in 2012.
The Employment Agreement entered into in 2001 with Mr. Cushman had an initial term of three years with annual renewals. The current Employment Agreements with Messrs. Watson, Louis, Nash, Litzsinger, and Graham have a rolling term of one year and provide that they will be automatically extended for additional one-year periods unless either the employee or the employer gives notice of non-renewal 60-days before the end of the term or extended term. All of the Employment Agreements have been extended at their annual anniversary dates upon the same terms and conditions, except for Mr. Cushman, whose Employment Agreement has been extended annually since the end of its initial three year term upon the same terms and conditions. The compensation paid to avoid loaning against property that may be contaminated. In ordereach of Messrs. Cushman, Watson, Louis, Nash, Litzsinger, and Graham for years 2013, 2012, and 2011 under the terms of their respective Employment Agreements is set forth in the “Summary Compensation Table” on page 10 of this Proxy Statement.
Under the terms of their respective Employment Agreements, all Executive Officers are eligible to identify possible hazards,participate in the Executive Deferred Compensation Plan and the Salary Continuation Agreements (see discussion below) and are entitled to all other benefits made available to employees of the Company requires that all fee appraisals contain a reference to a visual assessmentgenerally.
All Executive Officers will receive severance pay upon termination of hazardous wastetheir written Employment Agreement by the appraiser. Further, on loans proposedCompany without cause in an amount ranging from 12 months to be secured by industrial, commercial or agricultural real estate, an Environmental Questionnaire must be completed by24 months of current base salary, except Mr. Cushman who also will receive a pro rata share of his annual incentive compensation for the borrower and any areasprior year. Payment of concern addressed. Additionally, the borrowerseverance pay 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 acceptablesubject to the Company.limitations set forth in applicable laws and regulations.
Recent Regulatory DevelopmentsPOST-EMPLOYMENT COMPENSATION
In response to global credit and liquidity issues involvingSalary Continuation Agreements
The Company has entered into a number of financial institutions, the United States government, particularly the United States DepartmentSalary Continuation Agreement with each of the Treasury (the “U.S. Treasury”)Executive Officers. The Salary Continuation Agreements provide for five general classes of benefits for Executive Officers, which benefits vest over a period of eight (8) to ten (10) years with credit for prior service or as determined by the Chief Executive Officer and the Federal financial institution regulatory agencies, have taken a varietyBoard of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions, including capital injections, guarantees of bank liabilities and the acquisition of illiquid assets from banks.Directors:
1. | Normal Retirement Benefits. The normal retirement benefit is calculated to provide a target benefit in the amount equal to sixty percent (60%) of the Executive’s compensation at the time of retirement (age 65) or a lesser amount as determined by the Chief Executive Officer and the Board of Directors. |
TARP and the CPP. On October 3, 2008, the EESA was signed into law. Pursuant to the EESA, the U.S. Treasury was granted the authority to take a range of actions for the purpose of stabilizing and providing liquidity to the U.S. financial markets and has implemented several programs, including the purchase by the U.S. Treasury of certain troubled assets from financial institutions under the Troubled Asset Relief Program” (the “TARP”) and the direct purchase by the U.S. Treasury of equity securities of financial institutions under the Capital Purchase Program (the “CPP”). The final investment under the CPP was made in December 2009. The Company did not participate in the CPP.
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2. | Early Termination Benefit. The early termination benefit is the vested portion of the target retirement benefit. |
Financial Stability Plan. On February 10, 2009,
3. | Disability Benefit. The disability benefit is a Disability Lump Sum Benefit specified in the agreement for the plan year immediately preceding the disability, payable only upon total disability as defined in the agreement. |
4. | Death Benefit. The death benefit is an amount determined by a formula that takes into account the number of years of service and the anticipated compensation level at the age of retirement. |
5. | Change of Control Benefit. The change of control benefit is an amount determined as follows: Executive Officer’s Fully Vested Present Value Benefit payable at age 65 for the current plan year plus two times the Executive Officer’s current Plan Year Compensation (except with respect to the Chief Executive Officer, which is 2.99 times plan year compensation). This benefit is payable only in the event of a change in control as defined in the Salary Continuation Agreement and is limited by the provisions of Internal Revenue Code section 280G and by federal statute or regulation. |
The Company determined that it would be more cost effective for the U.S. Treasury announced a Financial Stability Plan (the “FSP”)Company to acquire prepaid policies of life insurance to fund these anticipated future obligations than to pay annual premiums. The Company, as a comprehensive approach to strengtheningresult of acquiring the financial system and addressing the credit crisis. The Plan included a Capital Assistance Program (the “CAP”) that was intended to serve as a bridge to raising private capital and to ensure sufficient capital to preserve or increase lending in a worse-than-expected economic deterioration. Eligibility to participateprepaid policies, has cash values in the CAP was consistentpolicies in excess of the amount paid for those policies.
The Company and some of the Executive Officers who have Salary Continuation Agreements have entered into split dollar life insurance agreements in connection with the criterialife insurance policies obtained by the Company on their lives.
The following table illustrates the approximate annual retirement income that may become payable to a key employee credited with the number of years of service shown, assuming that benefits commence at age 65 and are payable in the form of an annuity for QFI’sthe employee’s life or for 20 years (whichever is greater):
ANNUAL RETIREMENT INCOME
Years of Credited Service
Final Average | ||||||||||||||||||||||||
Compensation | 1 | 2 | 3 | 4 | 5 | |||||||||||||||||||
$ | 100,000 | $ | 6,000 | $ | 12,000 | $ | 18,000 | $ | 24,000 | $ | 30,000 | |||||||||||||
120,000 | 7,200 | 14,400 | 21,600 | 28,800 | 36,000 | |||||||||||||||||||
140,000 | 8,400 | 16,800 | 25,200 | 33,600 | 42,000 | |||||||||||||||||||
160,000 | 9,600 | 19,200 | 28,800 | 38,400 | 48,000 | |||||||||||||||||||
180,000 | 10,800 | 21,600 | 32,400 | 43,200 | 54,000 | |||||||||||||||||||
200,000 | 12,000 | 24,000 | 36,000 | 48,000 | 60,000 | |||||||||||||||||||
250,000 | 15,000 | 30,000 | 45,000 | 60,000 | 75,000 | |||||||||||||||||||
300,000 | 18,000 | 36,000 | 54,000 | 72,000 | 90,000 |
Final Average | ||||||||||||||||||||||||
Compensation | 6 | 7 | 8 | 9 | 10 | |||||||||||||||||||
$ | 100,000 | $ | 36,000 | $ | 42,000 | $ | 48,000 | $ | 54,000 | $ | 60,000 | |||||||||||||
120,000 | 43,200 | 50,400 | 57,600 | 64,800 | 72,000 | |||||||||||||||||||
140,000 | 50,400 | 58,800 | 67,200 | 75,600 | 84,000 | |||||||||||||||||||
160,000 | 57,600 | 67,200 | 76,800 | 86,400 | 96,000 | |||||||||||||||||||
180,000 | 64,800 | 75,600 | 86,400 | 97,200 | 108,000 | |||||||||||||||||||
200,000 | 72,000 | 84,000 | 96,000 | 108,000 | 120,000 | |||||||||||||||||||
250,000 | 90,000 | 105,000 | 120,000 | 135,000 | 150,000 | |||||||||||||||||||
300,000 | 108,000 | 126,000 | 144,000 | 162,000 | 180,000 |
Mr. Cushman began accruing retirement benefits under his Salary Continuation Agreement effective January 1, 2001, and is fully vested. Messrs. Watson, Louis, Nash, Litzsinger, and Graham began accruing retirement benefits under their Salary Continuation Agreements according to their respective hire dates. The terms of the Salary Continuation Agreements did not change in form, timing, or with regard to any amount payable under the CPP. Eligible institutions with consolidated assets below $100 billion would be ableAgreements.
As of December 31, 2013, the Company’s aggregate accrued obligations under all Salary Continuation Agreements were $9,973,000 (includes obligations to obtain capitalretirees under the CAP after a supervisory review. The CAP ended in November 2009 and the Company did not participate.old plans).
American Recovery and Reinvestment Act. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) was signed into law. Section 7001 of the ARRA amended Section 111 of the EESA in its entirety. While the U.S. Treasury must promulgate regulations to implement the restrictions and standards set forth in Section 7001, the ARRA, among other things, significantly expands the executive compensation restrictions previously imposed by the EESA. Such restrictions apply to any entity that has received or will receive financial assistance under the TARP, and shall generally continue to apply for as long as any obligation arising from financial assistance provided under the TARP, including preferred stock issued under the CPP, remains outstanding. These ARRA restrictions do not apply to any TARP recipient during such time when the federal government (i) only holds any warrants to purchase common stock of such recipient or (ii) holds no preferred stock or warrants to purchase common stock of such recipient. The Company is not subject to these restrictions because it did not participate in TARP.
The Small Business Jobs Act of 2010
On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “SBJ Act”), which, among other matters, authorizes the U.S. Treasury to buy up to $30 billion in preferred stock or subordinated debt issued by community banks (or their bank holding companies provided 90% of the funds received are downstreamed to the bank subsidiary) with assets less that $10 billion pursuant to the Small Business Lending Fund (the “SBLF”) created under the SBJ Act. Funds received as capital investments will qualify as Tier 1 capital. The SBLF investments are intended to increase the availability of credit for small businesses and thereby induce the creation of jobs in support of economic recovery.
The participating banks (or bank holding companies) will pay an annual dividend on the preferred stock or subordinated debt purchased by the U.S. Treasury in an amount which ranges between 5% and 1% during the initial measurement period of approximately two years determined by reducing the dividend rate 1% for every 2.5% increase in the bank’s small business lending up to a lending increase of 10%. The dividend rate will be adjusted quarterly during the initial period. If a participant’s lending activity does not increase in the initial period, the dividend rate will increase thereafter to 7%. After 4.5 years, the dividend rate increases to 9% until the SBLF funds are repaid.
On December 23, 2010, the federal banking agencies jointly issued guidance on underwriting standards for small business loans originated under the SBLF which require adherence to safe and sound credit standards and risk management processes. It is uncertain whether the SBLF will have the intended effect of creating jobs in sufficient numbers to positively impact the economic recovery. The Company did not participate in the SBLF.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Dodd-Frank Act is intended to restructure the regulation of the financial services sector by, among other things, (i) establishing a framework to identify systemic risks in the financial system implemented by a newly created Financial Stability Oversight Council and other federal banking agencies; (ii) expanding the resolution authority of the federal banking agencies over troubled financial institutions; (iii) authorizing changes to capital and liquidity requirements; (iv) changing deposit insurance assessments; and (v) enhancing regulatory supervision to improve the safety and soundness of the financial services sector. The Dodd-Frank Act is expected to have a significant impact upon our business as its provisions are implemented over time. Below is a summary of certain provisions of the Dodd-Frank Act which, directly or indirectly, may affect us.
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The following table summarizes the retirement benefits payable to the Executive Officers as of December 31, 2013.
PENSION BENEFITS TABLE
Number of | ||||||||||||||
Years | ||||||||||||||
Credited | Present Value as of | Payments During | ||||||||||||
Name | Plan Name | Service | December 31, 2013 | Last Fiscal Year | ||||||||||
Michael J. Cushman | Salary Continuation Plan | 16 | $ | 2,502,138 | — | |||||||||
Kevin R. Watson | Salary Continuation Plan | 7 | $ | 1,256,010 | — | |||||||||
Scott R. Louis | Salary Continuation Plan | 8 | $ | 560,874 | — | |||||||||
Roger D. Nash | Salary Continuation Plan | 8 | $ | 648,074 | — | |||||||||
Gary S. Litzsinger | Salary Continuation Plan | 9 | $ | 265,351 | — | |||||||||
Leo J. Graham | Salary Continuation Plan | 10 | $ | 1,558,615 | — |
Executive Deferred Compensation Plan
The Executive Deferred Compensation Plan (“EDCP”), adopted by the Directors of the Company and North Valley Bank effective January 1, 2001 and restated effective January 1, 2007, is a nonqualified executive benefit plan in which the eligible executive voluntarily elects to defer some or all of his or her current compensation in exchange for the Company’s promise to pay a deferred benefit. The deferred compensation is credited with interest under the plan and the accrued liability is paid to the executive at retirement. Unlike a 401(k) plan or a pension plan, an EDCP is a nonqualified plan. Accordingly, this plan is selectively made available to certain highly compensated employees and executives without regard to the nondiscrimination requirements of qualified plans. The EDCP is also an unfunded plan, which means there are no specific assets set aside to fund the plan. The Company has purchased life insurance policies in order to provide for payment of its obligations under the Executive Deferred Compensation Plan, but the executive has no rights under the plan beyond those of a general creditor of the plan sponsor. The deferred amount is not taxable income to the individual and is not a tax-deductible expense to the plan sponsor.
The EDCP is embodied in a written agreement between the plan sponsor and the executive selected to participate in the plan. The agreement includes provisions that indicate the benefits to be provided at retirement or in the event of death, disability, or termination of employment prior to retirement. The agreement provides for full vesting of deferred amounts since the executive is setting aside his or her current compensation. If the individual leaves, the account balance would be paid according to the terms specified in the agreement. If the individual were to die prior to or during retirement, the promised benefits would be paid to the individual’s beneficiary or estate.
As of December 31, 2013, the Company’s aggregate accrued obligations under all executive deferred compensation plans were $436,000.
The following table summarizes the nonqualified deferred compensation benefits payable to the Executive Officers as of December 31, 2013.
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NONQUALIFIED DEFERRED COMPENSATION TABLE
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Executive | Registrant | Aggregate | Aggregate Balance | |||||||||||||||
Contributions in | Contributions in | Aggregate Earnings | Withdrawals/ | at Last Fiscal Year- | ||||||||||||||||
Last Fiscal Year | Last Fiscal Year | in Last Fiscal Year | Distributions | End | ||||||||||||||||
Name | ($) | ($) | (1)($) | ($) | ($) | |||||||||||||||
Michael J. Cushman | $ | — | $ | — | $ | 8,697 | $ | — | $ | 113,475 | ||||||||||
Kevin R. Watson | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Scott R. Louis | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Roger D. Nash | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Gary S. Litzsinger | $ | 3,892 | $ | — | $ | 3,015 | $ | — | $ | 40,802 | ||||||||||
Leo J. Graham | $ | — | $ | — | $ | 973 | $ | — | $ | 12,696 |
(1) | ||
Many of the requirements under the Dodd-Frank Act will be implemented over an extended period of time. Therefore, the nature and extent of regulations that will be issued by various regulatory agencies and the impact such regulations will have on the operations of financial institutions such as the Company is unclear. Such regulations resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changesChange in order to comply with new statutory and regulatory requirements.
Future Legislation and Regulation
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 NVB 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 NVB.
Employees
At December 31, 2013, the Company had approximately 319 employees, (which includes 297 full-time equivalent employees). None of the Company’s employees are represented by a labor union, and management considers its relations with employees to be good.
Website Access
Information on the Company and its subsidiary NVB may be obtained from the Company’s website www.novb.com. Copies of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments thereto are available free of charge on the website as soon as they are published by the SEC through a link to the Edgar reporting system maintained by the SEC. Simply select the “NOVB Investors” menu item, then click on “Shareholder Relations” and then select the “SEC Filings” link. Also made available through the “SEC Filings” link are the Section 16 reports of ownership and changes in ownership of the Company’s common stock which are filed with the Securities and Exchange Commission by the directors and executive officers of the Company and by any persons who own more than ten percent of the outstanding shares of such stock. Information on the Company website is not incorporated by reference into this report.
ITEM 1A. RISK FACTORSControl Agreements
In addition to the risks associated with the businessevent of banking generally, as described above under Item 1 “Description of Business”, the Company’s business, financial condition, operating results, future prospects and stock price can be adversely impacted by certain risk factors, as set forth below, any one of which could cause the Company’s actual results to vary materially from recent resultsa sale, dissolution or from the Company’s anticipated future results.
Termination of our Merger Agreement with TriCo could negatively affect the Company and NVB. On January 21, 2014, the Company and TriCo Bancshares (“TriCo”) entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) providing for the merger of the Company with and into TriCo (the “Merger”). If the Merger Agreement is terminated or the Merger is not consummated for any reason, we may suffer adverse consequences, such as: (1) the market price of our common stock may decline to the extent that the market price prior to termination reflects a market assumption that the Merger will be completed; (2) recognizing substantial expenses incurred in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement without realizing the expected benefits of the Merger; (3) our ability to attract, retain and motivate key personnel, depositors and borrowers as such personnel, depositors and borrowers may experience uncertainty about their future roles following the consummation of the Merger; (4) competitors may target our existing customers by highlighting potential uncertainties and integration difficulties that may result from the Merger; (5) the Merger Agreement restricts us from taking certain actions without TriCo’s consent while the Merger is pending which may, among other matters, prevent us from pursuing certain transactions or making other changes to our business prior to consummation of the Merger or termination of the Merger Agreement; and (6) we have a small number of key personnel and the pursuit of the Merger and the preparation for the integration may place a burden on management and internal resources.
The consideration to be paid in the Merger is fixed and will not be adjusted for changes in the business, assets, liabilities, prospects, outlook, financial condition or results of operationsliquidation of the Company or TriCo, or in the event of any change in our stock price or TriCo’s stock price.The Merger Agreement provides that thea merger consideration (i.e., the number of shares of TriCo common stock that will be issued to the holders of the Company’s common stock) is fixed and will not be adjusted for changes in the business, assets, liabilities, prospects, outlook, financial condition or results of operations of the Company or TriCo, or changes in the market price of, analyst estimates of, or projections relating to, the Company’s common stock or TriCo’s common stock.
Extensive Regulation of Banking. The operations of the Company and its subsidiary, North Valley Bank, are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of such operations. The Company and North Valley Bank believe they are in substantial compliance in all material respects with laws, rules and regulations applicable to the conduct of their banking business. Because the banking business is highly regulated, the laws, rules and regulations applicable to the Company are subject to regular modification and change. These laws, rules and regulations, or any other laws, rules or regulations adopted in the future, could make compliance more difficult or expensive, restrict the Company’s ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by the Company, or otherwise adversely affect the Company’s results of operations, financial condition, or future prospects. The Dodd-Frank Act, signed into law on July 21, 2010, continues to have a broad impact on the financial services sector, including significant regulatory and compliance changes. Many of the Dodd-Frank Act requirements are being implemented over time and, given the uncertainty associated with the manner in which they will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on the Company’s operations is not clear. Changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business, results of operations or financial condition.
Competition. An economy characterized by a decline in real estate values, high unemployment and general uncertainty has increased competition for good quality loans among depository institutions operating in the Company’s market areas. Ultimately, the Company and North Valley Bank may not be able to compete successfully against current and future competitors. Many competitors offer the banking services that are offered by North Valley Bank. These competitors include national and super-regional banks, finance companies, investment banking and brokerage firms, credit unions, government-assisted farm credit programs, other community banks and technology-oriented financial institutions offering online services. In particular, North Valley Bank’s competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances, such as Internet-based banking services that cross traditional geographic bounds, enable more companies to provide financial services. If North Valley Bank is unable to attract and retain banking customers, it may be unable to continue its level of loans and deposits, which may adversely affect its and the Company’s results of operations, financial condition and future prospects.
Dependence on Key Employees.The Company and North Valley Bank are dependent on the successful recruitment and retention of highly qualified personnel. Our ability to implement our business strategies is closely tied to the strengths of our chief executive officer and other key officers. Our key officers have extensive experience in the banking industry which is not easily replaced. 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 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. The Company very actively recruits for all open positions and management believes that its employee relations are good.
Growth Strategy. The Company has pursued and continues to pursue a growth strategy which depends primarily on generating an increasing level of loans and deposits at acceptable risk levels. The Company may not be able to sustain this growth strategy without establishing new branches or new products. Therefore, the Company may expand in its current markets by opening or acquiring branch offices or may expand into new markets or make strategic acquisitions of other financial institutions or branch offices. This expansion may require significant investments in equipment, technology, personnel and site locations. Our success in implementing our growth strategy may not be possible without corresponding increases in our noninterest expenses. In addition, growth through acquisitions represents a component of our business strategy. The need to integrate the operations and personnel of acquired banks and branches may not always be successfully accomplished. Any inability to improve operating performance through integration and/or merger of operations, functions or banks could increase expenses and impact the Company’s performance.
Governmental Fiscal and Monetary Policies. The business of banking is affected significantly by the fiscal and monetary policies of the federal government and its agencies. Such policies are beyond the control of the Company. The Company is particularly affected by the policies established by the Board of Governors in relation to the supply of money and credit in the United States. The instruments of monetary policy available to the Board of Governors can be used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits, and this can and does have a material effect on the Company’s business, results of operations and financial condition.
Geographic Concentration. All of the business of the Company is located in the State of California and the banking offices of the Company are located in the Northern California Counties of Shasta, Trinity, Humboldt, Del Norte, Yolo, Sonoma, Placer and Mendocino. As a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those counties. Our success depends upon the business activity, population, employment and income levels, deposits and real estate activity in these markets. Adverse economic conditions and unemployment trends in those markets are affecting the ability of our customers to repay their loans which has reduced our growth rate and impacted our financial condition and results of operations. Economic conditions in the State of California are subject to various uncertainties at this time, including the budgetary and fiscal difficulties facing the California State Government. Conditions in the California economy may deteriorate and such deterioration would adversely affect the Company.
Commercial Loans.As of December 31, 2013, approximately 9.3% of our loan portfolio consisted of commercial business loans. The credit risk for commercial loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the mobility of collateral, the effect of general economic conditions and the increased difficulty of evaluating and monitoring these types of loans. In addition, unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired.
Real Estate Values.A large portion of the loan portfolio of the Company is dependent on real estate. At December 31, 2013, real estate served as the principal source of collateral with respect to approximately 81.9% of the Company’s loan portfolio. A continuing substantial decline in the economy in general, or a continuing declineconsolidation in real estate values in the Company’s primary operating market areas in particular, 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 mortgage-backed securities included in 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. In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize the amount equal to the indebtedness secured by the property in the event of foreclosure.
Construction and Development Loans. At December 31, 2013, real estate construction loans totaled $27.4 million, or 5.4% of our total loan portfolio. Residential construction loans, including land acquisition and development, totaled $20.3 million or 74.0% of the Company’s real estate construction portfolio, and 4.0% of the total loan portfolio. Construction, land acquisition and development lending involve additional risks because funds are advanced on the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the completion of the project and the ability of the borrower to sell the property, rather than the ability of the borrower or the guarantor to repay the principal and interest. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan, as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time.
Other Real Estate Owned (“OREO”). Real estate acquired through, or in lieu of, loan foreclosures is expected to be sold and is recorded at its fair value less estimated costs to sell. The amount, if any, by which the recorded amount of the loan exceeds the fair value (less estimated costs to sell) are charged to the allowance for loan losses, if necessary. The Company’s earnings could be materially and adversely affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments, and other expenses associated with property ownership. Also, any further decrease in market prices of real estate in our market areas may lead to additional OREO write downs, with a corresponding expense in our income statement. The Company’s OREO totaled $3,454,000, $22,423,000 and $20,106,000 at December 31, 2013, 2012 and 2011, respectively.
Allowance for Loan Losses.Like all financial institutions, the Company maintains an allowance for loan losses to provide for loan defaults and non-performance, but the allowance for loan losses may not be adequate to cover actual loan losses. In addition, future provisions for loan losses could materially and adversely affect the Company and therefore the Company’s operating results. The Company’s allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond the Company’s control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review the Company’s loans and allowance for loan losses. We believe that the Company’s allowance for loan losses is adequate to cover current losses, but a continuing decline in real estate values combined with higher rates of unemployment or under-employment in our operating markets could result in an increase in classified loans and the allowance for loan losses. These occurrences could materially and adversely affect the Company’s earnings.
Nonperforming Loans. In recent years, we have experienced some improvement in the performance of loans, particularly construction, development and land loans, and unsecured commercial and consumer loans after several years of deterioration. The Company’s nonperforming loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) were approximately $5,093,000, $5,835,000 and $18,411,000 at December 31, 2013, 2012 and 2011, respectively. Nonperforming loans as a percentage of the Company’s total loans were 1.00%, 1.19%, and 4.04% at December 31, 2013, 2012 and, 2011, respectively. Nonperforming loans adversely affect the Company’s net income in various ways. We do not record interest income on nonaccrual loans; the costs of reappraising adversely classified assets, legal and other costs associated with loan collections, and other operating costs related to foreclosed assets have increased our noninterest expense; and upon taking collateral through foreclosure or similar proceedings, we are required to mark the related loan to the then fair value of the collateral, less estimated selling costs, which may result in a loss. Until economic and market conditions improve, we expect that our level of nonperforming loans will continue to impact our earnings, and could have a substantial adverse impact if conditions deteriorate further.
The Effects of Legislation in Response to Current Credit Conditions. Legislation passed at the federal level and/or by the State of California in response to current conditions affecting credit markets could cause the Company to experience higher loan losses if such legislation reduces the amount that borrowers are otherwise contractually required to pay under existing loan contracts with North Valley Bank. Such legislation could also result in the imposition of limitations upon North Valley Bank’s ability to foreclose on property or other collateral or make foreclosure less economically feasible. Such events could result in increased loan losses and require a material increase in the allowance for loan losses and thereby adversely affect the Company’s results of operations, financial condition, future prospects, profitability and stock price.
Dilution of Common Stock.Shares of the Company’s common stock may be issued in public or private capital raising transactions, future acquisitions, joint ventures, strategic alliances, or for other corporate purchases approved by the Board of Directors. On April 22, 2010, the Company raised $40 million (in gross proceeds) in a private placement of 40,000 shares of its Mandatorily Convertible Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”) to a limited number of institutional and other accredited investors, including certain directors and executive officers of the Company. The shares of Series A Preferred Stock were convertible into shares of the Company’s common stock and, on July 21, 2010, with the prior approval of the Company shareholders, all 40,000 shares of Series A Preferred Stock were converted into a 26,666,646 shares of Company common stock (resulting in a total of 34,162,463 shares of common stock outstanding on such date). Shares of the Company’s common stock remaining eligible for future sale could have a further dilutive effect on the market for the common stock and could adversely affect the market price. The Amended and Restated Articles of Incorporation of the Company currently authorize the issuance of 60,000,000 shares of common stock, of which 6,836,463 were outstanding at December 31, 2013 (after a one-for-five reverse stock split effective on December 28, 2010). Pursuant to Company stock option plans, at December 31, 2013, employees and directors of the Company had outstanding options to purchase 354,710 shares of common stock. As of December 31, 2013, there were 241,635 shares of common stock available for grants under the Company’s stock option plans.
Operations Risks.The Company is subject to a variety of operations risks, including, but not limited to, reputational risk, legal risk and compliance risk, data processing system failures and errors, operational errors resulting from faulty or disabled computer or telecommunications systems and the risk of fraud or theft by employees or outsiders, any of which may adversely affect our business and results of operations. 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 Bank is subject to periodic regulatory examinations in the ordinary course of business which are conducted by the Federal Reserve Bank of San Francisco and the California DBO.
Business Confidence and International Uncertainty.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 United States economy and by extension, the California economy including business activity in the Company’s market areas. Further economic deterioration and a loss of business confidence, whether at the national, state or local level, 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 required to be reserved for loan losses, reducing the value of collateral held as security for the Company’s loans, and causing a decline in the Company’s stock price.
The Effects of Changes to FDIC Insurance Coverage Limits and Assessments.FDIC insurance assessments are uncertain and increased premiums may adversely affect the Company’s earnings. The FDIC charges insured financial institutions premiums to maintain the DIF. Current economic conditions have increased expectations for additional bank closures and, in such event, the FDIC would take control of the failed banks and guarantee payment of deposits up to applicable insured limits from the DIF. Insurance premium assessments to insured financial institutions may increase as necessary to maintain adequate funding of the DIF. The EESA of 2008 included a provision for an increase in the amount of deposits insured by the FDIC to $250,000, which was scheduled to remain in effect through December 31, 2013. With enactment of the Dodd-Frank Act on July 21, 2010, the $250,000 per depositor insurance limit was made permanent. The TAG program which provided unlimited deposit insurance for non-interest bearing transaction accounts was not extended and it expired on December 31, 2012. It is not clear how depositors will regard the increase in insurance coverage to $250,000 in the future. Despite the increase, some depositors may reduce the amount of deposits held at North Valley Bank if concerns regarding bank failures persist, which could affect the level and composition of North Valley Bank’s deposit portfolio and thereby directly impact its funding costs and net interest margin. North Valley Bank’s funding costs may also be adversely affected in the event that activities of the Federal Reserve Board and the U.S. Department of the Treasury to provide liquidity for the banking system and improvement in capital markets are curtailed or are unsuccessful. Such events could reduce liquidity in the markets, thereby increasing funding costs to North Valley Bank or reducing the availability of funds to finance its existing operations and thereby adversely affect the Company’s results of operations, financial condition, future prospects, profitability and stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company’s head office is located at 300 Park Marina Circle, Redding, California 96001. As of December 31, 2013, the Bank had branch offices in Shasta County (ten branches), Trinity County (two branches), Humboldt County (five branches), Del Norte County (one branch), Yolo County (one branch), Sonoma County (one branch), Placer County (one branch) and Mendocino County (one branch).
The Bank owns eleven branch office locations. The Bank leases eleven branch office locations, one loan production office, one administrative building, one non branch location and one storage warehouse facility. Expiration dates of the Bank’s leases range from October 2013 to September 2023. Certain properties currently leased have renewal options which could extend the use of the facility for additional specified terms, and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance. In the opinion of management, all properties are adequately covered by insurance and existing facilities are considered adequate for present and anticipated future use.
The following table summarizes the Company’s premises, both owned and leased:
As of December 31, 2013, the Bank’s investment in premises and equipment, net of depreciation, totaled $7,833,000. SeeNote 6 to the Consolidated Financial Statements.
From time to time, the Company, through NVB, acquires real property through foreclosure of defaulted loans. The policy of the Company is not to usethe surviving or permanently retain any such properties but to resell them when practicable.resulting Company, a “change in control” occurs.
There are no material legal proceedings pending against the Company or against any of its property. The Company, becauseAll 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. 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 haveExecutive Officers are, upon a materially adverse effect on its consolidated financial position.
On January 24, 2014, a putative shareholder class action lawsuit titledJohn Solak v. North Valley Bancorp, et al. was filedchange in the Superior Court of the State of California, County of Shasta. TriCo Bancshares and all of the individuals serving as Directorscontrol of the Company, are also named as defendants. The complaint alleges breachentitled under their Employment Agreements to receive the “change in control” benefits described in their Salary Continuation Agreements (see discussion of fiduciary duty and aiding and abetting breach of fiduciary duty in connection with the Agreement and Plan of Merger and Reorganization signed between the Company and TriCo Bancshares on January 21, 2014. The Company and the Directors have not yet respondedSalary Continuation Agreements above), subject to the complaint. The Company and its legal counsel believe the complaint’s claims are without merit. The resolution of this matter is not expected to have a material impact on the Company’s business, financial conditionany limitations by federal statute or results of operations, though no assurance can be given in this regard.regulation.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The North Valley Bancorp common stock is quoted and trades on the NASDAQ Global Select MarketAll options outstanding under the symbol “NOVB.” The shares were first listed with the NASDAQ Stock Market in April 1998. The table below summarizes the Common Stock high and low trading prices during the two-year period ended December 31, 2013 as reported on the NASDAQ Global Select Market. The Company did not declare any cash dividends on its common stock for the years ended 2013 and 2012.
