FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
------------------- --------------------
Commission file number 0-10652
NORTH VALLEY BANCORP
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(Exact name of registrant as specified in its charter)
California 94-2751350
--------------------------- -------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
880 East Cypress Avenue, Redding, California 96002
-------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (530) 221-8400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
-------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock, was $73,916,000
as of March 1, 2001.
The number of shares outstanding of common stock as of March 1, 2001, were
5,825,875.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 2001 Annual Meeting
of Shareholders are incorporated by reference in Part III, Items 10, 11, 12 and
13 of this Form 10-K.
TABLE OF CONTENTS PAGE
PART I
Item 1 Description of Business 1
Item 2 Description of Properties 20
Item 3 Legal Proceedings 20
Item 4 Submission of Matters to a Vote of Security Holders 21
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholders Matters 21
Item 6 Selected Financial Data 22
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 7A Quantitative and Qualitative Disclosures About Market Risk 30
Item 8 Financial Statements and Supplementary Data 31
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 31
PART III
Item 10 Directors and Executive Officers of the Registrant;
Compliance with Section 16(a) of the Exchange Act 31
Item 11 Executive Compensation 32
Item 12 Security Ownership of Certain Beneficial Owners and
Management 32
Item 13 Certain Relationships and Related Transactions 32
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 32
Financial Statements 33
Signatures 37
-i-
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Certain statements in this Annual Report on Form 10-K (excluding
statements of fact or historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Shasta
County; volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; the California power crisis; and changes in the securities
markets. Therefore, the information set forth herein should be carefully
considered when evaluating the business prospects of the Company and its
subsidiaries. See also "Certain Additional Business Risks" on pages 19 through
20 herein, and other risk factors discussed elsewhere in this Report.
GENERAL
North Valley Bancorp (the "Company") is a multi-bank holding company
registered with and subject to regulation and supervision by the Board of
Governors of the Federal Reserve System (the "Board of Governors"). The Company
was incorporated in 1980 in the State of California. On October 11, 2000 the
Company acquired with Six Rivers National Bank which was accounted for under the
pooling-of-interests method of accounting. Upon consummation of the merger, the
outstanding common shares of Six Rivers National Bank were converted into an
aggregate of 2,075,546 shares of North Valley Bancorp common stock based on an
exchange ratio of 1.40 shares of North Valley Bancorp common stock for each
share of Six Rivers National Bank common stock. Unless otherwise noted, the
information contained herein has been restated on a historical basis as if the
Companies had been combined for all periods presented. The Company wholly owns
its principal subsidiaries, North Valley Bank ("NVB"), Six Rivers National Bank
("SRNB"), North Valley Trading Company ("Trading Company"), which is inactive,
and Bank Processing, Inc. ("BPI"), a California corporation. The sole subsidiary
of NVB, which is inactive, is North Valley Basic Securities (the "Securities
Company").
At December 31, 2000, the Company had approximately 297 employees
(which includes 263 full-time equivalent employees). None of the Company's
employees are represented by a union and management believes that relations with
employees are good.
NVB was organized in September 1972, under the laws of the State of
California, and commenced operations in February 1973. NVB is principally
supervised and regulated by the California Commissioner of Financial
Institutions (the "Commissioner") and conducts a commercial and retail banking
business, which includes accepting demand, savings, money market rate deposit
accounts, and time deposits, and making commercial, real estate and consumer
loans. It also offers installment note collections, issues cashier's checks and
money orders, sells travelers' checks and provides safe deposit boxes and other
customary banking services. As a state-chartered insured bank, NVB is also
subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and
its deposits are insured by the FDIC up to the legal limits thereupon. NVB does
not offer trust services or international banking services and does not plan to
do so in the near future.
NVB operates eleven banking offices in Shasta and Trinity Counties, for
which it has received all of the requisite regulatory approvals. The
headquarters office in Redding opened in February 1973. In October 1973, NVB
opened its Weaverville Office; in October 1974, its Hayfork Office; in January
1978, its Anderson Office; and in September 1979, its Enterprise Office (East
Redding). On December 20, 1982, NVB acquired the assets of two branches of the
Bank of California: one located in Shasta Lake and the other in Redding,
California. On June 1, 1985, NVB opened its Westwood Village Office in South
Redding. On November 27, 1995, NVB opened a branch located in Palo Cedro,
California. On October 14, 1997, NVB opened a branch located in Shasta Lake,
California. NVB opened two super-market branches in 1998 located in Cottonwood,
California, on January 20, 1998, and Redding, California, on September 8, 1998.
On May 11, 1998, NVB opened a Business Banking Center in Redding, California, to
provide banking services to business and professional clients.
SRNB is a national banking association which was formed in 1989 and
operates eight full service offices in Eureka (2), Crescent City, Ferndale,
Garberville, McKinleyville and Willits. In 1997, SRNB completed the purchase and
conversion of four branches of Bank of America which increased its presence from
its original market of Humboldt and Del Norte counties into Trinity County to
the Northeast and Mendocino County to the South. As a national banking
association, SRNB is principally supervised and regulated by the Office of the
Comptroller of the Currency ("OCC"). As a federally insured bank, SRNB is also
subject to regulation by the FDIC and its deposits are insured by the FDIC up to
the legal limits thereupon. SRNB does not offer trust services or international
banking services and does not plan to do so in the near future
The Trading Company, incorporated under the laws of the State of
California in 1984, formed a joint venture to explore trading opportunities in
the Pacific Basin. The joint venture terminated in July 1986, and the Trading
Company is now inactive. The Securities Company, formed to hold premises
pursuant to Section 752 of the California Financial Code, is inactive. North
Valley Consulting Services was established as a consulting service for
depository institutions and in December 1988, changed its name to Bank
Processing, Inc. BPI was established as a bank processing service to provide
data processing services to other depository institutions, pursuant to Section
225.25(b)(7) of Federal Reserve Regulation Y and Section 4(c)(8) of the Bank
Holding Company Act of 1956, as amended ("BHCA").
BPI is utilizing "excess capacity" on its system to process other
depository institutions' data, and is currently processing daily applications
for the Company and two other banks where entries are captured and files updated
by the "Liberty Banking Package," which includes: Demand Deposits (DDA), Savings
Deposits (SAV), Central Information Files (CIF), Mortgage Loans (MLA),
Installment Loans (ILA), Commercial Loans (CLA), Individual Retirement Accounts
(IRA), and Financial Information Statements, i.e., General Ledger (FIS). These
data processing activities do not involve providing hardware or software to
banking clients.
At December 31, 2000, BPI had cash on-hand of approximately $176,000.
Since August 18, 1995, NVB has maintained an agreement with Linsco
Private Ledger ("LPL") which furnishes brokerage services and standardized
investment advice to Bank customers at an LPL office located at 1327 South
Street, Redding, California in the upstairs portion of a branch of NVB. All
investments recommended to Bank customers appear on an approved list or are
specially approved by LPL's central office. NVB shares in the fees and
commissions paid to LPL on a pre-determined schedule. On January 9, 2001, SRNB
signed an agreement with Essex National Securities ("Essex") whereby Essex will
provide brokerage services and standardized investment advice to SRNB customers
at SRNB's Main office located at 402 F Street, Eureka, California. SRNB shares
in the fees and commissions paid to Essex on a pre-determined schedule.
The Company does not hold deposits of any one customer or group of
customers where the loss of such deposits would have a material adverse effect
on the Company. The Company's business is not seasonal.
SELECTED STATISTICAL DATA
The following tables present certain consolidated statistical
information concerning the business of the Company. All amounts have been
restated on a historical basis to reflect the merger with Six Rivers National
Bank, which closed in October 2000, as a pooling of interests as if the
Companies had been combined for all periods presented. This information should
be read in conjunction with the Consolidated Financial Statements and the notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations and other information contained elsewhere herein. Averages
are based on daily averages.
Tax-equivalent adjustments of 33% have been made in calculating yields
on tax-exempt securities.
2
AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN
The following table sets forth the Company's consolidated condensed
average daily balances and the corresponding average yields received and average
rates paid of each major category of assets, liabilities, and stockholders'
equity for each of the past three years.
2000 1999 1998
--------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ ------- -------- ------ ------- -------- ------
Assets
Federal funds sold $ 14,330 $ 855 5.97% $ 24,759 $ 1,200 4.85% $ 36,637 $ 1,992 5.44%
Investment Securities:
Taxable 82,812 5,604 6.77% 81,986 4,898 5.97% 78,381 4,790 6.11%
Non-taxable(1) 30,937 2,739 8.85% 36,294 3,222 8.88% 38,228 3,300 8.63%
FHLB & FRB stock 2,670 179 6.69% 2,023 122 6.03% 1,834 116 6.32%
Interest earning cash 6,680 418 6.26% 6,949 440 6.33% 5,210 334 6.41%
-------- -------- -------- -------- -------- --------
Total investments 123,099 8,940 7.26% 127,252 8,682 6.82% 123,653 8,540 6.91%
Total loans and leases(2)(3) 342,831 31,076 9.06% 313,169 27,453 8.77% 278,037 25,873 9.31%
-------- -------- -------- -------- -------- --------
Total interest-earning
assets/interest income 480,260 $ 40,871 8.51% 465,180 $ 37,335 8.03% 438,327 $ 36,405 8.31%
Non-earning assets 56,289 47,872 45,835
Allowance for loan and
Lease losses (5,743) (4,947) (3,170)
-------- -------- --------
Total assets $530,806 $508,105 $480,992
======== ======== ========
Liabilities and
Stockholders' equity
Transaction $ 85,220 $ 1,478 1.73% $ 79,853 $ 1,378 1.73% $ 72,659 $ 1,411 1.94%
Savings and money market 108,411 3,608 3.33% 104,096 3,139 3.02% 99,342 3,142 3.16%
Time deposits 190,335 10,511 5.52% 188,714 9,134 4.84% 187,907 10,022 5.33%
Other borrowed funds 9,901 638 6.44% 7,831 378 4.83% 1,311 76 5.80%
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities/interest
expense 393,867 16,235 4.12% 380,494 14,029 3.69% 361,219 14,651 4.06%
-------- -------- --------
Non-interest bearing 75,339 69,346 65,426
deposits
Other liabilities 8,540 7,673 5,024
-------- -------- --------
Total liabilities 477,746 457,513 431,669
Stockholders' equity 53,060 50,592 49,323
-------- -------- --------
Total liabilities and
stockholders equity $530,806 $508,105 $480,992
======== ======== ========
Net interest income/spread $ 24,636 4.39% $ 23,306 4.34% $ 21,754 4.25%
======== ====== ======== ====== ======== ======
Net interest margin (4) 5.13% 5.01% 4.96%
====== ====== ======
(1) Tax-equivalent basis
(2) Loans on nonaccrual status have been included in the computations of average
balances.
(3) Includes loan fees of $69, $229 and $517 for the years ended December 31,
2000, 1999 and 1998, respectively
(4) Net interest margin is determined by dividing net interest income by total
average interest earning assets.
3
RATE VOLUME ANALYSIS OF CHANGES IN NET INTERST INCOME
The following table summarizes changes in net interest income resulting
from changes in average asset and liability balances (volume) and changes in
average interest rates. The change in interest due to both rate and volume has
been allocated to the change in rate.
2000 COMPARED TO 1999 1999 COMPARED TO 1998
------------------------------------ ------------------------------------
TOTAL TOTAL
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
Interest income
Interest on fed funds sold $ (622) $ 277 $ (345) $ (576) $ (216) $ (792)
Interest on investment securities:
Taxable 56 650 706 215 (107) 108
Non-taxable (475) (9) (484) (171) 93 (78)
FHLB & FRB stock 44 13 57 11 (5) 6
Interest earning cash (17) (5) (22) 110 (4) 106
---------- ---------- ---------- ---------- ---------- ----------
Total investments (392) 649 257 165 (23) 142
Interest on loans and leases 2,689 934 3,623 3,080 (1,500) 1,580
---------- ---------- ---------- ---------- ---------- ----------
Total interest income $ 1,675 $ 1,861 $ 3,535 $ 2,669 $ (1,739) $ 930
---------- ---------- ---------- ---------- ---------- ----------
Interest expense
Transaction accounts $ 93 $ 7 $ 100 $ 124 $ (157) $ (33)
Savings and money market 144 325 469 143 (146) (3)
Time deposits 90 1,287 1,377 39 (927) (888)
Other borrowed funds 134 126 260 315 (13) 302
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense $ 461 $ 1,745 $ 2,206 $ 621 $ (1,243) $ (622)
---------- ---------- ---------- ---------- ---------- ----------
Total change in net interest income $ 1,214 $ 116 $ 1,330 $ 2,048 $ (496) $ 1,552
========== ========== ========== ========== ========== ==========
INVESTMENT SECURITIES:
The Company's policy regarding investments is as follows:
TRADING SECURITIES are carried at fair value. Changes in fair value are
included in other operating income. The Company did not have any securities
classified as trading at December 31, 2000, 1999, and 1998.