Year Ended December 31, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter | $ | 19.00 | $ | 14.00 | $ | 12.44 | $ | 9.39 | ||||||||
Second Quarter | $ | 18.00 | $ | 16.22 | $ | 15.00 | $ | 12.24 | ||||||||
Third Quarter | $ | 20.00 | $ | 16.49 | $ | 14.41 | $ | 13.00 | ||||||||
Fourth Quarter | $ | 20.24 | $ | 18.56 | $ | 14.41 | $ | 13.65 |
Holders
The Company had approximately 447 shareholders of record as of December 31, 2013.
Dividends
As a California corporation, the Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law (the “Corporation Law”). The Corporation Law provides that neither a corporation nor any of its subsidiaries shall make a distribution to the corporation’s shareholders unless the board of directors has determined in good faith either of the following: (1) the amount of retained earnings of the corporation immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or (2) immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount. The good faith determination of the board of directors may be based upon (1) financial statements prepared on the basis of reasonable accounting practices and principles, (2) a fair valuation, or (3) any other method reasonable under the circumstances; provided, that a distribution may not be made if the corporation or subsidiary making the distribution is, or is likely to be, unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature. The term “preferential dividends arrears amount” means the amount, if any, of cumulative dividends in arrears on all shares having a preference with respect to payment of dividends over the class or series to which the applicable distribution is being made, provided that if the articles of incorporation provide that a distribution can be made without regard to preferential dividends arrears amount, then the preferential dividends arrears amount shall be zero. The term “preferential rights amount” means the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights, including accrued but unpaid dividends, of other shareholders upon dissolution that are superior to the rights of the shareholders receiving the distribution, provided that if the articles of incorporation provide that a distribution can be made without regard to any preferential rights, then the preferential rights amount shall be zero.
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 NVB. As a California banking corporation, the ability of NVB to pay cash dividends and/or management fees is subject to restrictions set forth in the California Financial Code (the “Financial Code”). The Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of (a) the bank’s retained earnings; or (b) the bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its net income for its current fiscal year. In the event that the Commissioner determines that the stockholders’ equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the Commissioner may order the bank to refrain from making a proposed distribution.
The Board of Governors generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. The policy of the Board of Governors is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Such policy also applies to the payment of cash dividends by state member banks such as NVB.
The FDIC may also restrict the payment of dividends by a subsidiary bank if such payment would be deemed unsafe or unsound or if after the payment of such dividends, the bank would be included in one of the “undercapitalized” categories for capital adequacy purposes pursuant to the FDIC Improvement Act of 1991.
The Board of Directors of the Company decides whether to declare and pay dividends after consideration of the Company’s earnings, financial condition, future capital needs, regulatory requirements and other factors as the Board of Directors may deem relevant. On January 29, 2009, primarily as a result of the Company’s operating performance for 2008, the Board of Directors determined that it was in the best interest of the Company to suspend indefinitely the payment of quarterly cash dividends on its common stock, beginning in 2009. As a result, no cash dividends were declared or paid during 2013, 2012 and 2011.
SeeNote 16 to the Consolidated Financial Statements for additional information regarding the payment of dividends, including information regarding certain limitations on the payment of dividends or distributions by the Company or NVB.
Performance Graph
The following graph compares our cumulative total shareholder return since December 31, 2008 with the NASDAQ Composite Index, the SNL $500 million - $1 billion Bank Index, and SNL Western Bank Index. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100.00 on December 31, 2008.
Period Ending | ||||||||||||||||||||||||
Index | 12/31/08 | 12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | ||||||||||||||||||
North Valley Bancorp | 100.00 | 55.88 | 47.86 | 51.39 | 76.15 | 101.12 | ||||||||||||||||||
NASDAQ Composite | 100.00 | 145.36 | 171.74 | 170.38 | 200.63 | 281.22 | ||||||||||||||||||
SNL Bank $500M-$1B | 100.00 | 95.24 | 103.96 | 91.46 | 117.25 | 152.05 | ||||||||||||||||||
SNL Western Bank | 100.00 | 91.83 | 104.05 | 94.00 | 118.63 | 166.91 |
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected historical consolidated financial data, and is derived in part from our audited consolidated financial statements. The selected historical consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, which are included in this Annual Report on Form 10-K as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Selected Consoldidated Financial Data | ||||||||||||||||||||
Year ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||
Income Statement | ||||||||||||||||||||
Total interest income | $ | 32,213 | $ | 33,731 | $ | 37,145 | $ | 38,922 | $ | 43,955 | ||||||||||
Total interest expense | 1,618 | 3,525 | 5,786 | 8,985 | 12,721 | |||||||||||||||
Net interest income | 30,595 | 30,206 | 31,359 | 29,937 | 31,234 | |||||||||||||||
Provision for loan losses | — | 2,100 | 2,650 | 7,970 | 26,500 | |||||||||||||||
Net interest income after provision for loan losses | 30,595 | 28,106 | 28,709 | 21,967 | 4,734 | |||||||||||||||
Total noninterest income | 14,137 | 16,419 | 14,365 | 12,944 | 14,010 | |||||||||||||||
Total noninterest expense | 39,513 | 39,979 | 39,715 | 42,144 | 53,990 | |||||||||||||||
Income (loss) before provision (benefit) for income taxes | 5,219 | 4,546 | 3,359 | (7,233 | ) | (35,246 | ) | |||||||||||||
Provision (benefit) for income taxes | 1,594 | (1,744 | ) | 312 | (985 | ) | (9,394 | ) | ||||||||||||
Net income (loss) | 3,625 | 6,290 | 3,047 | (6,248 | ) | (25,852 | ) | |||||||||||||
Preferred stock discount | — | — | — | (18,667 | ) | — | ||||||||||||||
Net income (loss) available to common stockholders | $ | 3,625 | $ | 6,290 | $ | 3,047 | $ | (24,915 | ) | $ | (25,852 | ) | ||||||||
Income (loss) per share (1) | ||||||||||||||||||||
Basic | $ | 0.53 | $ | 0.92 | $ | 0.45 | $ | (6.42 | ) | $ | (17.24 | ) | ||||||||
Diluted | $ | 0.53 | $ | 0.92 | $ | 0.45 | $ | (6.42 | ) | $ | (17.24 | ) | ||||||||
Statement of Condition | ||||||||||||||||||||
Total assets | $ | 917,764 | $ | 902,343 | $ | 904,966 | $ | 884,941 | $ | 884,362 | ||||||||||
Investment securities, interest-bearing deposits in other financial institutions and federal funds sold | $ | 319,842 | $ | 303,905 | $ | 354,380 | $ | 275,114 | $ | 195,019 | ||||||||||
Net loans | $ | 499,943 | $ | 481,753 | $ | 443,559 | $ | 498,473 | $ | 583,878 | ||||||||||
Deposits | $ | 787,849 | $ | 768,580 | $ | 766,239 | $ | 753,790 | $ | 787,809 | ||||||||||
Stockholder’s equity | $ | 93,429 | $ | 96,161 | $ | 89,465 | $ | 83,978 | $ | 52,302 | ||||||||||
Common Stock Data | ||||||||||||||||||||
Shares outstanding | 6,836,463 | 6,835,192 | 6,833,752 | 6,832,492 | 1,499,163 | |||||||||||||||
Book value per share (2) | $ | 13.67 | $ | 14.07 | $ | 13.09 | $ | 12.29 | $ | 34.89 | ||||||||||
Performance Ratios | ||||||||||||||||||||
Return (loss) on average assets | 0.40 | % | 0.69 | % | 0.34 | % | (0.69 | %) | (2.85 | %) | ||||||||||
Return (loss) on average equity | 3.78 | % | 6.70 | % | 3.54 | % | (8.03 | %) | (34.92 | %) | ||||||||||
Capital Ratios | ||||||||||||||||||||
Risk based capital: | ||||||||||||||||||||
Total (8% minimum ratio) | 19.04 | % | 18.28 | % | 19.53 | % | 17.63 | % | 12.19 | % | ||||||||||
Tier I (4% minimum ratio) | 17.79 | % | 17.01 | % | 17.99 | % | 15.94 | % | 9.09 | % | ||||||||||
Leverage ratio | 12.16 | % | 11.77 | % | 11.82 | % | 11.48 | % | 7.16 | % |
(1) Earnings per share amounts have been adjusted to give effect to a one for five reverse stock split on December 28, 2010.
(2) Represents stockholders’ equity divided by the number of shares of common stock outstanding at the end of the period indicated.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to, matters described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and subject to the safe-harbor provision of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may contain words related to future projections including, but not limited to, words such as “believe,” “expect,” “anticipate,” “intend,” “may,” “will,” “should,” “could,” “would,” and variations of those words and similar words that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, the following: (1) the duration of financial and economic volatility and actions taken by the United States Congress and governmental agencies, including the United States Department of the Treasury, to deal with challenges to the U.S. financial system; (2) variances in the actual versus projected growth in assets and return on assets; (3) loan losses; (4) expenses; (5) changes in the interest rate environment including interest rates charged on loans, earned on securities investments and paid on deposits and other borrowed funds; (6) competition effects; (7) fee and other noninterest income earned; (8) general economic conditions nationally, regionally, and in the operating market areas of the Company and its subsidiaries, including State and local budget issues being addressed in California; (9) changes in the regulatory environment including government intervention in the U.S. financial system; (10) changes in business conditions and inflation; (11) changes in securities markets, public debt markets, and other capital markets; (12) data processing and other operational systems failures or fraud; (13) a further decline in real estate values in the Company’s operating market areas; (14) the effects of uncontrollable events such as terrorism, the threat of terrorism or the impact of the current military conflicts in Afghanistan and Iraq and the conduct of the war on terrorism by the United States and its allies, worsening financial and economic conditions, natural disasters, and disruption of power supplies and communications; and (15) changes in accounting standards, tax laws or regulations and interpretations of such standards, laws or regulations, as well as other factors. The factors set forth under Item 1A, “Risk Factors,” in this report and other cautionary statements and information set forth in this report should be carefully considered and understood as being applicable to all related forward-looking statements contained in this report when evaluating the business prospects of the Company and its subsidiaries.
Forward-looking statements are not guarantees of performance. By their nature, they involve risks, uncertainties and assumptions. Actual results and shareholder values in the future may differ significantly from those expressed in forward-looking statements. You are cautioned not to put undue reliance on any forward-looking statement. Any such statement speaks only as of the date of the report, and in the case of any documents that may be incorporated by reference, as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statements, or to report any new information, future event or other circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by law. However, your attention is directed to any further disclosures made on related subjects in our subsequent reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.
Critical Accounting Policies
General.The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. 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, initial and subsequent valuation of other real estate owned, expenses related to the Company’s share-based payments programs, valuation of deferred tax assets and liabilities and investment impairment to be critical accounting policies.
Loans and Allowance for Loan Losses. The allowance for loan losses is an estimate of loan losses inherent in the Company’s loan portfolio as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are evaluated collectively for impairment.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.
A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.
The determination of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company calculates the allowance for each portfolio segment (loan type). These portfolio segments include commercial, real estate commercial, real estate construction (including land and development loans), real estate mortgage, installment and other loans (principally home equity loans). The allowance for loan losses attributable to each portfolio segment, which includes both individually impaired loans and loans that are collectively evaluated for impairment, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet.
The Company assigns a risk rating to all loans except pools of homogeneous loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows:
Pass– A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention – A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard– A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful– Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss– Loans classified as loss are considered uncollectible and charged off immediately.
The general reserve component of the allowance for loan losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below.
Commercial.Commercial loans generally possess more inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Real Estate Commercial.Real estate commercial loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate Construction. Real estate construction loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Real Estate Mortgage. The degree of risk in real estate mortgage lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Individual loans and receivables in homogeneous loan portfolio segments are not evaluated for specific impairment. Rather, the sole component of the allowance for these loan types is determined by collectively measuring impairment reserve factors based on management’s assessment of the following for each homogeneous loan portfolio segment: (1) inherent credit risk, (2) delinquencies, (3) historical losses and (4) other qualitative factors. The homogenous loan portfolio segments are described in further detail below.
Installment– An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made directly for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Other (principally home equity loans) – The degree of risk in home equity loans depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s primary regulators, the Federal Reserve Bank of San Francisco and the California Department of Financial Institutions, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
Other Real Estate Owned (“OREO”).OREO represents properties acquired through foreclosure or physical possession. Write-downs to fair value at the time of transfer to OREO is charged to allowance for loan losses. These properties are subsequently accounted for at the lower of cost or fair value less costs to sell. Subsequent to foreclosure, management periodically evaluates the value of OREO held for sale and records a valuation allowance for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on our assessment of information available to us and depends upon a number of factors, including our historical experience, economic conditions, and issues specific to individual properties. Management’s evaluation of these factors involves subjective estimates and judgments that may change.
Share Based Compensation. At December 31, 2013, the Company had two stock-based compensation plans: the 1998 Employee Stock Incentive Plan and the 2008 Stock Incentive Plan which are described more fully in Notes 1 and 13 toat the Consolidated Financial Statements included herein in Item 8, “Financial Statements and Supplementary Data”. Compensation cost is recognized on all share-based payments over the requisite service periods of the awards based on the grant-date fair value of the options determined using the Black-Scholes-Merton based option valuation model. Critical assumptions that are assessed in computing the fair value of share-based payments include stock price volatility, expected dividend rates, the risk free interest rate and the expected lives of such options. Compensation cost recorded is net of estimated forfeitures expected to occur prior to vesting. For further information on the computation of the fair value of share-based payments, seeNotes 1 and13 to the Consolidated Financial Statements.
Impairment of Investment Securities. An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.
Accounting for Income Taxes.The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.
The Company applies the asset and liability method to account for income taxes. Deferred tax assets and liabilities are calculated by applying applicable tax laws to the differences between the financial statement basis and the tax basis of assets and liabilities. The effect on deferred taxes of changes in tax laws and rates is recognized in income in the period that includes the enactment date. On the consolidated balance sheet, net deferred tax assets are included in other assets. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
The Company accounts for uncertainty in income taxes by recording only tax positions that met the more likely than not recognition threshold, that the tax position would be sustained in a tax examination.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of December 31, 2013, the liability for unrecognized tax benefits is $519,000.
As of December 31, 2013, the net deferred tax asset was $15,309,000. This is compared to a net deferred tax asset of $12,346,000 as of December 31, 2012.
Business Organization
North Valley Bancorp (the “Company”) is a California corporation and a bank holding company for NVB, a state-chartered, Federal Reserve Member bank. NVB operates out of its main office located at 300 Park Marina Circle, Redding, California 96001, with twenty-two branches, including two supermarket branches. The Company’s principal business consists of attracting deposits from the general public and using the funds to originate commercial, real estate and installment loans to customers, who are predominately small and middle market businesses and middle income individuals. The Company’s primary source of revenues is interest income from its loan and investment securities portfolios. The Company is not dependent on any single customer for more than ten percent of its revenues.
Overview
Proposed Merger with TriCo Bancshares
As announced by the Company on January 21, 2014 and reported in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 22, 2014 (the “Current Report”), the Company has entered into an Agreement and Plan of Merger and Reorganization dated January 21, 2014 (the “Merger Agreement”), pursuant to which the Company would merge with and into TriCo Bancshares, a California corporation (“TriCo”), with TriCo being the surviving corporation. Immediately thereafter, the Company’s subsidiary bank, North Valley Bank, would be merged with and into TriCo’s subsidiary bank, Tri Counties Bank. Underfully vested may, nonetheless, under the terms of the Merger Agreement, the Company shareholders would receive a fixed exchange ratiorelevant agreement of 0.9433 sharesmerger or consolidation or plan of TriCo common stock for each share of Company common stock, providing the Company shareholders with aggregate ownership on a pro forma basis of approximately 28.6% of the common stock of the combined company. Holders of the Company’s outstanding in-the-money stock options would receive cash, net of applicable taxes withheld, for the value of their unexercised stock options. The merger is expectedsale, liquidation or dissolution, be entitled to qualifybe exercised as a tax-free exchange for shareholders who receive shares of TriCo common stock. The transactions contemplated by the Merger Agreement are expected to close in the second or third quarter of 2014, pending approvals of the Company shareholders and the TriCo shareholders, the receipt of all necessary regulatory approvals, and the satisfaction of other closing conditions which are customary for such transactions. For additional information, reference should be made to the text of the Agreement and Plan of Merger and Reorganization, filed as an exhibit to the Current Report, and to otherif they were fully (100 percent) vested. Summary information regarding TriCo and theeach Company their respective businesses and the status of their proposed merger, as reported from time to time in other filings with the Securities and Exchange Commission.
Financial Results
For the year ended December 31, 2013, the Company recorded net income of $3,625,000, compared to net income of $6,290,000, for the year ended December 31, 2012. For 2013, the Company realized a return on average stockholders’ equity of 3.78% and a return on average assets of 0.40%, as compared to a return on average stockholders’ equity of 6.70% and a return on average assets of 0.69% for 2012.
During 2013, total assets increased $15,421,000, or 1.71%, to $917,764,000 at year end. The loan portfolio increased $17,033,000, or 3.46%, and totaled $509,244,000 at December 31, 2013 compared to $492,211,000 at December 31, 2012. See “Loan Portfolio” on page 39 for further information. Available-for-sale investment securities decreased $6,336,000 to $279,479,000 at December 31, 2013 from $285,815,000 at December 31, 2012 due to proceeds from maturities and principal pay downs. The loan to deposit ratio at December 31, 2013 was 64.6% as compared to 64.0% at December 31, 2012. Total deposits increased $19,269,000, or 2.51%, to $787,849,000 at December 31, 2013 compared to $768,580,000 at December 31, 2012. The overall increase in deposits was due to the increase in non-maturity deposits of $41,908,000. This was offset by a decrease in time certificates of $22,639,000.
Nonperforming loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) decreased $742,000, or 12.7%, to $5,093,000 at December 31, 2013 from $5,835,000 at December 31, 2012. Nonperforming loans as a percentage of total loans were 1.00% at December 31, 2013, compared to 1.19% at December 31, 2012.
Nonperforming assets (defined as nonperforming loans and OREO) totaled $8,547,000 at December 31, 2013, a decrease of $19,711,000 from the December 31, 2012 balance of $28,258,000. Nonperforming assets as a percentage of total assets were 0.93% at December 31, 2013 compared to 3.13% at December 31, 2012.
Gross charge-offs for the year ended December 31, 2013 were $1,840,000 and recoveries for the same year totaled $683,000 resulting in net charge-offs of $1,157,000, compared to gross charge-offs for the year ended December 31, 2012 of $4,702,000 and recoveries of $404,000 resulting in net charge-offs of $4,298,000.
Results of Operations
Net Interest Income and Net Interest Margin (fully taxable equivalent basis): Net interest incomestock option plan is the difference between interest earned on loans and investments and interest paid on deposits and borrowings, and is the primary revenue source for the Company. Net interest margin is net interest income expressed as a percentage of average earning assets. These items have been adjusted to give effect to $190,000, $272,000 and $324,000 of taxable-equivalent interest income on tax-free investments for the years ending December 31, 2013, 2012 and 2011.
Net interest income for 2013 was $30,785,000, a $307,000, or 1.01%, increase from net interest income of $30,478,000 in 2012. Interest income decreased $1,600,000, or 4.71%, to $32,403,000 in 2013 due primarily to a decrease in average yield on loans. The Company also had $224,000 in foregone interest income for the loans placed on nonaccrual status during the year ended December 31, 2013 compared to $575,000 and $1,039,000 for the years ended December 31, 2012 and 2011, respectively. The average loans outstanding in 2013 increased $30,848,000, or 6.64%, to $495,495,000. This higher loan volume increased interest income by $1,731,000 in 2013. The average yield earned on the loan portfolio decreased 42 basis points to 5.19% for 2013. This decrease in yield decreased interest income by $2,054,000 in 2013. The net decrease to interest income from the loan portfolio was $323,000. The 2013 average balance of the investment portfolio decreased $11,908,000, or 3.85%, compared to 2012, which accounted for the $456,000 decrease in interest income in 2013. The 2013 average yield of the investment portfolio decreased 32 basis points which accounted for an $809,000 decrease in interest income.
Interest expense in 2013 decreased $1,907,000, or 54.10%, to $1,618,000. The decrease was primarily related to the average rates paid on time deposits which decreased 38 basis points to 0.43% and reduced interest expense by $596,000 along with a decrease in average time deposits of $35,425,000 which reduced interest expense by $287,000 during 2013, and secondarily driven by a decrease in interest expense on other borrowed funds. The average rate paid on other borrowed funds decreased 219 basis points to 2.31% for 2013 compared to 4.50% for 2012, resulting in a decrease to interest expense of $506,000. The average rate paid on savings and money market accounts decreased 8 basis points to 0.13% for 2013 compared to 0.21% for 2012, resulting in a decrease to interest expense of $186,000 in 2013. This decrease was offset partially by higher average balances in savings and money market accounts of $19,190,000 in 2013, resulting in a $40,000 increase in interest expense compared to 2012.
Net interest margin for 2013 decreased 3 basis points to 3.77% from 3.80% in 2012. The net interest margin for the fourth quarter of 2013 was 3.71%, which was a 22 basis point decrease from 3.93% in the fourth quarter of 2012 and an 11 basis point decrease from 3.82% in the third quarter of 2013. The decrease in the net interest margin in the fourth quarter of 2013 compared to the third quarter of 2013 is primarily due to a decrease average rate earned on loans.
Net interest income for 2012 was $30,478,000, a $1,205,000, or 3.80%, decrease from net interest income of $31,683,000 in 2011. Interest income decreased $3,466,000, or 9.25%, to $34,003,000 in 2012 due primarily to a decrease in average yield on loans. The Company also had $575,000 in foregone interest income for the loans placed on nonaccrual status during the year ended December 31, 2012 compared to $1,039,000 for the year ended December 31, 2011. The average loans outstanding in 2012 decreased $18,198,000, or 3.77%, to $464,647,000. This lower loan volume decreased interest income by $1,088,000 in 2012. The average yield earned on the loan portfolio decreased 37 basis points to 5.61% for 2012. This decrease in yield decreased interest income by $1,713,000 in 2012. The net decrease to interest income from the loan portfolio was $2,801,000. The 2012 average balance of the investment portfolio increased $14,441,000, or 4.90%, compared to 2011, which accounted for the $298,000 increase in interest income in 2012. The 2012 average yield of the investment portfolio decreased 35 basis points which accounted for a $956,000 decrease in interest income.
Interest expense in 2012 decreased $2,261,000, or 39.08%, to $3,525,000. The decrease was primarily related to the average rates paid on time deposits which decreased 40 basis points to 0.81% and reduced interest expense by $783,000 along with a decrease in average time deposits of $22,932,000 which reduced interest expense by $277,000 during 2012. The average rate paid on savings and money market accounts decreased 23 basis points to 0.21% for 2012 compared to 0.44% for 2011, resulting in a decrease to interest expense of $525,000 in 2012. This decrease was offset partially by higher average balances in savings and money market accounts of $5,569,000 in 2012, resulting in a $25,000 increase in interest expense compared to 2011. The average rate paid on other borrowed funds decreased 141 basis points to 4.50% for 2012 compared to 5.91% for 2011, resulting in a decrease to interest expense of $426,000.
Net interest margin for 2012 decreased 12 basis points to 3.80% from 3.92% in 2011. The net interest margin for the fourth quarter of 2012 was 3.93%, which was a 25 basis point increase from 3.68% in the fourth quarter of 2011 and a 15 basis point increase from 3.78% in the third quarter of 2012. The increase in the net interest margin in the fourth quarter of 2012 compared to the third quarter of 2012 is primarily due to a decrease in average balance and average rate paid on the other borrowed funds.set forth below.
The following table sets forth the Company’s consolidated condensed average daily balancesNorth Valley Bank Executive Deferred Compensation Agreements 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.
Average Daily Balance Sheets | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
Average | Yield/ | Interest | Average | Yield/ | Interest | Average | Yield/ | Interest | ||||||||||||||||||||||||||||
Balance | Rate | Amount | Balance | Rate | Amount | Balance | Rate | Amount | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Federal funds sold | $ | 23,091 | 0.23 | % | $ | 54 | $ | 27,861 | 0.24 | % | $ | 66 | $ | 31,103 | 0.23 | % | $ | 73 | ||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Taxable securities | 289,510 | 2.09 | % | 6,051 | 297,451 | 2.38 | % | 7,075 | 280,708 | 2.70 | % | 7,580 | ||||||||||||||||||||||||
Nontaxable securities(1) | 7,936 | 7.04 | % | 559 | 11,903 | 6.72 | % | 800 | 14,205 | 6.71 | % | 953 | ||||||||||||||||||||||||
Total investments | 297,446 | 2.22 | % | 6,610 | 309,354 | 2.55 | % | 7,875 | 294,913 | 2.89 | % | 8,533 | ||||||||||||||||||||||||
Total loans (2)(3) | 495,495 | 5.19 | % | 25,739 | 464,647 | 5.61 | % | 26,062 | 482,845 | 5.98 | % | 28,863 | ||||||||||||||||||||||||
Total earning assets/interest income | 816,032 | 3.97 | % | 32,403 | 801,862 | 4.24 | % | 34,003 | 808,861 | 4.63 | % | 37,469 | ||||||||||||||||||||||||
Nonearning assets | 102,653 | 120,321 | 106,836 | |||||||||||||||||||||||||||||||||
Allowance for loan losses | (9,774 | ) | (11,888 | ) | (14,426 | ) | ||||||||||||||||||||||||||||||
Net nonearning assets | 92,879 | 108,433 | 92,410 | |||||||||||||||||||||||||||||||||
Total assets | $ | 908,911 | $ | 910,295 | $ | 901,271 | ||||||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
Transaction accounts | $ | 195,048 | 0.04 | % | $ | 73 | $ | 180,038 | 0.07 | % | $ | 125 | $ | 164,616 | 0.18 | % | $ | 293 | ||||||||||||||||||
Savings and money market | 245,260 | 0.13 | % | 325 | 226,070 | 0.21 | % | 471 | 220,501 | 0.44 | % | 971 | ||||||||||||||||||||||||
Time deposits | 158,051 | 0.43 | % | 686 | 193,476 | 0.81 | % | 1,569 | 216,408 | 1.21 | % | 2,629 | ||||||||||||||||||||||||
Other borrowed funds | 23,085 | 2.31 | % | 534 | 30,205 | 4.50 | % | 1,360 | 32,012 | 5.91 | % | 1,893 | ||||||||||||||||||||||||
Total interest bearing liabilities/interest expense | 621,444 | 0.26 | % | 1,618 | 629,789 | 0.56 | % | 3,525 | 633,537 | 0.91 | % | 5,786 | ||||||||||||||||||||||||
Noninterest bearing deposits | 174,281 | 164,437 | 159,242 | |||||||||||||||||||||||||||||||||
Other liabilities | 17,338 | 22,163 | 22,386 | |||||||||||||||||||||||||||||||||
Total liabilities | 813,063 | 816,389 | 815,165 | |||||||||||||||||||||||||||||||||
Stockholders’ equity | 95,848 | 93,906 | 86,106 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 908,911 | $ | 910,295 | $ | 901,271 | ||||||||||||||||||||||||||||||
Net interest income | $ | 30,785 | $ | 30,478 | $ | 31,683 | ||||||||||||||||||||||||||||||
Net interest spread | 3.71 | % | 3.68 | % | 3.72 | % | ||||||||||||||||||||||||||||||
Net interest margin (4) | 3.77 | % | 3.80 | % | 3.92 | % | ||||||||||||||||||||||||||||||
(1) Tax-equivalent basis; nontaxable 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 $190, $361 and $234 for years ended December 31, 2013, 2012 and 2011.
(4) Net interest margin is determined by dividing net interest income by total average earning assets.
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 rate (in thousands).
Changes in Volume/Rate
2013 Compared to 2012 | 2012 Compared to 2011 | |||||||||||||||||||||||
�� | Total | Total | ||||||||||||||||||||||
Average | Average | Increase | Average | Average | Increase | |||||||||||||||||||
Volume | Rate | (Decrease) | Volume | Rate | (Decrease) | |||||||||||||||||||
Interest Income | ||||||||||||||||||||||||
Interest on federal funds sold | $ | (11 | ) | $ | (1 | ) | $ | (12 | ) | $ | (7 | ) | $ | — | $ | (7 | ) | |||||||
Interest on investments: | ||||||||||||||||||||||||
Taxable securities | (189 | ) | (835 | ) | (1,024 | ) | 452 | (957 | ) | (505 | ) | |||||||||||||
Nontaxable securities | (267 | ) | 26 | (241 | ) | (154 | ) | 1 | (153 | ) | ||||||||||||||
Total investments | (456 | ) | (809 | ) | (1,265 | ) | 298 | (956 | ) | (658 | ) | |||||||||||||
Interest on loans | 1,731 | (2,054 | ) | (323 | ) | (1,088 | ) | (1,713 | ) | (2,801 | ) | |||||||||||||
Total interest income | 1,264 | (2,864 | ) | (1,600 | ) | (797 | ) | (2,669 | ) | (3,466 | ) | |||||||||||||
Interest Expense | ||||||||||||||||||||||||
Transaction accounts | 11 | (63 | ) | (52 | ) | 28 | (196 | ) | (168 | ) | ||||||||||||||
Savings and money market | 40 | (186 | ) | (146 | ) | 25 | (525 | ) | (500 | ) | ||||||||||||||
Time deposits | (287 | ) | (596 | ) | (883 | ) | (277 | ) | (783 | ) | (1,060 | ) | ||||||||||||
Other borrowed funds | (320 | ) | (506 | ) | (826 | ) | (107 | ) | (426 | ) | (533 | ) | ||||||||||||
Total interest expense | (556 | ) | (1,351 | ) | (1,907 | ) | (331 | ) | (1,930 | ) | (2,261 | ) | ||||||||||||
Total change in net interest income | $ | 1,820 | $ | (1,513 | ) | $ | 307 | $ | (466 | ) | $ | (739 | ) | $ | (1,205 | ) |
Provision for Loan losses. The provision for loan losses reflects changes in the credit quality of the entire loan portfolio. The provision for loan losses corresponds to management’s assessment as to the inherent risk in the portfolio for probable incurred losses. The provision adjusts the balance in the allowance for loan losses so that the allowance is adequate toNorth Valley Bank Executive Salary Continuation Agreements provide for the potential losses based upon historical experience, current economic conditions, the mix in the portfolio and other factors necessary in estimating these inherent losses. For further information, see discussion under “Loan Portfolio” on page 39 and “Allowance for Loan losses” on page 44.