AVAILABLE FOR SALE SECURITIES are carried at fair value and represent
securities not classified as trading securities nor as held to maturity
securities. Unrealized gains and losses resulting from changes in fair value are
recorded, net of tax, within accumulated other comprehensive income, which is a
separate component of stockholders' equity, until realized. Gains or losses on
disposition are recorded in other operating income based on the net proceeds
received and the carrying amount of the securities sold, using the specific
identification method.
HELD TO MATURITY SECURITIES is carried at cost adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income. The Company's policy of carrying such investment
securities at amortized cost is based upon its ability and management's intent
to hold such securities to maturity.
4
At December 31, the amortized cost of securities and their approximate
fair value were as follows (in thousands):
Gross Gross Carrying
AVAILABLE FOR SALE SECURITIES: Amortized Unrealized Unrealized Amount
DECEMBER 31, 2000 Cost Gains Losses (Fair Value)
---------- ---------- ---------- ----------
Securities of U.S. government agencies
and corporations $ 48,546 $ 168 $ (368) $ 48,346
Obligations of states and political subdivisions 2,671 21 (1) 2,691
Mortgage-backed securities 20,871 279 (31) 21,119
Corporate Securities 6,338 21 (458) 5,901
Other Securities 88 (21) 67
---------- ---------- ---------- ----------
$ 78,514 $ 489 $ (879) $ 78,124
========== ========== ========== ==========
DECEMBER 31, 1999
Securities of U.S. government agencies
and corporations $ 38,611 $ 7 $ (1,296) $ 37,322
Obligations of states and political subdivisions 2,676 (34) 2,642
Mortgage-backed securities 35,040 2 (464) 34,578
Corporate Securities 14,634 (740) 13,894
Foreign Debt Securities 503 5 508
Other Securities 139 6 (25) 120
---------- ---------- ---------- ----------
$ 91,603 $ 20 $ (2,559) $ 89,064
========== ========== ========== ==========
DECEMBER 31, 1998
Securities of U.S. government agencies
and corporations $ 30,733 $ 145 $ (149) $ 30,729
Obligations of states and political subdivisions 3,306 45 3,351
Mortgage-backed securities 39,444 21 (122) 39,343
Corporate Securities 8,466 33 8,499
Foreign Debt Securities 503 22 525
Other Securities 215 5 (33) 187
---------- ---------- ---------- ----------
$ 82,667 $ 271 $ (304) $ 82,634
========== ========== ========== ==========
HELD TO MATURITY SECURITIES
DECEMBER 31, 2000
Obligations of states and political subdivisions $ 25,811 $ 1,115 -- $ 26,926
========== ========== ========== ==========
DECEMBER 31, 1999
Obligations of states and political subdivisions $ 29,616 $ 843 $ (102) $ 30,357
========== ========== ========== ==========
DECEMBER 31, 1998
Obligations of states and political subdivisions $ 35,399 $ 2,040 -- $ 37,439
========== ========== ========== ==========
The policy of the Company requires that management determine the
appropriate classification of securities at the time of purchase. If management
has the intent and the Company has the ability at the time of purchase to hold
securities until maturity, they are classified as investments held to maturity,
and carried at amortized historical cost. Securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale and carried at market value. Securities held for indefinite
periods of time include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk, and other related factors.
5
Scheduled maturities of held to maturity and available for sale
securities (other than equity securities with a fair value of approximately
$67,000) at December 31, 2000, are shown below (in thousands). Expected
maturities may differ from contractual maturities because borrowers may have the
right to prepay with or without penalty.
The following table sets forth the maturities of investment securities
at December 31, 2000 and the weighted average yields of such securities.
Tax-equivalent adjustments have been made in calculating yields on obligations
of state and political subdivisions.
Maturity Distribution and Yields of Investment Securities:
HELD TO MATURITY AVAILABLE FOR SALE
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AMORTIZED AVERAGE FAIR
YIELD (1) COST YIELD (1) VALUE
DECEMBER 31 2000 2000 2000 2000
----------- ------- ------- ------- -------
Securities of U.S. government agencies and
corporations
Due within one year 5.64% $ 8,164
Due after one year but within five years 6.31% 29,154
Due after five years but within ten years 7.11% 14,705
Due after ten years 7.38% 24,852
------- -------
Total 6.74% 76,875
Obligations of states and political
subdivisions
Due within one year 9.00% $ 4,278
Due after one year but within five years 9.03% 7,112 7.21% 417
Due after five years but within ten years 8.99% 7,688 6.71% 765
Due after ten years 8.84% 6,733
------- ------- ------- -------
Total 8.96% 25,811 6.89% 1,182
------- ------- ------- -------
Total 8.96% $25,811 6.74% $78,057
======= ======= ======= =======
(1) Tax-equivalent basis at fiscal year end.
LOAN AND LEASE PORTFOLIO
The Company originates loans for business, consumer and real estate
activities and leases for equipment purchases. Such loans and leases are
concentrated in the primary markets in which the Company operates. Substantially
all loans are collateralized. Generally, real estate loans are secured by real
property. Commercial and other loans are secured by bank deposits or business or
personal assets and leases are generally secured by equipment. The Company's
policy for requiring collateral is through analysis of the borrower, the
borrower's industry and the economic environment in which the loan would be
granted. The loans are expected to be repaid from cash flows or proceeds from
the sale of selected assets of the borrower.
6
Major classifications of loans and leases at December 31 are summarized
as follows (in thousands):
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Commercial, financial and agricultural $143,658 $130,606 $123,591 $111,455 $ 98,810
Real estate - construction 4,794 4,049 9,084 6,195 3,192
Real estate - mortgage(1) 100,937 82,202 89,865 65,008 59,847
Installment 105,393 92,973 64,777 53,658 61,647
Direct financing leases 5,183 5,395 5,585 6,089 5,791
Other 9,727 15,434 13,904 13,390 13,283
-------- -------- -------- -------- --------
Total loans and leases receivable 369,692 330,659 306,806 255,795 242,570
Less:
Allowance for loan and lease losses 4,964 4,606 4,704 2,861 2,061
Deferred loan fees 69 229 517 806 872
-------- -------- -------- -------- --------
Net loans and leases $364,659 $325,824 $301,585 $252,128 $239,637
======== ======== ======== ======== ========
(1) Includes loans held for sale
At December 31, 2000 and 1999, the Company serviced real estate loans
and loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $136,641,000 and $154,158,000,
respectively.
The Company was contingently liable under letters of credit issued on
behalf of its customers for $2,817,000 and $2,366,000 at December 31, 2000 and
1999, respectively. At December 31, 2000, commercial and consumer lines of
credit, and real estate loans of approximately $29,704,000 and $14,642,000.,
were undisbursed. These instruments involve, to varying degrees, elements of
credit and market risk more than the amounts recognized in the balance sheet.
The contractual or notional amounts of these transactions express the extent of
the Company's involvement in these instruments and do not necessarily represent
the actual amount subject to credit loss.
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturity of certain loan categories.
Excluded categories are residential mortgages of 1-4 family residences,
installment loans and lease financing outstanding as of December 31, 2000. Also
provided with respect to such loans are the amounts due after one year,
classified according to the sensitivity to changes in interest rates:
After One
Within Through After
(In thousands) One Year Five Years Five Years Total
----------- ------------ ---------- -----------
Commercial, financial and
agricultural and installment $ 30,552 $ 117,019 $ 101,480 $ 249,051
Real Estate - construction 4,794 4,794
----------- ------------ ---------- -----------
Total $ 35,346 $ 117,019 $ 101,480 $ 253,845
=========== ============ ========== ===========
Loans maturing after one year with:
Fixed interest rates $ 26,279 $ 70,599 $ 96,878
Variable interest rates 90,740 30,881 121,621
------------ ---------- -----------
Total $ 117,019 $ 101,480 $ 218,499
============ ========== ===========
7
IMPAIRED, NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES
At December 31, 2000 and 1999, the recorded investment in loans and
leases for which impairment has been recognized was approximately $811,000 and
$2,774,000. Of the 2000 balance, approximately $811,000 has a related valuation
allowance of $400,000. Of the 1999 balance, approximately $2,774,000 has a
related valuation allowance of $613,000. For the years ended December 31, 2000,
1999 and 1998, the average recorded investment in loans and leases for which
impairment has been recognized was approximately $1,376,000, $4,180,000 and
$5,645,000. During the portion of the year that the loans and leases were
impaired the Company recognized interest income of approximately $124,000,
$207,000 and $292,000 for cash payments received in 2000, 1999 and 1998.
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 at December 31 are summarized as follows (in
thousands):
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Nonaccrual loans and leases $ 780 $ 2,145 $ 5,203 $ 3,360 $ 2,709
Loans 90 days past due but still accruing interest 561 223 368 244 14
Restructured loans -- 601 242 166 256
Other real estate owned 341 699 929 596 329
------- ------- ------- ------- -------
Total nonperforming assets $ 1,682 $ 3,668 $ 6,742 $ 4,366 $ 3,308
======= ======= ======= ======= =======
If interest on nonaccrual loans and leases had been accrued, such
income would have approximated $139,000 in 2000, $349,000 in 1999, and $407,000
in 1998. Interest income of $124,000 in 2000, $207,000 in 1999, and $292,000 in
1998 was recorded when it was received on the nonaccrual loans and leases.
Based on its review of impaired, past due and nonaccrual loans and
other information known to management at the date of this report, in addition to
the nonperforming loans included in the above table, management has not
identified loans and leases about which it has serious doubts regarding the
borrowers' ability to comply with present loan repayment terms, such that said
loans might subsequently be classified as nonperforming.
At December 31, 2000, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonaccrual.
8
SUMMARY OF LOAN LOSS EXPERIENCE:
The following table summarizes the Company's loan and lease loss
experience for the years ended December 31:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Average loans and leases outstanding $342,831 $313,169 $278,037 $246,862 $222,889
Allowance for loan and lease losses
at beginning of period 4,606 4,704 2,861 2,061 2,021
Loans and leases charged off:
Commercial, financial and agricultural 1,276 1,105 2,904 1,694 575
Real Estate - construction -- -- 3 -- 2
Real Estate - mortgage 53 105 35 128 139
Installment 269 788 735 411 258
Other 79 67 33 33 16
-------- -------- -------- -------- --------
Total loans and leases charged off 1,677 2,065 3,710 2,266 990
Recoveries of loans and leases
previously charged off:
Commercial, financial and agricultural 262 244 59 16 7
Real Estate - construction -- -- -- -- --
Real Estate - mortgage -- 32 12 4 --
Installment 89 422 144 34 26
Other 14 7 4 1 1
-------- -------- -------- -------- --------
Total recoveries of loans and leases
Previously charged off 365 705 219 55 34
-------- -------- -------- -------- --------
Net loans and leases charged off 1,312 1,360 3,491 2,211 956
Provisions for loan and lease losses 1,670 1,262 5,334 3,011 996
-------- -------- -------- -------- --------
Balance of allowance for loan and lease
losses at end of period $ 4,964 $ 4,606 $ 4,704 $ 2,861 $ 2,061
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans
and leases outstanding 0.38% 0.43% 1.26% 0.90% 0.43%
Allowance for loan and lease losses to
total loans and leases 1.34% 1.39% 1.54% 1.12% 0.85%
The Company maintains an allowance for loan and lease losses (the
"Allowance") to provide for probable loan and lease losses in the loan and lease
portfolio. Additions to the Allowance are made by charges to operating expense
in the form of a provision for loan and lease losses. Loans and leases are
charged against the Allowance when management believes that the collectibility
of the principal is unlikely, while any recoveries are credited to the
Allowance.
The Company evaluates the adequacy of its Allowance by specific
categories of loans and leases rather than on an overall basis. In determining
the adequacy of the Allowance, management considers such factors as the
Company's lending policies, historical loan and lease loss experience,
non-performing loans and leases and problem credits, loan volumes and
concentrations, collateral values, evaluations made by bank regulatory
authorities, assessment of economic conditions particularly related to the real
estate market and the current business cycle, and other appropriate data in its
attempt to identify the risks in the loan portfolio. While these factors are
essentially judgmental, the management of the Company believes that the
Allowance at December 31, 2000 was adequate against foreseeable losses in its
loan and lease portfolio at that time. The risk of nonpayment of loans and
leases is inherent in commercial banking, and, while management has procedures
in place to identify loans and leases with more than a normal risk of default,
it is not always possible to identify all such potential problem credits. To
some extent, the degree of perceived risk is taken into account in establishing
the structure of, and interest rates and security for, specific loans and leases
and various types of loans and leases. The Company also attempts to minimize its
credit risk exposure by use of thorough loan application, approval and review
procedures.