The Company did not record a provision for loan losses for the year ended December 31, 2013. The Company’s provision for loan losses was $2,100,000 and $2,650,000 for the years ended December 31, 2012 and 2011, respectively. The decrease in the provision for loan losses is due primarily to a decrease in the level of charge-offs experienced of $2,862,000 to $1,840,000 at December 31 2013, down from $4,702,000 at December 31, 2012 and the decrease in the level of nonperforming loans to $5,093,000 at December 31, 2013, down from $5,835,000 at December 31, 2012. Loan charge-offs, net of recoveries were $1,157,000 in 2013, $4,298,000 in 2012 and $4,987,000 in 2011. The ratio of net charge-offs to average loans outstanding were 0.23% in 2013, 0.93% in 2012 and 1.03% in 2011. The ratioacceleration of the allowance for loan lossespayment of benefits to total loans was 1.83%Executive Officers thereunder upon a change in 2013, 2.12% in 2012 and 2.77% in 2011. The process for determining allowance adequacy and the resultant provision for loan losses includes a comprehensive analysiscontrol of the loan portfolio. Factors in the analysis include size and mix of the loan portfolio, nonperforming loan levels, charge-off/recovery activity and other qualitative factors including economic environment and activity. The decision to not record a provision for the year ended December 31, 2013 reflects management’s assessment of the overall adequacy of the allowance for loan losses including the consideration of the level of nonperforming loans, other trends in the quality and performance of our loan portfolio, and other general economic factors. Management believes that the current level of allowance for loan lossesCompany. Summary information regarding such agreements is set forth below, as of December 31, 2013, except for acceleration of $9,301,000, or 1.83%equity awards which is computed as of total loans, is adequate at this time. The allowance for loan losses was $10,458,000, or 2.12% of total loans, at December 31, 2012. This assessment includesJanuary 21, 2014, the considerationdate of the changes in nonperforming loans and the overall effect of the economy, particularly in real estate values in Northern California.Merger Agreement signed with TriCo.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
Amount | ||||||
Name | Payable (1) | |||||
Michael J. Cushman(2) | Payment of Three-times current Salary plus 3-year Average Bonus and Accelerated vesting of Salary Continuation Plan | $ | 1,353,255 | |||
Kevin R. Watson | Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting of Salary Continuation Plan | $ | 859,181 | |||
Scott R. Louis | Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting of Salary Continuation Plan | $ | 648,141 | |||
Roger D. Nash | Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting of Salary Continuation Plan | $ | 601,127 | |||
Gary S. Litzsinger | Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting of Salary Continuation Plan | $ | 549,358 | |||
Leo J. Graham | Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting of Salary Continuation Plan | $ | 655,317 |
(1) | Each amount shown in this column is the maximum, as the individual Agreements limit the amount of payment to any Executive Officer as a result of a change in control, including the value of acceleration of any equity awards and salary continuation plans, to the maximum amount permissible to avoid an “excess parachute payment” under Section 280G of the Internal Revenue Code and may be further limited by federal statute or regulation. |
(2) | The above amount is reduced by $235,131 due to the amount exceeding the 280G threshold. |
Noninterest Income.REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee consists of the following table is a summarymembers of the Company’s noninterest incomeBoard of Directors: Martin A. Mariani (Chairman), Roger B. Kohlmeier, Timothy R. Magill, and J.M. “Mike” Wells, Jr. All members of the Committee are independent as defined under SOX, the rules and regulations of the SEC and the corporate governance listing standards of NASDAQ.
The Compensation Committee reviews and recommends to the Board of Directors, salaries, performance based incentives, both annual and long-term, and other matters relating to the compensation of the Chief Executive Officer and the Chief Executive Officer’s recommendations as to Executive Officers, taking into consideration non-salary based benefits in the form of Company paid expenses for car allowances and club memberships. The Committee determines the base salary for the years endedChief Executive Officer by: (1) examining the Company’s performance against preset goals, (2) examining the Company’s performance within the banking industry, (3) evaluating the overall performance of the Chief Executive Officer, and (4) comparing the base salary of the Chief Executive Officer to that of other chief executive officers in the banking industry in the Company’s market area. In December 31 (in thousands):2013, the Committee recommended, and the Board approved, the following executive salaries, unchanged from January 2013, effective January 15, 2014: Mr. Cushman’s annual salary of $323,512; Mr. Watson’s annual salary of $212,580; Mr. Louis’ annual salary of $174,879; Mr. Nash’s annual salary of $174,879; Mr. Litzsinger’s annual salary of $149,940; and Mr. Graham’s annual salary of $193,597.
2013 | 2012 | 2011 | ||||||||||
Service charges on deposit accounts | $ | 3,690 | $ | 4,333 | $ | 4,635 | ||||||
Other fees and charges | 4,422 | 4,715 | 4,663 | |||||||||
Earnings on cash surrender value of life insurance policies | 1,472 | 1,363 | 1,359 | |||||||||
Gain on sale of loans | 3,038 | 3,154 | 1,172 | |||||||||
Gain on sale of securities | 548 | 1,877 | 1,677 | |||||||||
Other | 967 | 977 | 859 | |||||||||
Total | $ | 14,137 | $ | 16,419 | $ | 14,365 |
In December 2013, the Committee recommended, and the Board approved, that no stock options be awarded to the executives or directors as a result of discussions with the Chief Executive Officer, the General Counsel, outside legal counsel and other consultants in contemplation of the possible announcement of the Merger Agreement (subsequently signed on January 21, 2014) and the potential impact of the terms and conditions of the Merger Agreement on director and executive compensation issues, including the awarding of stock options.
Noninterest incomeThe members of the Compensation Committee have reviewed and discussed the foregoing Compensation Discussion and Analysis with management and, based on such review and discussion, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the North Valley Bancorp Annual Report on Form 10-K for the year ended December 31, 2013 decreased by $2,282,000, or 13.9%, to $14,137,000 from $16,419,000 for the year ended December 31, 2012. The decrease was primarily attributed to a reduction in gain on sale of securities of $1,329,000. Service charges on deposit accounts decreased by $643,000 to $3,690,000 for the year ended December 31, 2013 compared to $4,333,000 for the same period in 2012, reflecting a continuation of the decrease from December 31, 2012 to December 31, 2011, due to a decline in customer utilization of the program.2013.
Submitted by: | ||
Martin A. Mariani, Chairman | ||
Roger B. Kohlmeier | ||
Timothy R. Magill | ||
J.M. “Mike” Wells, Jr. | ||
Noninterest income for the year ended December 31, 2012 increased by $2,054,000, or 14.3%, to $16,419,000 from $14,365,000 for the year ended December 31, 2011. The increase was primarily attributed to gain on sale of loans of $3,154,000. Of the $3,154,000 gain on sale of loans for the year ended December 31, 2012, the sale of mortgage loans was $2,682,000 and the sale of SBA loans was $472,000 compared to the sale of mortgage loans of $492,000 and the sale of SBA loans of $680,000 for the same period in 2011. Service charges on deposit accounts decreased by $302,000 to $4,333,000 for the year ended December 31, 2012 compared to $4,635,000 for the same period in 2011. All other sources of fees and charges increased by $52,000 to $4,715,000 for the year ended December 31, 2012 compared to $4,663,000 for the same period in 2011. The Company had a $1,877,000 gain on sale of securities for the year ended December 31, 2012, an increase of $200,000 compared to $1,677,000 for the same period in 2011.
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY’S PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 THAT MIGHT INCORPORATE THIS PROXY STATEMENT OR FUTURE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, IN WHOLE OR IN PART, THE ABOVE REPORT SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY SUCH FILING.
Noninterest Expense.The following table is a summary of the Company’s noninterest expense for the years ended December 31 (in thousands):DIRECTOR COMPENSATION
2013 | 2012 | 2011 | ||||||||||
Salaries and benefits | $ | 20,454 | $ | 20,277 | $ | 18,657 | ||||||
Other real estate owned expense | 3,539 | 3,556 | 4,804 | |||||||||
Data processing | 2,605 | 2,517 | 2,507 | |||||||||
Occupancy | 2,495 | 2,547 | 2,786 | |||||||||
Professional services | 1,034 | 1,105 | 1,090 | |||||||||
Loan expense | 978 | 922 | 337 | |||||||||
Furniture and equipment | 860 | 938 | 1,062 | |||||||||
Director expense | 822 | 614 | 420 | |||||||||
FDIC and state assessments | 820 | 922 | 1,355 | |||||||||
ATM and online banking | 573 | 768 | 1,182 | |||||||||
Marketing | 571 | 608 | 607 | |||||||||
Printing and supplies | 488 | 479 | 542 | |||||||||
Operations expense | 474 | 507 | 652 | |||||||||
Postage | 450 | 477 | 537 | |||||||||
Messenger | 418 | 447 | 608 | |||||||||
Telecommunications | 294 | 412 | 305 | |||||||||
Other | 2,638 | 2,883 | 2,264 | |||||||||
Total | $ | 39,513 | $ | 39,979 | $ | 39,715 |
Noninterest expense decreased $466,000, or 1.17%, to $39,513,000 for the year ended December 31, 2013 from $39,979,000 for the same period in 2012. Salaries and employee benefits increased $177,000, for the year ended December 31, 2013 compared to the same period in 2012 primarily due to the hiring of production personnel and the development of production incentive plans. Occupancy and furniture and equipment expense decreased $130,000 for the year ended December 31, 2013 compared to the same period of 2012 due to a decrease in depreciation and rent expense as a result of facilities consolidation initiatives completed in 2012 and 2011. OREO expense decreased $17,000 to $3,539,000, for the year ended December 31, 2013 compared to $3,556,000 for the same period in 2012. For the year ended December 31, 2013, OREO expense consisted of operating expenses and losses from disposals or write-downs of $329,000 and $3,210,000, respectively, compared to $523,000 and $3,033,000, respectively, in 2012. FDIC and state assessments decreased $102,000 to $820,000 for the year ended December 31, 2013, compared to $922,000 for the same period in 2012, asAs a result of the terminationreview by the Compensation Committee of regulatory agreements withcertain third party compensation studies and other publicly available information, the Federal Reserve BankCommittee made recommendation to the Board of San FranciscoDirectors concerning the forms and the DBO ( formerly the California DFI) as well as a change in FDIC insurance assessment methodology, which changed the assessment base from total deposits to average total assets less tangible capital. All other expenses decreased $394,000 to $11,345,000amount of Director Compensation that would be appropriate for the year ended December 31, 2013 comparedCompany and its banking subsidiary based on market study, peer analysis, duties and responsibilities of an independent director, and performance of the Company and subsidiary Bank. The following sets forth the forms of Director Compensation that the Company employs to $11,739,000 for the same period in 2012.recruit and retain experienced directors.
Noninterest expense increased $264,000, or 0.66%, to $39,979,000 for the year ended December 31, 2012 from $39,715,000 for the same period in 2011. Salaries and employee benefits increased $1,620,000, for the year ended December 31, 2012 compared to the same period in 2011 primarily due to the hiring of production personnel and the development of production incentive plans. Occupancy and furniture and equipment expense decreased $363,000 for the year ended December 31, 2012 compared to the same period of 2011 due to a decrease in depreciation and rent expense as a result of facilities consolidation initiatives completed in 2012 and 2011. OREO expense decreased $1,248,000 to $3,556,000, for the year ended December 31, 2012 compared to $4,804,000 for the same period in 2011. For the year ended December 31, 2012, OREO expense consisted of operating expenses and losses from disposals or write-downs of $523,000 and $3,033,000, respectively, compared to $708,000 and $4,096,000, respectively, in 2011. FDIC and state assessments decreased $433,000 to $922,000 for the year ended December 31, 2012, compared to $1,355,000 for the same period in 2011, as a result of the termination of regulatory agreements with the Federal Reserve Bank of San Francisco and the California Department of Financial Institutions as well as a change in FDIC insurance assessment methodology, which changed the assessment base from total deposits to average total assets less tangible capital. All other expenses increased $688,000 to $11,739,000 for the year ended December 31, 2012 compared to $11,051,000 for the same period in 2011.
Income Taxes. The Company recorded a provision for income taxes for the year ended December 31, 2013 of $1,594,000, compared to a benefit for income taxes of $1,744,000, and a provision for income taxes of $312,000 for the year ended December 31, 2012 and December 31, 2011. The effective tax provision rate for state and federal income taxes was 30.6% for the year ended December 31, 2013, compared to an effective tax benefit rate of 38.4% for the year ended December 31, 2012, and an effective tax provision rate of 9.3% for the year ended December 31, 2011. The difference in the effective tax rate compared to the statutory tax rate is primarily the result of the Company’s investment in municipal securities and Company-owned life insurance policies whose income is exempt from Federal taxes. In addition, the Company receives certain tax benefits from the State of California Franchise Tax Board for operating and providing loans, as well as jobs, in designated “Enterprise Zones”.Director Deferred Fee Plan
The Company evaluates deferred income tax assets for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws, our ability to successfully implement tax planning strategies, or variances between our future projected operating performance and our actual results. The Company is required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence atDirector Deferred Fee Plan (“DDFP”), adopted by the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period. The realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the carry back and carry forward periods under the tax law. Due to the Company’s cumulative tax losses in 2009 and 2010, it was determined to establish a partial valuation allowance in 2010 of $4,500,000 to reflect the portion of the deferred tax assets that the Company determined to be more likely than not that it will not be realized. During the quarter ended December 31, 2011, the Company reversed the Federal portion of its valuation allowance in the amount of $223,000, and in the quarter ended September 30, 2012, the Company eliminated the remaining valuation allowance of $4,277,000.
As of December 31, 2013, the Company had recorded net deferred income tax assets (which are included in other assets in the accompanying condensed consolidated balance sheet, of approximately $15,309,000. For a discussion of the Company’s deferred income tax assets, see “Critical Accounting Policies — Accounting for Income Tax” above and Note 11 of the Consolidated Financial Statements.
Balance Sheet Analysis
North Valley Bancorp’s total assets increased $15,421,000, or 1.7%, to $917,764,000 at December 31, 2013 compared to $902,343,000 at December 31, 2012 with an increase in the loan portfolio offset by decreases in the investment securities.
Investment Securities. The investment securities portfolio decreased $6,340,000 from year end 2012 to a total of $279,481,000 at December 31, 2013.
The policyDirectors 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,North Valley Bank effective January 1, 2001 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 fair 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.
The amortized cost of securities and their approximate fair value are summarized in the following table for the years ended
December 31 (in thousands):
2013 | 2012 | 2011 | ||||||||||||||||||||||
Amortized | Amortized | Amortized | ||||||||||||||||||||||
Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | |||||||||||||||||||
Available-for-Sale: | ||||||||||||||||||||||||
Obligations of U.S. government sponsored agencies | $ | 19,669 | $ | 18,198 | $ | 21,003 | $ | 21,118 | $ | 15,042 | $ | 15,234 | ||||||||||||
Obligations of states and political subdivisions | 5,216 | 5,317 | 10,698 | 11,197 | 13,811 | 14,455 | ||||||||||||||||||
Government sponsored agency mortgage-backed securities | 251,923 | 248,277 | 239,543 | 245,631 | 270,337 | 275,204 | ||||||||||||||||||
Corporate securities | 6,000 | 4,755 | 6,000 | 4,756 | 6,000 | 4,232 | ||||||||||||||||||
Equity securities | 3,000 | 2,932 | 3,000 | 3,113 | 3,000 | 3,080 | ||||||||||||||||||
Total available-for-sale | $ | 285,808 | $ | 279,479 | $ | 280,244 | $ | 285,815 | $ | 308,190 | $ | 312,205 | ||||||||||||
Held-to-Maturity: | ||||||||||||||||||||||||
Government sponsored agency mortgage-backed securities | $ | 2 | $ | 2 | $ | 6 | $ | 6 | $ | 6 | $ | 6 | ||||||||||||
Total investment securities | $ | 285,810 | $ | 279,481 | $ | 280,250 | $ | 285,821 | $ | 308,196 | $ | 312,211 |
The following table shows estimated fair value of our investment securities, exclusive of equity securities with a fair value of $2,932,000, by year of maturity as of December 31, 2013. Expected maturities, specifically of government sponsored agency 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 are summarized in the following table (in thousands):
Within | After One But Within | After Five But Within | After Ten | |||||||||||||||||||||||||||||||||||||
One Year | Five Years | Ten Years | Years | Total | ||||||||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||
Available-for-Sale: | ||||||||||||||||||||||||||||||||||||||||
Obligations of U.S. government sponsored agencies | $ | — | — | $ | — | — | $ | 18,198 | 1.72 | % | $ | — | — | $ | 18,198 | 1.72 | % | |||||||||||||||||||||||
Obligations of states and political subdivisions | 3,214 | 7.28 | % | 420 | 7.96 | % | 978 | 7.02 | % | 705 | 7.17 | % | 5,317 | 7.27 | % | |||||||||||||||||||||||||
Government sponsored agency mortgage-backed securities | 887 | 3.63 | % | 103,637 | 2.40 | % | 143,494 | 2.06 | % | 259 | 2.18 | % | 248,277 | 2.20 | % | |||||||||||||||||||||||||
Corporate securities | — | — | — | — | — | �� | 4,755 | 2.29 | % | 4,755 | 2.29 | % | ||||||||||||||||||||||||||||
Total available-for-sale | $ | 4,101 | 6.49 | % | $ | 104,057 | 2.42 | % | $ | 162,670 | 2.05 | % | $ | 5,719 | 2.89 | % | $ | 276,547 | 2.27 | % | ||||||||||||||||||||
Held-to-Maturity: | ||||||||||||||||||||||||||||||||||||||||
Government sponsored agency mortgage-back securities | $ | 2 | 2.41 | % | $ | — | — | $ | — | — | $ | — | — | $ | 2 | 2.41 | % |
An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that thererestated effective January 1, 2008, is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.
Loan Portfolio.The loan portfolio increased $17,033,000, or 3.5%, in 2013 and totaled $509,244,000 at December 31, 2013. The loan to deposit ratio was 64.6%, 64.0% and 59.5% at December 31, 2013, 2012 and 2011.
Major classifications of loans for the years ended December 31 are summarized as follows (in thousands):
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Commercial | $ | 47,526 | $ | 46,078 | $ | 46,160 | $ | 54,639 | $ | 66,513 | ||||||||||
Real estate - commercial | 326,631 | 295,630 | 276,644 | 291,514 | 313,917 | |||||||||||||||
Real estate - construction | 27,472 | 23,003 | 27,463 | 55,181 | 92,111 | |||||||||||||||
Real estate - mortgage | 63,120 | 74,353 | 47,362 | 49,726 | 59,816 | |||||||||||||||
Installment | 5,376 | 6,689 | 10,925 | 14,690 | 22,289 | |||||||||||||||
Other | 39,311 | 45,941 | 47,965 | 48,292 | 48,478 | |||||||||||||||
Total loans receivable | 509,436 | 491,694 | 456,519 | 514,042 | 603,124 | |||||||||||||||
Deferred loan (fees) costs, net | (192 | ) | 517 | (304 | ) | (576 | ) | (707 | ) | |||||||||||
Allowance for loan losses | (9,301 | ) | (10,458 | ) | (12,656 | ) | (14,993 | ) | (18,539 | ) | ||||||||||
Net loans | $ | 499,943 | $ | 481,753 | $ | 443,559 | $ | 498,473 | $ | 583,878 |
Commercial loans increased $1,448,000 or 3.1% in 2013 due to an increase in loan originations. The Company increased its Real Estate – Construction loans during the year by $4,469,000, or 19.4%, from $23,003,000 at December 31, 2012 to $27,472,000 at December 31, 2013. Real Estate – Commercial loans increased $31,001,000, or 10.5%, during 2013 from $295,630,000 at December 31, 2012 to $326,631,000 at December 31, 2013. Real Estate – Mortgage loans decreased $11,233,000, or 15.1%. Installment loans decreased $1,313,000, or 19.6%, due to the Company’s decision in January 2008 to discontinue its purchases of indirect auto contracts. Other loans at December 31, 2013 decreased $6,630,000, or 14.4%, from 2012.
At December 31, 2013 and 2012, the Company serviced Real Estate-Mortgage loans and loans guaranteed by the Small Business Administration which it had sold to the secondary market of approximately $188,484,000 and $159,010,000, respectively.
The Company was contingently liable under letters of credit issued on behalf of its customers for $4,557,000 and $4,713,000 at December 31, 2013 and 2012, respectively. At December 31, 2013, commercial and consumer lines of credit, and real estate loans of approximately $38,683,000 and $35,264,000, respectively, were undisbursed. At December 31, 2012, commercial and consumer lines of credit, and real estate loans of approximately $47,350,000 and $31,925,000, 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.
The Company originates loans for business, consumer and real estate activities for equipment purchases. Such loans are concentrated in the primary marketsnonqualified director benefit plan in which the Company operates. Substantially all loans are collateralized. Generally, real estate loans are secured by real property. Commercial and other loans are secured by bank deposits or business or personal assets and leases are generally secured by equipment. The Company’s policy for requiring collateral is through analysis of the borrower, the borrower’s industry and the economic environment in which the loan would be granted. The loans are expectedeligible director voluntarily elects to be repaid from cash flows or proceeds from the sale of selected assets of the borrower.
Maturity Distribution and Interest Rate Sensitivity of Loans and Commitments.The following table shows the maturity of certain loan categories and commitments. Also provided with respect to such loans and commitments are the amounts due after one year, classified according to the sensitivity to changes in interest rates (in thousands):
After One | ||||||||||||||||
Within | Through | After | ||||||||||||||
One Year | Five Years | Five Years | Total | |||||||||||||
Commercial | $ | 19,593 | $ | 11,340 | $ | 16,593 | $ | 47,526 | ||||||||
Real estate - commercial | 39,867 | 54,730 | 232,034 | 326,631 | ||||||||||||
Real estate - construction | 4,525 | 20,384 | 2,563 | 27,472 | ||||||||||||
Real estate - mortgage | 7,046 | 7,301 | 48,773 | 63,120 | ||||||||||||
Installment | 2,662 | 1,479 | 1,235 | 5,376 | ||||||||||||
Other | 21,973 | 951 | 16,387 | 39,311 | ||||||||||||
$ | 95,666 | $ | 96,185 | $ | 317,585 | $ | 509,436 | |||||||||
Loans maturing after one year with: | ||||||||||||||||
Fixed interest rates | $ | 76,318 | $ | 291,823 | $ | 368,141 | ||||||||||
Variable interest rates | $ | 19,867 | $ | 25,762 | $ | 45,629 |
Impaired, Nonaccrual, Past Due, Troubled Debt Restructuring and Other Nonperforming Assets. The Company considers a loan 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 original loan agreement. The measurement of impaired loans 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 are measured for impairment based on the fair value of the collateral.
The following table shows information related to impaired loans at and for the period ended (in thousands):
As of December 31, 2013 | As of December 31, 2012 | |||||||||||||||||||||||
Unpaid | Unpaid | |||||||||||||||||||||||
Recorded | Principal | Related | Recorded | Principal | Related | |||||||||||||||||||
Investment | Balance | Allowance | Investment | Balance | Allowance | |||||||||||||||||||
With no allocated allowance | ||||||||||||||||||||||||
Commercial | $ | 458 | $ | 481 | $ | — | $ | 585 | $ | 586 | $ | — | ||||||||||||
Real estate - commercial | 4,193 | 4,284 | — | 2,778 | 2,974 | — | ||||||||||||||||||
Real estate - construction | 435 | 449 | — | 1,210 | 1,273 | — | ||||||||||||||||||
Real estate - mortgage | 919 | 948 | — | 684 | 736 | — | ||||||||||||||||||
Installment | 96 | 115 | — | 122 | 138 | — | ||||||||||||||||||
Other | 374 | 397 | — | 111 | 120 | — | ||||||||||||||||||
Subtotal | 6,475 | 6,674 | — | 5,490 | 5,827 | — | ||||||||||||||||||
With allocated allowance | ||||||||||||||||||||||||
Commercial | 240 | 240 | 150 | — | — | — | ||||||||||||||||||
Real estate - commercial | 113 | 113 | 28 | 184 | 217 | 171 | ||||||||||||||||||
Real estate - construction | — | — | — | 161 | 161 | 18 | ||||||||||||||||||
Real estate - mortgage | 416 | 416 | 50 | — | — | — | ||||||||||||||||||
Subtotal | 769 | 769 | 228 | 345 | 378 | 189 | ||||||||||||||||||
Total Impaired Loans | $ | 7,244 | $ | 7,443 | $ | 228 | $ | 5,835 | $ | 6,205 | $ | 189 |
The following table presents the average balance related to impaired loans for the period indicated (in thousands):
2013 | 2012 | 2011 | ||||||||||||||||||||||
Average Book | Interest Income | Average Book | Interest Income | Average Book | Interest Income | |||||||||||||||||||
Balance | Recognized | Balance | Recognized | Balance | Recognized | |||||||||||||||||||
Commercial | $ | 960 | $ | — | $ | 941 | $ | — | $ | 2,056 | $ | — | ||||||||||||
Real estate - commercial | 4,784 | 77 | 3,069 | — | 6,354 | — | ||||||||||||||||||
Real estate - construction | 458 | 20 | 1,673 | — | 9,453 | — | ||||||||||||||||||
Real estate - mortgage | 1,415 | 52 | 681 | — | 991 | — | ||||||||||||||||||
Installment | 127 | 2 | 139 | — | 110 | — | ||||||||||||||||||
Other | 388 | — | 122 | — | 91 | — | ||||||||||||||||||
Total | $ | 8,132 | $ | 151 | $ | 6,625 | $ | — | $ | 19,055 | $ | — |
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or when a loan becomes contractually past due by 90 days or more with respect to interest or principal (except that when management believes a loan is well secured and in the process of collection, interest accruals are continued on loans deemed by management to be fully collectible). When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
Nonperforming assets for the years ended December 31 are summarized as follows (in thousands):
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Nonaccrual loans | $ | 5,093 | $ | 5,835 | $ | 18,359 | $ | 20,065 | $ | 46,598 | ||||||||||
Loans past due 90 days or more and still accruing interest | — | — | 52 | — | — | |||||||||||||||
Total nonperforming loans | 5,093 | 5,835 | 18,411 | 20,065 | 46,598 | |||||||||||||||
Other real estate owned | 3,454 | 22,423 | 20,106 | 25,784 | 12,377 | |||||||||||||||
Total nonperforming assets | $ | 8,547 | $ | 28,258 | $ | 38,517 | $ | 45,849 | $ | 58,975 |
At December 31, 2013 and 2012, the recorded investment in nonperforming loans (defined as nonaccrual loans and loans 90 days or more past due and still accruing interest) was approximately $5,093,000 and $5,835,000, respectively. The Company had $150,000 of specific allowance for loan losses on nonperforming loans of $240,000 at December 31, 2013 as compared to $189,000 of specific allowance for loan losses on nonperforming loans of $345,000 at December 31, 2012. Nonperforming loans as a percentage of total loans were 1.00% and 1.19% at December 31, 2013 and 2012, respectively. Nonperforming assets (nonperforming loans and OREO) totaled $8,547,000 at December 31, 2013, a decrease of $19,711,000 from the total at December 31, 2012. Nonperforming assets as a percentage of total assets were 0.93% and 3.13% at December 31, 2013 and 2012, respectively.
If interest on nonaccrual loans had been accrued, such income would have approximated $224,000, $575,000 and $1,039,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
There were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual at December 31, 2013.
At December 31, 2013, net carrying value of other real estate owned decreased $18,969,000 to $3,454,000 from $22,423,000 at December 31, 2012. During the year 2013, the Company transferred seven properties into OREO totaling $1,445,000, sold twenty three properties totaling $17,204,000, had write-downs of OREO of $3,057,000, and recorded loss on sale of OREO of $153,000. At December 31, 2013, OREO was comprised of seven properties which consisted of the following: three residential land parcels totaling $2,487,000, one residential construction loan totaling $161,000 one commercial land parcel for $41,000, one non-farm non-residential property totaling $571,000 and one residential property totaling $194,000.
The composition of nonperforming loans as of December 31, 2013, September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012 was as follows (in thousands):
December | September | June | March | December | ||||||||||||||||||||||||||||||||||||
2013 | 2013 | 2013 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
Amount | total | Amount | total | Amount | total | Amount | total | Amount | total | |||||||||||||||||||||||||||||||
Commercial | $ | 698 | 13.7 | % | $ | 582 | 11.2 | % | $ | 648 | 11.0 | % | $ | 563 | 8.7 | % | $ | 585 | 10.0 | % | ||||||||||||||||||||
Real estate - commercial | 3,425 | 67.2 | % | 3,391 | 65.0 | % | 3,669 | 62.5 | % | 4,355 | 67.5 | % | 2,962 | 50.8 | % | |||||||||||||||||||||||||
Real estate - construction | 110 | 2.2 | % | 438 | 8.4 | % | 450 | 7.7 | % | 770 | 11.9 | % | 1,371 | 23.5 | % | |||||||||||||||||||||||||
Real estate - mortgage | 417 | 8.2 | % | 412 | 7.9 | % | 622 | 10.6 | % | 513 | 8.0 | % | 684 | 11.7 | % | |||||||||||||||||||||||||
Installment | 69 | 1.4 | % | 82 | 1.6 | % | 89 | 1.5 | % | 93 | 1.4 | % | 122 | 2.1 | % | |||||||||||||||||||||||||
Other | 374 | 7.3 | % | 311 | 6.0 | % | 393 | 6.7 | % | 155 | 2.4 | % | 111 | 1.9 | % | |||||||||||||||||||||||||
Total nonaccrual loans | $ | 5,093 | 100.0 | % | $ | 5,216 | 100.0 | % | $ | 5,871 | 100.0 | % | $ | 6,449 | 100.0 | % | $ | 5,835 | 100.0 | % |
At December 31, 2013, there were seven real-estate-commercial loans totaling $3,425,000, or 67.2%, of the nonperforming loans. The largest real estate-commercial loan is for a commercial real estate building located in Sacramento County for $1,231,000. Charge-offs of $720,000 have been taken on this loan and no specific reserve has been established for this loan at December 31, 2013. The remaining six real estate-commercial loans total $2,194,000 (approximate average loan balance of $366,000). Charge-offs of $239,000 have been taken on these loans and no specific reserves have been established for these loans at December 31, 2013.
The following table shows an aging analysis of the loan portfolio by the amount of time past due (in thousands):
As of December 31, 2013 | ||||||||||||||||||||
Accruing Interest | ||||||||||||||||||||
Greater than | ||||||||||||||||||||
30-89 Days | 89 Days | |||||||||||||||||||
Current | Past Due | Past Due | Nonaccrual | Total | ||||||||||||||||
Commercial | $ | 46,587 | $ | 241 | $ | — | $ | 698 | $ | 47,526 | ||||||||||
Real estate - commercial | 322,773 | 433 | — | 3,425 | 326,631 | |||||||||||||||
Real estate - construction | 27,362 | — | — | 110 | 27,472 | |||||||||||||||
Real estate - mortgage | 62,178 | 525 | — | 417 | 63,120 | |||||||||||||||
Installment | 5,273 | 34 | — | 69 | 5,376 | |||||||||||||||
Other | 38,594 | 343 | — | 374 | 39,311 | |||||||||||||||
Total | $ | 502,767 | $ | 1,576 | $ | — | $ | 5,093 | $ | 509,436 |
As of December 31, 2012 | ||||||||||||||||||||
Accruing Interest | ||||||||||||||||||||
Greater than | ||||||||||||||||||||
30-89 Days | 89 Days | |||||||||||||||||||
Current | Past Due | Past Due | Nonaccrual | Total | ||||||||||||||||
Commercial | $ | 45,473 | $ | 20 | $ | — | $ | 585 | $ | 46,078 | ||||||||||
Real estate - commercial | 292,505 | 163 | — | 2,962 | 295,630 | |||||||||||||||
Real estate - construction | 21,436 | 196 | — | 1,371 | 23,003 | |||||||||||||||
Real estate - mortgage | 72,907 | 762 | — | 684 | 74,353 | |||||||||||||||
Installment | 6,529 | 38 | — | 122 | 6,689 | |||||||||||||||
Other | 45,581 | 249 | — | 111 | 45,941 | |||||||||||||||
Total | $ | 484,431 | $ | 1,428 | $ | — | $ | 5,835 | $ | 491,694 |
A troubled debt restructuring (“TDRs”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
At December 31, 2013, accruing TDRs were $2,151,000 and nonaccrual TDRs were $905,000 compared to accruing TDRs of $2,414,000 and nonaccrual TDRs of $1,072,000 at December 31, 2012. At December 31, 2013, there were $78,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. At December 31, 2012, there were no specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. There were no commitments to lend additional amounts at December 31, 2013 and 2012 to customers with outstanding loans classified as troubled debt restructurings. There were no TDRs that subsequently defaulted during the twelve months following the modification of terms for either 2013 or 2012.
The following table presents loans that were modified and recorded as TDRs for the twelve months ended December 31, 2013 and 2012.