9
The following table shows the allocation of the Company's Allowance and
the percent of allowance in each category to the total allowance at the dates
indicated (dollars in thousands).
DECEMBER 31 2000 1999 1998
-------------------------- ------------------------- ------------------------
ALLOWANCE % ALLOWANCE % ALLOWANCE %
FOR OF FOR OF FOR OF
LOSSES ALLOWANCE LOSSES ALLOWANCE LOSSES ALLOWANCE
---------- --------- ---------- --------- ---------- ---------
Loan Categories:
Commercial, financial
Agricultural $ 2,953 59.5% $ 2,401 52.1% $ 3,209 68.2%
Real Estate-construction 93 1.9% 57 1.2% 10 0.2%
Real Estate-mortgage 258 5.2% 243 5.3% 611 13.0%
Installment 1,181 23.8% 517 11.2% 587 12.5%
Other 54 1.1% 22 0.5% 69 1.5%
Unallocated 425 8.5% 1,366 29.7% 218 4.6%
---------- ------ ---------- ------ ---------- ------
Total $ 4,964 100.0% $ 4,606 100.0% $ 4,704 100.0%
========== ====== ========== ====== ========== ======
The Allowance totaled $4,964,000, or 1.34% of total loans outstanding
at December 31, 2000 compared to 1.39% of total loans outstanding at December
31, 1999. Based on management's evaluation of the current loan portfolio and
economic trends during 2000, the Company made a provision to its Allowance of
$1,670,000 which was primarily the result of the increase in loan volume, the
level of loans charged off during 2000 and adjusting the risk grades and factors
assigned to the SRNB loan portfolio to be consistent with those assigned to the
NVB portfolio. Management is continuing evaluation of the loan portfolio and
assessment of current economic conditions will dictate future provision levels.
CERTIFICATES OF DEPOSIT
Maturities of time certificates of deposit of $100,000 or more
outstanding at December 31, 2000 are summarized as follows (dollars in
thousands):
REMAINING MATURITIES:
Three months or less $ 15,737
Over three through twelve months 25,445
Over one year through three years 6,302
Over three years --
---------
Total $ 47,484
=========
As of December 31, 2000, the Company did not have any brokered
deposits. In general, it is the Company's policy not to accept brokered
deposits.
10
RETURN ON EQUITY AND ASSETS:
The following table sets forth-certain financial ratios for the
Company:
DECEMBER 31 2000 1999 1998
----------- ---- ---- ----
Return on average equity (net income
Divided by average equity) 5.82% 11.35% 6.00%
Return on average assets (net income
Divided by average total assets) 0.58% 1.13% 0.62%
Equity to assets ratio (average equity
Divided by average total assets) 10.00% 9.96% 10.25%
Dividend payout ratio (dividends
paid or declared divided by net income) 54.86% 25.81% 46.72%
BORROWING ARRANGEMENTS
As of December 31, 2000, the Company had $16,399,000 outstanding in
overnight borrowings from the Federal Home Loan Bank of San Francisco ("FHLB")
and through correspondent banks. Other borrowings outstanding as of December 31,
2000 consist of a loan from the FRB in the form of Treasury Tax and Loan notes
and generally are required to be repaid within 30 days from the transaction date
as well as a term note from the FHLB which matures in 2005 and is secured by
certain real estate loans. The following table summarizes these borrowings (in
thousands):
2000 1999 1998
------- ------- -------
Long-Term Borrowings:
FHLB loan, fixed rate of 6.55% $ 480 $ 562 $ 638
FHLB loan, fixed rate of 4.37% 5,000
------- ------- -------
Total Long-Term borrowings $ 480 $ 5,562 $ 638
======= ======= =======
Short-Term borrowings:
FHLB $13,400 $ 4,400
FRB loan 122 603 $ 39
Correspondent bank 2,999
------- ------- -------
Total Short-Term borrowings $16,521 $ 5,003 $ 39
======= ======= =======
The following table provides information related to the Company's
short-term borrowings under its federal funds purchased, security repurchase
arrangements and lines of credit for the periods indicated:
Short-Term Borrowings
2000 1999 1998
------- ------- -------
Average balance during the year $ 9,901 $ 7,831 $ 1,311
Average interest rate for the year 6.44% 4.83% 5.80%
Maximum month-end balance during the year $16,521 $ 5,003 $ 1,518
Average rate as of December 31, 6.18% 4.02% 5.49%
11
SUPERVISION AND REGULATION
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended. The
Company is also subject to the periodic reporting requirements of Section 13 of
the Securities Exchange Act of 1934, as amended, which include, but are not
limited to, the filing of annual, quarterly and other current reports with the
Securities and Exchange Commission.
The Company is licensed by the California Commissioner of Financial
Institutions (the "Commissioner"), its deposits are insured by the FDIC, and it
has chosen not to become a member of the Federal Reserve System. Consequently,
NVB is subject to the supervision of, and is regularly examined by, the
Commissioner and the FDIC. Such supervision and regulation include comprehensive
reviews of all major aspects of the Company's business and condition, including
its capital ratios, allowance for loan and lease losses and other factors.
However, no inference should be drawn that such authorities have approved any
such factors. NVB is required to file reports with the Commissioner and the FDIC
and provide such additional information as the Commissioner and the FDIC may
require.
SRNB, is a national banking association, chartered under the National
Bank Act, and is principally supervised, regulated and examined by the Office of
the Comptroller of the Currency ("OCC"). The deposits of SRNB are insured under
the Federal Deposit Insurance Corporation and SRNB is subject to the rules and
regulations of the FDIC pertaining to deposit insurance and other matters. All
national banks are members of the Federal Reserve System. The regulations of the
OCC, the FDIC and the Board of Governors of the Federal Reserve System govern
many aspects of the business and activities of SRNB, including investments,
loans, borrowings, branching, mergers and acquisitions, reporting and numerous
other areas. SRNB is also subject to the provisions of California law applicable
to the business of banking, to the extent such provisions are not in conflict
with, or preempted by, federal banking law.
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994.
The Company, and any subsidiaries, which it may acquire or organize,
are deemed to be "affiliates" of NVB and SRNB within the meaning of that term as
defined in the Federal Reserve Act. This means, for example, that there are
limitations (a) on loans by NVB or SRNB to affiliates, and (b) on investments by
NVB or SRNB 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.
On April 12, 1999, the OCC required SRNB to enter into a Consent Order
(the "Order"). The Order required that SRNB formulate and implement a plan to
strengthen its policies and procedures relative to its loan administration,
credit and collateral exceptions, classified assets, allowance for loan losses
and violations of law related to lending limits. The Board of Directors of SRNB
agreed to execute the Order and followed an action plan that detailed the steps
necessary to comply with the Order. Effective July 20, 2000, the OCC found SRNB
to be in compliance with all aspects of the Order and therefore, terminated the
Order.
The Board of Governors, the OCC and the FDIC have adopted risk-based
capital guidelines for evaluating the capital adequacy of bank holding companies
and banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, the Company and its banking
subsidiaries are required to maintain capital equal to at least 8.0% of its
assets and commitments to extend credit, weighted by risk, of which at least
4.0% must consist primarily of common equity (including retained earnings) and
the remainder may consist of subordinated debt, cumulative preferred stock, or a
limited amount of loan loss reserves. The Company and its banking subsidiaries
12
are subject to regulations issued by the Board of Governors, the OCC and the
FDIC, which require maintenance of a certain level of capital. These regulations
impose two capital standards: a risk-based capital standard and a leverage
capital standard.
Assets, commitments to extend credit and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
Under the Board of Governors' risk-based capital guidelines, assets
reported on an institution's balance sheet and certain off-balance sheet items
are assigned to risk categories, each of which has an assigned risk weight.
Capital ratios are calculated by dividing the institution's qualifying capital
by its period-end risk-weighted assets. The guidelines establish two categories
of qualifying capital: Tier 1 capital (defined to include common shareholders'
equity and noncumulative perpetual preferred stock) and Tier 2 capital which
includes, among other items, limited life (and in case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for credit losses. Tier 2 capital may also include up
to 45% of the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if any, of
fair market value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to exclude all or a
portion of the unrealized gains upon a determination that the equity securities
are not prudently valued. Unrealized gains and losses on other types of assets,
such as bank premises and available-for-sale debt securities, are not included
in Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
Under the Board of Governors' leverage capital standard an institution
is required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. The Board of
Governors and the FDIC have adopted a minimum leverage ratio for bank holding
companies as a supplement to the risk-weighted capital guidelines. The leverage
ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets)
for the highest rated bank holding companies or those that have implemented the
risk-based capital market risk measure. All other bank holding companies must
maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital
ratios required for bank holding companies that have significant financial
and/or operational weakness, a high risk profile, or are undergoing or
anticipating rapid growth.
At December 31, 2000, NVB, SRNB and the Company are in compliance with
the risk-based capital and leverage ratios described above. See Item 8,
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA and Note 18 to the Financial
Statements incorporated by reference, therein, for a listing of the Company's
risk-based capital ratios at December 31, 2000 and 1999.
The Board of Governors, the OCC and FDIC have adopted regulations
implementing a system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five
capital categories with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less
than 4%; (4) "Significantly undercapitalized" - consisting of institutions with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
13
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without the prior
approval of the FDIC and the FDIC must prohibit a critically undercapitalized
institution from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than in the usual
course of business, including investment expansion, acquisition, sale of assets
or other similar actions; (2) extending credit for any highly leveraged
transaction; (3) amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material change in accounting
methods; (5) engaging in certain affiliate transactions; (6) paying excessive
compensation or bonuses; and (7) paying interest on new or renewed liabilities
at rates which would increase the weighted average costs of funds beyond
prevailing rates in the institution's normal market areas.
Under FDICIA, the federal financial institution agencies have adopted
regulations which require institutions to establish and maintain comprehensive
written real estate lending policies which address certain lending
considerations, including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation, approval and reporting
requirements. FDICIA further generally prohibits an insured state bank from
engaging as a principal in any activity that is impermissible for a national
bank, absent FDIC determination that the activity would not pose a significant
risk to the Bank Insurance Fund, and that the bank is, and will continue to be,
within applicable capital standards. Similar restrictions apply to subsidiaries
of insured state banks. The Company does not currently intend to engage in any
activities which would be restricted or prohibited under FDICIA.
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
14
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
revised rating system is identified as the "CAMELS" system.
The federal financial institution agencies have established bases for
analysis and standards for assessing a financial institution's capital adequacy
in conjunction with the risk-based capital guidelines including analysis of
interest rate risk, concentrations of credit risk, risk posed by non-traditional
activities, and factors affecting overall safety and soundness. The safety and
soundness standards for insured financial institutions include analysis of (1)
internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; and (7) excessive compensation for
executive officers, directors or principal shareholders which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard, the agency may require the financial institution to submit to
the agency an acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted plan, the agency
must require the institution to correct the deficiency. The agencies may elect
to initiate enforcement action in certain cases rather than rely on an existing
plan particularly where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution.
Community Reinvestment Act ("CRA") regulations evaluate banks' lending
to low and moderate income individuals and businesses across a four-point scale
from "outstanding" to "substantial noncompliance," and are a factor in
regulatory review of applications to merge, establish new branches or form bank
holding companies. In addition, any bank rated in "substantial noncompliance"
with the CRA regulations may be subject to enforcement proceedings.
The Company's ability to pay cash dividends is subject to restrictions
set forth in the California General Corporation Law. Funds for payment of any
cash dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from each of the Company's subsidiary banks.
The payment of cash dividends and/or management fees by NVB is subject to
restrictions set forth in the California Financial Code, as well as restrictions
established by the FDIC. The payment of cash dividends and/or management fees by
SRNB are subject to restrictions as established by the OCC. See Item 5 below for
further information regarding the payment of cash dividends by the Company, NVB
and SRNB.
COMPETITION
At June 30, 2000, the competing commercial and savings banks in
competition with the Company, NVB and SRNB had thirty banking offices in Shasta
and Trinity Counties where NVB operates its eleven banking offices and there
were fifty-one competing offices of commercial and savings bank offices in Del
Norte, Mendocino and Humboldt Counties where SRNB operates its seven banking
offices. Additionally, the Company competes with thrifts and, to a lesser
extent, credit unions, finance companies and other financial service providers
for deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services and international banking which the Company is
not authorized nor prepared to offer currently. The Company has arranged with
correspondent banks and with others to provide some of these services for their
customers. For borrowers requiring loans in excess of each subsidiary bank's
legal lending limit, the Company has offered, and intend to offer in the future,
such loans on a participating basis with correspondent banks and with other
independent banks, retaining the portion of such loans which is within the
applicable lending limits. As of December 31, 2000, NVB's and SRNB's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $5,675,000 and $2,474,000 on an unsecured basis and $9,458,000 and
$4,123,000 on a fully secured basis, based on regulatory capital of $37,830,000
and $16,492,000, respectively.
In order to compete with the major financial institutions in its
primary service areas, the Company, through its subsidiary banks, utilizes to
the fullest extent possible, the flexibility which is accorded by its
independent status. This includes an emphasis on specialized services, local
promotional activity, and personal contacts by the officers, directors and
employees of the Company, NVB and SRNB. The Company's subsidiary banks also seek
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.
15
Banking is a business that depends heavily on net interest income. Net
interest income is defined as the difference between the interest rate paid to
obtain deposits and other borrowings and the interest rate received on loans
extended to customers and on securities held in each subsidiary bank's
portfolio. Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
The net interest income of the Company, and to a large extent, its
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on the Company are not
predictable.
In 1996, pursuant to Congressional mandate, the FDIC reduced bank
deposit insurance assessment rates to a range from $0 to $0.27 per $100 of
deposits, dependent upon a bank's risk. Based upon the above risk-based
assessment rate schedule, NVB's current capital ratios and NVB's current levels
of deposits, NVB anticipates no change in the assessment rate applicable to NVB
during 2001 from that in 2000. SRNB's assessment rates, however, have recently
been higher than those of NVB due to the Order which was in effect from April
12, 1999 to July 20, 2000. Management anticipates that the level of deposit
insurance assessment rates for SRNB will be similar to that of NVB for the
foreseeable future.
Since 1996, California law implementing certain provisions of prior
federal law has (1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch business unit located
in California without acquisition of the whole business unit of the California
bank; and (3) prohibited interstate branching through de novo establishment of
California branch offices. Initial entry into California by an out-of-state
institution must be accomplished by acquisition of or merger with an existing
whole bank, which has been in existence for at least five years.
The federal financial institution agencies, especially the OCC and the
Board of Governors, have taken steps to increase the types of activities in
which national banks and bank holding companies can engage, and to make it
easier to engage in such activities. The OCC has issued regulations permitting
national banks to engage in a wider range of activities through subsidiaries.
"Eligible institutions" (those national banks that are well capitalized, have a
high overall rating and a satisfactory or better CRA rating, and are not subject
to an enforcement order) may engage in activities related to banking through
operating subsidiaries subject to an expedited application process. In addition,
a national bank may apply to the OCC to engage in an activity through a
subsidiary in which the bank itself may not engage.
On November 12, 1999, President Clinton signed into law The Financial
Services Modernization Act of 1999 (the "FSMA"). The FSMA eliminated most of the
remaining depression-era "firewalls" between banks, securities firms and
insurance companies which was established by Banking Act of 1933, also known as
the Glass-Steagall Act ("Glass-Steagall). Glass-Steagall sought to insulate
banks as depository institutions from the perceived risks of securities dealing
and underwriting, and related activities. The FSMA repeals Section 20 of
Glass-Steagall, which prohibited banks from affiliating with securities firms.
Bank holding companies that can qualify as "financial holding companies" can now
acquire securities firms or create them as subsidiaries, and securities firms
can now acquire banks or start banking activities through a financial holding
company. The FSMA includes provisions which permit national banks to conduct
financial activities through a subsidiary that are permissible for a national
bank to engage in directly, as well as certain activities authorized by statute,
or that are financial in nature or incidental to financial activities to the
same extent as permitted to a "financial holding company" or its affiliates.
This liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
business in the United States. Consequently, the common ownership of banks,
securities firms and insurance firms is now possible, as is the conduct of
commercial banking, merchant banking, investment management, securities
underwriting and insurance within a single financial institution using a
"financial holding company" structure authorized by the FSMA.
16
Prior to the FSMA, significant restrictions existed on the affiliation
of banks with securities firms and on the direct conduct by banks of securities
dealing and underwriting and related securities activities. Banks were also
(with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The FSMA removes these restrictions and substantially
eliminates the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies, which qualify as
financial holding companies through an application process, can now insure,
guarantee, or indemnify against loss, harm, damage, illness, disability, or
death; issue annuities; and act as a principal, agent, or broker regarding such
insurance services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the FSMA, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. Implementing regulations have recently been
issued for comment by all of the federal financial institution regulatory
agencies and the Securities and Exchange Commission. These regulations will
require, in general, that financial institutions (1) may not disclose non-public
personal information of customers to non-affiliated third parties without notice
to their customers, who must have opportunity to direct that such information
not be disclosed; (2) may not disclose customer account numbers except to
consumer reporting agencies; and (3) must give prior disclosure of their privacy
policies before establishing new customer relationships.
The Company, NVB, and SRNB have not determined whether or when either
of them may seek to acquire and exercise new powers or activities under the
FSMA, and the extent to which competition will change among financial
institutions affected by the FSMA has not yet become clear.
Certain legislative and regulatory proposals that could affect the
Company and banking business in general are periodically introduced before the
United States Congress, the California State Legislature and Federal and state
government agencies. It is not known to what extent, if any, legislative
proposals will be enacted and what effect such legislation would have on the
structure, regulation and competitive relationships of financial institutions.
It is likely, however, that such legislation could subject the Company and its
subsidiary banks to increased regulation, disclosure and reporting requirements
and increase competition and the Company's cost of doing business.
In addition to legislative changes, the various federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such and regulations may have on the Company and its
subsidiary banks.
DISCHARGE OF MATERIALS INTO THE ENVIRONMENT
Compliance with federal, state and local regulations regarding the
discharge of materials into the environment may have a substantial effect on the
capital expenditure, earnings and competitive position of the Company in the
event of lender liability or environmental lawsuits. Under federal law,
liability for environmental damage and the cost of cleanup may be imposed upon
any person or entity that is an "owner" or "operator" of contaminated property.
17
State law provisions, which were modeled after federal law, are substantially
similar. Congress established an exemption under Federal law for lenders from
"owner" and/or "operator" liability, which provides that "owner" and/or
"operator" do not include "a person, who, without participating in the
management of a vessel or facility, holds indicia of ownership primarily to
protect his security interests in the vessel or facility."
In the event that the Company was held liable as an owner or operator
of a toxic property, it could be responsible for the entire cost of
environmental damage and cleanup. Such an outcome could have a serious effect on
the Company's consolidated financial condition depending upon the amount of
liability assessed and the amount of cleanup required.
The Company takes reasonable steps to avoid loaning against property
that may be contaminated. In order to identify possible hazards, the Company
requires that all fee appraisals contain a reference to a visual assessment of
hazardous waste by the appraiser. Further, on loans proposed to be secured by
industrial, commercial or agricultural real estate, an Environmental
Questionnaire must be completed by the borrower and any areas of concern
addressed. Additionally, the borrower is required to review and sign a Hazardous
Substance Certificate and Indemnity at the time the note is signed.
If the investigation reveals and if certain warning signs are
discovered, but it cannot be easily ascertained, that an actual environmental
hazard exists, the Company may require that the owner/buyer of the property, at
his/her expense, have an Environmental Inspection performed by an insured,
bonded environmental engineering firm acceptable to the Company.
CALIFORNIA POWER CRISIS
The State of California is presently experiencing serious periodic
electric power shortages. It is uncertain whether or when these shortages will
be discontinued. The Company and its subsidiaries could be materially and
adversely affected either directly or indirectly by a severe electric power
shortage if such a shortage caused any of its critical data processing or
computer systems and related equipment to fail, or if the local infrastructure
systems such as telephone systems should fail, or the Company's and its
subsidiaries' significant vendors, suppliers, service providers, customers,
borrowers, or depositors are adversely impacted by their internal systems or
those of their respective customers or suppliers. Material increases in the
expenses related to electric power consumption and the related increase in
operating expense could also have an adverse effect on the Company's future
results of operations.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can
be impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
The Company and its subsidiaries are dependent on the successful
recruitment and retention of highly qualified personnel. Business banking, one
of the Company's principal lines of business, is dependent on relationship
banking, in which Company personnel develop professional relationships with
small business owners and officers of larger business customers who are
responsible for the financial management of the companies they represent. If
these employees were to leave the Company and become employed by a local
competing bank, the Company could potentially lose business customers. In
addition, the Company relies on its customer service staff to effectively serve
the needs of its consumer customers. Since overall employment levels are near
their modern-day low, this begins to be a risk to the Company that must be
mitigated. The Company very actively recruits for all open position and
management believes that employee relations are good.
Shares of Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could adversely
affect the market price. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock, of which 5,805,416 were
outstanding at December 31, 2000. Pursuant to its stock option plans, at
December 31, 2000, the Company had outstanding options to purchase 570,734
shares of Company Common Stock. As of December 31, 2000, 520,347 shares of
Company Common Stock remained available for grants under the Company's stock
option plans. Sales of substantial amounts of Company Common Stock in the public
market could adversely affect the market price of Common Stock. Pursuant to the
18
Agreement and Plan of Reorganization and Merger, dated as of October 3, 1999,
between the Company and SRNB, the Company issued 2,075,546 shares of its common
stock to shareholders and option holders of Six Rivers National Bank Common
Stock.
A large portion of the loan portfolio of the Company is dependent on
real estate. At December 31, 2000, real estate served as the principal source of
collateral with respect to approximately 53% of the Company's loan portfolio. A
worsening of current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available-for-sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value for Company Common Stock. Acts of nature, including fires,
earthquakes and floods, which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also negatively impact the
Company's financial condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or employee
fraud. The Company maintains a system of internal controls to mitigate against
such occurrences and maintains insurance coverage for such risks, but should
such an event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Standards Accounting Board released for comment on
February 14, 2001, a revised proposal for the elimination of "pooling of
interests" accounting. The FASB indicated that it will accept comments through
March 16, 2001. As proposed, it is currently anticipated that the FASB will
issue a final statement in June 2001, which would likely require, among other
matters, that all mergers initiated after the issuance of the final statement be
accounted for as "purchase" transactions. As proposed, a merger or business
combination would be considered initiated if the major terms of the transaction,
including the exchange or conversion ratio, are publicly announced or otherwise
disclosed to shareholders of the combining companies. The revised proposal
contemplates that goodwill will not be amortized to earnings as originally
proposed. Instead, goodwill would be recognized as an asset in the financial
statements, measured as the excess of the cost of an acquired entity over the
net of the amounts assigned to identifiable assets acquired and liabilities
assumed, and then tested for impairment to assess losses and expensed against
earnings only in the periods in which the recorded value of goodwill exceeded
its implied fair value, based on standards to be specified in the final
statement. The effect of the proposal upon bank mergers is uncertain, however,
the goodwill in a purchase accounting transaction may not be included in the
calculation of regulatory capital requirements and some investment bankers have
expressed the view that the elimination of "pooling of interests" accounting
will result in lower merger premiums for sellers with the possibility of fewer
transactions occurring after the effective date of the final statement.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, ("SFAS No. 133") is effective for
all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS No. 133, as amended, certain contracts that were
not formerly considered derivatives may now meet the definition of a derivative.
The Company will adopt SFAS No. 133 effective January 1, 2001. Management
believes the adoption of SFAS No. 133 will not have a significant impact upon
the financial position, results of operations, or cash flows of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued in September 2000. SFAS
No. 140 is a replacement of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". Most of the
provisions of SFAS No. 125 were carried forward to SFAS No. 140 without
reconsideration by the FASB, and some were changed in only minor ways. In
issuing SFAS No. 140, the FASB included issues and decisions that had been
addressed and determined since the original publication of SFAS No. 125. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Management
believes that adopting these components of SFAS No. 140 will not have a material
impact on the financial position or results of operations of the Company. SFAS
No. 140 must be applied prospectively. For recognition and reclassification of
collateral and for disclosures about securitizations and collateral, this
Statement was adopted as of December 31, 2000 and did not have a material impact
on the financial position or results of operations of the Company.
19
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal executive and administrative office is located
at 880 E. Cypress Avenue, Redding, Shasta County, California. The office, which
occupies approximately 4,500 square feet of space, is located within the
Enterprise Office of its subsidiary, North Valley Bank.