As of December 31, 2013 | As of December 31, 2012 | |||||||||||||||||||||||
Accruing TDRs | Accruing TDRs | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Number | Outstanding | Outstanding | Number | Outstanding | Outstanding | |||||||||||||||||||
of | Recorded | Recorded | of | Recorded | Recorded | |||||||||||||||||||
Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||
Real estate - commercial | 1 | $ | 435 | $ | 435 | 5 | $ | 1,350 | $ | 1,350 | ||||||||||||||
Real estate - construction | — | $ | — | $ | — | 1 | $ | 343 | $ | 343 | ||||||||||||||
Real estate - mortgage | 1 | $ | 209 | $ | 209 | 2 | $ | 721 | $ | 721 |
Nonaccrual TDRs | Nonaccrual TDRs | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Number | Outstanding | Outstanding | Number | Outstanding | Outstanding | |||||||||||||||||||
of | Recorded | Recorded | of | Recorded | Recorded | |||||||||||||||||||
Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||
Commercial | 1 | $ | 36 | $ | 36 | 1 | $ | 529 | $ | 529 | ||||||||||||||
Real estate - construction | 1 | $ | 110 | $ | 110 | 2 | $ | 398 | $ | 398 | ||||||||||||||
Real estate - mortgage | 1 | $ | 113 | $ | 113 | — | $ | — | $ | — | ||||||||||||||
Installment | — | $ | — | $ | — | 4 | $ | 120 | $ | 120 | ||||||||||||||
Other | 3 | $ | 210 | $ | 210 | 1 | $ | 25 | $ | 25 |
A summary of TDRs by type of concession and by type of loan as of December 31, 2013 and 2012 is shown below:
December 31, 2013 | ||||||||||||||||||||
Accruing TDRs | Rate | |||||||||||||||||||
Reduction | ||||||||||||||||||||
Number | and | |||||||||||||||||||
of | Rate | Maturity | Maturity | |||||||||||||||||
Contracts | Reduction | Extension | Extension | Total | ||||||||||||||||
Real estate - commercial | 5 | $ | — | $ | 195 | $ | 686 | $ | 881 | |||||||||||
Real estate-construction | 1 | $ | — | $ | 325 | $ | — | $ | 325 | |||||||||||
Real estate - mortgage | 3 | $ | — | $ | 293 | $ | 625 | $ | 918 | |||||||||||
Installment | 1 | $ | — | $ | — | $ | 27 | $ | 27 |
December 31, 2013 | ||||||||||||||||||||
Nonaccrual TDRs | Rate | |||||||||||||||||||
Reduction | ||||||||||||||||||||
Number | and | |||||||||||||||||||
of | Rate | Maturity | Maturity | |||||||||||||||||
Contracts | Reduction | Extension | Extension | Total | ||||||||||||||||
Commercial | 2 | $ | — | $ | — | $ | 391 | $ | 391 | |||||||||||
Real estate-construction | 1 | $ | — | $ | 110 | $ | — | $ | 110 | |||||||||||
Real estate - mortgage | 1 | $ | — | $ | — | $ | 113 | $ | 113 | |||||||||||
Installment | 2 | $ | — | $ | — | $ | 59 | $ | 59 | |||||||||||
Other | 4 | $ | 104 | $ | 60 | $ | 68 | $ | 232 |
December 31, 2012 | ||||||||||||||||||||
Accruing TDRs | Rate | |||||||||||||||||||
Reduction | ||||||||||||||||||||
Number | and | |||||||||||||||||||
of | Rate | Maturity | Maturity | |||||||||||||||||
Contracts | Reduction | Extension | Extension | Total | ||||||||||||||||
Real estate - commercial | 5 | $ | 202 | $ | — | $ | 1,148 | $ | 1,350 | |||||||||||
Real estate-construction | 1 | $ | — | $ | 343 | $ | — | $ | 343 | |||||||||||
Real estate - mortgage | 2 | $ | — | $ | 298 | $ | 423 | $ | 721 |
December 31, 2012 | ||||||||||||||||||||
Nonaccrual TDRs | Rate | |||||||||||||||||||
Reduction | ||||||||||||||||||||
Number | and | |||||||||||||||||||
of | Rate | Maturity | Maturity | |||||||||||||||||
Contracts | Reduction | Extension | Extension | Total | ||||||||||||||||
Commercial | 1 | $ | — | $ | — | $ | 529 | $ | 529 | |||||||||||
Real estate-construction | 2 | $ | 327 | $ | 71 | $ | — | $ | 398 | |||||||||||
Installment | 4 | $ | — | $ | — | $ | 120 | $ | 120 | |||||||||||
Other | 1 | $ | — | $ | — | $ | 25 | $ | 25 |
The following table presents the activity in the allowance for loan losses by portfolio segment (in thousands):
December 31, 2013 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 843 | $ | 6,295 | $ | 690 | $ | 982 | $ | 98 | $ | 721 | $ | 829 | $ | 10,458 | ||||||||||||||||
Charge-offs | (208 | ) | (438 | ) | (401 | ) | (420 | ) | (84 | ) | (289 | ) | (1,840 | ) | ||||||||||||||||||
Recoveries | 593 | 46 | 6 | 11 | 27 | — | 683 | |||||||||||||||||||||||||
Provision for loan losses | (352 | ) | (707 | ) | 315 | 269 | 90 | 400 | (15 | ) | — | |||||||||||||||||||||
Total ending allowance balance | $ | 876 | $ | 5,196 | $ | 610 | $ | 842 | $ | 131 | $ | 832 | $ | 814 | $ | 9,301 | ||||||||||||||||
December 31, 2012 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,333 | $ | 7,528 | $ | 1,039 | $ | 935 | $ | 185 | $ | 736 | $ | 900 | $ | 12,656 | ||||||||||||||||
Charge-offs | (480 | ) | (2,681 | ) | (822 | ) | (353 | ) | (221 | ) | (145 | ) | (4,702 | ) | ||||||||||||||||||
Recoveries | 110 | 63 | 80 | 39 | 103 | 9 | 404 | |||||||||||||||||||||||||
Provision for loan losses | (120 | ) | 1,385 | 393 | 361 | 31 | 121 | (71 | ) | 2,100 | ||||||||||||||||||||||
Total ending allowance balance | $ | 843 | $ | 6,295 | $ | 690 | $ | 982 | $ | 98 | $ | 721 | $ | 829 | $ | 10,458 |
December 31, 2011 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,517 | $ | 8,439 | $ | 1,936 | $ | 956 | $ | 339 | $ | 666 | $ | 1,140 | $ | 14,993 | ||||||||||||||||
Charge-offs | (928 | ) | (2,917 | ) | (405 | ) | (440 | ) | (345 | ) | (490 | ) | (5,525 | ) | ||||||||||||||||||
Recoveries | 212 | 108 | 10 | 2 | 206 | — | 538 | |||||||||||||||||||||||||
Provision for loan losses | 532 | 1,898 | (502 | ) | 417 | (15 | ) | 560 | (240 | ) | 2,650 | |||||||||||||||||||||
Total ending allowance balance | $ | 1,333 | $ | 7,528 | $ | 1,039 | $ | 935 | $ | 185 | $ | 736 | $ | 900 | $ | 12,656 |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (in thousands):
December 31, 2013 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 150 | $ | 28 | $ | — | $ | 50 | $ | — | $ | — | $ | — | $ | 228 | ||||||||||||||||
Collectively evaluated for impairment | 726 | 5,168 | 610 | 792 | 131 | 832 | 814 | 9,073 | ||||||||||||||||||||||||
Total ending allowance balance | $ | 876 | $ | 5,196 | $ | 610 | $ | 842 | $ | 131 | $ | 832 | $ | 814 | $ | 9,301 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 698 | $ | 4,306 | $ | 435 | $ | 1,335 | $ | 96 | $ | 374 | $ | 7,244 | ||||||||||||||||||
Loans collectively evaluated for impairment | 46,828 | 322,325 | 27,037 | 61,785 | 5,280 | 38,937 | 502,192 | |||||||||||||||||||||||||
Total ending loans balance | $ | 47,526 | $ | 326,631 | $ | 27,472 | $ | 63,120 | $ | 5,376 | $ | 39,311 | $ | 509,436 |
December 31, 2012 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 171 | $ | 18 | $ | — | $ | — | $ | — | $ | — | $ | 189 | ||||||||||||||||
Collectively evaluated for impairment | 843 | 6,124 | 672 | 982 | 98 | 721 | 829 | 10,269 | ||||||||||||||||||||||||
Total ending allowance balance | $ | 843 | $ | 6,295 | $ | 690 | $ | 982 | $ | 98 | $ | 721 | $ | 829 | $ | 10,458 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 585 | $ | 2,962 | $ | 1,371 | $ | 684 | $ | 122 | $ | 111 | $ | 5,835 | ||||||||||||||||||
Loans collectively evaluated for impairment | 45,493 | 292,668 | 21,632 | 73,669 | 6,567 | 45,830 | 485,859 | |||||||||||||||||||||||||
Total ending loans balance | $ | 46,078 | $ | 295,630 | $ | 23,003 | $ | 74,353 | $ | 6,689 | $ | 45,941 | $ | 491,694 |
December 31, 2011 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 450 | $ | 606 | $ | 504 | $ | 37 | $ | 13 | $ | — | $ | — | $ | 1,610 | ||||||||||||||||
Collectively evaluated for impairment | 883 | 6,922 | 535 | 898 | 172 | 736 | 900 | 11,046 | ||||||||||||||||||||||||
Total ending loans balance | $ | 1,333 | $ | 7,528 | $ | 1,039 | $ | 935 | $ | 185 | $ | 736 | $ | 900 | $ | 12,656 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 1,788 | $ | 5,998 | $ | 9,440 | $ | 938 | $ | 107 | $ | 88 | $ | 18,359 | ||||||||||||||||||
Loans collectively evaluated for impairment | 44,372 | 270,646 | 18,023 | 46,424 | 10,818 | 47,877 | 438,160 | |||||||||||||||||||||||||
Total ending loans balance | $ | 46,160 | $ | 276,644 | $ | 27,463 | $ | 47,362 | $ | 10,925 | $ | 47,965 | $ | 456,519 |
The following table shows the loan portfolio allocated by management’s internal risk ratings (in thousands):
As of December 31, 2013 | ||||||||||||||||
Pass | Special Mention | Substandard | Total | |||||||||||||
Commercial | $ | 45,446 | $ | 1,107 | $ | 973 | $ | 47,526 | ||||||||
Real estate - commercial | 309,828 | 6,213 | 10,590 | 326,631 | ||||||||||||
Real estate - construction | 27,101 | 261 | 110 | 27,472 | ||||||||||||
Real estate - mortgage | 61,200 | — | 1,920 | 63,120 | ||||||||||||
Installment | 5,278 | — | 98 | 5,376 | ||||||||||||
Other | 38,611 | — | 700 | 39,311 | ||||||||||||
Total | $ | 487,464 | $ | 7,581 | $ | 14,391 | $ | 509,436 |
As of December 31, 2012 | ||||||||||||||||
Pass | Special Mention | Substandard | Total | |||||||||||||
Commercial | $ | 44,486 | $ | 129 | $ | 1,463 | $ | 46,078 | ||||||||
Real estate - commercial | 278,834 | — | 16,796 | 295,630 | ||||||||||||
Real estate - construction | 21,386 | — | 1,617 | 23,003 | ||||||||||||
Real estate - mortgage | 71,973 | — | 2,380 | 74,353 | ||||||||||||
Installment | 6,562 | — | 127 | 6,689 | ||||||||||||
Other | 45,658 | — | 283 | 45,941 | ||||||||||||
Total | $ | 468,899 | $ | 129 | $ | 22,666 | $ | 491,694 |
The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the probable incurred losses in the loan 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 loss experience, and the Company’s underwriting policies. During the second quarter of 2013, there was a change in the Bank’s method of calculating the historical loss factors applied to loans identified as “homogenous segments” of the loan portfolio as follows: Losses from the past twelve quarters are applied to loan pools based on a “Migration Analysis” method. The method calculates Net Charge Offs (charge offs less corresponding recoveries) and measures them against average balances in loan pools based on the risk grade in effect on charged-off loans four quarters prior to the actual charge off date. The logic behind this four quarter “look back” is to account for management’s estimate of the typical time lapse between the recognition of the problem loan and the recognition ofdefer some or all of the loan as uncollectable. In addition, the loss ratios are calculated using “factored” logic which systematically reduces the Net Charge Off value so that charge offs occurringhis or her current fees in older periods do not have as much weight as more recent charge offs. Management of the Company believes that, given the recent trends in historical losses and the correlation of those losses with a loans identified risk grade, that incorporation of a migration analysis in the current and future analyses was a prudent refinement of the allowance methodology. In addition, management believes that the decreases in the overall level of the allowance for loan losses over the past several quarters is directionally consistent with the improving credit quality trends of the loan portfolio. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable incurred losses in loans receivable. 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 loss adequacy periodically. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.
The allowance for loan losses is comprised of several components including the specific, formula and unallocated allowance relating to loans in the loan portfolio. Our methodology for determining the allowance for loan losses consists of several key elements, which include:
The Company also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing agreements, for example, the Bank’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $146,000 and $143,000, as of December 31, 2013 and 2012, respectively.
Management anticipates modest growth in commercial lending and commercial real estate and to a lesser extent consumer and real estate mortgage lending, while it anticipates a further decline in construction lending. As a result, future provisions may be required and the ratio of the allowance for loan losses to loans outstanding may increase to reflect portfolio risk, increasing concentrations, loan type and changes in economic conditions. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
Deposits.Deposits represent the Company’s primary source of funds. They are primarily core deposits in that they are demand, savings and money market, and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable as they are mostly derived from long-term banking relationships. During 2013, total deposits increased $19,269,000, or 2.51%, to $787,849,000 compared to $768,580,000 at December 31, 2012. Noninterest-bearing demand deposits increased $7,116,000, or 4.00%, interest-bearing demand deposits increased $17,193,000, or 9.28% and savings and money market deposits increased $17,599,000, or 7.55% during 2013. This increase was offset by a decrease in deposits from time certificates of $22,639,000, or 13.13% during 2013 as the Bank reduced the rates paid on time certificates. The shift in deposit mix has resulted in noninterest-bearing demand deposits representing 23.5% of total deposits at December 31, 2013 compared to 23.1% of total deposits at December 31, 2012.
During 2012, total deposits increased $2,341,000, or 0.31%, to $768,580,000 compared to $766,239,000 at December 31, 2011. Noninterest-bearing demand deposits increased $10,349,000, or 6.18%, interest-bearing demand deposits increased $15,191,000, or 8.93% and savings and money market deposits increased $16,735,000, or 7.74% during 2012. This increase was offset by a decrease in deposits from time certificates of $39,934,000, or 18.81% during 2012 as the Bank reduced the rates paid on time certificates. The shift in deposit mix has resulted in noninterest-bearing demand deposits representing 23.1% of total deposits at December 31, 2012 compared to 21.9% of total deposits at December 31, 2011.
The following table summarizes the Company’s deposits by type for the years ended December 31 (in thousands):
2013 | 2012 | 2011 | ||||||||||
Noninterest-bearing demand | $ | 184,971 | $ | 177,855 | $ | 167,506 | ||||||
Interest-bearing demand | 202,508 | 185,315 | 170,124 | |||||||||
Savings and money market | 250,633 | 233,034 | 216,299 | |||||||||
Time certificates | 149,737 | 172,376 | 212,310 | |||||||||
Total deposits | $ | 787,849 | $ | 768,580 | $ | 766,239 |
Capital Resources. The Company maintains capital to support future growth and maintain financial strength 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 stockholders’ equity (ROE). Stockholders’ equity decreased $2,732,000 to $93,429,000 as of December 31, 2013, as compared to $96,161,000 at December 31, 2012. The decrease was due to a change in accumulated other comprehensive loss of $6,686,000, which was partially offset by net income of $3,625,000, and stock based compensation expense of $329,000. Under current regulations, management believes that the Company meets all capital adequacy requirements. The Company suspended indefinitely the payment of quarterly cash dividends on its common stock beginning in 2009.
The following table displays the Company’s and Bank’s capital ratios at December 31, 2013 (dollars in thousands).
Minimum for Capital Adequacy | Well-capitalized | |||||||||||||||
Capital | Ratio | Purposes | Ratios | |||||||||||||
Company: | ||||||||||||||||
Total capital (to risk weighted assets) | $ | 119,178 | 19.04 | % | 8.00 | % | N/A | |||||||||
Tier 1 capital (to risk weighted assets) | $ | 111,333 | 17.79 | % | 4.00 | % | N/A | |||||||||
Tier 1 capital (to average assets) | $ | 111,333 | 12.16 | % | 4.00 | % | N/A | |||||||||
Bank: | ||||||||||||||||
Total capital (to risk weighted assets) | $ | 116,783 | 18.68 | % | 8.00 | % | 10.00 | % | ||||||||
Tier 1 capital (to risk weighted assets) | $ | 108,947 | 17.42 | % | 4.00 | % | 6.00 | % | ||||||||
Tier 1 capital (to average assets) | $ | 108,947 | 11.90 | % | 4.00 | % | 5.00 | % |
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 0.9% at December 31, 2013) 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
Overview.The Company constantly monitors earning asset and deposit levels, developments and trends in interest rates, liquidity, capital adequacy and marketplace opportunities with the view towards maximizing shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue market risk. 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.
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 andexchange for the Company’s fixed-rate liabilities, theypromise to pay a deferred benefit. The deferred fees are duecredited with interest under the plan and the accrued liability is paid to falling rates. In general, the change in market value dueDirector at retirement. Unlike a 401(k) plan or a pension plan, a DDFP is a nonqualified plan. Accordingly, this plan is only made available to changes in interest ratesoutside Directors without regard to the nondiscrimination requirements of qualified plans. The DDFP is greater in financial instruments that have longer remaining maturities. Therefore,also an unfunded plan, which means there are no specific assets set aside to fund 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.
plan. The Company has a certain portionpurchased life insurance policies in order to provide for payment of its loan portfolio tiedobligations under the Director Deferred Fee Plan, but the Director has no rights under the plan beyond those of a general creditor of the plan sponsor. The deferred amount is not taxable income to the national prime rate. If these rates are lowered because of general market conditions, e.g.,individual and is not a tax-deductible expense to 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 securities that was funded by deposit accounts on which the rate is steadily rising.plan sponsor.
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 Federal Home Loan Bank (“FHLB”) with the appropriate maturity or repricing characteristics.
Basis Risk. The third interest-related risk, basis risk, arises from the fact that interest rates rarely change in a parallel or equal manner. The interest rates associated with the various assets and liabilities differ in how often they change, the extent to which they change, and whether they change sooner or later than other interest rates. For example, while the repricing of a specific asset and a specific liability may occur at roughly the same time, the interest rate on the liability may rise one percent in response to rising market rates while the asset increases only one-half percent. While the Company would appear to be evenly matched with respect to mismatch risk, it would suffer a decrease in net interest income. This exposure to basis risk is the type of interest risk least able to be managed, but is also the least dramatic. Avoiding 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. 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 the three specific types of risks; market risk, mismatch risk, and basis risk.
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, 2013 analysis indicates the following results for changes in net economic value and changes in net interest income over a one-year period given the interest rate shocks listed in the table below. Management believes that short and medium term interest rates will continue to remain at historical lows throughout the year.
Shocked | Shocked | |||||||
by -1% | by +2% | |||||||
Net interest income | -0.7 | % | -0.9 | % | ||||
Net economic value | -2.8 | % | -8.0 | % |
For the modeling, the Company has made certain assumptions about the duration of its non-maturing deposits that are 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.
Liquidity.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 secured federal funds for $10,000,000 as of December 31, 2013 were available to provide liquidity. In addition, NVB is a member of the FHLB providing an additional available line of credit of $260,689,000 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 of San Francisco of $2,131,000 secured by qualifying investment securities. As of December 31, 2013, borrowings of $21,651,000 were outstanding in the form of Subordinated Debentures.
The Company manages both assets and liabilitiesthe Directors who have DDFP Agreements have also entered into split dollar life insurance agreements in connection with the life insurance policies obtained by monitoring assetthe Company 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 available-for-sale investment securities) totaled $336,962,000 and $324,334,000, or 36.7% and 35.9% of total assets at December 31, 2013 and December 31, 2012, respectively.North Valley Bank on their lives.
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 provideThe DDFP is embodied in a relatively stable and low cost source of funds. Core deposits totaled $716,631,000 and $686,544,000 at December 31, 2013 and December 31, 2012, respectively.
In assessing liquidity, historical information such as seasonal loan demand, local economic cycleswritten agreement between the plan sponsor and the economyDirector selected to participate in general are considered along withthe plan. The Agreement includes provisions that indicate the benefits to be provided at retirement or in the event of death, disability, or termination of Board membership prior to retirement. The Agreement provides for full vesting of deferred amounts since the Director is setting aside his or her current ratios, management goals and unique characteristics offees. If the Company. Management believesindividual leaves, the Company isaccount balance would be paid according to the terms specified in compliance with its policies relatingthe Agreement. If the individual were to liquidity.die prior to or during retirement, the promised benefits would be paid to the individual’s beneficiary or estate.
Certificates of Deposit. Maturities of time certificates of deposit outstanding of less than $100,000 and $100,000 or more at December 31, 2013 are summarized as follows (in thousands):
$ 100,000 | Under | |||||||
and over | $ 100,000 | |||||||
Three Months or Less | $ | 15,117 | $ | 24,139 | ||||
Over Three Months Through Twelve Months | 44,423 | 42,129 | ||||||
Over One Year Through Three Years | 10,790 | 10,729 | ||||||
Over Three Years | 888 | 1,522 | ||||||
Total | $ | 71,218 | $ | 78,519 |
As of December 31, 2013, the Company had $400,000 in brokered deposits consisting solely of customers’ time certificates of deposits that utilizedCompany’s aggregate accrued obligations under the CDARs program. As a policy, the Company limits the use of brokered deposits to 10% of total assets.Directors Deferred Fee Plan were $1,334,000.
Other Borrowed Funds. The Company did not have outstanding balances for Federal Home Loan Bank advances or Federal funds purchased at December 31, 2013, 2012 and 2011.Components of Director Compensation
Certain Contractual Obligations.North Valley Bancorp reviews the level of compensation of its non-employee Directors on an annual basis. To determine whether the current level of compensation for its non-employee Directors is appropriate, North Valley Bancorp has historically obtained data from a number of different sources including:
● | Publicly available data describing director compensation in peer companies; |
● | Data provided by the California Banker’s Association with regard to director compensation; |
● | Information obtained directly from other companies. |
During 2013, each Director (other than the Chairman) of North Valley Bancorp was paid $3,000 per quarterly meeting of the Board of Directors and each Director (other than the Chairman) of North Valley Bank was paid $500 per monthly meeting of the Board of Directors. Payments for attendance at Loan Committee meetings of North Valley Bank during 2013 were $250 per meeting. The Chairman of the Board of Directors of the Company was paid $5,000 for each quarterly meeting of the Board of Directors and the Chairman of the Board of Directors of North Valley Bank was paid $850 for each Board of Directors meeting during 2013. The Chairman of the Loan Committee was paid $350 per meeting during 2013. The Chairman of the Audit Committee was paid a quarterly fee of $1,000 during 2013. The Chairman of the Compensation Committee was paid a quarterly fee of $850 during 2013. In 2013, the Board of Directors of the Company approved an annual retainer of $18,000 paid quarterly to the Chairman of the Board of the Company and $12,000 to each of the independent Directors paid quarterly.
Commencing in 1998, each non-employee Director of the Company has received an award of shares of Common Stock as part of his or her annual retainer as a Director pursuant to the 1998 Employee Stock Incentive Plan and continued under the 2008 Stock Incentive Plan. Each award is fully vested when granted to the outside Director. The amount of Common Stock awarded annually is 180 shares per Director.
During 2013, cash compensation paid to non-employee Directors of the Company totaled $154,800. Directors electing coverage under the group health insurance plan available to employees of the Company have been required to pay 100% of their health insurance premiums since January 1989.
The following table summarizes certain contractual obligations ofsets forth information with regard to compensation earned by non-employee Directors in 2013. Compensation earned by the Company as of December 31, 2013 (in thousands):
Total | Less than one year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Loan Commitments | $ | 73,947 | $ | 35,549 | $ | 5,714 | $ | 252 | $ | 32,432 | ||||||||||
Subordinated Debentures, floating rate of 3.49% payable on 2033 | 6,186 | — | — | — | 6,186 | |||||||||||||||
Subordinated Debentures, floating rate of 3.04% payable on 2034 | 5,155 | — | — | — | 5,155 | |||||||||||||||
Subordinated Debentures, floating rate of 1.57% payable on 2036 | 10,310 | — | — | — | 10,310 | |||||||||||||||
Operating lease obligations | 3,744 | 1,047 | 1,262 | 525 | 910 | |||||||||||||||
Certificates of deposits | 149,737 | 125,808 | 21,519 | 2,410 | — | |||||||||||||||
Deferred compensation(1) | 1,770 | 158 | 197 | 77 | 1,338 | |||||||||||||||
Supplemental retirement plans(1) | 9,973 | 300 | 2,748 | 839 | 6,086 | |||||||||||||||
Total | $ | 260,822 | $ | 162,862 | $ | 31,440 | $ | 4,103 | $ | 62,417 |
(1) These amounts represent known certain payments to participants under the Company’s deferred compensation and supplemental retirement plans. SeeNote 12 to the Consolidated Financial Statements at Item 15 of this report for additional information related to the Company’s deferred compensation and supplemental retirement plan liabilities.
In addition, liabilities related to income taxes are not includedonly employee Director, Michael J. Cushman, is described in the table because the amount and timing of any cash payments cannot be reasonably estimated. Further discussion of income taxes and liabilities recorded is included in Note 11 to the Consolidated Financial Statements.“Executive Compensation” section above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATADIRECTOR COMPENSATION TABLE
Change in Pension | ||||||||||||||||||||||||||||
Value and | ||||||||||||||||||||||||||||
Nonqualified | ||||||||||||||||||||||||||||
Non-Equity | Deferred | |||||||||||||||||||||||||||
Fees Earned or | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||||
Paid in Cash | Stock Awards | Option Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||
Name (1) | (2)($) | ($) | ($) | ($) | (3)($) | ($) | ($) | |||||||||||||||||||||
Dante W. Ghidinelli | $ | 49,600 | $ | 3,391 | $ | 71,465 | — | $ | — | — | $ | 124,456 | ||||||||||||||||
Kevin D. Hartwick | $ | 51,950 | $ | 3,391 | $ | 71,465 | — | $ | 1,374 | — | $ | 128,180 | ||||||||||||||||
Patrick W. Kilkenny | $ | 46,800 | $ | 3,391 | $ | 71,465 | — | $ | — | — | $ | 121,656 | ||||||||||||||||
Roger B. Kohlmeier | $ | 44,350 | $ | 3,391 | $ | 71,465 | — | $ | — | — | $ | 119,206 | ||||||||||||||||
Timothy R. Magill | $ | 44,700 | $ | 3,391 | $ | 71,465 | — | $ | 3,215 | — | $ | 122,771 | ||||||||||||||||
Martin A. Mariani | $ | 47,700 | $ | 3,391 | $ | 71,465 | — | $ | 4,020 | — | $ | 126,576 | ||||||||||||||||
Dolores M. Vellutini | $ | 45,950 | $ | 3,391 | $ | 71,465 | — | $ | — | — | $ | 120,806 | ||||||||||||||||
J.M. Wells, Jr. | $ | 71,500 | $ | 3,391 | $ | 71,465 | — | $ | 28,186 | — | $ | 174,542 |
The Financial Statements required by this item are set forth following Item 15 of this Form 10-K, and are incorporated herein by reference.
(1) | Includes only Directors who served during 2013. |
(2) | Includes cash payments made to Directors of North Valley Bancorp for meetings attended during 2013. |
(3) | The amounts in this column represent the above-market or preferential earnings on any nonqualified compensation. The above-market rate is determined by using the amount above 120% of the Federal long-term rate. For 2013, the interest rate paid was 8.00%, and the above-market rate was determined to be 3.42%. |
The following table disclosesshows the Company’s condensed selected unaudited quarterly financial dataaggregate number of stock awards and option awards outstanding for each of the quarters in the two-year period ended December 31, 2013.
For the Quarter Ended | ||||||||||||||||||||||||||||||||
(In thousands except per share data) | December 2013 | September 2013 | June 2013 | March 2013 | December 2012 | September 2012 | June 2012 | March 2012 | ||||||||||||||||||||||||
Interest income | $ | 8,199 | $ | 8,165 | $ | 7,981 | $ | 7,868 | $ | 8,276 | $ | 8,426 | $ | 8,420 | $ | 8,609 | ||||||||||||||||
Interest expense | 392 | 391 | 403 | 432 | 504 | 713 | 1,091 | 1,217 | ||||||||||||||||||||||||
Net interest income | 7,807 | 7,774 | 7,578 | 7,436 | 7,772 | 7,713 | 7,329 | 7,392 | ||||||||||||||||||||||||
Provision for loan losses | — | — | — | — | — | 700 | 1,000 | 400 | ||||||||||||||||||||||||
Noninterest income | 2,948 | 3,209 | 3,651 | 4,329 | 4,269 | 4,204 | 4,687 | 3,259 | ||||||||||||||||||||||||
Noninterest expense | 9,653 | 10,036 | 9,936 | 9,888 | 11,336 | 9,759 | 9,228 | 9,656 | ||||||||||||||||||||||||
Income before provision (benefit) for income taxes | 1,102 | 947 | 1,293 | 1,877 | 705 | 1,458 | 1,788 | 595 | ||||||||||||||||||||||||
Provision (benefit) for income taxes | 212 | 367 | 399 | 616 | 160 | (2,546 | ) | 527 | 115 | |||||||||||||||||||||||
Net income | $ | 890 | $ | 580 | $ | 894 | $ | 1,261 | $ | 545 | $ | 4,004 | $ | 1,261 | $ | 480 | ||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.13 | $ | 0.08 | $ | 0.13 | $ | 0.18 | $ | 0.08 | $ | 0.59 | $ | 0.18 | $ | 0.07 | ||||||||||||||||
Diluted | $ | 0.13 | $ | 0.08 | $ | 0.13 | $ | 0.18 | $ | 0.08 | $ | 0.59 | $ | 0.18 | $ | 0.07 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As previously reported in the Company’s Current Report on Form 8-K, as filed with the Commission on November 4, 2011, Perry-Smith LLP was replaced by Crowe Horwath LLP as the Company’s independent registered public accounting firm for the year ended December 31, 2012. This change in accountants was the result of a transaction consummated on November 1, 2011 whereby Crowe Horwath LLP acquired certain assets of Perry-Smith LLP and certain Perry-Smith LLP personnel became associated with Crowe Horwath LLP. Except as described above there has been no change in the independent accountants engaged to audit the financial statements of the Company during the two fiscal years ended December 31, 2013. There have been no disagreements with such independent registered public accountants during the two fiscal years ended December 31, 2013 on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that all information required to be disclosed by the Company is recorded, processed and reported in reports filed by the Company under the Exchange Act. Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, to allow timely and accurate disclosure in accordance with the definition of “disclosure controls and procedures” in Rule 13a-15(e) of the Exchange Act. In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of December 31, 2013, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effectivenon-employee Director as of December 31, 2013.
Management’s report on internal control over financial reporting is set forth in “Item 8. Financial Statements and Supplementary Data,” and is incorporated herein by reference. Crowe Horwath LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, was engaged to assess the effectiveness of the Company’s internal control over financial reporting. The report of Crowe Horwath LLP, which is set forth in “Item 8. Financial Statements and Supplementary Data,” is incorporated herein by reference.