The following table sets forth information about the Company's
premises:
DESCRIPTION OFFICE TYPE OWNED/LEASED
- --------------------------------------------------------------------------------
North Valley Bank:
Redding Branch Owned
Westwood Branch Leased
Shasta Lake Branch Owned
Country Club Branch Owned
Weaverville Branch Owned
Hayfork Branch Owned
Buenaventura Supermarket Branch Leased
Anderson Branch Owned
Enterprise Branch Owned
Cottonwood Supermarket Branch Leased
Palo Cedro Branch Leased
Redding Warehouse Storage Facility Leased
Park Marina Limited Used Branch Leased
BPI Data Processing/Administrative Owned
Six Rivers National Bank:
Eureka Mall Branch Leased
McKinleyville Branch Leased
Crescent City Branch Owned
Eureka Downtown Branch Owned
Ferndale Branch Owned
Garberville Branch Leased
Willits Branch Owned
In November 2000, SRNB was required to divest of its Weaverville branch
office as a condition of regulatory approval of the plan of reorganization
between the Company and SRNB. All of the deposits and certain loans were sold in
the transaction and the property is now being leased to Scott Valley Bank, which
currently operates the property as a branch office.
From time to time, the Company through NVB and SRNB acquires real
property through foreclosure of defaulted loans. The policy of the Company is
not to use or permanently retain any such properties but to resell them when
practicable.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
against any of its property. The Company, because of the nature of its business,
is generally subject to various legal actions, threatened or filed, which
involve ordinary, routine litigation incidental to its business. Some of the
pending cases seek punitive damages in addition to other relief. Although the
amount of the ultimate exposure, if any, cannot be determined at this time, the
Company, based on the advice of counsel, does not expect that the final outcome
of threatened or filed suits will have a materially adverse effect on its
consolidated financial position.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The North Valley Bancorp common stock is listed and trades on the
Nasdaq National Market under the symbol "NOVB". The shares were first listed in
the Nasdaq Stock Market in April 1998.
The following table summarizes the Common Stock high and low trading
prices and volume of shares traded in the quarters ended March 31, 1999 through
December 31, 2000 as reported by Nasdaq and as restated on a historical basis to
reflect the merger with Six Rivers National Bank, which closed in October 2000,
as a pooling of interests as if the Companies had been combined for all periods
presented.
PRICE OF COMMON CASH DIVIDENDS
STOCK DECLARED
--------------------- --------
QUARTER ENDED: HIGH LOW
-------- --------
March 31, 1999 $ 11.65 $ 10.11 $ 0.06
June 30, 1999 12.38 10.27 $ 0.06
September 30, 1999 11.45 9.52 $ 0.06
December 31, 1999 11.12 9.33 $ 0.06
March 31, 2000 $ 10.44 $ 8.42 $ 0.06
June 30, 2000 10.68 9.47 $ 0.06
September 30, 2000 12.84 10.41 $ 0.06
December 31, 2000 12.81 10.88 $ 0.10
The Company had approximately 1,071 shareholders of record as of March
1, 2001.
See "Supervision and Regulation" in Item 1, DESCRIPTION OF BUSINESS,
for information related to shareholder and dividend matters including
information regarding certain limitations on payment of dividends.
21
ITEM 6. SELECTED FINANCIAL DATA (1)
NORTH VALLEY BANCORP & SUBSIDIARIES
(Dollars In Thousands Except Per Share Data)
FOR THE YEAR ENDED DECEMBER 31 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Net interest income $ 23,731 $ 22,250 $ 20,732 $ 17,161 $ 15,522
Net income $ 3,088 $ 5,744 $ 2,960 $ 5,263 $ 4,909
PERFORMANCE RATIOS:
Return on average assets 0.58% 1.13% 0.62% 1.37% 1.44%
Return on average equity 5.82% 11.35% 6.00% 16.14% 17.35%
CAPITAL RATIOS:
Risk based capital:
Tier 1 (4% Minimum Ratio) 13.05% 13.37% 12.77% 12.29% 11.37%
Total (8% Minimum Ratio) 14.30% 14.44% 13.82% 13.14% 12.18%
Leverage Ratio 9.73% 9.27% 8.77% 9.59% 8.11%
BALANCE SHEET DATA AT DECEMBER 31
Assets $ 540,221 $ 521,073 $ 499,598 $ 464,564 $ 356,896
Investment securities and
federal funds sold $ 105,235 $ 133,280 $ 152,873 $ 164,886 $ 82,340
Net loans (including loans held for sale) $ 364,659 $ 325,824 $ 301,585 $ 252,128 $ 239,637
Deposits $ 460,291 $ 452,697 $ 442,813 $ 411,255 $ 321,214
Stockholders' equity $ 54,857 $ 51,841 $ 48,700 $ 47,302 $ 29,654
COMMON SHARE DATA
Net income (2)
Basic $ 0.53 $ 1.00 $ 0.52 $ 1.12 $ 1.09
Diluted $ 0.53 $ 0.99 $ 0.51 $ 1.10 $ 1.07
Book value (3) $ 9.45 $ 8.97 $ 8.49 $ 8.33 $ 6.68
Shares Outstanding 5,805,416 5,780,997 5,736,519 5,680,803 4,438,152
SUMMARY OF OPERATIONS
Total interest income $ 39,966 $ 36,279 $ 35,383 $ 29,797 $ 26,908
Total interest expense 16,235 14,029 14,651 12,636 11,386
---------- ---------- ---------- ---------- ----------
Net interest income 23,731 22,250 20,732 17,161 15,522
Provision for loan and lease losses 1,670 1,262 5,334 3,011 996
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and lease losses 22,061 20,988 15,398 14,150 14,526
Total non interest income 6,872 5,368 5,690 5,363 3,536
Total non interest expense 24,236 18,281 17,300 13,224 11,041
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 4,697 8,075 3,788 6,289 7,021
Provision for income taxes 1,609 2,331 828 1,026 2,112
---------- ---------- ---------- ---------- ----------
Net Income $ 3,088 $ 5,744 $ 2,960 $ 5,263 $ 4,909
========== ========== ========== ========== ==========
(1) All amounts have been restated on a historical basis to reflect the merger
with SRNB, which closed in October, 2000, as a pooling-of-interests as if
the Companies had been combined for all periods presented.
(2) Net income per share amounts have been adjusted to give effect to a two
for one stock split on October 15, 1998
(3) Represents stockholders' equity divided by the number of shares of common
stock outstanding at the end of the period indicated
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
North Valley Bancorp (the "Company") is a multi-bank holding company
for North Valley Bank ("NVB"), a state-nonmember bank and Six Rivers National
Bank ("SRNB") a nationally chartered bank. All amounts have been restated on a
historical basis to reflect the merger with SRNB, which closed in October, 2000,
as a pooling-of-interests as if the Companies had been combined for all periods
presented. NVB operates out of its main office located at 880 E. Cypress Avenue,
Redding, CA 96002, with eleven branches, which include two supermarket branches
in Shasta and Trinity Counties in Northern California. SRNB operates seven
branches located in Del Norte, Mendocino and Humboldt Counties. The Company
operates as three business segments; North Valley Bank, Six Rivers National Bank
and Other. Management analyzes the operations of NVB, SRNB and Other separately.
Other consists of Bancorp and BPI, both of which provide services to NVB and
SRNB. Management allocates the costs of Bancorp and BPI to NVB and SRNB based
primarily on usage through a variety of statistical data. NVB and SRNB are
separately chartered institutions each with its own Board of Directors and
regulated independently of each other. 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.
Certain statements in this Form 10-K (excluding statements of fact or
historical financial information) involve forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in Banking industry increases significantly; changes in the
interest rate environment reduce margins; general economic conditions, either
nationally or regionally, are less favorable than expected, resulting in, among
other things, a deterioration in credit quality and an increase in the provision
for possible loan losses; changes in the regulatory environment; changes in
business conditions, particularly in the Northern California region; volatility
of rate sensitive deposits; operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; the
California power crises; and changes in the securities markets.
EARNINGS SUMMARY
FOR THE YEAR ENDED DECEMBER 31,
(in thousands except per share 2000 1999 1998
amounts) --------- --------- ---------
Net interest income $ 23,731 $ 22,250 $ 20,732
Provision for loan and lease losses (1,670) (1,262) (5,334)
Noninterest income 6,872 5,368 5,690
Noninterest expense (24,236) (18,281) (17,300)
Provision for income taxes (1,609) (2,331) (828)
--------- --------- ---------
Net income $ 3,088 $ 5,744 $ 2,960
========= ========= =========
Earnings Per Share
Basic $ 0.53 $ 1.00 $ 0.52
========= ========= =========
Diluted $ 0.53 $ 0.99 $ 0.51
========= ========= =========
Return on Average Assets 0.58% 1.13% 0.62%
Return on Average Equity 5.82% 11.35% 6.00%
23
For the year ended December 31, 2000, the Company had net income of
$3,088,000 as compared to $5,744,000 for the same period in 1999 and $2,960,000
in 1997. On a per share basis, diluted earnings per share was $0.53 for the year
ended December 31, 2000 compared to $0.99 for the same period in 1999 and $0.51
for the same period in 1998.
For the year ended December 31, 2000, net income was negatively
impacted by merger-related charges as well as one-time charges ancillary to the
acquisition of with Six Rivers National Bank, which closed on October 11, 2000.
Merger-related charges primarily related to legal, accounting, investment
banking, and severance costs and other one-time charges were $3,169,000 and
$149,000 on a pre-tax basis. These charges were partially offset by net interest
income which increased by $1,481,000 in 2000 compared to 1999 and non-interest
income which increased by $1,504,000 in 2000 over 1999.
For the year ended December 31, 2000, the Company paid or declared
quarterly dividends totaling $1,694,000 to stockholders of the Company. The
Company's return on average total assets and average stockholders' equity were
0.58% and 5.82% for the period ended December 31, 2000, compared with 1.13% and
11.35% for the same period in 1999 and 0.62% and 6.00% for the same period in
1998.
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans
and investments and interest paid on deposits and borrowings and is the primary
revenue source for the Company. For the year ended December 31, 2000, net
interest income was $23,731,000 compared to $22,250,000 for the same period in
1999 and $20,732,000 for 1998. The increase in net interest income in 2000 of
$1,481,000 was primarily due to an increase in average loans outstanding of
$29,662,000 or 9.5% and an increase in yields on assets of 0.48%, partially
offset by an increase in interest expense. The increase in interest expense was
due to an increase in average interest-bearing liabilities of $13,373,000
coupled with an increase in the average rate paid on interest-bearing
liabilities of 0.43%. The increase in net interest income in 1999 over 1998 was
due to growth in average loans of $35,132,000 partially offset by a decrease in
earning asset yields of 0.28% and a reduction on the average rates paid on
interest-bearing liabilities of 0.37% coupled with an increase in average
interest bearing liabilities of $19,275,000.
The net interest margin ("NIM") is calculated by dividing net interest
income by average interest-earning assets and is calculated using a fully
taxable equivalent basis. The NIM for the year ended December 31, 2000 was 5.13%
as compared to 5.01% for the same period in 1999 and 4.96% in 1998. The
increases in the NIM were a result of the same factors that increased net
interest income during 2000 and 1999 discussed in the paragraph above.
NONINTEREST INCOME
Total noninterest income increased $1,504,000 to $6,872,000 for the
year ended December 31, 2000 from $5,368,000 for the same period in 1999 and
$5,690,000 in 1998. This increase in 2000 is primarily the result of an increase
in service charges on deposit accounts of $1,018,000, an increase in net gains
on sales of securities and loans of $484,000 partially offset by a decrease in
other fees and charges of $194,000. Included in gains on sales for 2000 are
gains on sale of loans in the amount of $45,000, gains on sale of John Hancock
Life common stock of $1,138,000, obtained from the demutualization of the
company, partially offset by losses on sale of investment securities of
$731,000. The losses on sales of investment securities were realized to raise
liquidity at SRNB in order to effect the sale of the Weaverville, California
branch. As mentioned earlier, the branch divestiture was required by the
regulators as a condition to their approval of the merger transaction with SRNB.
The decrease in noninterest income in 1999 of $322,000 from 1998 was due to a
decrease in gains on sales of securities and loans of $1,178,000 partially
offset by an increase in service charges on deposits of $362,000, an increase of
$228,000 in other fees and charges and an increase in other income of $266,000.
In March of 2000, NVB began a program called Positively Free
Checking(TM) in which NVB offers retail checking accounts to customers, which
have no per-check fee and no monthly service charge fee. This program has
increased the level of new accounts and new customers at NVB. In October of
2000, this same program was implemented at SRNB. This program has been
instrumental in increasing service charge income for the Company in 2000 and
management believes that this program will continue to enhance fee income in
2001.