None.
Aggregate Stock | Aggregate Option | Grant Date Fair Value of | ||||||||||
Awards Outstanding | Awards | Stock and Option Awards | ||||||||||
as of 12/31/13 | Outstanding as of | Made during 2013 | ||||||||||
Name | (#) | 12/31/13 (#) | ($) | |||||||||
Dante W. Ghidinelli | — | 21,460 | $ | 74,856 | ||||||||
Kevin D. Hartwick | — | 21,460 | $ | 74,856 | ||||||||
Patrick W. Kilkenny | — | 17,500 | $ | 74,856 | ||||||||
Roger B. Kohlmeier | — | 20,740 | $ | 74,856 | ||||||||
Timothy R. Magill | — | 17,500 | $ | 74,856 | ||||||||
Martin A. Mariani | — | 20,740 | $ | 74,856 | ||||||||
Dolores M. Vellutini | — | 21,460 | $ | 74,856 | ||||||||
J.M. Wells, Jr. | — | 20,760 | $ | 74,856 |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2014 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 2014 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 2014 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, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the section of the Company’s Definitive Proxy Statement for the 2014 Annual Meeting of Shareholders of the Company to be filed with the Commission, entitled “Certain Relationships and Related Transactions.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference from the section of the Company’s Definitive Proxy Statement for the 2014 Annual Meeting of Shareholders of the Company to be filed with the Commission, entitled “Principal Accounting Fees and Services.”
ITEM 15. EXHIBITS AND, FINANCIAL STATEMENT SCHEDULES
Documents Filed as Part of this Report
(a)(1) Financial Statements
Report of Management on Internal Control Over Financial Reporting
The Board of Directors and Shareholders
North Valley Bancorp
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, 2013, 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.
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 both accounting principles generally accepted in the United States of America and FFIEC Call Report Instructions as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 1992 Internal Control – Integrated Framework. Based on this assessment, management believes that, as of December 31, 2013, the Company’s internal control over financial reporting is effective based on those criteria.
Crowe Horwath 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. That report follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
North Valley Bancorp
Redding, California
We have audited the accompanying consolidated balance sheets of North Valley Bancorp and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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.
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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Valley Bancorp and subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, North Valley Bancorp and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net income | $ | 3,625 | $ | 6,290 | $ | 3,047 | ||||||
Other comprehensive (loss) income: | ||||||||||||
Unrealized (losses) gains on securities: | ||||||||||||
Unrealized holding gains (losses) arising during the period | (11,353 | ) | 3,433 | 6,293 | ||||||||
Tax effect | 4,655 | (1,408 | ) | (2,580 | ) | |||||||
Reclassification adjustment for gains included in gain on sales or calls of securities, net | (548 | ) | (1,877 | ) | (1,677 | ) | ||||||
Provision for income taxes | 225 | 770 | 688 | |||||||||
Net of tax | (7,021 | ) | 918 | 2,724 | ||||||||
Defined benefit pension plans | ||||||||||||
Net gain (loss) arising during the period | 275 | (1,359 | ) | (856 | ) | |||||||
Tax effect | (113 | ) | 557 | 351 | ||||||||
Reclassification adjustment for amortization of prior service cost and net gain included in salaries and employee benefits | 293 | 137 | 108 | |||||||||
Benefit for income taxes | (120 | ) | (57 | ) | (44 | ) | ||||||
Net of tax | 335 | (722 | ) | (441 | ) | |||||||
Total other comprehensive (loss) income | (6,686 | ) | 196 | 2,283 | ||||||||
Comprehensive (loss) income | $ | (3,061 | ) | $ | 6,486 | $ | 5,330 |
The accompanying notes are an integral part of these consolidated financial statements.
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
(In thousands, except share data)
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
Common Stock | Retained | Comprehensive | ||||||||||||||||||
Shares | Amount | Earnings | (Loss) Income | Total | ||||||||||||||||
Balance January 1, 2011 | 6,832,492 | $ | 98,128 | $ | (13,337 | ) | $ | (813 | ) | $ | 83,978 | |||||||||
Other comprehensive loss | 2,283 | 2,283 | ||||||||||||||||||
Equity based compensation | 1,260 | 157 | 157 | |||||||||||||||||
Net income | 3,047 | 3,047 | ||||||||||||||||||
Balance December 31, 2011 | 6,833,752 | 98,285 | (10,290 | ) | 1,470 | 89,465 | ||||||||||||||
Other comprehensive income | 196 | 196 | ||||||||||||||||||
Equity based compensation | 1,440 | 210 | 210 | |||||||||||||||||
Net income | 6,290 | 6,290 | ||||||||||||||||||
Balance December 31, 2012 | 6,835,192 | 98,495 | (4,000 | ) | 1,666 | 96,161 | ||||||||||||||
Other comprehensive loss | (6,686 | ) | (6,686 | ) | ||||||||||||||||
Equity based compensation | 1,271 | 329 | 329 | |||||||||||||||||
Net income | 3,625 | 3,625 | ||||||||||||||||||
Balance December 31, 2013 | 6,836,463 | $ | 98,824 | $ | (375 | ) | $ | (5,020 | ) | $ | 93,429 |
The accompanying notes are an integral part of these consolidated financial statements.
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 3,625 | $ | 6,290 | $ | 3,047 | ||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
Depreciation and amortization | 1,019 | 1,080 | 1,197 | |||||||||
Amortization of premium on securities, net | 1,664 | 2,117 | 1,637 | |||||||||
Amortization of core deposit intangible | 146 | 146 | 146 | |||||||||
Provision for loan losses | — | 2,100 | 2,650 | |||||||||
Net losses on sale and write-down of other real estate owned | 3,210 | 3,033 | 4,096 | |||||||||
Gain on sale of loans | (3,038 | ) | (3,154 | ) | (1,172 | ) | ||||||
Gain on sale and calls of securities | (548 | ) | (1,877 | ) | (1,677 | ) | ||||||
(Gain) loss on sale of premises and equipment | (80 | ) | 40 | 289 | ||||||||
Deferred tax expense (benefit) | 1,683 | (1,762 | ) | 203 | ||||||||
Stock based compensation expense | 329 | 210 | 157 | |||||||||
Effect of changes in: | ||||||||||||
Accrued interest receivable | 93 | 340 | 156 | |||||||||
Other assets | (2,104 | ) | (1,517 | ) | 1,452 | |||||||
Accrued interest payable and other liabilities | (548 | ) | (2,572 | ) | 1,342 | |||||||
Proceeds from sales of loans originated for sale | 79,418 | 102,810 | 35,021 | |||||||||
Loans originated for sale | (74,613 | ) | (99,656 | ) | (33,849 | ) | ||||||
Net cash provided by operating activities | 10,256 | 7,628 | 14,695 | |||||||||
Cash flows from investing activities | ||||||||||||
Purchases of time deposits at other financial institutions | (7 | ) | (260 | ) | (1,500 | ) | ||||||
Purchases of available-for-sale securities | (91,054 | ) | (173,479 | ) | (188,190 | ) | ||||||
Proceeds from sales/calls of available-for-sale securities | 20,215 | 133,047 | 101,940 | |||||||||
Proceeds from maturities/prepayments of available-for-sale securities | 64,159 | 68,137 | 44,345 | |||||||||
Proceeds from maturities/calls of held-to-maturity securities | 4 | — | — | |||||||||
Purchases of FHLB and FRB stock and other securities | (89 | ) | (269 | ) | (903 | ) | ||||||
Purchases of jumbo residential mortgages | — | (29,990 | ) | — | ||||||||
Net (increase) decrease in loans | (20,775 | ) | (22,543 | ) | 41,810 | |||||||
Proceeds from sales of other real estate owned | 17,204 | 6,889 | 12,036 | |||||||||
Proceeds from sales of premises and equipment | 305 | 27 | — | |||||||||
Purchases of premises and equipment | (523 | ) | (1,667 | ) | (1,348 | ) | ||||||
Net cash (used in) provided by investing activities | (10,561 | ) | (20,108 | ) | 8,190 | |||||||
Cash flows from financing activities | ||||||||||||
Net increase in deposits | 19,269 | 2,341 | 12,449 | |||||||||
Repayment of subordinated debentures | — | (10,310 | ) | — | ||||||||
Net cash provided by (used in) financing activities | 19,269 | (7,969 | ) | 12,449 | ||||||||
Net increase (decrease) in cash and cash equivalents | 18,964 | (20,449 | ) | 35,334 | ||||||||
Cash and cash equivalents, beginning of year | 38,519 | 58,968 | 23,634 | |||||||||
Cash and cash equivalents, end of year | $ | 57,483 | $ | 38,519 | $ | 58,968 | ||||||
Supplemental cash flow information: | ||||||||||||
Interest paid | $ | 1,646 | $ | 8,387 | $ | 3,840 | ||||||
Income taxes paid | $ | 900 | $ | 122 | $ | 44 | ||||||
Supplemental noncash disclosures: | ||||||||||||
Transfer from loans to other real estate owned | $ | 818 | $ | 12,239 | $ | 10,454 | ||||||
Transfer from premises to other real estate owned | $ | 627 | $ | — | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED December 31, 2013, 2012 and 2011
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. The accounting and reporting practices of North Valley Bancorp (the “Company”) and its wholly owned subsidiary, North Valley Bank (“NVB”), conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. The operations of the Company are comprised predominately of NVB. NVB is a commercial banking institution with twenty-two banking offices in Shasta, Trinity, Humboldt, Del Norte, Yolo, Sonoma, Placer and Mendocino Counties located in California. Between 2003 to 2005, the Company formed North Valley Capital Trust II, North Valley Capital Trust III, and North Valley Capital Statutory Trust IV (collectively, the Trusts) which Trust II, and III are Delaware statutory business trusts and Trust IV is a Connecticut statutory business trust formed for the exclusive purpose of issuing and selling Trust Preferred Securities.
NVB’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. The deposits of NVB are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits.
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 allowance for loan losses, loan servicing rights, deferred tax assets, and fair values of financial instruments are particularly subject to change.
Consolidation and Basis of Presentation.The consolidated financial statements include the Company and its wholly owned subsidiary NVB. NVB has one wholly owned inactive subsidiary, North Valley Trading Company. All material intercompany accounts and transactions have been eliminated in consolidation.
For financial reporting purposes, the Company’s investments in the Trusts of $651,000 are accounted for under the equity method and, accordingly, 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 as debt on the Company’s consolidated balance sheet.
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 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.
Reclassifications.Certain amounts in 2012 and 2011 have been reclassified to conform with the 2013 consolidated financial statement presentation. These reclassifications had no effect on prior year net income or stockholders’ equity.
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.Net cash flows are reported for customer loan and deposit transactions and time deposits in other financial institutions.
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, 2013 and 2012, the Company had no reserve requirement.
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 or during the years ended December 31, 2013, 2012 and 2011.
Available-for-sale securities are carried at estimated 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 (loss) income, which is a separate component of stockholders’ equity.
Held-to-maturity securitiesare 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.
Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value. During the years ended December 31, 2013, 2012 and 2011, there were no transfers of securities between categories.
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. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums which are accounted for using thelevel-yield method without anticipating prepayments.
An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.
Loans.Loans are reported at the principal amount outstanding, net of unearned income, including net deferred loan fees, and the allowance for loan losses.
Interest on loans is calculated using the simple interest method on the daily balance of the principal amount outstanding.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the original interest rate, except that as a practical expedient, it may measure impairment based on an observable market price, or the fair value of the collateral if collateral dependent. A loan is collateral dependent if the repayment is expected to be provided solely by the underlying collateral.
The determination of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
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.
A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.
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. The unamortized balance of deferred fees and costs is reported as a component of net loans.
Loan Sales and Servicing.The Company originates and sells residential mortgage loans to Freddie Mac and others. The Company retains the servicing on certain loans that are sold. Deferred origination fees and expenses are recognized at the time of sale in the determination of the gain or loss.When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.The gain (loss) is recognized at the time of sale or when all recourse provisions, if any, have lapsed 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. Servicing income net of amortization is included in non-interest income on the consolidated statements of income.
At December 31, 2013 and 2012, the Company serviced real estate loans which it had sold to the secondary market of approximately $175,904,000 and $145,314,000, respectively. At December 31, 2013 and 2012, the Company serviced loans guaranteed by the Small Business Administration which it had sold to the secondary market of approximately $12,580,000 and $13,696,000, respectively.
Allowance for Loan Losses.The allowance for loan losses is an estimate of probable incurred loan losses in the Company’s loan portfolio as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after loan losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are evaluated collectively for impairment.
The Company calculates the allowance for each portfolio segment. These portfolio segments include commercial, real estate commercial, real estate construction (including land and development loans), real estate mortgage, installment, and other loans (principally home equity loans). The allowance for loan losses attributable to each portfolio segment, which includes both individually impaired and loans that are collectively evaluated for impairment, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet.
The general reserve component of the allowance for loan losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses over the past twelve quarters and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below.
Commercial.Commercial loans generally possess a more inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Real Estate Commercial.Real estate commercial loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate Construction. Real estate construction loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Real Estate Mortgage. The degree of risk in real estate mortgage lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Individual loans and receivables in homogeneous loan portfolio segments are not evaluated for specific impairment. Rather, the sole component of the allowance for these loan types is determined by collectively measuring impairment reserve factors based on management’s assessment of the following for each homogeneous loan portfolio segment: (1) inherent credit risk, (2) delinquencies, (3) historical losses and (4) other qualitative factors. The homogenous loan portfolio segments are described in further detail below.
Installment– An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made directly for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Other (principally home equity loans) – The degree of risk in home equity depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
The Company assigns a risk rating to all loans except pools of homogeneous loans and periodically, but not less than annually, performs detailed reviews of all such individual loans over $250,000 to identify credit risks and to assess the overall collectability of the portfolio. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. The risk ratings of these smaller homogeneous loans are typically determined by the extent of their monthly required payments being past due, if any. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows:
Pass. A pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard. A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss. Loans classified as loss are considered uncollectible and charged off immediately.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly, the Board of Directors and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company’s primary regulators, the FRB and the California Department of Financial Institutions, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
Allowance for Loan Losses on Off-Balance-Sheet Credit Exposures. The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet.
Other Real Estate Owned (“OREO”). Real estate acquired through, or in lieu of, loan foreclosures is expected to be sold and is recorded at its fair value less estimated costs to sell. The amount, if any, by which the recorded amount of the loan exceeds the fair value less estimated costs to sell are charged to the allowance for loan losses, if necessary. These properties are subsequently accounted for at the lower of cost or fair value less costs to sell. 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 noninterest expenses and gains and losses on their disposition are included in other income or noninterest expenses.
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. The useful lives of premises are estimated to be twenty to thirty years. The useful lives of furniture, fixtures and equipment are estimated to be two to ten years. 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.
FHLB and FRB Stock and Other Securities.The Company purchases restricted stock in the Federal Home Loan Bank of San Francisco (FHLB), the FRB and others as required to participate in various programs offered by these institutions. These investments are carried at cost and may be redeemed at par with certain restrictions. Both cash and stock dividends are reported as income. Restricted stock is periodically evaluated for impairment based on ultimate recovery of par.
Bank Owned Life Insurance.The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Core Deposit Intangibles.These assets represent the estimated fair value of the deposit relationship acquired in acquisitions and is being amortized by the straight-line method. The core deposit intangible was recorded at $1,421,000 in August, 2004 with accumulated amortization of $1,312,000 at December 31, 2013. It was being amortized at $146,000 per year over an estimated life of ten years with a remaining amortization period of nine months. Amortization expense on these intangibles was $146,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Amortization expense during 2014 is expected to be $109,000. Management evaluates the recoverability and remaining useful life annually to determine whether events or circumstances warrant a revision to the intangible asset or the remaining period of amortization. There were no revisions resulting from management’s assessment in 2013, 2012 or 2011.
Defined Benefit Pension and Other Post Retirement Plans.Since December 31, 2006, the Company has recognized the funded status of its defined benefit plan in the accompanying consolidated balance sheet with gains or losses and prior service costs or credits that arise during the period that are not recognized as net period benefit expenses recorded in other comprehensive income (loss). The Company has recognized the underfunded status of its supplemental retirement plan as a liability in the consolidated balance sheet and recognizes subsequent changes in that unfunded status through other comprehensive income (loss). For the years ended December 31, 2013, 2012 and 2011, the amount recognized through other comprehensive income (loss) was $335,000, ($722,000) and ($441,000), respectively.
Income Taxes.Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes. The Company applies the asset and liability method to account for income taxes. Deferred tax assets and liabilities are calculated by applying enacted tax laws and tax rates applicable at the time of the calculation to the differences between the financial statement basis and the tax basis of assets and liabilities. The effect on deferred taxes of changes in tax laws and rates is recognized in income in the period that includes the enactment date. On the consolidated balance sheet, net deferred tax assets are included in other assets. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest expense associated with unrecognized tax benefits is classified as interest expense in the consolidated statement of income.Penalties associated with unrecognized tax benefits are classified as other expense in the consolidated statement of income.
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, 2013, the Company had two shareholder approved stock-based compensation plans: the 1998 Employee Stock Incentive Plan and the 2008 Stock Incentive Plan. The plans do not provide for the settlement of awards in cash and new shares are issued upon exercise of options.
The North Valley Bancorp 1998 Employee Stock Incentive Plan (the “Stock Incentive Plan”) was adopted by the Board of Directors in February 1998 and approved by the shareholders of the Company at the 1998 Annual Meeting. The Stock Incentive Plan provides for awards in the form of options (which may constitute incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”) to key employees) and also provides for the award of shares of Common Stock to outside directors.Directors. The shares of Common Stock authorized to be awarded as options under the Stock Incentive Plan consist of 120,000 shares increased in an amount equal to 2% of shares outstanding each year, commencing January 1, 1999. The Stock Incentive Plan defines “key employee” as a common-law employee of the Company, its parent or any subsidiary of the Company, an “outside Director,” or a consultant or advisor who provides services to the Company, its parent or any subsidiary of the Company. For purposes of the Stock Incentive Plan, an “outside Director” is defined as a member of the Board who is not a common-law employee of the Company, its parent or any subsidiary of the Company.
20 |
Pursuant to the Stock Incentive Plan, as of April 1, 2014, there were outstanding options to purchase 47,718 shares of Company Common Stock. As provided in the 1998 Employee Stock Incentive Plan, the authorization to award incentive stock options terminated on February 19, 2008.
The Stock Incentive Plan is administered by a committee of the Board of Directors. As of December 31, 2013,April 1, 2014, the Committee members are Dante W. Ghidinelli, Kevin D. Hartwick, Patrick W. Kilkenny, Roger B. Kohlmeier, and Dolores M. Vellutini. The Committee must have a totalmembership composition which enables the Stock Incentive Plan to qualify under SEC Rule 16b-3 with regard to the grant of 241,635 sharesoptions or other rights under the Stock Incentive Plan to persons who are subject to Section 16 of Commonthe Securities Exchange Act of 1934, as amended (the “Exchange Act”). Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of options or determining awards or other rights under the Stock were availableIncentive Plan to persons subject to Section 16 of the Exchange Act.
In the event that the Company is a party to a merger or other reorganization, outstanding options and stock awards shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for future grants under the assumption of outstanding options by the surviving Company or its parent, for their continuation by the Company (if the Company is a surviving Company), for accelerated vesting and accelerated expiration, or for settlement in cash.
North Valley Bancorp 2008 Stock Incentive Plan.Plan
The North Valley Bancorp 2008 Stock Incentive Plan (the “2008 Stock Incentive Plan”) was adopted by the Company’s Board of Directors onin February 27, 2008 effective that date, and was approved by the Company’s shareholders of the Company at the annual meeting, May 22, 2008. The terms of the 2008 Stock Incentive Plan are substantially the same as the North Valley Bancorp 1998 Employee Stock Incentive Plan.Annual Meeting. The 2008 Stock Incentive Plan provides for share based awardsthe grant to key employees in the form of stock options, which may consist of NSOs and ISOs.incentive stock options or non-statutory stock options. The 2008 Stock Incentive Plan also provides for the grant to outside directors,Directors, and to consultants and advisers to the Company, in the form of stock awards or stock options, all of which must be NSOs. A total of 601,925 shares were authorized under all plans at December 31, 2013. Pursuant to the 1998 Employee Stock Incentive Plan there were outstanding options to purchase 51,930 shares of Common Stock at December 31, 2013. At December 31, 2013, thenon-statutory stock options. The shares of Common Stock authorized to be grantedawarded as options under the terms of the 2008 Stock Incentive Plan totaledconsist of 549,995 consisting of 302,780 shares to be issued upon the exercise of options granted and still outstanding as of that date, 5,580 shares issued as stock awards and 241,635 shares reserved for future stock option grants and director stock awards. Effective January 1, 2009, and on each January 1 thereafter for the remaining term of the 2008 Stock Incentive Plan, the aggregate number of shares of Common Stock which are reserved for issuance pursuant to options granted under the terms of the 2008 Stock Incentive Plan shall be increased by a number of shares of Common Stock equal to 2% of the total number of the shares of Common Stock of the Company outstanding at the end of the most recently concluded calendar year. Any shares of Common Stock that have been reserved but not issued as options during any calendar year shall remain available for grant during any subsequent calendar year. Each outside director of the Company shall also be eligible to receive a stock award of 180 shares of Common Stock as part of his or her annual retainer paid by the Company for his or her services as a director. Each stock award shall be fully vested when granted to the outside director. In September 2013 and July 2012, each director was awarded 180 shares for their retainer grant. The number of shares of Common Stock available as stock awards to outside directors shall equal the number of shares of Common Stock to be awarded to such outside directors. Outstanding options under the plans are exercisable until their expiration.
Cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) is to be classified as a cash flow from financing activities in the statement of cash flows.
Determining Fair Value.The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton based option valuation model that uses the assumptions discussed below. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
Expected Term – The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company’s historical option activity.
Expected Volatility - The Company uses the trading history of the common stock of the Company in determining an estimated volatility factor when using the Black-Scholes-Merton option-pricing formula to determine the fair value of options granted.
Expected Dividend – The Company estimates the expected dividend based on its historical experience of dividends declared per year, giving consideration to any anticipated changes and the estimated stock price over the expected term based on historical experience when using the Black-Scholes-Merton option-pricing formula.
Risk-Free Interest Rate - The Company bases the risk-free interest rate used in the Black-Scholes-Merton option-pricing formula on the implied yield currently available on U.S. Treasury zero-coupon issues with the same or substantially equivalent remaining term as the expected term of the options.
Estimated Forfeitures - When estimating forfeitures, the Company considers voluntary and involuntary termination behavior as well as analysis of actual option forfeitures.
There were 114,234, 77,908 and 66,000 options granted in 2013, 2012 and 2011, respectively. The fair value of each option is estimated on the date of grant with the following assumptions:
2013 | 2012 | 2011 | ||||
Weighted average dividend yield | 0.00% | 0.00% | 0.00% | |||
Weighted average expected volatility | 59.78% | 58.50% | 53.60% | |||
Weighted average risk-free interest rate | 1.38% | 1.40% | 2.27% | |||
Weighted average expected option life | 6.32 years | 6.49 years | 7.67 years | |||
Weighted average grant date fair value | $9.53 | $6.28 | $6.07 |
Comprehensive (Loss) Income. Comprehensive (loss) 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 changes in the funded status of the pension liability and are presented net of tax. Comprehensive (loss) income is reported on the consolidated statement of changes in stockholders’ equity.
Adoption of New Financial Accounting Standards
In February 2013, the FASB amended existing guidance related to reporting amounts reclassified out of other comprehensive (loss) income out of accumulated other comprehensive (loss) income. These amendments do not change the current requirements for reporting net income or other comprehensive (loss) income in financial statements. These amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive (loss) income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive (loss) income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts. These amendments are effective prospectively for interim and annual reporting periods beginning after December 15, 2012 and are disclosed in Note 18.
2. INVESTMENT SECURITIES
The amortized cost of investment securities and their estimated fair value were as follows (in thousands):
As of December 31, 2013 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Available-for-Sale: | ||||||||||||||||
Obligations of U.S. government sponsored agencies | $ | 19,669 | $ | — | $ | (1,471 | ) | $ | 18,198 | |||||||
Obligations of state and political subdivisions | 5,216 | 151 | (50 | ) | 5,317 | |||||||||||
Government sponsored agency mortgage-backed securities | 251,923 | 2,528 | (6,174 | ) | 248,277 | |||||||||||
Corporate debt securities | 6,000 | — | (1,245 | ) | 4,755 | |||||||||||
Equity securities | 3,000 | — | (68 | ) | 2,932 | |||||||||||
Total available-for-sale | $ | 285,808 | $ | 2,679 | $ | (9,008 | ) | $ | 279,479 | |||||||
Held-to-Maturity: | ||||||||||||||||
Government sponsored agency mortgage-backed securities | $ | 2 | $ | — | $ | — | $ | 2 |
As of December 31, 2012 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Available-for-Sale: | ||||||||||||||||
Obligations of U.S. government sponsored agencies | $ | 21,003 | $ | 115 | $ | — | $ | 21,118 | ||||||||
Obligations of state and political subdivisions | 10,698 | 499 | — | 11,197 | ||||||||||||
Government sponsored agency mortgage-backed securities | 239,543 | 6,152 | (64 | ) | 245,631 | |||||||||||
Corporate debt securities | 6,000 | — | (1,244 | ) | 4,756 | |||||||||||
Equity securities | 3,000 | 113 | — | 3,113 | ||||||||||||
Total available-for-sale | $ | 280,244 | $ | 6,879 | $ | (1,308 | ) | $ | 285,815 | |||||||
Held-to-Maturity: | ||||||||||||||||
Government sponsored agency mortgage-backed securities | $ | 6 | $ | — | $ | — | $ | 6 |
Net unrealized (losses) gains on available-for-sale securities totaling ($6,329,000) and $5,571,000 were recorded, net of ($2,595,000) and $2,284,000 in tax (benefits) provision, as accumulated other comprehensive (loss) gain within stockholders’ equity at December 31, 2013 and 2012, respectively. All government sponsored agency mortgage-backed securities are residential mortgages for the years ended December 31, 2013 and 2012.
For the years ended December 31, 2013, 2012 and 2011 there were $548,000, $1,886,000 and $1,687,000, respectively, in gross realized gains on sales or calls of available for sale securities. For the year ended December 31, 2013 there were no gross realized losses on sales or calls of securities categorized as available for sale securities. For the years ended December 31, 2012 and 2011 there were $9,000 and $10,000, respectively, in gross realized losses on sales or calls of securities categorized as available for sale securities. For the years ended December 31, 2013, 2012 and 2011 there were $20,215,000, $133,047,000 and $101,940,000, respectively, in gross proceeds from sales or calls of available for sale securities. There were no sales or transfers of held to maturity securities for the years ended December 31, 2013, 2012 and 2011. For the year ended December 31, 2013 there were gross proceeds of $4,000 in maturities or calls of held to maturity securities. For the years ended December 31, 2012 and 2011 there were no gross proceeds from maturities and calls of held to maturity securities.
The following tables show 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 (in thousands). Unrealized losses for held-to-maturity investment securities during the same period were not significant.
As of December 31, 2013 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
Description of Securities | ||||||||||||||||||||||||
Obligations of U.S. government sponsored agencies | $ | 18,198 | $ | (1,471 | ) | $ | — | $ | — | $ | 18,198 | $ | (1,471 | ) | ||||||||||
Obligations of state and political subdivisions | 1,145 | (50 | ) | — | — | 1,145 | (50 | ) | ||||||||||||||||
Government sponsored agency mortgage-backed securities | 156,421 | (5,163 | ) | 17,296 | (1,011 | ) | 173,717 | (6,174 | ) | |||||||||||||||
Corporate debt securities | — | — | 4,755 | (1,245 | ) | 4,755 | (1,245 | ) | ||||||||||||||||
Equity securities | 2,932 | (68 | ) | — | — | 2,932 | (68 | ) | ||||||||||||||||
Total impaired securities | $ | 178,696 | $ | (6,752 | ) | $ | 22,051 | $ | (2,256 | ) | $ | 200,747 | $ | (9,008 | ) |
As of December 31, 2012 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
Description of Securities | ||||||||||||||||||||||||
Government sponsored agency mortgage-backed securities | $ | 34,878 | $ | (64 | ) | $ | — | $ | — | $ | 34,878 | $ | (64 | ) | ||||||||||
Corporate debt securities | — | — | 4,756 | (1,244 | ) | 4,756 | (1,244 | ) | ||||||||||||||||
Total impaired securities | $ | 34,878 | $ | (64 | ) | $ | 4,756 | $ | (1,244 | ) | $ | 39,634 | $ | (1,308 | ) |
Obligations of U.S. Government Sponsored Agencies.Management believes that the unrealized losses on the Company’s investment in obligations of U.S. government sponsored agencies is caused by interest rate changes, and is not attributable to changes in credit quality. The Company’s investments in obligations of U.S. government sponsored agencies include two securities which were in a loss position for less than twelve months, none of which are individually significant. Management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis, which may be upon maturity. The Company does not consider these securities to be other-than-temporarily impaired at December 31, 2013.
Obligations of States and Political Subdivisions.Management believes that the unrealized losses on the Company’s investment in obligations of states and political subdivisions is caused by interest rate changes and other market conditions, and is not attributable to changes in credit quality. The Company’s investments in obligations of states and political subdivisions include two securities which were in a loss position for less than twelve months, none of which are individually significant. Management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis, which may be upon maturity. The Company does not consider these securities to be other-than-temporarily impaired at December 31, 2013.
Government Sponsored Agency Mortgage Backed Securities.Management believes that the unrealized losses on the Company’s investment in government sponsored agency mortgage-backed securities is caused by interest rate changes and other market conditions and is not attributable to changes in credit quality. These investments include fourteen securities which were in a loss position for less than twelve months and two securities in a loss position for twelve months or longer, none of which are individually significant. Additionally, the contractual cash flows of these investments are guaranteed by an agency of the U.S. government and thus it is expected that the securities would not be settled at any price less than the amortized cost of the Company’s investment. Management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis, which may be upon maturity. The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2013 or 2012.
Corporate Debt Securities. As of December 31, 2013, there were two corporate debt securities in a loss position for twelve months or more. There is a current active market for these securities and management believes that the unrealized losses on the Company’s investment in these corporate debt securities is due to the yield of the securities and is not attributable to changes in credit quality. The two corporate debt securities are each a $3,000,000 single-issuer trust preferred security issued by two separate large publicly-traded financial institutions. The securities are tied to the front-end of the yield curve, three-month LIBOR (a short-term interest rate) and have a spread over that. Management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis, which may be upon maturity. The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2013 or 2012.
Maturities.The Company invests in government sponsored agency mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) issued by the FNMA, the Federal Home Loan Mortgage Corporation and Government National Mortgage Association. Actual maturities of the MBSs and 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 MBSs and CMOs and adjusts scheduled maturities periodically based upon changes in the Wall Street estimates.
Contractual maturities of held-to-maturity and available-for-sale securities (other than equity securities with an amortized cost and fair value of approximately $3,000,000 and $2,932,000) at December 31, 2013, are shown below (in thousands).
Held-to-Maturity | Available-for-Sale | |||||||||||||||
Amortized Cost | Estimated | Estimated | ||||||||||||||
(Carrying | Fair | Amortized | Fair Value | |||||||||||||
Amount) | Value | Costs | (Carrying Amount) | |||||||||||||
Within one year | $ | 2 | $ | 2 | $ | 4,003 | $ | 4,101 | ||||||||
One to five years | — | — | 102,441 | 104,057 | ||||||||||||
Five to ten years | — | — | 169,362 | 162,670 | ||||||||||||
Beyond ten years | — | — | 7,002 | 5,719 | ||||||||||||
$ | 2 | $ | 2 | $ | 282,808 | $ | 276,547 |
At December 31, 2013 and 2012, securities having fair value amounts of approximately $272,092,000 and $276,308,000, respectively, were pledged to secure public deposits, short-term borrowings, treasury tax and loan balances and for other purposes required by law or contract.
3. LOANS
The Company originates loans for business, consumer and real estate activities for equipment purchases. Such loans are concentrated in Yolo, Placer, Sonoma, 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 are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrower.
Major classifications of loans at December 31 were as follows (in thousands):
2013 | 2012 | |||||||
Commercial | $ | 47,526 | $ | 46,078 | ||||
Real estate - commercial | 326,631 | 295,630 | ||||||
Real estate - construction | 27,472 | 23,003 | ||||||
Real estate - mortgage | 63,120 | 74,353 | ||||||
Installment | 5,376 | 6,689 | ||||||
Other | 39,311 | 45,941 | ||||||
Gross loans | 509,436 | 491,694 | ||||||
Deferred loan (fees) costs, net | (192 | ) | 517 | |||||
Allowance for loan losses | (9,301 | ) | (10,458 | ) | ||||
Loans, net | $ | 499,943 | $ | 481,753 |
Salaries and employee benefits totaling $1,048,000, $1,263,000 and $800,000 have been deferred as loan origination costs for the years ended December 31, 2013, 2012 and 2011, respectively.
Certain real estate loans receivable are pledged as collateral for available borrowings with the FHLB. Pledged loans totaled $91,447,000 and $116,929,000 December 31, 2013 and 2012, respectively (seeNote 9).
The following table presents impaired loans and the related allowance for loan losses as of the dates indicated (in thousands):
As of December 31, 2013 | As of December 31, 2012 | |||||||||||||||||||||||
Unpaid | Unpaid | |||||||||||||||||||||||
Recorded | Principal | Related | Recorded | Principal | Related | |||||||||||||||||||
Investment | Balance | Allowance | Investment | Balance | Allowance | |||||||||||||||||||
With no allocated allowance | ||||||||||||||||||||||||
Commercial | $ | 458 | $ | 481 | $ | — | $ | 585 | $ | 586 | $ | — | ||||||||||||
Real estate - commercial | 4,193 | 4,284 | — | 2,778 | 2,974 | — | ||||||||||||||||||
Real estate - construction | 435 | 449 | — | 1,210 | 1,273 | — | ||||||||||||||||||
Real estate - mortgage | 919 | 948 | — | 684 | 736 | — | ||||||||||||||||||
Installment | 96 | 115 | — | 122 | 138 | — | ||||||||||||||||||
Other | 374 | 397 | — | 111 | 120 | — | ||||||||||||||||||
Subtotal | 6,475 | 6,674 | — | 5,490 | 5,827 | — | ||||||||||||||||||
With allocated allowance | ||||||||||||||||||||||||
Commercial | 240 | 240 | 150 | — | — | — | ||||||||||||||||||
Real estate - commercial | 113 | 113 | 28 | 184 | 217 | 171 | ||||||||||||||||||
Real estate - construction | — | — | — | 161 | 161 | 18 | ||||||||||||||||||
Real estate - mortgage | 416 | 416 | 50 | — | — | — | ||||||||||||||||||
Subtotal | 769 | 769 | 228 | 345 | 378 | 189 | ||||||||||||||||||
Total Impaired Loans | $ | 7,244 | $ | 7,443 | $ | 228 | $ | 5,835 | $ | 6,205 | $ | 189 |
The following table presents the average balance related to impaired loans for the period indicated (in thousands):
2013 | 2012 | 2011 | ||||||||||||||||||||||
Average Book | Interest Income | Average Book | Interest Income | Average Book | Interest Income | |||||||||||||||||||
Balance | Recognized | Balance | Recognized | Balance | Recognized | |||||||||||||||||||
Commercial | $ | 960 | $ | — | $ | 941 | $ | — | $ | 2,056 | $ | — | ||||||||||||
Real estate - commercial | 4,784 | 77 | 3,069 | — | 6,354 | — | ||||||||||||||||||
Real estate - construction | 458 | 20 | 1,673 | — | 9,453 | — | ||||||||||||||||||
Real estate - mortgage | 1,415 | 52 | 681 | — | 991 | — | ||||||||||||||||||
Installment | 127 | 2 | 139 | — | 110 | — | ||||||||||||||||||
Other | 388 | — | 122 | — | 91 | — | ||||||||||||||||||
Total | $ | 8,132 | $ | 151 | $ | 6,625 | $ | — | $ | 19,055 | $ | — |
Nonperforming loans include all such loans 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 and in the process of collection. Nonperforming loans at December 31 are summarized as follows (in thousands):
Loans Past Due Over | ||||||||||||||||
Nonaccrual | 90 Days Still Accruing | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Commercial | $ | 698 | $ | 585 | $ | — | $ | — | ||||||||
Real estate - commercial | 3,425 | 2,962 | — | — | ||||||||||||
Real estate - construction | 110 | 1,371 | — | — | ||||||||||||
Real estate - mortgage | 417 | 684 | — | — | ||||||||||||
Installment | 69 | 122 | — | — | ||||||||||||
Other | 374 | 111 | — | — | ||||||||||||
Total | $ | 5,093 | $ | 5,835 | $ | — | $ | — |
If interest on nonaccrual loans had been accrued, such income would have approximated $224,000, $575,000 and $1,039,000 for the years ended December 31, 2013, 2012 and 2011.
At December 31, 2013 there were no commitments to lend additional funds to borrowers whose loans were classified as nonaccrual.
The following table shows an aging analysis of the loan portfolio by the amount of time past due (in thousands):
As of December 31, 2013 | ||||||||||||||||||||
Accruing Interest | ||||||||||||||||||||
Greater than | ||||||||||||||||||||
30-89 Days | 89 Days | |||||||||||||||||||
Current | Past Due | Past Due | Nonaccrual | Total | ||||||||||||||||
Commercial | $ | 46,587 | $ | 241 | $ | — | $ | 698 | $ | 47,526 | ||||||||||
Real estate - commercial | 322,773 | 433 | — | 3,425 | 326,631 | |||||||||||||||
Real estate - construction | 27,362 | — | — | 110 | 27,472 | |||||||||||||||
Real estate - mortgage | 62,178 | 525 | — | 417 | 63,120 | |||||||||||||||
Installment | 5,273 | 34 | — | 69 | 5,376 | |||||||||||||||
Other | 38,594 | 343 | — | 374 | 39,311 | |||||||||||||||
Total | $ | 502,767 | $ | 1,576 | $ | — | $ | 5,093 | $ | 509,436 |
As of December 31, 2012 | ||||||||||||||||||||
Accruing Interest | ||||||||||||||||||||
Greater than | ||||||||||||||||||||
30-89 Days | 89 Days | |||||||||||||||||||
Current | Past Due | Past Due | Nonaccrual | Total | ||||||||||||||||
Commercial | $ | 45,473 | $ | 20 | $ | — | $ | 585 | $ | 46,078 | ||||||||||
Real estate - commercial | 292,505 | 163 | — | 2,962 | 295,630 | |||||||||||||||
Real estate - construction | 21,436 | 196 | — | 1,371 | 23,003 | |||||||||||||||
Real estate - mortgage | 72,907 | 762 | — | 684 | 74,353 | |||||||||||||||
Installment | 6,529 | 38 | — | 122 | 6,689 | |||||||||||||||
Other | 45,581 | 249 | — | 111 | 45,941 | |||||||||||||||
Total | $ | 484,431 | $ | 1,428 | $ | — | $ | 5,835 | $ | 491,694 |
A troubled debt restructuring (“TDRs”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
At December 31, 2013, accruing TDRs were $2,151,000 and nonaccrual TDRs were $905,000 compared to accruing TDRs of $2,414,000 and nonaccrual TDRs of $1,072,000 at December 31, 2012. At December 31, 2013, there were $78,000 in specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. At December 31, 2012, there were no specific reserves allocated to customers whose loan terms were modified in troubled debt restructurings. There were no commitments to lend additional amounts at December 31, 2013 and 2012 to customers with outstanding loans classified as troubled debt restructurings. There were no TDRs that subsequently defaulted during the twelve months following the modification of terms for either 2013 or 2012.
The following table presents loans that were modified and recorded as TDRs during the twelve months ended December 31, 2013 and 2012.
As of December 31, 2013 | As of December 31, 2012 | |||||||||||||||||||||||
Accruing TDRs | Accruing TDRs | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Number | Outstanding | Outstanding | Number | Outstanding | Outstanding | |||||||||||||||||||
of | Recorded | Recorded | of | Recorded | Recorded | |||||||||||||||||||
Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||
Real estate - commercial | 1 | $ | 435 | $ | 435 | 5 | $ | 1,350 | $ | 1,350 | ||||||||||||||
Real estate - construction | — | $ | — | $ | — | 1 | $ | 343 | $ | 343 | ||||||||||||||
Real estate - mortgage | 1 | $ | 209 | $ | 209 | 2 | $ | 721 | $ | 721 |
Nonaccrual TDRs | Nonaccrual TDRs | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Number | Outstanding | Outstanding | Number | Outstanding | Outstanding | |||||||||||||||||||
of | Recorded | Recorded | of | Recorded | Recorded | |||||||||||||||||||
Contracts | Investment | Investment | Contracts | Investment | Investment | |||||||||||||||||||
Commercial | 1 | $ | 36 | $ | 36 | 1 | $ | 529 | $ | 529 | ||||||||||||||
Real estate - construction | 1 | $ | 110 | $ | 110 | 2 | $ | 398 | $ | 398 | ||||||||||||||
Real estate - mortgage | 1 | $ | 113 | $ | 113 | — | $ | — | $ | — | ||||||||||||||
Installment | — | $ | — | $ | — | 4 | $ | 120 | $ | 120 | ||||||||||||||
Other | 3 | $ | 210 | $ | 210 | 1 | $ | 25 | $ | 25 |
A summary of TDRs by type of concession and by type of loan as of December 31, 2013 and 2012, is shown below:
December 31, 2013 | ||||||||||||||||||||
Accruing TDRs | Rate | |||||||||||||||||||
Reduction | ||||||||||||||||||||
Number | and | |||||||||||||||||||
of | Rate | Maturity | Maturity | |||||||||||||||||
Contracts | Reduction | Extension | Extension | Total | ||||||||||||||||
Real estate - commercial | 5 | $ | — | $ | 195 | $ | 686 | $ | 881 | |||||||||||
Real estate-construction | 1 | $ | — | $ | 325 | $ | — | $ | 325 | |||||||||||
Real estate - mortgage | 3 | $ | — | $ | 293 | $ | 625 | $ | 918 | |||||||||||
Installment | 1 | $ | — | $ | — | $ | 27 | $ | 27 |
Nonaccrual TDRs | Rate | |||||||||||||||||||
Reduction | ||||||||||||||||||||
Number | and | |||||||||||||||||||
of | Rate | Maturity | Maturity | |||||||||||||||||
Contracts | Reduction | Extension | Extension | Total | ||||||||||||||||
Commercial | 2 | $ | — | $ | — | $ | 391 | $ | 391 | |||||||||||
Real estate-construction | 1 | $ | — | $ | 110 | $ | — | $ | 110 | |||||||||||
Real estate - mortgage | 1 | $ | — | $ | — | $ | 113 | $ | 113 | |||||||||||
Installment | 2 | $ | — | $ | — | $ | 59 | $ | 59 | |||||||||||
Other | 4 | $ | 104 | $ | 60 | $ | 68 | $ | 232 |
December 31, 2012 | ||||||||||||||||||||
Accruing TDRs | Rate | |||||||||||||||||||
Reduction | ||||||||||||||||||||
Number | and | |||||||||||||||||||
of | Rate | Maturity | Maturity | |||||||||||||||||
Contracts | Reduction | Extension | Extension | Total | ||||||||||||||||
Real estate - commercial | 5 | $ | 202 | $ | — | $ | 1,148 | $ | 1,350 | |||||||||||
Real estate-construction | 1 | $ | — | $ | 343 | $ | — | $ | 343 | |||||||||||
Real estate - mortgage | 2 | $ | — | $ | 298 | $ | 423 | $ | 721 |
Nonaccrual TDRs | Rate | |||||||||||||||||||
Reduction | ||||||||||||||||||||
Number | and | |||||||||||||||||||
of | Rate | Maturity | Maturity | |||||||||||||||||
Contracts | Reduction | Extension | Extension | Total | ||||||||||||||||
Commercial | 1 | $ | — | $ | — | $ | 529 | $ | 529 | |||||||||||
Real estate-construction | 2 | $ | 327 | $ | 71 | $ | — | $ | 398 | |||||||||||
Installment | 4 | $ | — | $ | — | $ | 120 | $ | 120 | |||||||||||
Other | 1 | $ | — | $ | — | $ | 25 | $ | 25 |
The following table presents the activity in the allowance for loan losses by portfolio segment (in thousands):
December 31, 2013 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 843 | $ | 6,295 | $ | 690 | $ | 982 | $ | 98 | $ | 721 | $ | 829 | $ | 10,458 | ||||||||||||||||
Charge-offs | (208 | ) | (438 | ) | (401 | ) | (420 | ) | (84 | ) | (289 | ) | (1,840 | ) | ||||||||||||||||||
Recoveries | 593 | 46 | 6 | 11 | 27 | — | 683 | |||||||||||||||||||||||||
Provision for loan losses | (352 | ) | (707 | ) | 315 | 269 | 90 | 400 | (15 | ) | — | |||||||||||||||||||||
Total ending allowance balance | $ | 876 | $ | 5,196 | $ | 610 | $ | 842 | $ | 131 | $ | 832 | $ | 814 | $ | 9,301 | ||||||||||||||||
December 31, 2012 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,333 | $ | 7,528 | $ | 1,039 | $ | 935 | $ | 185 | $ | 736 | $ | 900 | $ | 12,656 | ||||||||||||||||
Charge-offs | (480 | ) | (2,681 | ) | (822 | ) | (353 | ) | (221 | ) | (145 | ) | (4,702 | ) | ||||||||||||||||||
Recoveries | 110 | 63 | 80 | 39 | 103 | 9 | 404 | |||||||||||||||||||||||||
Provision for loan losses | (120 | ) | 1,385 | 393 | 361 | 31 | 121 | (71 | ) | 2,100 | ||||||||||||||||||||||
Total ending allowance balance | $ | 843 | $ | 6,295 | $ | 690 | $ | 982 | $ | 98 | $ | 721 | $ | 829 | $ | 10,458 |
December 31, 2011 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 1,517 | $ | 8,439 | $ | 1,936 | $ | 956 | $ | 339 | $ | 666 | $ | 1,140 | $ | 14,993 | ||||||||||||||||
Charge-offs | (928 | ) | (2,917 | ) | (405 | ) | (440 | ) | (345 | ) | (490 | ) | (5,525 | ) | ||||||||||||||||||
Recoveries | 212 | 108 | 10 | 2 | 206 | — | 538 | |||||||||||||||||||||||||
Provision for loan losses | 532 | 1,898 | (502 | ) | 417 | (15 | ) | 560 | (240 | ) | 2,650 | |||||||||||||||||||||
Total ending allowance balance | $ | 1,333 | $ | 7,528 | $ | 1,039 | $ | 935 | $ | 185 | $ | 736 | $ | 900 | $ | 12,656 |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (in thousands):
December 31, 2013 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 150 | $ | 28 | $ | — | $ | 50 | $ | — | $ | — | $ | — | $ | 228 | ||||||||||||||||
Collectively evaluated for impairment | 726 | 5,168 | 610 | 792 | 131 | 832 | 814 | 9,073 | ||||||||||||||||||||||||
Total ending allowance balance | $ | 876 | $ | 5,196 | $ | 610 | $ | 842 | $ | 131 | $ | 832 | $ | 814 | $ | 9,301 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 698 | $ | 4,306 | $ | 435 | $ | 1,335 | $ | 96 | $ | 374 | $ | 7,244 | ||||||||||||||||||
Loans collectively evaluated for impairment | 46,828 | 322,325 | 27,037 | 61,785 | 5,280 | 38,937 | 502,192 | |||||||||||||||||||||||||
Total ending loans balance | $ | 47,526 | $ | 326,631 | $ | 27,472 | $ | 63,120 | $ | 5,376 | $ | 39,311 | $ | 509,436 |
December 31, 2012 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 171 | $ | 18 | $ | — | $ | — | $ | — | $ | — | $ | 189 | ||||||||||||||||
Collectively evaluated for impairment | 843 | 6,124 | 672 | 982 | 98 | 721 | 829 | 10,269 | ||||||||||||||||||||||||
Total ending allowance balance | $ | 843 | $ | 6,295 | $ | 690 | $ | 982 | $ | 98 | $ | 721 | $ | 829 | $ | 10,458 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 585 | $ | 2,962 | $ | 1,371 | $ | 684 | $ | 122 | $ | 111 | $ | 5,835 | ||||||||||||||||||
Loans collectively evaluated for impairment | 45,493 | 292,668 | 21,632 | 73,669 | 6,567 | 45,830 | 485,859 | |||||||||||||||||||||||||
Total ending loans balance | $ | 46,078 | $ | 295,630 | $ | 23,003 | $ | 74,353 | $ | 6,689 | $ | 45,941 | $ | 491,694 |
December 31, 2011 | Commercial | Real Estate Commercial | Real Estate Construction | Real Estate Mortgage | Installment | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 450 | $ | 606 | $ | 504 | $ | 37 | $ | 13 | $ | — | $ | — | $ | 1,610 | ||||||||||||||||
Collectively evaluated for impairment | 883 | 6,922 | 535 | 898 | 172 | 736 | 900 | 11,046 | ||||||||||||||||||||||||
Total ending loans balance | $ | 1,333 | $ | 7,528 | $ | 1,039 | $ | 935 | $ | 185 | $ | 736 | $ | 900 | $ | 12,656 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 1,788 | $ | 5,998 | $ | 9,440 | $ | 938 | $ | 107 | $ | 88 | $ | 18,359 | ||||||||||||||||||
Loans collectively evaluated for impairment | 44,372 | 270,646 | 18,023 | 46,424 | 10,818 | 47,877 | 438,160 | |||||||||||||||||||||||||
Total ending loans balance | $ | 46,160 | $ | 276,644 | $ | 27,463 | $ | 47,362 | $ | 10,925 | $ | 47,965 | $ | 456,519 |
The following table shows the loan portfolio allocated by management’s internal risk ratings (in thousands):
As of December 31, 2013 | ||||||||||||||||
Pass | Special Mention | Substandard | Total | |||||||||||||
Commercial | $ | 45,446 | $ | 1,107 | $ | 973 | $ | 47,526 | ||||||||
Real estate - commercial | 309,828 | 6,213 | 10,590 | 326,631 | ||||||||||||
Real estate - construction | 27,101 | 261 | 110 | 27,472 | ||||||||||||
Real estate - mortgage | 61,200 | — | 1,920 | 63,120 | ||||||||||||
Installment | 5,278 | — | 98 | 5,376 | ||||||||||||
Other | 38,611 | �� | — | 700 | 39,311 | |||||||||||
Total | $ | 487,464 | $ | 7,581 | $ | 14,391 | $ | 509,436 | ||||||||
As of December 31, 2012 | ||||||||||||||||
Pass | Special Mention | Substandard | Total | |||||||||||||
Commercial | $ | 44,486 | $ | 129 | $ | 1,463 | $ | 46,078 | ||||||||
Real estate - commercial | 278,834 | — | 16,796 | 295,630 | ||||||||||||
Real estate - construction | 21,386 | — | 1,617 | 23,003 | ||||||||||||
Real estate - mortgage | 71,973 | — | 2,380 | 74,353 | ||||||||||||
Installment | 6,562 | — | 127 | 6,689 | ||||||||||||
Other | 45,658 | — | 283 | 45,941 | ||||||||||||
Total | $ | 468,899 | $ | 129 | $ | 22,666 | $ | 491,694 |
The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the probable incurred losses in the loan 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 loss experience, and the Company’s underwriting policies. During the second quarter of 2013, there was a change in the Bank’s method of calculating the historical loss factors applied to loans identified as “homogenous segments” of the loan portfolio as follows: Losses from the past twelve quarters are applied to loan pools based on a “Migration Analysis” method. The method calculates Net Charge Offs (charge offs less corresponding recoveries) and measures them against average balances in loan pools based on the risk grade in effect on charged-off loans four quarters prior to the actual charge off date. The logic behind this four quarter “look back” is to account for management’s estimate of the typical time lapse between the recognition of the problem loan and the recognition of some or all of the loan as uncollectable. In addition, the loss ratios are calculated using “factored” logic which systematically reduces the Net Charge Off value so that charge offs occurring in older periods do not have as much weight as more recent charge offs. Management of the Company believes that, given the recent trends in historical losses and the correlation of those losses with a loans identified risk grade, that incorporation of a migration analysis in the current and future analyses was a prudent refinement of the allowance methodology. In addition, management believes that the decreases in the overall level of the allowance for loan losses over the past several quarters is directionally consistent with the improving credit quality trends of the loan portfolio. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable incurred losses in loans receivable. 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 loss adequacy periodically. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.
The allowance for loan losses is comprised of several components including the specific, formula and unallocated allowance relating to loans in the loan portfolio. Our methodology for determining the allowance for loan losses consists of several key elements, which include:
The Company also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing agreements, for example, the Bank’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $146,000 and $143,000, as of December 31, 2013 and 2012, respectively.
4. OTHER REAL ESTATE OWNED
The table shows the changes in other real estate owned (OREO) during the years ended December 31 as follows (in thousands):
2013 | 2012 | 2011 | ||||||||||
Balance, beginning of year | $ | 22,423 | $ | 20,106 | $ | 25,784 | ||||||
Loans transferred to other real estate owned | 818 | 12,239 | 10,454 | |||||||||
Premises transferred to other real estate owned | 627 | — | — | |||||||||
Sales of other real estate owned | (17,204 | ) | (6,889 | ) | (12,036 | ) | ||||||
Loss on sale or write-down of other real estate owned | (3,210 | ) | (3,033 | ) | (4,096 | ) | ||||||
Balance, end of year | $ | 3,454 | $ | 22,423 | $ | 20,106 |
The following table presents the components of OREO expense (in thousands):
As of December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operating expenses | $ | 329 | $ | 523 | $ | 708 | ||||||
Provision for unrealized losses | 3,057 | 2,638 | 4,002 | |||||||||
Net loss on sales | 153 | 395 | 94 | |||||||||
Total other real estate owned expense | $ | 3,539 | $ | 3,556 | $ | 4,804 |
5. FAIR VALUE MEASUREMENTS
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
●Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
●Significant other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets or liabilities, quoted prices for securities in inactive markets and inputs derived principally from, or corroborated by, observable market data by correlation or other means.
●Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis (in thousands):
Recurring Basis
Fair Value Measurements at December 31, 2013 Using: | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Available-for-sale securities: | ||||||||||||||||
Obligations of U.S. government sponsored agencies | $ | 18,198 | $ | — | $ | 18,198 | $ | — | ||||||||
Obligations of state and political subdivisions | 5,317 | — | 5,317 | — | ||||||||||||
Government sponsored agency mortgage-backed securities | 248,277 | — | 248,277 | — | ||||||||||||
Corporate debt securities | 4,755 | — | 4,755 | — | ||||||||||||
Equity securities | 2,932 | — | 2,932 | — | ||||||||||||
$ | 279,479 | $ | — | $ | 279,479 | $ | — | |||||||||
Fair Value Measurements at December 31, 2012 Using: | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Available-for-sale securities: | ||||||||||||||||
Obligations of U.S. government sponsored agencies | $ | 21,118 | $ | — | $ | 21,118 | $ | — | ||||||||
Obligations of state and political subdivisions | 11,197 | — | 11,197 | — | ||||||||||||
Government sponsored agency mortgage-backed securities | 245,631 | — | 245,631 | — | ||||||||||||
Corporate debt securities | 4,756 | — | 4,756 | — | ||||||||||||
Equity securities | 3,113 | — | 3,113 | — | ||||||||||||
$ | 285,815 | $ | — | $ | 285,815 | $ | — |
Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year ended December 31, 2013, there were no transfers between Levels 1 and 2.
There were no liabilities measured at fair value on a recurring basis at December 31, 2013 or 2012.
Nonrecurring Basis
Total at | ||||||||||||||||||||
December 31, | Fair Value Measurements Using: | |||||||||||||||||||
2013 | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||||||
Impaired loans: | ||||||||||||||||||||
Commercial | $ | 157 | $ | — | $ | — | $ | 157 | $ | 63 | ||||||||||
Real estate - commercial | 593 | — | — | 593 | 239 | |||||||||||||||
Real estate - construction | 110 | — | — | 110 | 71 | |||||||||||||||
Real estate - mortgage | 291 | — | — | 291 | 42 | |||||||||||||||
Other | 164 | — | — | 164 | 71 | |||||||||||||||
Other real estate owned: | ||||||||||||||||||||
Real estate - commercial | 570 | — | — | 570 | 57 | |||||||||||||||
Real estate - construction | 2,147 | — | — | 2,147 | 1,125 | |||||||||||||||
Total assets measured at fair value on a nonrecurring basis | $ | 4,032 | $ | — | $ | — | $ | 4,032 | $ | 1,668 | ||||||||||
Total at | ||||||||||||||||||||
December 31, | Fair Value Measurements Using: | |||||||||||||||||||
2012 | Level 1 | Level 2 | Level 3 | Total Losses | ||||||||||||||||
Impaired loans: | ||||||||||||||||||||
Commercial | $ | 585 | $ | — | $ | — | $ | 585 | $ | 126 | ||||||||||
Real estate - commercial | 2,222 | — | — | 2,222 | 1,313 | |||||||||||||||
Real estate - construction | 143 | — | — | 143 | 19 | |||||||||||||||
Real estate - mortgage | 464 | — | — | 464 | 29 | |||||||||||||||
Installment | 75 | — | — | 75 | 27 | |||||||||||||||
Other | 25 | — | — | 25 | 24 | |||||||||||||||
Other real estate owned: | ||||||||||||||||||||
Real estate - construction | 7,360 | — | — | 7,360 | 2,194 | |||||||||||||||
Real estate - mortgage | 184 | — | — | 184 | 140 | |||||||||||||||
Total assets measured at fair value on a nonrecurring basis | $ | 11,058 | $ | — | $ | — | $ | 11,058 | $ | 3,872 |
Impaired Loans - The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, and additional discounts by management for known market factors and time since the last appraisal. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Other Real Estate Owned – Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis (in thousands):
Range | ||||||||||
(Weighted | ||||||||||
December 31, 2013 | Fair Value | Valuation Techniques | Unobservable Inputs | Average) | ||||||
Impaired loans: | ||||||||||
Commercial | $ | 157 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Real estate - commercial | $ | 593 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Real estate - construction | $ | 110 | Sales comparison approach | Adjustment for differences between the comparable sales | 2% to 3% (3%) | |||||
Real estate - mortgage | $ | 291 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Other | $ | 164 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Other real estate owned: | ||||||||||
Real estate - commercial | $ | 570 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Real estate - construction | $ | 2,147 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% to 6% (6%) |
Range | ||||||||||
(Weighted | ||||||||||
Monday, December 31, 2012 | Fair Value | Valuation Techniques | Unobservable Inputs | Average) | ||||||
Impaired loans: | ||||||||||
Commercial | $ | 585 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Real estate - commercial | $ | 2,222 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Real estate - construction | $ | 143 | Sales comparison approach | Adjustment for differences between the comparable sales | 2% to 3% (3%) | |||||
Real estate - mortgage | $ | 464 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Other | $ | 25 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) | |||||
Other real estate owned: | ||||||||||
Real estate - construction | $ | 7,360 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% to 6% (6%) | |||||
Real estate - mortgage | $ | 184 | Sales comparison approach | Adjustment for differences between the comparable sales | 6% to 11% (9%) |
Disclosures about Fair Value of Financial Instruments
The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities.
The following assumptions were used as of December 31, 2013 and 2012 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
The fair values of performing loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
The fair value of nonperforming loans is estimated by discounting estimated future cash flows using current interest rates with an additional risk adjustment reflecting the individual characteristics of the loans, or using the fair value of underlying collateral for collateral dependent loans as a practical expedient.
The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (in thousands):
�� | Fair Value Measurements at | |||||||||||||||||||
December 31, 2013 Using | ||||||||||||||||||||
Carrying | ||||||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
FINANCIAL ASSETS | ||||||||||||||||||||
Cash and due from banks | $ | 19,348 | $ | 19,348 | $ | — | $ | — | $ | 19,348 | ||||||||||
Federal funds sold | 38,135 | 38,135 | — | — | 38,135 | |||||||||||||||
Time deposits at other financial institutions | 2,226 | — | 2,226 | — | 2,226 | |||||||||||||||
FHLB, FRB and other securities | 8,402 | — | — | — | N/A | |||||||||||||||
Securities: | ||||||||||||||||||||
Available-for-sale | 279,479 | — | 279,479 | — | 279,479 | |||||||||||||||
Held-to-maturity | 2 | — | 2 | — | 2 | |||||||||||||||
Loans | 499,943 | — | 510,611 | 510,611 | ||||||||||||||||
Accrued interest receivable | 2,124 | — | 692 | 1,432 | 2,124 | |||||||||||||||
FINANCIAL LIABILITIES | ||||||||||||||||||||
Deposits: | ||||||||||||||||||||
Nonmaturity deposits | $ | 638,112 | $ | 638,112 | $ | — | $ | — | $ | 638,112 | ||||||||||
Time deposits | 149,737 | — | 149,899 | — | 149,899 | |||||||||||||||
Subordinated debentures | 21,651 | — | — | 7,702 | 7,702 | |||||||||||||||
Accrued interest payable | 108 | 2 | 29 | 77 | 108 |
Fair Value Measurements at | ||||||||||||||||||||
December 31, 2012 Using | ||||||||||||||||||||
Carrying | ||||||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
FINANCIAL ASSETS | ||||||||||||||||||||
Cash and due from banks | $ | 22,654 | $ | 22,654 | $ | — | $ | — | $ | 22,654 | ||||||||||
Federal funds sold | 15,865 | 15,865 | — | — | 15,865 | |||||||||||||||
Time deposits at other financial institutions | 2,219 | — | 2,219 | — | 2,219 | |||||||||||||||
FHLB, FRB and other securities | 8,313 | — | — | — | N/A | |||||||||||||||
Securities: | ||||||||||||||||||||
Available-for-sale | 285,815 | — | 285,815 | — | 285,815 | |||||||||||||||
Held-to-maturity | 6 | — | 6 | — | 6 | |||||||||||||||
Loans | 481,753 | — | — | 500,689 | 500,689 | |||||||||||||||
Accrued interest receivable | 2,217 | — | 767 | 1,450 | 2,217 | |||||||||||||||
FINANCIAL LIABILITIES | ||||||||||||||||||||
Deposits: | ||||||||||||||||||||
Nonmaturity deposits | $ | 596,204 | $ | 596,204 | $ | — | $ | — | $ | 596,204 | ||||||||||
Time deposits | 172,376 | — | 172,805 | — | 172,805 | |||||||||||||||
Subordinated debentures | 21,651 | — | — | 9,018 | 9,018 | |||||||||||||||
Accrued interest payable | 136 | 2 | 54 | 80 | 136 |
Major classifications of premises and equipment at December 31 are summarized as follows (in thousands):
2013 | 2012 | |||||||
Land | $ | 2,207 | $ | 2,620 | ||||
Building and building improvements | 8,696 | 9,341 | ||||||
Furniture, fixtures and equipment | 12,716 | 12,599 | ||||||
Leasehold improvements | 2,805 | 2,791 | ||||||
Construction in process | 26 | 5 | ||||||
Total premises and equipment | 26,450 | 27,356 | ||||||
Less: Accumulated depreciation | (18,617 | ) | (18,175 | ) | ||||
Premises and equipment, net | $ | 7,833 | $ | 9,181 |
Depreciation and amortization included in occupancy and equipment expense totaled $1,019,000, $1,080,000 and $1,197,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company has operating leases for certain premises and equipment. These leases expire on various dates through 2023 and have various renewal options ranging from 1 to 25 years. Rent expense for such leases for the years ended December 31, 2013, 2012 and 2011 was $1,107,000, $1,109,000 and $1,252,000, respectively.