24
NONINTEREST EXPENSE
The following table is a summary of the Company's noninterest expense for the
periods indicated:
(in thousands) 2000 1999 1998
---------- ---------- ----------
Salaries & employee benefits $ 10,205 $ 8,638 $ 8,044
Equipment expense 1,748 1,323 1,291
Occupancy expense 1,423 1,219 1,129
Professional Services 1,101 1,243 1,339
ATM expense 684 554 518
Printing & supplies 472 398 505
Postage 414 356 345
Messenger expense 316 332 286
Data processing expenses 294 297 303
Merger & integration expense 3,169 149
Other 4,410 3,772 3,540
---------- ---------- ----------
Total noninterest expenses $ 24,236 $ 18,281 $ 17,300
========== ========== ==========
Total noninterest expense was $24,236,000 for the year ended December
31, 2000, compared to $18,281,000 for the same period in 1999 and 17,300,000 in
1998. The increase in 2000 was primarily a result of $3,169,000 in
merger-related charges in 2000 compared to $149,000 in 1999. Salaries and
employee benefits expense also increased in 2000 by $1,567,000 as compared to
1999 due to an increase in staffing levels. In 2000, the Company created a
customer call center and increased staffing at BPI to accommodate the additional
processing volume associated with SRNB. The merger with SRNB was originally
slated to close in July of 2000 and therefore the additional hiring took place
in the first and second quarters of 2000. Since the transaction did not actually
close until October of 2000, the Company incurred some extra salary costs during
that period without the benefit of the cost savings which were expected by
consolidating systems and back-office operations. The increase in equipment
expense of $425,000 was primarily a result of the start up of the customer call
center as well as expenses incurred to conform the accounting methods for
certain equipment owned by SRNB to the methods used by the Company. The increase
in 1999 over 1998 in salaries and employee benefit expenses of $594,000 and in
other expenses of $232,000 was to support internal growth and regular staff
salary increases.
INCOME TAXES
The provision for income taxes for the year ended December 31, 2000 was
$1,609,000 as compared to $2,331,000 for the same period in 1999 and $828,000
for 1998. The effective income tax rate for state and federal income taxes was
34.3%, for the year ended December 31, 2000 compared to 28.9% for the same
period in 1999 and 21.9% for the same period in 1998. The difference in the
effective tax rate compared to the statutory tax rate (42.05%) is primarily the
result of the Company's investment in municipal securities. Interest earned on
municipal securities is exempt from federal income tax and therefore lowers the
Company's effective tax rate well below the statutory rate. The increase in the
effective tax rate for 2000 was due to the merger-related charges, some of which
are not tax deductible.
IMPAIRED, NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS AND LEASES AND OTHER REAL
ESTATE OWNED
At December 31, 2000 and 1999, the recorded investment in loans and
leases for which impairment has been recognized was approximately $811,000 and
$2,774,000. Of the 2000 balance, approximately $811,000 has a related valuation
allowance of $400,000. Of the 1999 balance, approximately $2,774,000 has a
related valuation allowance of $613,000. For the years ended December 31, 2000,
1999 and 1998, the average recorded investment in loans and leases for which
impairment has been recognized was approximately $1,376,000, $4,180,000 and
$5,645,000. During the portion of the year that the loans and leases were
impaired the Company recognized interest income of approximately $124,000,
$207,000 and $292,000 for cash payments received in 2000, 1999 and 1998.
25
Nonaccrual loans consist of loans on which the accrual of interest has
been discontinued and other loans where management believes that borrowers'
financial condition is such that the collection of interest is doubtful, or when
a loan becomes contractually past due by 90 days or more with respect to
interest or principal (except that when management believes a loan is well
secured and in the process of collection, interest accruals are continued on
loans considered by management to be fully collectible). Loans are charged off
when management determines that the loan is considered uncollectible. Other real
estate owned consists of real property acquired through foreclosure on the
related collateral underlying defaulted loans.
A summary of nonperforming assets at December 31, 2000, 1999 and 1998
is as follows:
(in thousands) 2000 1999 1998
------ ------ ------
Total nonaccrual loans and leases $ 780 $2,145 $5,203
Troubled debt restructuring -- 601 242
Loans and leases 90 days past due and still accruing 561 223 368
------ ------ ------
Total nonperforming loans and leases 1,341 2,969 5,813
Other real estate owned 341 699 929
------ ------ ------
Total nonperforming assets $1,682 $3,668 $6,742
====== ====== ======
Nonaccrual loans and leases to total gross loans 0.21% 0.65% 1.70%
Nonperforming loans and leases to total gross loans 0.36% 0.90% 1.90%
Total nonperforming assets to total assets 0.31% 0.70% 1.35%
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained at a level that
management of the Company considers to be adequate for losses that can be
reasonably anticipated in relation to the risks inherent in the loan and lease
portfolio. The allowance is increased by a provision charged to operating
expenses and reduced by net charge-offs. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions, historical loan and lease
loss experience, and the evaluation of risks which vary with the type of loan or
lease, creditworthiness of the borrower and the value of the underlying
collateral. At December 31, 2000, based on known information, management
believes that the allowance for loan and lease losses was adequate to absorb
losses inherent in existing loans and leases and commitments to extend credit,
based on evaluations of the collectibility and prior loss experience of loans
and leases and commitments to extend credit as of such date.
The evaluation process is designed to determine the adequacy of the
allowance for loan losses. This process attempts to assess the risk of losses
inherent in the loan portfolio by segregating the allowance for loan losses into
three components: "Specific," "loss migration," and "general." The specific
component is established by allocating a portion of the allowance for loan
losses to individual classified credits based on specific circumstances and
assessments. The loss migration component is calculated as a function of the
historical loss migration experience of the internal loan credit risk rating
categories. The general component is an unallocated portion that supplements the
first two components and includes: management's judgement of the current
economic conditions particularly as they relate to the real estate market,
current business cycle, borrower's financial condition, loan impairment,
evaluation of the performing loan portfolio, continual evaluation of problem
loans identified as having a higher degree of risk, off balance sheet risks, net
charge off trends, and other factors.
The allowance for loan and lease losses totaled $4,964,000 or 1.34% of
the total loan and leases outstanding at December 31, 2000 compared to
$4,606,000 or 1.39% of total loans outstanding at December 31, 1999 and
$4,704,000 or 1.54% at December 31, 1998. The increase in the allowance in 2000
over 1999 is primarily related to the overall growth in the loan and lease
portfolio and is a direct result of the provision for loan losses exceeding net
loan charge-offs. The decrease in the allowance for loan and lease losses in
1999 compared to 1998 was the result of significant declines in the level of
nonperforming loans.
26
There is uncertainty concerning future economic trends. Accordingly, it
is not possible to predict the effect future economic trends may have on the
levels of the allowance for loan losses and the related provision for loan
losses in future periods.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors and borrowers.
Collection of principal and interest on loans, the pay-downs and maturities of
investment securities, deposits with other banks, customer deposits and short
term borrowing, when needed, are primary sources of funds that contribute to
liquidity. Unused lines of credit from correspondent banks to provide federal
funds for $11,500,000 as of December 31, 2000 were available to provide
liquidity. In addition, NVB and SRNB are both members of the Federal Home Loan
Bank ("FHLB") System providing an additional line of credit of $26,413,000
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
Federal Reserve Bank ("FRB") of $11,822,000 secured by first deeds of trust on
eligible commercial real estate loans. As of December 31, 2000, borrowings of
$13,400,000 were outstanding with the FHLB and $2,999,000 was outstanding with
one of the Company's primary correspondent banks.
The Company manages both assets and liabilities by monitoring asset and
liability mixes, volumes, maturities, yields and rates in order to preserve
liquidity and earnings stability. Total liquid assets (cash and due from banks,
federal funds sold, and investment securities) totaled $134,818,000 and
$158,203,000 (or 25.0% and 30.4% of total assets) at December 31, 2000 and
December 31, 1999, respectively. Total liquid assets for December 31, 2000 and
December 31, 1999 include investment securities of $25,811,000 and $29,616,000,
respectively, classified as held to maturity based on the Company's intent and
ability to hold such securities to maturity.
Core deposits, defined as demand deposits, interest bearing demand
deposits, regular savings, money market deposit accounts and time deposits of
less than $100,000, continue to provide a relatively stable and low cost source
of funds. Core deposits totaled $412,807,000 and $405,535,000 at December 31,
2000 and December 31, 1999, respectively.
In assessing liquidity, historical information such as seasonal loan
demand, local economic cycles and the economy in general are considered along
with current ratios, management goals and unique characteristics of the Company.
Management believes the Company is in compliance with its policies relating to
liquidity.
INTEREST RATE SENSITIVITY
The Company constantly monitors earning asset and deposit levels,
developments and trends in interest rates, liquidity, capital adequacy and
marketplace opportunities. Management responds to all of these to protect and
possibly enhance net interest income while managing risks within acceptable
levels as set forth in the Company's policies. In addition, alternative business
plans and contemplated transactions are also analyzed for their impact. This
process, known as ASSET/LIABILITY MANAGEMENT is carried out by changing the
maturities and relative proportions of the various types of loans, investments,
deposits and other borrowings in the ways prescribed above.
The tool used to manage and analyze the interest rate sensitivity of a
financial institution is known as a simulation model and is performed with
specialized software built for this specific purpose for financial institutions.
This model allows management to analyze three specific types of risks; market
risk, mismatch risk, and basis risk.
MARKET RISK
Market risk results from the fact that the market values of assets or
liabilities on which the interest rate is fixed will increase or decrease with
changes in market interest rates. If the Company invests in a fixed-rate, long
term security and then interest rates rise, the security is worth less than a
comparable security just issued because the older security pays less interest
than the newly issued security. If the security had to be sold before maturity,
then the Company would incur a loss on the sale. Conversely, if interest rates
27
fall after a fixed-rate security is purchased, its value increases, because it
is paying at a higher rate than newly issued securities. The fixed rate
liabilities of the Company, like certificates of deposit and fixed-rate
borrowings, also change in value with changes in interest rates. As rates drop,
they become more valuable to the depositor and hence more costly to the Company.
As rates rise, they become more valuable to the Company. Therefore, while the
value changes when rates move in either direction, the adverse impacts of market
risk to the Company's fixed-rate assets are due to rising rates and for the
Company's fixed-rate liabilities, they are due to falling rates. In general, the
change in market value due to changes in interest rates is greater in financial
instruments that have longer remaining maturities. Therefore, the exposure to
market risk of assets is lessened by managing the amount of fixed-rate assets
and by keeping maturities relatively short. These steps, however, must be
balanced against the need for adequate interest income because variable-rate and
shorter-term assets generally yield less interest than longer-term or fixed-rate
assets.
MISMATCH RISK
The second interest-related risk, mismatched risk, arises from the fact
that when interest rates change, the changes do not occur equally in the rates
of interest earned and paid because of differences in the contractual terms of
the assets and liabilities held. A difference in the contractual terms, a
mismatch, can cause adverse impacts on net interest income.
The Company has a certain portion of its loan portfolio tied to the
national prime rate. If these rates are lowered because of general market
conditions, e.g., the prime rate decreases in response to a rate decrease by the
Federal Reserve Open Market Committee ("FOMC"), these loans will be repriced. If
the Company were at the same time to have a large proportion of its deposits in
long-term fixed-rate certificates, interest earned on loans would decline while
interest paid on the certificates would remain at higher levels for a period of
time until they mature. Therefore net interest income would decrease
immediately. A decrease in net interest income could also occur with rising
interest rates if the Company had a large portfolio of fixed-rate loans and
securities that was funded by deposit accounts on which the rate is steadily
rising.
This exposure to mismatch risk is managed by attempting to match the
maturities and repricing opportunities of assets and liabilities. This may be
done by varying the terms and conditions of the products that are offered to
depositors and borrowers. For example, if many depositors want shorter-term
certificates while most borrowers are requesting longer-term fixed rate loans,
the Company will adjust the interest rates on the certificates and loans to try
to match up demand for similar maturities. The Company can then partially fill
in mismatches by purchasing securities or borrowing funds from the FHLB with the
appropriate maturity or repricing characteristics.
BASIS RISK
The third interest-related risk, basis risk, arises from the fact that
interest rates rarely change in a parallel or equal manner. The interest rates
associated with the various assets and liabilities differ in how often they
change, the extent to which they change, and whether they change sooner or later
than other interest rates. For example, while the repricing of a specific asset
and a specific liability may occur at roughly the same time, the interest rate
on the liability may rise one percent in response to rising market rates while
the asset increases only one-half percent. While the Company would appear to be
evenly matched with respect to mismatch risk, it would suffer a decrease in net
interest income. This exposure to basis risk is the type of interest risk least
able to be managed, but is also the least dramatic. Avoiding concentration in
only a few types of assets or liabilities is the best means of increasing the
chance that the average interest received and paid will move in tandem. The
wider diversification means that many different rates, each with their own
volatility characteristics, will come into play.
28
NET INTEREST INCOME AND NET ECONOMIC VALUE SIMULATIONS
The quantify the extent of all of these risks both in its current
position and in transactions it might take 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, 2000 balances indicate that the Company's net
interest income at risk over a one-year period and net economic value at risk
from 2% shocks are within normal expectations for sudden changes.
SHOCKED BY -2% SHOCKED BY +2%
Net interest income +2.2% (3.6%)
Net economic value +15.8% (24.3%)
For the modeling, the Company has made certain assumptions about the
duration of its non-maturity deposits that are important to determining net
economic value at risk. The Company has compared its assumptions with those used
by other financial institutions.
FINANCIAL CONDITION AS OF DECEMBER 31, 2000 AS COMPARED TO DECEMBER 31, 1999
Total assets at December 31, 2000, were $540,221,000, compared to
December 31, 1999 assets of $521,073,000. Increases in average deposits of
$17,296,000 and a decrease in average investment securities and overnight
investments of $14,582,000 were used to fund an increase in average loans of
$29,662,000.
Investment securities and federal funds sold totaled $105,235,000 at
December 31, 2000, compared to $133,280,000 at December 31, 1999 as these
investments were used to fund loan demand. Both NVB and SRNB are members of
Federal Home Loan Bank of San Francisco and collectively hold $1,400,000 in FHLB
stock.
During 2000, net loans increased to $364,659,000 from $324,952,000 at
December 31, 1999. Loans are the Company's largest component of earning assets.
The Company's average loan to deposit ratio was 74.6% in 2000 compared to 70.9%
in 1999.
During 2000, total deposits increased to $460,291,000 compared to
$452,697,000 at December 31, 1999. This growth, which occurred in all deposit
categories, even considering the divestiture of the Weaverville branch which had
approximately $17 million in deposits. As discussed earlier, this divestiture
was a regulatory condition to closing the merger transaction with SRNB.
The Company maintains capital to support future growth and dividend
payouts while trying to effectively manage the capital on hand. From the
depositor standpoint, a greater amount of capital on hand relative to total
assets is generally viewed as positive. At the same time, from the standpoint of
the shareholder, a greater amount of capital on hand may not be viewed as very
positive because it limits the Company's ability to earn a high rate of return
on shareholders equity (ROE). Stockholders' equity increased to $54,857,000 as
of December 31, 2000, as compared to $51,841,000 at December 31, 1999.
29
Under current regulations, the management believes that the Company
meets all capital adequacy requirements.
MINIMUM FOR
CAPITAL ADEQUACY
CAPITAL RATIO PURPOSES
---------- ------- ----------
COMPANY:
Tier I capital
(to average assets) $ 51,482 9.73% 4.00%
Tier I capital
(to risk weighted assets) $ 51,482 13.05% 4.00%
Total capital
(to risk weighted assets) $ 56,415 14.30% 8.00%
IMPACT OF INFLATION
Impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because a financial
institution's assets and liabilities consist largely of monetarily based items.
The relatively low proportion of the Company's fixed assets (approximately 1.8%
December 31, 2000) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative financial instruments include futures, forwards, interest
rate swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options. However, the Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates and generally require collateral from the borrower. Letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party up to a stipulated amount and with
specified terms and conditions.
Commitments to extend credit and letters of credit are not recorded as
an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by
management. Interest rate risk is the potential of economic losses due to future
interest rate changes. Please see "Interest Rate Sensitivity" on previous pages
for a more detailed description.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this item are set forth following
Item 14 of this Form 10-K, and are incorporated herein by reference.
The following table discloses the Company's condensed selected
quarterly financial data for each of the quarters in the two year period ended
December 31, 2000. All amounts have been restated on a historical basis to
reflect the merger with Six Rivers National Bank, which closed in October 2000,
as a pooling of interests as if the Companies had been combined for all periods
presented.
FOR THE QUARTER ENDED
------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(in thousands) 2000 2000 2000 2000 1999 1999 1999 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Interest income $ 9,651 $ 9,912 $ 10,144 $ 10,259 $ 8,820 $ 8,662 $ 9,057 $ 9,740
Interest expense 3,816 3,993 4,175 4,251 3,469 3,397 3,491 3,672
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 5,835 5,919 5,969 6,008 5,351 5,265 5,566 6,068
Provision for loan and
lease losses 520 570 230 350 405 370 280 207
Noninterest income 2,052 1,523 1,568 1,729 1,319 1,285 1,534 1,230
Noninterest expense 4,949 5,319 5,167 8,801 4,153 4,409 4,512 5,207
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
provision for income taxes 2,418 1,553 2,140 (1,414) 2,112 1,771 2,308 1,884
Provision (benefit) for
income taxes 767 433 660 (251) 674 564 660 433
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 1,651 $ 1,120 $ 1,480 $ (1,163) $ 1,438 $ 1,207 $ 1,648 $ 1,451
========== ========== ========== ========== ========== ========== ========== ==========
Earnings Per Share
Basic $ 0.29 $ 0.19 $ 0.25 $ (0.20) $ 0.25 $ 0.21 $ 0.28 $ 0.26
========== ========== ========== ========== ========== ========== ========== ==========
Diluted $ 0.28 $ 0.19 $ 0.25 $ (0.19) $ 0.25 $ 0.21 $ 0.28 $ 0.25
========== ========== ========== ========== ========== ========== ========== ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The information concerning directors and executive officers required by
this item is incorporated by reference from the section of the Company's
Definitive Proxy Statement for the 2001 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."
31
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 2001 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 2001 Annual Meeting
of Shareholders of the Company to be filed with the Commission, entitled
"Election of Directors - Security Ownership of Certain Beneficial Owners and
Management", as to share information in the tables of beneficial ownership and
footnotes thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the section of the Company's Definitive Proxy Statement for the 2001 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Certain
Relationships and Related Transactions".
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the report:
1. Financial Statements:
2. Exhibits: See Index to Exhibits at page 34.
(b) The Company filed two reports on Form 8-K during the fourth
quarter of 2000: on October 16, 2000, and on October 26, 2000.
The Form 8-K filed on October 16, 2000, reported (under Item 5
- Other Events) on the October 11, 2000 closing of the
acquisition by the Company of Six Rivers National Bank. The
Form 8-K filed on October 26, 2000, reported further (under
Item 2 - Acquisition or Disposition of Assets) on the
acquisition of Six Rivers National Bank and (under Item 7 -
Financial Statements and Exhibits) on the unaudited pro forma
condensed combined financial information of the Company and
Six Rivers National Bank.
(c) Exhibits See Index to Exhibits at page 58 of this Annual
Report on Form 10-K, which is incorporated herein by
reference.
(d) Financial Statement Schedules
Not applicable.
32
NORTH VALLEY BANCORP AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2000 AND 1999 AND FOR EACH
OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 2000 AND INDEPENDENT AUDITORS' REPORT
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
North Valley Bancorp
Redding, California
We have audited the accompanying consolidated balance sheets of North Valley
Bancorp and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of North Valley Bancorp and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
The consolidated financial statements give retroactive effect to the merger of
North Valley Bancorp and Six Rivers National Bank, which has been accounted for
as a pooling of interests as described in Note 2 to the financial statements.
/s/ DELOITTE & TOUCHE, LLP
- -------------------------------
Sacramento, California
February 1, 2001
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------
ASSETS 2000 1999
Cash and cash equivalents:
Cash and due from banks $ 27,428 $ 22,625
Federal funds sold and repurchase agreements 1,300 14,600
--------- ---------
Total cash and cash equivalents 28,728 37,225
Interest bearing deposits in other financial institutions 1,706 8,125
Securities:
Available for sale, at fair value 78,124 89,064
Held to maturity, at amortized cost (fair value of $26,926 and
$30,357 at December 31, 2000 and 1999) 25,811 29,616
Loans held for sale, at lower of cost or market 872
Loans and leases, net of allowance for loan and lease losses of $4,964
and $4,606 and deferred loan fees of $69 and $229 at
December 31, 2000 and 1999 364,659 324,952
Premises and equipment, net of accumulated depreciation and amortization 9,623 9,497
Other real estate owned 341 699
FHLB and FRB stock and other securities 2,155 2,298
Goodwill and core deposit intangibles, net 3,451 4,422
Accrued interest receivable 3,738 3,386
Other assets 21,885 10,917
--------- ---------
TOTAL ASSETS $ 540,221 $ 521,073
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 67,863 $ 71,641
Interest-bearing:
Demand accounts 49,469 43,497
Savings 153,493 147,571
Time certificates 189,466 189,988
--------- ---------
Total deposits 460,291 452,697
Other borrowed funds 602 6,165
Federal funds purchased 16,399 4,400
Accrued interest and other liabilities 8,072 5,970
--------- ---------
Total liabilities 485,364 469,232
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; none outstanding
Common stock, no par value: authorized 20,000,000 shares: outstanding
5,805,416 and 5,780,997 at December 31, 2000 and 1999 30,301 29,948
Retained earnings 24,729 23,335
Accumulated other comprehensive loss, net of tax (173) (1,442)
--------- ---------
Total stockholders' equity 54,857 51,841
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 540,221 $ 521,073
========= =========
See notes to consolidated financial statements
F-1
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------
2000 1999 1998
-------- -------- --------
INTEREST INCOME:
Loans including fees $ 30,699 $ 27,118 $ 25,495
Lease financing 378 336 366
Securities:
Taxable 6,200 5,460 5,251
Exempt from federal taxes 1,834 2,165 2,279
Federal funds sold and repurchase agreement 855 1,200 1,992
-------- -------- --------
Total interest income 39,966 36,279 35,383
INTEREST EXPENSE:
Deposits 15,598 13,652 14,574
Other borrowings 637 377 77
-------- -------- --------
Total interest expense 16,235 14,029 14,651
-------- -------- --------
NET INTEREST INCOME 23,731 22,250 20,732
PROVISION FOR LOAN AND LEASE LOSSES 1,670 1,262 5,334
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 22,061 20,988 15,398
-------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 4,493 3,475 3,113
Other fees and charges 1,094 1,288 1,060
Gain (loss) on sale of loans 45 (76) 167
(Loss) gain on sale or calls of securities (731) 44 979
Gain on sale of shares of demutualized life insurance company 1,138
Other 833 637 371
-------- -------- --------
Total noninterest income 6,872 5,368 5,690
-------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 10,205 8,638 8,044
Occupancy expense 1,423 1,219 1,129
Equipment expense 1,748 1,323 1,291
Merger and integration expense 3,169 149
Other 7,691 6,952 6,836
-------- -------- --------
Total noninterest expenses 24,236 18,281 17,300
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,697 8,075 3,788
PROVISION FOR INCOME TAXES 1,609 2,331 828
-------- -------- --------
NET INCOME $ 3,088 $ 5,744 $ 2,960
======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.53 $ 1.00 $ 0.52
======== ======== ========
Diluted $ 0.53 $ 0.99 $ 0.51
======== ======== ========
See notes to consolidated financial statements
F-2
NORTH VALLEY BANCORP AND SUSBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK OTHER
------------------ COMPREHENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT INCOME EARNINGS INCOME (LOSS) TOTAL
--------- ------- -------- -------- ------------- ---------
Balance, January 1, 1998 5,680,803 $29,118 $ 17,497 $ 687 $ 47,302
Comprehensive income:
Net income $ 2,960 2,960 2,960
Other comprehensive income,
net of tax of $(17):
Unrealized gain (loss) on available
for sale securities, net of
reclassification adjustment of $705 (686) (686) (686)
Minimum pension liability adjustments 18 18 18
--------
Total comprehensive income $ 2,292
========
Stock options exercised 55,716 358 358
Tax benefit derived from the exercise
of stock options 131 131
Cash dividends on common stock (1,383) (1,383)
--------- ------- -------- ------------- ---------
Balance, December 31, 1998 5,736,519 29,607 19,074 19 48,700
Comprehensive income:
Net income $ 5,744 5,744 5,744
Other comprehensive income,
net of tax of $(810)
Unrealized gain (loss) on available
for sale securities, net of
reclassification adjustment of $11 (1,489) (1,489) (1,489)
Minimum pension liability adjustments 28 28 28
--------
Total comprehensive income $ 4,283
========
Stock options exercised 44,478 301 301
Tax benefit derived from the exercise
of stock options 40 40
Cash dividends on common stock (1,483) (1,483)
--------- ------- -------- ------------- ---------
Balance, December 31, 1999 5,780,997 29,948 23,335 (1,442) 51,841
Comprehensive income:
Net income $ 3,088 3,088 3,088
Other comprehensive income,
net of tax of $921:
Unrealized gain (loss) on available
for sale securities, net of
reclassification adjustment of $(480) 1,269 1,269 1,269
--------
Total comprehensive income $ 4,357
========
Stock options exercised 24,419 111 111
Compensation expense on stock
options/grants 208 208
Tax benefit derived from the exercise
of stock options 34 34
Cash dividends on common stock (1,694) (1,694)
--------- ------- -------- ------------- ---------
Balance, December 31, 2000 5,805,416 $30,301 $ 24,729 $ (173) $ 54,857
========= ======= ======== ============= =========
See notes to consolidated financial statements.