The following schedule represents the Company’s noncancelable future minimum scheduled lease payments at December 31, 2013 (in thousands):
2014 | $ | 1,047 | ||
2015 | 793 | |||
2016 | 469 | |||
2017 | 299 | |||
2018 | 226 | |||
Thereafter | 910 | |||
Total | $ | 3,744 |
7. OTHER ASSETS
Major classifications of other assets at December 31 were as follows (in thousands):
2013 | 2012 | |||||||
Deferred taxes, net | $ | 15,309 | $ | 12,346 | ||||
Federal and state tax receivable | 1,314 | 444 | ||||||
Prepaid expenses | 767 | 879 | ||||||
Mortgage and SBA servicing asset | 1,362 | 1,139 | ||||||
Other | 748 | 789 | ||||||
Total other assets | $ | 19,500 | $ | 15,597 |
Originated mortgage and SBA servicing assets totaling $706,000, $628,000 and $421,000 were recognized during the years ended December 31, 2013, 2012 and 2011, respectively. Amortization of mortgage and SBA servicing assets totaled $483,000, $343,000 and $275,000 for the years ended December 31, 2013, 2012 and 2011, respectively. There were no impairment charges to mortgage servicing assets during the years ended December 31, 2013, 2012 and 2011. At December 31, 2013 and 2012, the Company serviced real estate loans and loans guaranteed by the Small Business Administration which it had sold to the secondary market of approximately $188,484,000 and $159,010,000, respectively. Fair value of loan servicing assets at year-end 2013 was determined using discount rates ranging from 9.25% to 12.75%, prepayment speeds ranging from 144psa to 320psa, depending on the stratification of the specific right, and a weighted average default rate of 1.25%. Fair value of loan servicing assets at year-end 2012 was determined using discount rates ranging from 9.25% to 12.75%, prepayment speeds ranging from 318psa to 512psa, depending on the stratification of the specific right; and a weighted average default rate of 1.25%.
8. DEPOSITS
The following table summarizes the Company’s deposits by type for the years ended December 31 (in thousands):
2013 | 2012 | |||||||
Noninterest-bearing demand | $ | 184,971 | $ | 177,855 | ||||
Interest-bearing demand | 202,508 | 185,315 | ||||||
Savings and money market | 250,633 | 233,034 | ||||||
Time certificates | 149,737 | 172,376 | ||||||
Total deposits | $ | 787,849 | $ | 768,580 |
The aggregate amount of time certificates of deposit in denominations of $100,000 or more was $71,218,000 and $82,036,000 at December 31, 2013 and 2012, respectively. Interest expense incurred on such time certificates of deposit was $399,000, $805,000 and $1,245,000 for the years ended December 31, 2013, 2012 and 2011. At December 31, 2013, the scheduled maturities of all time deposits were as follows (in thousands):
Years | Amount | |||
2014 | $ | 125,808 | ||
2015 | 15,498 | |||
2016 | 6,021 | |||
2017 | 2,410 | |||
$ | 149,737 |
At December 31, 2013, the Company had the following lines of credit with correspondent banks to purchase federal funds (in thousands):
Description | Amount | Expiration | ||||
Secured: | ||||||
Secured fed funds | $ | 10,000 | 6/30/2014 | |||
First deeds of trust on eligible 1-4 unit residential loans | $ | 70,932 | Monthly | |||
Securities backed credit program | $ | 189,757 | Monthly | |||
Discount -securities | $ | 2,131 | Monthly |
The Company did not have outstanding balances for FHLB advances or Federal Funds purchased at December 31, 2013 and 2012.
The Company owns the common stock of three business trusts that have issued an aggregate of $21.0 million in trust preferred securities fully and unconditionally guaranteed by the Company. The entire proceeds of each respective issuance of trust preferred securities were invested by the separate business trusts into junior subordinated debentures issued by the Company, with identical maturity, repricing and payment terms as the respective issuance of trust preferred securities. The aggregate amount of junior subordinated debentures issued by the Company is $22.0 million, with the maturity dates for the respective debentures ranging from 2033 through 2036. Subject to regulatory approval, the Company may redeem the respective junior subordinated debentures earlier than the maturity date, with certain of the debentures being redeemable beginning in April 2008, July 2009 and March 2011.
On November 9, 2009, the Company elected to defer the payment of interest on these securities. The Company is allowed to defer the payment of interest for up to 20 consecutive quarterly periods without triggering an event of default. The obligation to pay interest is cumulative and continued to accrue. On May 29, 2012, the Company received approval from the Federal Reserve Bank of San Francisco and on May 9, 2012, the Company received approval from the California Department of Financial Institutions to pay all deferred interest on its junior subordinated notes underlying its trust preferred securities in the amount of $5,854,000 and to fully redeem its North Valley Capital Trust I notes in the amount of $10,310,000, bearing an interest rate of 10.25%. On July 23, 2012, the Company paid all deferred interest on its junior subordinated notes and on July 25, 2012, it redeemed, in full, the notes associated with North Valley Capital Trust I.
The obligation to pay interest on the Debentures is cumulative and will continue to accrue, currently at a variable rate of 3.49% on the 2033 Debentures, variable rate of 3.04% on the 2034 Debentures and a variable rate of 1.57% on the 2036 Debentures. Interest is generally set at variable rates based on the three-month LIBOR, reset and payable quarterly, plus 3.25% for the 2033Debentures, plus 2.80% for the 2034 Debentures, and plus 1.33% for the 2036 Debentures. At December 31, 2013 and 2012, the Company had recorded accrued and unpaid interest payments of $77,000 and $79,000, respectively.
The trust preferred securities issued by the trusts are currently included in Tier 1 capital in the amount of $21,000,000 for purposes of determining Leverage, Tier 1 and Total Risk-Based capital ratios for the year ending December 31, 2013 and 2012.
The following table summarizes the terms of each subordinated debenture issuance (dollars in thousands):
Fixed or | ||||||||||||||||||||||
Date | Variable | Current | Rate | Redemption | Amount at December 31, | |||||||||||||||||
Series | Issued | Maturity | Rate | Rate | Index | Date | 2013 | 2012 | ||||||||||||||
North Valley Capital Trust II | 4/10/03 | 4/24/33 | Variable | 3.49 | % | LIBOR + 3.25% | 4/24/08 | 6,186 | 6,186 | |||||||||||||
North Valley Capital Trust III | 5/5/04 | 4/24/34 | Variable | 3.04 | % | LIBOR + 2.80% | 7/23/09 | 5,155 | 5,155 | |||||||||||||
North Valley Capital Statutory Trust IV | 12/29/05 | 3/15/36 | Variable | 1.57 | % | LIBOR + 1.33% | 3/15/11 | 10,310 | 10,310 | |||||||||||||
$ | 21,651 | $ | 21,651 |
Deferred costs related to the Subordinated Debentures, which are included in other assets in the accompanying consolidated balance sheet, totaled $0 and $6,000 at December 31, 2013 and 2012, respectively. Amortization of the deferred costs was $6,000, $20,000 and $42,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
11. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, was as follows (in thousands):
2013 | 2012 | 2011 | ||||||||||
Current tax (benefit) provision: | ||||||||||||
Federal | $ | (75 | ) | $ | (99 | ) | $ | 63 | ||||
State | (15 | ) | 117 | 46 | ||||||||
Total | (90 | ) | 18 | 109 | ||||||||
Deferred tax provision (benefit): | ||||||||||||
Federal | 1,472 | 2,715 | 695 | |||||||||
State | 212 | (200 | ) | (269 | ) | |||||||
Impact of valuation allowance | — | (4,277 | ) | (223 | ) | |||||||
Total | 1,684 | (1,762 | ) | 203 | ||||||||
Total provision (benefit) for income taxes | $ | 1,594 | $ | (1,744 | ) | $ | 312 |
Current and deferred tax provision (benefit) for the years ended December 31, 2013, 2012 and 2011 was $1,594,000, ($1,744,000), and $312,000, respectively. During 2010, the Company recorded a partial valuation allowance of $4,500,000 against the Company’s deferred tax asset. During the quarter ended December 31, 2011, the Company reversed the Federal portion of its valuation allowance in the amount of $223,000, and during the quarter ended September 30, 2012 the Company reversed the remaining State valuation allowance of $4,277,000.
At December 31, 2013, the Bank had Federal and State net operating loss carryforwards (NOLs) for tax purposes of approximately $4,627,000 and $26,586,000, respectively. The Company’s Federal NOLs will expire in 2031 and its California NOLs will expire in 2032 if not fully utilized.
The effective federal tax rate for the years ended December 31, differs from the statutory tax rate as follows:
2013 | 2012 | 2011 | ||||||||||
Federal statutory income tax rate | 35.0% | 35.0% | 35.0% | |||||||||
State income taxes net of Federal income tax benefit | 2.5% | (1.2% | ) | (4.3% | ) | |||||||
Tax exempt income | (2.5% | ) | (4.0% | ) | (6.5% | ) | ||||||
Impact of valuation allowance | — | (61.1% | ) | (6.6% | ) | |||||||
Increase in reserve for uncertain tax positions | — | — | 1.2% | |||||||||
Other | (4.4% | ) | (7.1% | ) | (9.5% | ) | ||||||
Effective tax (benefit) rate | 30.6% | (38.4% | ) | 9.3% |
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):
2013 | 2012 | |||||||
Deferred tax assets: | ||||||||
Allowance for loan losses | $ | 4,490 | $ | 5,252 | ||||
Accrued pension obligation | 3,573 | 3,070 | ||||||
Underfunded pension obligation | 893 | 1,125 | ||||||
Deferred compensation | 811 | 755 | ||||||
Unrealized loss on available-for-sale securities | 2,595 | — | ||||||
Discount on acquired loans | — | 14 | ||||||
Stock based compensation | 166 | 181 | ||||||
Tax credits | 2,634 | 2,092 | ||||||
Net operating loss | 4,501 | 4,109 | ||||||
Capital loss | 26 | 489 | ||||||
Other real estate owned | 684 | 2,597 | ||||||
Other | 526 | 864 | ||||||
Total deferred tax assets | $ | 20,899 | $ | 20,548 | ||||
Deferred tax liabilities: | ||||||||
Tax depreciation in excess of book depreciation | 1,069 | 1,149 | ||||||
FHLB stock dividend | 410 | 410 | ||||||
Deferred loan fees and costs | 894 | 986 | ||||||
Originated mortgage servicing rights | 463 | 412 | ||||||
Core deposit intangibles | 50 | 117 | ||||||
Unrealized gain on available-for-sale securities | — | 2,284 | ||||||
Market to market adjustment | — | 28 | ||||||
California franchise tax | 2,538 | 2,612 | ||||||
Other | 166 | 204 | ||||||
Total deferred tax liabilities | $ | 5,590 | $ | 8,202 | ||||
Net deferred tax asset | $ | 15,309 | $ | 12,346 |
The Company and its subsidiaries file income tax returns in the United States and California jurisdictions. There are currently no pending federal tax examinations by tax authorities. With few exceptions, the Company is no longer subject to examination by federal taxing authorities for the years ended on or before December 31, 2009 and by state and local taxing authorities for years ended on or before December 31, 2008. The Company’s primary market areas are designated as “Enterprise Zones” and the Company receives tax credits for hiring individuals in these markets and receives an interest deduction for loans made in designated enterprise zones. The tax credits and interest deductions are significant to the Company in reducing its effective tax rate. These positions could be challenged by the California Franchise Tax Board, and an unfavorable adjustment could occur. The California Franchise Tax Board is currently conducting examinations of the State of California returns for 2003, 2004, 2007 and 2008.
The Company determined its unrecognized tax benefit to be $519,000 for the years ended December 31, 2013 and 2012. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
2013 | 2012 | |||||||
Beginning balance | $ | 519 | $ | 519 | ||||
Additions based on tax positions related to the current year | — | — | ||||||
Additions for tax positions of prior years | — | — | ||||||
Reductions for tax positions of prior years | — | — | ||||||
Settlements | — | — | ||||||
Ending balance | $ | 519 | $ | 519 |
Of this total, the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods is not considered significant for disclosure purposes. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.
During the year ended December 31, 2013, the Company was not assessed any interest and penalties. The Company had approximately $86,000 and $42,000 for the payment of interest and penalties accrued at December 31, 2013 and 2012, respectively.
12. PENSION AND OTHER BENEFIT PLANS
Substantially all employees with at least one year of service participate in a Company-sponsored employee stock ownership plan (ESOP). The Company made discretionary contributions to the ESOP of $80,000, for the years ended December 31, 2013 and 2012, respectively and $40,000 for the year ended December 31, 2011. At December 31, 2013 and 2012, the ESOP owned approximately 48,794 and 47,445, respectively, 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 of $208,000, $172,000 and $69,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company has a nonqualified executive deferred compensation plan for key executives and directors. Under this plan, participants voluntarily elect to defer a portion of their salary, bonus or fees and the Company is required to credit these deferrals with interest. The Company’s deferred compensation obligation of $1,770,000 and $1,697,000 as of December 31, 2013 and 2012, respectively, is included in accrued interest payable and other liabilities. The interest cost for this plan was $135,000, $132,000 and $141,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company has a supplemental retirement plan for key executives, 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 $37,209,000 and $36,045,000 at December 31, 2013 and 2012, respectively. The related accrued pension obligation of $9,973,000 and $9,443,000 as of December 31, 2013 and 2012, 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 at or for the year ended December 31 (in thousands):
Pension Benefits | ||||||||||||
2013 | 2012 | |||||||||||
Change in projected benefit obligation (PBO) | ||||||||||||
Benefit obligation at the beginning of the year | $ | 9,443 | $ | 7,397 | ||||||||
Service cost | 683 | 602 | ||||||||||
Interest cost | 372 | 334 | ||||||||||
Benefit payments | (250 | ) | (250 | ) | ||||||||
Actuarial loss | (275 | ) | 1,360 | |||||||||
Plan amendments | — | — | ||||||||||
Projected benefit obligation at end of year | $ | 9,973 | $ | 9,443 | ||||||||
Accumulated benefit obligation at end of year | $ | 7,639 | $ | 7,031 | ||||||||
Change in plan assets: | ||||||||||||
Employer contributions | $ | 250 | $ | 250 | ||||||||
Benefit payments | (250 | ) | (250 | ) | ||||||||
Fair value of plan assets at end of year | $ | — | $ | — | ||||||||
Funded status | $ | (9,973 | ) | $ | (9,443 | ) | ||||||
Amounts recognized in statements of financial position | ||||||||||||
Current liability | (300 | ) | (278 | ) | ||||||||
Noncurrent liability | (9,673 | ) | (9,165 | ) | ||||||||
Net amount recognized | $ | (9,973 | ) | $ | (9,443 | ) | ||||||
Amounts recognized in accumulated other comprehensive income | ||||||||||||
Prior service cost | 305 | 403 | ||||||||||
Net loss | 1,872 | 2,342 | ||||||||||
Net amount recognized | $ | 2,177 | $ | 2,745 | ||||||||
Total amount recognized | (7,796 | ) | (6,698 | ) | ||||||||
Assumptions used to determine benefit obligations as of the end of fiscal year | ||||||||||||
Measurement Date | 12/31/2013 | 12/31/2012 | 12/31/2011 | |||||||||
Discount rate | 4.75 | % | 4.00 | % | 4.60 | % | ||||||
Expected return on assets | N/A | N/A | N/A | |||||||||
Rate of compensation increase | 8.00 | % | 8.00 | % | 8.00 | % |
Components of net periodic benefits cost | 2013 | 2012 | 2011 | |||||||||
Service cost | $ | 683 | $ | 602 | $ | 549 | ||||||
Interest cost | 372 | 334 | 333 | |||||||||
Amortization of prior service cost | 98 | 98 | 98 | |||||||||
Amortization of actuarial loss | 195 | 40 | 10 | |||||||||
Net periodic benefit cost | $ | 1,348 | $ | 1,074 | $ | 990 | ||||||
Other comprehensive (income) loss | $ | (568 | ) | $ | 1,222 | $ | 748 | |||||
Amounts included in accumulated other comprehensive income expected to be recognized during the next fiscal year | ||||||||||||
Prior service cost | $ | 98 | $ | 98 | $ | 98 | ||||||
Actuarial loss | $ | 142 | $ | 195 | $ | 39 | ||||||
Assumptions used in computing net periodic benefit cost | ||||||||||||
Measurement Date | 12/31/2013 | 12/31/2012 | 12/31/2011 | |||||||||
Discount rate | 4.75 | % | 4.00 | % | 4.60 | % | ||||||
Expected return on assets | N/A | N/A | N/A | |||||||||
Rate of compensation increase | 8.00 | % | 8.00 | % | 8.00 | % |
Estimated costs expected to be accrued in 2014 are $1,382,000. The following table presents the benefits expected to be paid under the plan in the periods indicated (in thousands):
Year | Pension Benefits | |||
2014 | 300 | |||
2015 | 346 | |||
2016 | 2,402 | |||
2017 | 378 | |||
2018 | 461 | |||
2019 - 2021 | 6,997 |
During 2013 and 2012 each director of the Company was awarded 180 shares of common stock for their share retainer grant. Total common stock grants were 1,440 during 2013 and 2012, respectively, and 1,260 during 2011. Compensation cost related to these awards was recognized based on the fair value of the shares at the date of the award which equaled $18.84, $13.10 and $10.40 per share, or a total expense of $27,000, $19,000 and $13,000, for the years ended December 31, 2013, 2012 and 2011, respectively.
Under the Company’s stock option plans as of December 31, 2013, there were 241,635 shares of the Company’s common stock 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 value at the date of the grant. Under the Employee Plan, options may not be granted at a price less than the fair value at the date of the grant. Under both plans, options may be exercised over a ten year term. The vesting period is generally fivefour years; however the vesting period can be modified at the discretion of the Company’s Board of Directors, and for all options granted in the fourth quarter in 2008 the vesting period is five years. The 2008 Stock Incentive Plan defines “key employee” as a common-law employee of the Company, its parent or any subsidiary of the Company, an “outside Director,” or a consultant or advisor who provides services to the Company, its parent or any subsidiary of the Company. For purposes of the 2008 Stock Incentive Plan, an “outside Director” is defined as a member of the Board who is not a common-law employee of the Company, its parent or any subsidiary of the Company.
Pursuant to the 2008 Stock Incentive Plan, as of April 1, 2014, there were outstanding options to purchase 302,780 shares of Company Common Stock.
The 2008 Stock Incentive Plan is administered by a committee of the Board of Directors. A summaryAs of April 1, 2014, the Committee members are Dante W. Ghidinelli, Kevin D. Hartwick, Patrick W. Kilkenny, Roger B. Kohlmeier, and Dolores M. Vellutini. The Committee must have a membership composition which enables the Stock Incentive Plan to qualify under SEC Rule 16b-3 with regard to the grant of options or other rights under the Stock Incentive Plan to persons who are subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of options or determining awards or other rights under the Stock Incentive Plan to persons subject to Section 16 of the Exchange Act.
In the event that the Company is a party to a merger or other reorganization, outstanding options and stock awards shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding stock options follows:by the surviving Company or its parent, for their continuation by the Company (if the Company is a surviving Company), for accelerated vesting and accelerated expiration, or for settlement in cash.
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Options | Price | Term | Value ($000) | |||||||||||||
Outstanding January 1, 2011 | 152,095 | 51.02 | ||||||||||||||
Granted | 66,000 | 10.38 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Expired or canceled | (34,025 | ) | 39.66 | |||||||||||||
Outstanding December 31, 2011 | 184,070 | 38.55 | ||||||||||||||
Granted | 77,908 | 11.13 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Expired or canceled | (13,156 | ) | 49.10 | |||||||||||||
Outstanding December 31, 2012 | 248,822 | $ | 29.40 | |||||||||||||
Granted | 114,234 | 16.80 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Expired or canceled | (8,346 | ) | 63.32 | |||||||||||||
Outstanding December 31, 2013 | 354,710 | $ | 24.55 | 7 | $ | 1,403 | ||||||||||
Fully vested and exercisable at December 31, 2013 | 138,607 | $ | 40.97 | 5 | $ | 345 | ||||||||||
Options expected to vest | 216,103 | $ | 14.01 | 9 | $ | 1,059 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information about stock options outstanding at December 31, 2013 is summarized as follows:Stock Ownership of Certain Beneficial Owners
As of February 14, 2014, no person known to the Company (based on Schedule 13G statements filed with the Securities and Exchange Commission) was the beneficial owner of more than five percent (5%) of the outstanding shares of the Company’s Common Stock, except as indicated below:
Average | Average | |||||||||||||||||||||||
Average | Exercise | Exercise | ||||||||||||||||||||||
Remaining | Price of | Price of | ||||||||||||||||||||||
Range of | Options | Contractual | Options | Options | Options | |||||||||||||||||||
Exercise Prices | Outstanding | Life (Years) | Outstanding | Exercisable | Exercisable | |||||||||||||||||||
$ | 0-12.38 | 140,408 | 7.90 | $ | 10.77 | 41,079 | $ | 10.65 | ||||||||||||||||
$ | 12.38-24.75 | 162,372 | 7.90 | $ | 18.64 | 45,598 | $ | 23.54 | ||||||||||||||||
$ | 61.88-74.25 | 22,229 | 4.07 | $ | 65.05 | 22,229 | $ | 65.05 | ||||||||||||||||
$ | 74.25-86.63 | 10,012 | 1.15 | $ | 81.00 | 10,012 | $ | 81.00 | ||||||||||||||||
$ | 86.63-99.00 | 5,514 | 2.02 | $ | 89.60 | 5,514 | $ | 89.60 | ||||||||||||||||
$ | 99.00-111.38 | 14,175 | 2.39 | $ | 99.98 | 14,175 | $ | 99.98 |
Number of | ||||||||||||
Shares | ||||||||||||
Beneficially | Percent of | |||||||||||
Name and Address | Title of Class | Owned | Class | |||||||||
Thomson, Horstmann and Bryant, Inc. | Common | 635,906 | 9.30 | % | ||||||||
501 Merritt 7 | ||||||||||||
Norwalk, CT 06851(1) | ||||||||||||
Basswood Capital Management LLC | Common | 615,373 | 9.00 | % | ||||||||
645 Madison Avenue 10th Floor | ||||||||||||
New York, New York 10022(2) | ||||||||||||
Sander O’Neill Asset Management, LLC | Common | 607,700 | 8.89 | % | ||||||||
150 East 52nd Street, 30th Floor | ||||||||||||
New York, New York 10022(3) | ||||||||||||
Ithan Creek Master Investors (Cayman) L.P. | Common | 597,332 | 8.74 | % | ||||||||
c/o Wellington Management Company, LLP | ||||||||||||
280 Congress Street | ||||||||||||
Boston, Massachusetts 02210(4) | ||||||||||||
Castine Captial Management, LLC | Common | 571,075 | 8.35 | % | ||||||||
One International Place, Suite 2401 | ||||||||||||
Boston, Massachusetts 02210(5) | ||||||||||||
Fidelity Puritan Trust: Fidelity Low-Priced Stock Fund | Common | 425,000 | 6.22 | % | ||||||||
c/o Fidelity Management & Research Company | ||||||||||||
245 Summer Street | ||||||||||||
Boston, Massachusetts 021210(6) | ||||||||||||
Heartland Value Fund | Common | 400,000 | 5.85 | % | ||||||||
c/o Heartland Advisors, Inc. | ||||||||||||
789 North Water Street, Suite 500 | ||||||||||||
Milwaukee, Wisconsin 53202(7) |
22 |
(1) | Information is based on a Schedule 13G filed by Thomson Horstmann & Bryant, Inc. on February 6, 2014. Thomson Horstmann & Bryant, Inc., by reason of its position as investment advisor, may be deemed to beneficially own 635,906 shares of Common Stock representing approximately 9.29% of the shares of Common Stock Outstanding. |
(2) | Information is based on a Schedule 13G filed by Basswood Capital Management, LLC, Matthew Lindenbaum and Bennett Lindenbaum on February 12, 2014. Each of Basswood Capital Management, LLC, by reason of its position as investment advisor, and Matthew Lindenbaum and Bennett Lindenbaum as the managing members of such investment advisor, may be deemed to beneficially own 615,373 shares of Common Stock representing approximately 9.00% of the shares of Common Stock outstanding. |
(3) | Information is based on a Schedule 13G/A filed by Sandler O’Neill Asset Management, LLC, SOAM Holdings, LLC, Malta Hedge Fund II, L.P. and their Managing Member, Terry Maltese, on February 12, 2014. Each of Sandler O’Neill Asset Management, LLC, by reason of its position as Investment Advisor, and Terry Maltese, by reason of his position as Managing Member of Sandler O’Neill Asset Management, LLC, may be deemed to beneficially own 607,700 shares of Common Stock representing approximately 8.89% of the shares of Common Stock outstanding. |
(4) | Information is based on a Schedule 13G/A filed by Ithan Creek Master Investors (Cayman) L.P., a Cayman Islands limited partnership (“Ithan Creek”), and Ithan Creek’s sole general partner, Wellington Hedge Management, LLC, on February 14, 2014. Ithan Creek and Wellington Hedge Management, LLC may be deemed to beneficially own 597,332 shares of Common Stock, representing approximately 8.74% of the shares of Common Stock outstanding, based on shared power to vote and dispose of the shares. Information is also based on a separate Schedule 13G/A filed by Wellington Management Company, LLP, an investment adviser registered under the Investment Advisers Act of 1940, on February 14, 2014, stating that Wellington Management Company, LLP, in its capacity as investment adviser, may be deemed to beneficially own 597,332 shares of Common Stock held of record by its investment advisory clients (representing approximately 8.74% of the shares of Common Stock outstanding). This Schedule 13G/A further states that no such client, except for Ithan Creek, is known by Wellington Management Company, LLP to have ownership interests in more than 5% of the Common Stock. |
(5) | Information is based on a Schedule 13G/A filed by Castine Capital Management, LLC, Castine Partners II, LP, and their Managing Member, Paul Magidson, on February 14, 2014. Each of Castine Capital Management, LLC, by reason of its position as Investment Advisor, and Paul Magidson, by reason of his position as Managing Member of Castine Capital Management, LLC and Castine Partners II, may be deemed to beneficially own 571,075 shares of Common Stock representing approximately 8.35% of the shares of Common Stock outstanding. |
(6) | Information is based on a Schedule 13G/A filed by FMR LLC and its direct and indirect subsidiaries, Edward C. Johnson 3d, Fidelity Management & Research Company and Fidelity Low-Priced Stock Fund on February 14, 2014. Fidelity Low-Priced Stock Fund, an investment company registered under the Investment Company Act of 1940, owned 425,000 shares of Common Stock representing approximately 6.22% of the shares of Common Stock outstanding. Also, Fidelity Management & Research Company, a wholly owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is beneficial owner of said shares as a result of acting as investment adviser to various investment companies registered under the Investment Company Act of 1940. Members of the family of Edward C. Johnson 3d, Chairman of FMR LLC, may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Edward C. Johnson, 3d, Chairman of FMR LLC, has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with each Board of Trustees. |
(7) | Information is based on a Schedule 13G/A filed by Heartland Advisors, Inc. and William J. Nasgovitz on February 6, 2014, with respect to 400,000 shares of Common Stock, representing approximately 5.90% of the shares of Common Stock outstanding, held by the Heartland Value Fund. The Schedule 13G states as follows: The Heartland Value Fund is a mutual fund series of the Heartland Group, Inc., an investment company registered under the Investment Company Act of 1940, as amended. Heartland Advisors, Inc. serves as the Investment advisor to the Heartland Value Fund and Heartland Advisors, Inc. is indirectly controlled by its President, William J. Nasgovitz. By reason of their relationships with the Heartland Value Fund, Heartland Advisors, Inc. and Mr. Nasgovitz may be deemed to share voting and/or dispositive power over the shares of Common Stock held by the Heartland Value Fund. Mr. Nasgovitz disclaims beneficial ownership of these shares. |
Stock Ownership of Directors and Executive Officers
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted pricefollowing table sets forth certain information regarding ownership of the Company’s common stock for options that were in-the-money at December 31, 2013. There were no options exercised during the years ended December 31, 2013, 2012 and 2011. The total fair valueCommon Stock with respect to each current Director of the options that vested during the years ended December 31, 2013, 2012Company and 2011 totaled $405,000, $191,000North Valley Bank, and $144,000, respectively.
The compensation cost that has been charged against income for stock based compensation was $432,000, $210,000 and $157,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
At December 31, 2013, the total unrecognized compensation cost related to stock-based awards granted to employees under the Company’s stock option plans was $1,404,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 3.7 years and will be adjusted for subsequent changes in estimated forfeitures.
14. 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 was contingently liable under letters of credit issued on behalf of its customerseach current Executive Officer named in the amount“Summary Compensation Table” on page 10, as well as for all Directors and Executive Officers of $4,557,000the Company and $4,713,000 at December 31, 2013North Valley Bank as a group. All of the shares of Common Stock of the Company shown in the following table are owned both of record and 2012, respectively. At December 31, 2013, commercial and consumer linesbeneficially, except as indicated in the notes to the table, as of credit and real estate loansApril 1, 2014. The table should be read with the understanding that more than one person may be the beneficial owner or possess certain attributes of approximately $38,683,000 and $35,264,000, respectively, were undisbursed. At December 31, 2012, commercial and consumer linesbeneficial ownership with respect to the same securities. Therefore, careful attention should be given to the footnote references set forth in the column “Percent of credit and real estate loans of approximately $47,350,000 and $31,925,000, respectively, were undisbursed. Approximately 87% of these undisbursed loan commitments are associated with variable rate loans.Class”.
Beneficial | Percent of | |||||||||
Beneficial Owner | Position | Ownership(1) | Class(2) | |||||||
Michael J. Cushman(5) | President and Chief Executive Officer | 82,176 | 1.20 | % | ||||||
and Director, | ||||||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Dante W. Ghidinelli(6) | Director, | 34,830 | * | |||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Leo J. Graham(5) | General Counsel and Corporate | 17,091 | * | |||||||
Secretary, | ||||||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Kevin D. Hartwick(7) | Director, | 53,618 | * | |||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Patrick W. Kilkenny | Director, | 7,450 | * | |||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Roger B. Kohlmeier | Director, | 23,478 | * | |||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Gary S. Litzsinger(5) | Executive Vice President and Chief | 10,862 | * | |||||||
Risk Officer, | ||||||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Scott R. Louis(5) | Executive Vice President and Chief | 27,604 | * | |||||||
Operating Officer, | ||||||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Timothy R. Magill | Director, | 30,341 | * | |||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Martin A. Mariani(8) | Director, | 30,801 | * | |||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Roger D. Nash(5) | Executive Vice President and Chief | 45,754 | * | |||||||
Credit Officer, | ||||||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Dolores M. Vellutini(9) | Director, | 40,596 | * | |||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
Kevin R. Watson(5) | Executive Vice President and Chief | 17,924 | * | |||||||
Financial Officer, | ||||||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
J.M. (“Mike”) Wells, Jr.(10) | Chairman, | 37,304 | * | |||||||
North Valley Bancorp | ||||||||||
North Valley Bank | ||||||||||
All Directors and Executive | 459,829 | 6.58 | % | |||||||
Officers as a group (14 persons)(1) (11) (12) (13) |
24 |
(1) | Includes shares beneficially owned, directly and indirectly, together with associates. Subject to applicable community property laws and shared voting and investment power with a spouse, sole investment and voting power is held by the beneficial owner of all shares unless noted otherwise. Includes stock options granted pursuant to the North Valley Bancorp 1998 Employee Stock Incentive Plan and the North Valley Bancorp 2008 Stock Incentive Plan with: 35,523 shares exercisable within 60 days of April 1, 2014, by Mr. Cushman; 9,460 shares exercisable within 60 days of April 1, 2014, by Mr. Ghidinelli; 12,300 shares exercisable within 60 days of April 1, 2014, by Mr. Graham; 9,460 shares exercisable within 60 days of April 1, 2014, by Mr. Hartwick; 5,500 shares exercisable within 60 days of April 1, 2014, by Mr. Kilkenny; 8,740 shares exercisable within 60 days of April 1, 2014, by Mr. Kohlmeier; 9,102 shares exercisable within 60 days of April 1, 2014, by Mr. Litzsinger; 8,917 shares exercisable within 60 days of April 1, 2014, by Mr. Louis; 5,500 shares exercisable within 60 days of April 1, 2014, by Mr. Magill; 8,740 shares exercisable within 60 days of April 1, 2014, by Mr. Mariani; 10,942 shares exercisable within 60 days of April 1, 2014, by Mr. Nash; 9,460 shares exercisable within 60 days of April 1, 2014, by Ms. Vellutini; 12,394 shares exercisable within 60 days of April 1, 2014, by Mr. Watson; and 8,760 shares exercisable within 60 days of April 1, 2014, by Mr. Wells. Includes shares allocated under the North Valley Bancorp Employee Stock Ownership Plan through December 31, 2013, with: 1,251 shares allocated to Mr. Cushman, 628 shares allocated to Mr. Graham, 407 shares allocated to Mr. Litzsinger, 521 shares allocated to Mr. Louis, 479 shares allocated to Mr. Nash and 529 shares allocated to Mr. Watson. |
(2) | Includes stock options exercisable within 60 days of April 1, 2014, as indicated in footnote 1. Percentages are based on 6,836,463 shares outstanding. An “*” indicates less than one percent. |
(3) | Intentionally omitted. |
(4) | Intentionally omitted. |
(5) | Michael J. Cushman is President and Chief Executive Officer of North Valley Bancorp and North Valley Bank; Kevin R. Watson is Executive Vice President and Chief Financial Officer of North Valley Bancorp and North Valley Bank; Scott R. Louis is Executive Vice President and Chief Operating Officer of North Valley Bancorp and North Valley Bank; Roger D. Nash is Executive Vice President and Chief Credit Officer of North Valley Bancorp and North Valley Bank; Gary S. Litzsinger is Executive Vice President and Chief Risk Officer of North Valley Bancorp and North Valley Bank; Leo J. Graham is General Counsel and Corporate Secretary of North Valley Bancorp and North Valley Bank (collectively, the “Executive Officers”). |
(6) | Includes 4,172 shares held by Mr. Ghidinelli as Trustee for the Balma Grandchildren Trust. |
(7) | Includes 84 shares held in custodian accounts for Mr. Hartwick’s children. |
(8) | Includes 7,669 shares held by Mr. Mariani’s children and as to which Mr. Mariani disclaims beneficial ownership. |
(9) | Includes 302 shares held by Ms. Vellutini’s spouse and 3,792 shares held by Ms. Vellutini’s son and as to which Ms. Vellutini disclaims beneficial ownership. |
(10) | Includes 26,584 shares held by The Wells Family Trust, of which Mr. Wells is Trustee. Includes 650 shares held by Mr. Wells’ spouse and as to which Mr. Wells disclaims beneficial ownership. Includes 1,310 shares held by the Estate of Jean M. Wells, of which Mr. Wells is the Executor. |
(11) | This group includes all current Executive Officers and Directors of the Company and its subsidiary, North Valley Bank. |
(12) | See footnotes 6, 7, 8, 9, 10, and 11. Includes 154,798 shares subject to options exercisable within 60 days of April 1, 2014, by Messrs. Cushman, Ghidinelli, Graham, Hartwick, Kohlmeier, Litzsinger, Louis, Mariani, Nash, Vellutini, Watson and Wells under the North Valley Bancorp 1998 Employee Stock Incentive Plan and the North Valley Bancorp 2008 Stock Incentive Plan. Also includes 3,815 shares allocated under the North Valley Bancorp Employee Stock Ownership Plan through December 31, 2013, to Messrs. Cushman, Graham, Litzsinger, Louis, Nash, and Watson. |
(13) | In calculating the percentage of ownership, all shares which the identified person has the right to acquire by the exercise of options are deemed to be outstanding for the purpose of computing the percentage of class owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. |
25 |
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 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. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2013 and 2012. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.
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. At December 31, 2013 and 2012, the reserve for unfunded commitments totaled $146,000 and $143,000, respectively.
In management’s opinion, a concentration exists in real estate-related loans which represent approximately 82% and 80% of the Company’s loan portfolio for years ended December 31, 2013 and 2012. Although management believes such concentrations to have no more than the normal risk of collectibility, a continued substantial decline in the economy in general, or a continued 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.
On January 24, 2014, a putative shareholder class action lawsuit titled John Solak v. North Valley Bancorp, et al. was filed in the Superior Court of the State of California, County of Shasta. TriCo Bancshares and all of the individuals serving as Directors of the Company are also named as defendants. The complaint alleges breach of fiduciary duty and aiding and abetting breach of fiduciary duty in connection with the Agreement and Plan ofProposed Merger and Reorganization signed between the Company and TriCo Bancshares on January 21, 2014. The Company and the Directors have not yet responded to the complaint. The Company and its legal counsel believe the complaint's claims are without merit. The resolution of this matter is not expected to have a material impact on the Company's business, financial condition or results of operations, though no assurance can be given in this regard.
15. RELATED PARTY TRANSACTIONS
At December 31, 2013 and 2012 the Company provided loans or had commitments to lend to, certain officers, directors and their associates and principal shareholders.
A summary of activity for the years ended December 31 were as follows (in thousands; renewals are not reflected as either new loans or repayments):
2013 | 2012 | |||||||
Beginning balance | $ | 4,689 | $ | 4,681 | ||||
Borrowings | 126 | 525 | ||||||
Repayments | (423 | ) | (517 | ) | ||||
$ | 4,392 | $ | 4,689 | |||||
Undisbursed commitments | $ | 116 | $ | 199 |
The Company and NVB 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, the Company and NVB must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. These quantitative measures are established by regulation and require that minimum amounts and ratios 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) are maintained. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
NVB is also subject to additional capital guidelines under the regulatory framework for prompt corrective action. To be categorized as well capitalized, NVB must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. The most recent notifications from the FDIC for NVB as of December 31, 2013 categorized NVB as well-capitalized under these guidelines. There are no conditions or events since that notification that management believes have changed NVB’s category.
Management believes, as of December 31, 2013 and 2012, that the Company and NVB met all capital adequacy requirements to which they are subject. There are no conditions or events since that management believes have changed the categories.
The Company’s and NVB’s actual capital amounts (in thousands) and ratios are also presented in the following tables.
To be Well Capitalized | ||||||||||||||||||||||||
For Capital | Under Prompt Corrective | |||||||||||||||||||||||
Adequacy Purposes | Action Provisions | |||||||||||||||||||||||
Actual | Minimum | Minimum | Minimum | Minimum | ||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Company | ||||||||||||||||||||||||
As of December 31, 2013 | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 119,178 | 19.04 | % | $ | 50,075 | 8.00 | % | N/A | N/A | ||||||||||||||
Tier 1 capital (to risk weighted assets) | $ | 111,333 | 17.79 | % | $ | 25,033 | 4.00 | % | N/A | N/A | ||||||||||||||
Tier 1 capital (to average assets) | $ | 111,333 | 12.16 | % | $ | 36,623 | 4.00 | % | N/A | N/A | ||||||||||||||
As of December 31, 2012: | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 113,028 | 18.28 | % | $ | 49,465 | 8.00 | % | N/A | N/A | ||||||||||||||
Tier 1 capital (to risk weighted assets) | $ | 105,211 | 17.01 | % | $ | 24,741 | 4.00 | % | N/A | N/A | ||||||||||||||
Tier 1 capital (to average assets) | $ | 105,211 | 11.77 | % | $ | 35,756 | 4.00 | % | N/A | N/A | ||||||||||||||
North Valley Bank | ||||||||||||||||||||||||
As of December 31, 2013 | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 116,783 | 18.68 | % | $ | 50,014 | 8.00 | % | $ | 62,518 | 10.00 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) | $ | 108,947 | 17.42 | % | $ | 25,017 | 4.00 | % | $ | 37,525 | 6.00 | % | ||||||||||||
Tier 1 capital (to average assets) | $ | 108,947 | 11.90 | % | $ | 36,621 | 4.00 | % | $ | 45,776 | 5.00 | % | ||||||||||||
As of December 31, 2012: | ||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 112,938 | 18.26 | % | $ | 49,480 | 8.00 | % | $ | 61,850 | 10.00 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) | $ | 105,122 | 17.00 | % | $ | 24,735 | 4.00 | % | $ | 37,102 | 6.00 | % | ||||||||||||
Tier 1 capital (to average assets) | $ | 105,122 | 11.76 | % | $ | 35,756 | 4.00 | % | $ | 44,695 | 5.00 | % |
The supervisory agreement signed on January 6, 2010 by and among North Valley Bancorp, North Valley Bank and the Federal Reserve Bank of San Francisco was terminated, effective as of April 16, 2012, and resolutions adopted by the Board of Directors of NVB at the request of the California Department of Financial Institutions were previously terminated, effective March 1, 2012.
As a California corporation, the Company’s ability to pay cash dividends is subject to restrictions set forth in the California General Corporation Law (the “Corporation Law”). The Corporation Law provides that neither a corporation nor any of its subsidiaries shall make a distribution to the corporation’s shareholders unless the board of directors has determined in good faith either of the following: (1) the amount of retained earnings of the corporation immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or (2) immediately after the distribution, the value of the corporation’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount. The good faith determination of the board of directors may be based upon (1) financial statements prepared on the basis of reasonable accounting practices and principles, (2) a fair valuation, or (3) any other method reasonable under the circumstances; provided, that a distribution may not be made if the corporation or subsidiary making the distribution is, or is likely to be, unable to meet its liabilities (except those whose payment is otherwise adequately provided for) as they mature. The term “preferential dividends arrears amount” means the amount, if any, of cumulative dividends in arrears on all shares having a preference with respect to payment of dividends over the class or series to which the applicable distribution is being made, provided that if the articles of incorporation provide that a distribution can be made without regard to preferential dividends arrears amount, then the preferential dividends arrears amount shall be zero. The term “preferential rights amount” means the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights, including accrued but unpaid dividends, of other shareholders upon dissolution that are superior to the rights of the shareholders receiving the distribution, provided that if the articles of incorporation provide that a distribution can be made without regard to any preferential rights, then the preferential rights amount shall be zero.
The Company’s ability to pay dividends is also limited by certain covenants contained in the indentures relating to trust preferred securities that have been issued by three business trusts and corresponding junior subordinated debentures. The Company owns the common stock of the three business trusts. The indentures provide that if an Event of Default (as defined in the indentures) has occurred and is continuing, or if the Company is in default with respect to any obligations under our guarantee agreement which covers payments of the obligations on the trust preferred securities, or if the Company gives notice of any intention to defer payments of interest on the debentures underlying the trust preferred securities, then the Company may not, among other restrictions, declare or pay any dividends.
Dividends from the Bank to the Company are restricted under California law to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the DFI, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year.
17. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect 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, and there was no difference in the denominator used in the calculation of basic earnings per share and diluted earnings per share in 2013, 2012 and 2011 (in thousands except earnings per share data):
December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Basic | ||||||||||||
Net income | $ | 3,625 | $ | 6,290 | $ | 3,047 | ||||||
Weighted average common shares outstanding | 6,836 | 6,834 | 6,833 | |||||||||
Basic earnings per common share | $ | 0.53 | $ | 0.92 | $ | 0.45 | ||||||
Diluted | ||||||||||||
Net income | $ | 3,625 | $ | 6,290 | $ | 3,047 | ||||||
Weighted average common shares outstanding | 6,836 | 6,834 | 6,833 | |||||||||
Dilutive effect of outstanding stock options | 21 | 1 | — | |||||||||
Average shares and dilutive potential common shares | 6,857 | 6,835 | 6,833 | |||||||||
Diluted earnings per common share | $ | 0.53 | $ | 0.92 | $ | 0.45 |
Stock options for 214,302, 247,822, and 183,070 shares of common stock were not considered in computing diluted earnings per common share for 2013, 2012 and 2011, respectively, because they were antidilutive.
18. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Changes in each component of accumulated other comprehensive (loss) income for the periods ended December 31, 2013 and 2012 were as follows (in thousands):
Adjustments | Accumulated | |||||||||||
Net Unrealized | Related to | Other | ||||||||||
Gains (Losses) | Defined Benefit | Comprehensive | ||||||||||
December 31, 2013 | on Securities | Pension Plan | (Loss) Income | |||||||||
Beginning balance | $ | 3,287 | $ | (1,621 | ) | $ | 1,666 | |||||
Net unrealized loss on securities available for sale, net of tax, $(4,655) | (6,698 | ) | (6,698 | ) | ||||||||
Reclassification adjustment for gains on securities, net of tax, $(225) | (323 | ) | (323 | ) | ||||||||
Net gains arising during the period, net of tax, $113 | — | 162 | 162 | |||||||||
Reclassification adjustment for amortization of prior service cost and net loss included in salaries and employee benefits, net of tax, $120 | — | 173 | 173 | |||||||||
Ending Balance | $ | (3,734 | ) | $ | (1,286 | ) | $ | (5,020 | ) | |||
December 31, 2012 | ||||||||||||
Beginning balance | $ | 2,369 | $ | (899 | ) | $ | 1,470 | |||||
Net unrealized gains on securities available for sale, net of tax, $1,408 | 2,025 | 2,025 | ||||||||||
Reclassification adjustment for gains on securities, net of tax, $(770) | (1,107 | ) | (1,107 | ) | ||||||||
Net gains arising during the period, net of tax, $(557) | (803 | ) | (803 | ) | ||||||||
Reclassification adjustment for amortization of prior service cost and net loss included in salaries and employee benefits, net of tax, $57 | 81 | 81 | ||||||||||
Ending Balance | $ | 3,287 | $ | (1,621 | ) | $ | 1,666 |
Changes in each component of accumulated other comprehensive income were as follows (in thousands):
December 31, 2013 | ||||||
Details About Accumulated Other Comprehensive (Loss) Income Components | Amount Reclassified From Accumulated Other Comprehensive (Loss) Income | Affected Line Item in the Statement Where Net Income is Presented | ||||
Gain on investment securities | $ | 548 | Gain on sales or calls of securities, net | |||
Amortization of prior service cost and net gain included in net periodic pension cost | (293 | ) | Salaries and employee benefits | |||
255 | Total before tax | |||||
(104 | ) | Provision for income tax | ||||
$ | 151 | Net of tax | ||||
December 31, 2012 | ||||||
Details About Accumulated Other Comprehensive (Loss) Income Components | Amount Reclassified From Accumulated Other Comprehensive (Loss) Income | Affected Line Item in the Statement Where Net Income is Presented | ||||
Gain on investment securities | $ | 1,877 | Gain on sales or calls of securities, net | |||
Amortization of prior service cost and net gain included in net periodic pension cost | (137 | ) | Salaries and employee benefits | |||
1,740 | Total before tax | |||||
(713 | ) | Provision for income tax | ||||
$ | 1,027 | Net of tax |
19. PARENT COMPANY ONLY - CONDENSED FINANCIAL INFORMATION
The condensed financial statements of the Company are presented below (in thousands):
CONDENSED BALANCE SHEET | ||||||||
As of December 31, | ||||||||
2013 | 2012 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 2,759 | $ | 1,023 | ||||
Investment in banking subsidiary | 107,812 | 113,383 | ||||||
Investment in other subsidiary | 2 | 2 | ||||||
Investment in unconsolidated subsidiary grantor trusts | 651 | 651 | ||||||
Other assets | 4,277 | 3,082 | ||||||
Total assets | $ | 115,501 | $ | 118,141 | ||||
Liabilities and stockholders’ equity | ||||||||
Subordinated debentures | $ | 21,651 | $ | 21,651 | ||||
Other liabilities | 421 | 329 | ||||||
Stockholders’ equity | 93,429 | 96,161 | ||||||
Total liabilities and stockholders’ equity | $ | 115,501 | $ | 118,141 |
CONDENSED STATEMENT OF INCOME | As of December 31, | |||||||||||
2013 | 2012 | 2011 | ||||||||||
Income: | ||||||||||||
Dividends from subsidiaries | $ | 4,500 | $ | 16,500 | $ | — | ||||||
Expense: | ||||||||||||
Interest on subordinated debentures | 532 | 1,352 | 1,892 | |||||||||
Legal and accounting | 522 | 485 | 470 | |||||||||
Other | 2,047 | 1,624 | 1,466 | |||||||||
Tax benefit | (1,303 | ) | (1,455 | ) | (1,609 | ) | ||||||
Total expense | 1,798 | 2,006 | 2,219 | |||||||||
Income (loss) before equity in undistributed income (loss) of subsidiaries | 2,702 | 14,494 | (2,219 | ) | ||||||||
Equity in undistributed income (loss) of subsidiaries | 923 | (8,204 | ) | 5,266 | ||||||||
Net income | $ | 3,625 | $ | 6,290 | $ | 3,047 | ||||||
CONDENSED STATEMENT OF CASH FLOWS | As of December 31, | |||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 3,625 | $ | 6,290 | $ | 3,047 | ||||||
Adjustments to reconcile net income to net cash from operating activites: | ||||||||||||
Equity in undistributed (loss) income of subsidiaries | (923 | ) | 8,204 | (5,266 | ) | |||||||
Stock-based compensation expense | 137 | 118 | 62 | |||||||||
Effect of changes in: | ||||||||||||
Other assets | (1,195 | ) | (73 | ) | 19 | |||||||
Other liabilities | 92 | (4,772 | ) | 302 | ||||||||
Net cash provided by (used in) operating activities | 1,736 | 9,767 | (1,836 | ) | ||||||||
Cash flows from investing activities | ||||||||||||
Investments in subsidiaries | — | 310 | — | |||||||||
Net cash provided by investing activities | — | 310 | ||||||||||
Cash flows from financing activities | ||||||||||||
Repayment of subordinated debentures | — | (10,310 | ) | — | ||||||||
Net cash used in financing activities | — | (10,310 | ) | — | ||||||||
Increase (decrease) in cash and cash equivalents | 1,736 | (233 | ) | (1,836 | ) | |||||||
Cash and cash equivalents, beginning of year | 1,023 | 1,256 | 3,092 | |||||||||
Cash and cash equivalents, end of year | $ | 2,759 | $ | 1,023 | $ | 1,256 |
20. SUBSEQUENT EVENT
As announced by the Company on January 21, 2014, and reported inon the Company'sCompany’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 22, 2014 (the "Current Report"“Current Report”), the Company has entered into an Agreement and Plan of Merger and Reorganization dated January 21, 2014 (the "Merger Agreement"“Merger Agreement”), pursuant to which the Company wouldwill merge with and into TriCo Bancshares, a California corporation ("TriCo"(“TriCo”), with TriCo being the surviving corporation. Immediately thereafter, the Company's subsidiary bank, North Valley Bank, would be merged with and into TriCo's subsidiary bank, Tri Counties Bank. Under the termsA copy of the Merger Agreement (together with certain other information regarding the Company shareholders would receive a fixed exchange ratio of 0.9433 shares of TriCo common stock for each share of Company common stock, providingproposed merger) is provided in the Company shareholders with aggregate ownership on a pro forma basis of approximately 28.6% of the common stock of the combined company. Holders of the Company's outstanding in-the-money stock options would receive cash, net of applicable taxes withheld, for the value of their unexercised stock options.Current Report. The mergertransaction is expected to qualify as a tax-free exchange for shareholders who receive shares of TriCo common stock. The transactions contemplated by the Merger Agreement are expected to close in the second or third quarter of 2014, pending approvals of the merger by the shareholders of the Company shareholders and the TriCo, shareholders, the receipt of all necessary regulatory approvals, and the satisfaction of other closing conditions which are customary for such transactions.
INDEX OF EXHIBITSAs a result of the Merger Agreement, the Board of Directors of the Company has decided to postpone its 2014 Annual Meeting of Shareholders and, as described in the Current Report, TriCo will file its registration statement on Form S-4 with the SEC containing the joint proxy statement and prospectus which the Company and TriCo intend to send to their respective shareholders seeking shareholder approvals to consummate the transaction. The Board of Directors of the Company has unanimously approved the Merger Agreement and the proposed merger with TriCo and each member of the Board of Directors has entered into a voting agreement with TriCo pursuant to which such director has agreed to vote all of his or her shares of Company common stock in favor of the transaction.
Equity Compensation Plan Information
The following table summarizes information about the options, warrants, and rights and other equity compensation under the Company’s equity plans as of December 31, 2013.
EQUITY COMPENSATION PLANS
Number of | Number of | |||||||||||
securities to be | Weighted-average | securities | ||||||||||
issued upon the | exercise price of | remaining available | ||||||||||
exercise of | outstanding | for future issuance | ||||||||||
outstanding options, | options, warrants, | under equity | ||||||||||
warrants, and rights | and rights | compensation plans | ||||||||||
Plan Category | (#) | ($) | (#) | |||||||||
Equity Compensation Plans approved by security holders (1) | 354,710 | $ | 24.55 | 241,635 | ||||||||
Equity Compensation Plans not approved by security holders | None | N/A | N/A | |||||||||
Total | 354,710 | $ | 24.55 | 241,635 |
(1) | ||||
following shareholder-approved plans: North Valley Bancorp 1998 Employee Stock Incentive Plan |
and North Valley Bancorp 2008 Stock Incentive | ||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
The Company has a policy that it does not enter into any transactions covered under Item 404 of Regulation S-K with the exception of loans made by North Valley Bank (see “Indebtedness of Management” below). There have been no transactions, or series of similar transactions, during 2013, or any currently proposed transaction, or series of similar transactions, to which the Company or North Valley Bank was or is to be a party, in which the amount involved exceeded or will exceed $120,000 and in which any Director, Director-Nominee or Executive Officer of the Company or North Valley Bank, or any shareholder owning of record or beneficially 5% or more of North Valley Bancorp Common Stock, or any member of the immediate family of any of the foregoing persons, had, or will have, a direct or indirect material interest.
Indebtedness of Management
Through its banking subsidiary, North Valley Bank, the Company has had and expects in the future to have banking transactions, including loans and other extensions of credit, in the ordinary course of its business with many of the Company’s Directors, Executive Officers, holders of five percent or more of the Company’s Common Stock and members of the immediate family of any of the foregoing persons, including transactions with companies or organizations of which such persons are directors, officers or controlling shareholders, on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated persons. Management believes that in 2013 such loan transactions did not involve more than the normal risk of collectability or present other unfavorable features. All loans and other extensions of credit made by North Valley Bank to the Directors and Executive Officers of the Company and North Valley Bank are made in compliance with the applicable restrictions of Section 22 of the Federal Reserve Act and Regulation O of the Board of Governors of the Federal Reserve System.
Director Independence
The Board of Directors of the Company has evaluated the independence of each of the members of the Board of Directors in accordance with applicable laws and regulations including the provisions of the Sarbanes-Oxley Act of 2002 (“SOX”), the rules and regulations of the Securities and Exchange Commission (the “SEC”) and the corporate governance listing standards of The NASDAQ Stock Market (“NASDAQ”).
The Board of Directors has determined that a majority of the Board of Directors is comprised of “Independent Directors” within the requirements of SOX, SEC and NASDAQ. The Board of Directors has further determined that Director Michael J. Cushman, who is employed as the President and Chief Executive Officer of the Company, is not independent.
The “Independent Directors” held two (2) regularly scheduled meetings during 2013 (executive sessions) at which only the “Independent Directors” were present.
Leadership Structure
The positions of Chairman of the Board of Directors and President and Chief Executive Officer are filled by different persons. Mr. Wells, an Independent Director, serves as Board Chairman, while Mr. Cushman serves as President and Chief Executive Officer. The Board believes that separating the roles of Chairman and Chief Executive Officer is preferable and in the best interests of shareholders because it gives the Independent Directors a significant role in setting priorities and enhances the Board’s ability to fulfill its oversight responsibilities. Separating the positions also provides an independent viewpoint and focus at meetings of the Board and improves communication between executive management and the Board.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The firm of Crowe Horwath LLP, which served the Company as Independent Registered Public Accounting Firm for the 2013 and 2012 fiscal years, has been recommended by the Audit Committee of the Board of Directors of the Company as the Company’s Independent Registered Public Accounting Firm for the 2014 fiscal year. There have been no disagreements with Crowe Horwath LLP during the fiscal years ended December 31, 2013 and 2012, respectively, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure. Crowe Horwath LLP has no interest, financial or otherwise, in the Company.
The Audit Committee of the Board of Directors of the Company approved each professional service rendered by Crowe Horwath LLP during the 2013 and 2012 fiscal years and considered whether the provision of non-audit services is compatible with maintaining their independence.
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During the period covering the fiscal years ended December 31, 2013 and 2012, Crowe Horwath LLP performed the professional services described below. No other services were provided in 2013 and 2012.
Description | 2013 | 2012 | ||||||
Audit Fees (1) | $ | 293,000 | $ | 284,000 | ||||
Audit-Related Fees (2) | $ | 29,500 | $ | 29,500 | ||||
Tax Fees (3) | $ | 53,100 | $ | 37,400 | ||||
All Other Fees | $ | — | $ | — |
1. | Audit fees consist of fees for professional services rendered for the audit of the Company’s consolidated financial statements, review of consolidated financial statements included in the Company’s quarterly reports and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements. |
2. | Audit-related fees represent fees for professional services in connection with the audit of the Company’s 401(k) Plan. |
3. | Tax services consist of compliance fees for the preparation of tax returns and tax payment-planning services. Tax services also include fees relating to other tax advice, tax consulting and planning other than for tax compliance and preparation. |
The Audit Committee consists of the following members of the Company’s Board of Directors: Dante W. Ghidinelli (Chairman), Kevin D. Hartwick, Patrick W. Kilkenny, Roger B. Kohlmeier, and Dolores M. Vellutini. All members of the Committee are independent as defined under SOX, the SEC Regulations and NASDAQ listing standards. Both Chairman Dante W. Ghidinelli and Mr. Kevin D. Hartwick have been, as a result of their accounting backgrounds determined to be qualified as an Audit Committee Financial Expert as defined under SOX, SEC rules and regulations and NASDAQ listing standards. The Committee operates under a written Charter adopted by the Board of Directors, which can be found at http://novb.com. The Audit Committee, in addition to its other functions, recommends to the Board of Directors, subject to shareholder ratification, the selection of the Company’s independent registered public accounting firm.
Management is responsible for the Company’s internal controls and the financial reporting process. The independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements accordance with the standards of the Public Company Accounting Oversight Board (United States) and generally accepted accounting principles and to issue a report thereon. The Audit Committee’s responsibility is to monitor and oversee these processes.
The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, internal control and financial reporting practices of the Company. The Committee’s primary responsibilities include the following: (1) serve as an independent and objective party to monitor the Company’s financial reporting process and internal control system; (2) retention of the Company’s independent registered public accounting firm and review and evaluation of their audit efforts along with those of the internal audit department; (3) evaluate the Company’s quarterly financial performance as well as its compliance with laws and regulations; (4) oversee management’s establishment and enforcement of financial policies and business practices; and (5) facilitate communication among the independent registered public accounting firm, financial and senior management, counsel, the internal audit department and the Board of Directors.
The Audit Committee has been updated quarterly on management’s process to assess the adequacy of the Company’s system of internal control over financial reporting, the framework used to make the assessment and management’s conclusions on the effectiveness of the Company’s internal control over financial reporting. The Audit Committee has also discussed with the independent registered public accounting firm the Company’s internal control assessment process, management’s assessment with respect thereto and the independent registered public accounting firm’s consideration of the Company’s system of internal control over financial reporting as a basis for designing audit procedures, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
It is not the duty or the responsibility of the Committee to conduct auditing or accounting reviews. Therefore, the Committee has relied, without further independent verification, on management’s representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States of America and on the representations of the independent registered public accounting firm included in their report on the Company’s financial statements. Furthermore, the Committee’s discussions with management do not provide the Committee with any other independent basis to determine or assure that the Company’s financial statements are presented in accordance with generally accepted accounting principles or that the audit of the Company’s financial statements has been carried out in accordance with generally accepted auditing standards.
28 |
The Audit Committee has reviewed and discussed the audited financial statements of the Company for the fiscal year ended December 31, 2013 with management and Crowe Horwath LLP, the Company’s independent registered public accounting firm. The Audit Committee has also discussed with Crowe Horwath LLP, the matters required to be discussed by Statement on Auditing Standards No. 16 (Communications with Audit Committees) as may be modified or supplemented. The Audit Committee has also received the written disclosures and the letter from Crowe Horwath LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent public accountants’ communications with the Audit Committee concerning independence and the Audit Committee has discussed the independence of Crowe Horwath LLP with that firm.
The Committee has recommended to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for filing with the Securities and Exchange Commission and has recommended ratification of Crowe Horwath LLP as the Independent Registered Public Accounting Firm for the Company for the fiscal year 2014.
Submitted by: |
Dante W. Ghidinelli (Chairman) Kevin D. Hartwick |
Patrick W. Kilkenny Roger B. Kohlmeier |
Dolores M. Vellutini |
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY’S PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 THAT MIGHT INCORPORATE THIS PROXY STATEMENT OR FUTURE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, IN WHOLE OR IN PART, THE ABOVE REPORT SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY SUCH FILING.
29 |
PART IV
ITEM 15. EXHIBITS
Exhibit Name | ||
31.1 | ||
31.2 | ||
32 | ||
3(f) | ||
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/ KEVIN R. WATSON | |
Kevin R. Watson | |
Executive Vice President and Chief Financial Officer | |
DATE: |
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/ J. M. Wells, Jr. | Director | |||
J. M. Wells, Jr. | ||||
/s/ Michael J. Cushman | Director, President and Chief Executive Officer | |||
Michael J. Cushman | ||||
(Principal Executive Officer) | ||||
/s/ Dan W. Ghidinelli | Director | |||
Dan W. Ghidinelli | ||||
/s/ Kevin D. Hartwick | Director | |||
Kevin D. Hartwick | ||||
/s/ Patrick W. Kilkenny | Director | |||
Patrick W. Kilkenny | ||||
/s/ Roger B. Kohlmeier | Director | |||
Roger B. Kohlmeier | ||||
/s/ Timothy R. Magill | Director | |||
Timothy R. Magill | ||||
/s/ Martin A. Mariani | Director | |||
Martin A. Mariani | ||||
/s/ Dolores M. Vellutini | Director | |||
Dolores M. Vellutini | ||||
/s/ Kevin R. Watson | Executive Vice President and Chief Financial | |||
Kevin R. Watson | ||||
Financial Officer & Principal | ||||
Accounting Officer) |