F-3
NORTH VALLEY BANCORP & SUBSIDIARIES
CONSOLDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,088 $ 5,744 $ 2,960
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,518 1,099 1,062
Amortization of premium on securities 116 41 358
Amortization /writedown of goodwill and core deposit intangible 971 248 248
Provision for loan and lease losses 1,670 1,262 5,334
Loss on sale/writedown of other real estate owned 277 230 61
(Gain) loss on sale or calls of securities 731 (44) (979)
Gain on sales of shares of demutualized life insurance company (1,138)
(Gain) loss on sale of loans (45) 76 (167)
Provision (benefit) for deferred taxes (890) 866 71
Effect of changes in:
Accrued interest receivable (352) (328) (280)
Other assets (10,920) (962) (3,293)
Accrued interest payable and other liabilities 1,893 (1,006) 2,080
-------- -------- --------
Net cash provided by (used in) operating activities (3,081) 7,226 7,455
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of other real estate owned 627 4,656 279
Purchases of available for sale securities (27,002) (52,352) (73,845)
Proceeds from sales of available for sale securities 24,344 1,504 4,418
Proceeds from maturities/calls of available for sale securities 15,136 41,893 28,923
Purchases of held to maturity securities (970) (1,500)
Proceeds from maturities/calls of held to maturity securities 4,792 5,804 5,290
Proceeds from sale of shares of demutualized life insurance company 1,138
Net change in FHLB and FRB stock and other securities 143 (442) (406)
Net change in interest bearing deposits in other financial institutions 6,162 (1,056) (761)
Proceeds from sales of loans 3,540 32,144 19,046
Net increase in loans and leases (44,546) (62,365) (73,670)
Purchases of premises and equipment- net (1,644) (1,049) (1,796)
-------- -------- --------
Net cash used in investing activities (18,280) (31,263) (94,022)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 7,594 9,884 31,558
Net change in other borrowed funds and federal funds purchased 6,436 9,888 (442)
Compensation expense on stock options / grants 208
Cash dividends paid (1,485) (1,850) (645)
Cash received for stock options exercised 111 301 358
-------- -------- --------
Net cash provided by financing activities 12,864 18,223 30,829
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,497) (5,814) (55,738)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 37,225 43,039 98,777
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 28,728 $ 37,225 $ 43,039
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 16,299 $ 14,061 $ 14,560
======== ======== ========
Income taxes $ 2,469 $ 1,633 $ 775
======== ======== ========
Noncash investing and financing activities
Transfer from loans to other real estate owned $ 546 $ 4,657 $ 673
======== ======== ========
Cash dividends declared $ 580 $ 371 $ 738
======== ======== ========
See notes to consolidated financial statements
F-4
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - North Valley Bancorp and subsidiaries (the "Company")
operates 18 branches, which include two supermarket branches, in Northern
California. The acquisition of Six Rivers National Bank was effective
October 11, 2000, resulting in Six Rivers National Bank operating as a
wholly owned subsidiary of North Valley Bancorp. The merger was accounted
for as a pooling-of-interests and all amounts have been restated on a
historical basis as if the Companies had been combined for all periods
presented. The Company operates as three business segments defined as the
Company's two wholly owned banking subsidiaries, North Valley Bank and Six
Rivers National Bank providing banking services to the Company's clients in
Northern California and all other activities, which primarily consist of the
Holding Company and Bank Processing, Inc. The Company's principal business
consists of attracting deposits from the general public and using the funds
to originate commercial, real estate and installment loans to customers, who
are predominately small and middle market businesses and middle income
individuals. The Company's primary source of revenues is interest income
from its loan and investment securities portfolios. The Company is not
dependent on any single customer for more than ten percent of the Company's
revenues.
GENERAL - The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America and
to prevailing practices within the banking industry. The Company follows the
accrual method of accounting.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The more significant accounting and reporting policies are discussed below.
CONSOLIDATION - The consolidated financial statements include North Valley
Bancorp and its wholly owned subsidiaries: North Valley Bank ("NVB") and its
wholly owned subsidiary, North Valley Basic Securities; Six Rivers National
Bank ("SRNB"); Bank Processing, Inc. ("BPI"); and North Valley Trading
Company. North Valley Trading Company and North Valley Basic Securities did
not have any activity in 2000, 1999 and 1998. All material intercompany
accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For the purposes of the statements of cash
flows, cash and cash equivalents have been defined as cash, demand deposits
with correspondent banks, cash items, 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.
INVESTMENTS - The Company's policy with regard to investments is as follows:
TRADING SECURITIES are carried at fair value. Changes in fair value
are included in other operating income. The Company did not have
any securities classified as trading at December 31, 2000 and 1999.
F-5
AVAILABLE FOR SALE SECURITIES are carried at fair value and
represent securities not classified as trading securities nor as
held to maturity securities. Unrealized gains and losses resulting
from changes in fair value are recorded, net of tax, as a net
amount within accumulated other comprehensive income, which is a
separate component of stockholders' equity. Gains or losses on
disposition are recorded in other operating income based on the net
proceeds received and the carrying amount of the securities sold,
using the specific identification method.
HELD TO MATURITY SECURITIES are carried at cost adjusted for
amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income. The Company's policy
of carrying such investment securities at amortized cost is based
upon its ability and management's intent to hold such securities to
maturity.
LOANS HELD FOR SALE - Loans held for sale are stated at the lower of cost or
market as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate loan basis. Valuation
adjustments are charged against noninterest income.
LOANS AND LEASES - Loans and leases are reported at the principal amount
outstanding, net of unearned income, including deferred loan fees and the
allowance for loan and lease losses.
Interest on loans is calculated by using the simple interest method on the
daily balance of the principal amount outstanding.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either
when reasonable doubt exists as to the full and timely collection of
interest or principal, or when a loan becomes contractually past due by 90
days or more with respect to interest or principal. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed against current period interest income. Income on such loans is
then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans when, in the judgment of management, the loans are estimated to
be fully collectible as to both principal and interest.
Direct financing leases are carried net of unearned income. Income from
leases is recognized by a method that approximates a level yield on the
outstanding net investment in the lease.
DEFERRED LOAN FEES - Loan fees and certain related direct costs to originate
loans are deferred and amortized to income by a method that approximates a
level yield over the contractual life of the underlying loans.
ALLOWANCE FOR LOAN AND LEASE LOSSES - The allowance for loan and lease
losses is established through a provision for loan and lease losses charged
to operations. Loans and leases are charged against the allowance for loan
and lease losses when management believes that the collectibility of the
principal is unlikely or, with respect to consumer installment loans,
according to an established delinquency schedule. Management attributes
general reserves to different types of loans using percentages, which are
based upon perceived risk associated with the portfolio and underlying
collateral, historical loss experience, and vulnerability to changing
economic conditions, which may affect the collectibility of the loans.
Specific reserves are allocated for impaired loans and leases, for loans and
leases, which have experienced a decline in internal grading, and when
management believes additional loss exposure exists. Although the allowance
for loan and lease losses is allocated to various portfolio segments, it is
general in nature and is available for the loan and lease portfolio in its
entirety. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans and leases commitments
to extend credit. Actual amounts could differ from those estimates.
The Company considers a loan or lease impaired if, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. The measurement of impaired
loans and leases is generally based on the present value of expected future
cash flows discounted at the historical effective interest rate, except that
all collateral-dependent loans and leases are measured for impairment based
on the fair value of the collateral.
F-6
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation, which is computed principally on the straight-line
method over the estimated useful lives of the respective assets. Leasehold
improvements are amortized on the straight-line method over the shorter of
the estimated useful lives of the improvements or the terms of the
respective leases.
OTHER REAL ESTATE OWNED - Real estate acquired through, or in lieu of, loan
foreclosures is expected to be sold and is recorded at the date of
foreclosure at the lower of the recorded investment in the property or its
fair value less estimated costs to sell (fair value) establishing a new cost
basis through a charge to allowance for loan losses, if necessary. After
foreclosure, valuations are periodically performed by management with any
subsequent write-downs recorded as a valuation allowance and charged against
operating expenses. Operating expenses of such properties, net of related
income are included in other expenses and gains and losses on their
disposition are included in other income and other expenses.
GOODWILL AND CORE DEPOSIT INTANGIBLES - These assets arose from the
acquisition of four additional branches in 1997. The resulting goodwill and
core deposit intangibles are being amortized over 25 and 15 years,
respectively, by the straight-line method. In November 2000, as a condition
to receiving regulatory approval for the merger, SRNB was required to divest
its Weaverville branch office which resulted in the write off of
approximately $727,000 of the goodwill and core deposit intangible related
to this property.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES - The Company originates and sells residential
mortgage loans to the Federal National Mortgage Association ("FNMA") and
others. The Company retains the servicing on all loans sold. Deferred
origination fees and expenses are recognized at the time of sale in the
determination of the gain or loss. To calculate the gain (loss) on sale of
loans, the Company's investment in a loan is allocated between the servicing
retained and the loan, based on the relative fair value of each portion. The
gain (loss) is recognized at the time of sale based on the difference
between the sale proceeds and the allocated carrying value of the related
loans sold. The fair value of the contractual servicing is reflected as a
servicing asset, which is amortized over the period of estimated net
servicing income using a method approximating the interest method. The
servicing asset is included in other assets, and is evaluated for impairment
on a periodic basis.
INCOME TAXES - The Company applies an asset and liability method in
accounting for deferred income taxes. Deferred tax assets and liabilities
are calculated by applying applicable tax laws to the differences between
the financial statement basis and the tax basis of assets and liabilities.
The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
OTHER BORROWED FUNDS - Other borrowed funds consist of amounts borrowed from
the Federal Reserve Bank ("FRB") related to Treasury Tax and Loan notes and
amounts borrowed from the Federal Home Loan Bank ("FHLB") collateralized by
certain real estate loans and investment securities.
MERGER AND INTEGRATION EXPENSES - Merger and integration expenses represent
incremental direct costs associated with the merger and consist primarily of
transaction costs for professional services including investment banking,
legal and accounting. Severance payments have also been included for certain
employees in the amount of $1,139,000 of which $330,000 was paid in 2000 and
$809,000 was accrued at year end and paid in January 2001.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) No. 25, Accounting for Stock Issued to Employees.
Compensation expense is recognized in the financial statements for the
differences between the fair value of the options at the date of the grant
and the exercise price at 85% of the fair value for the Director Plan. No
compensation expense has been recognized in the financial statements for the
Employee Plan. The Company presents the required pro forma disclosures of
the effect of stock-based compensation on net income and earnings per share
using the fair value method in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation.
F-7
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE - The Company uses the
"management approach" for reporting business segment information. The
management approach is based on the segments within a company used by the
chief operating decision maker for making operating decisions and assessing
performance. Reportable segments are to based on such factors as products
and services, geography, legal structure or any other manner by which a
company's management distinguishes major operating units. Utilizing this
approach, management has determined that the Company has three reportable
segments: SRNB, NVB and Other.
COMPREHENSIVE INCOME - Comprehensive income includes net income and other
comprehensive income, which represents the change in its net assets during
the period from nonowner sources. The components of other comprehensive
income for the Company include the unrealized gain or loss on
available-for-sale securities and adjustments to minimum pension liability
and are presented net of tax.
NEW ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities,
("SFAS No. 133") is effective for all fiscal years beginning after June 15,
2000. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under
SFAS No. 133, as amended, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company will adopt SFAS No. 133 effective January 1, 2001. Management
believes the adoption of SFAS No. 133 will not have a significant impact
upon the financial position, results of operations, or cash flows of the
Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" was issued in September 2000. SFAS No.
140 is a replacement of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". Most of
the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without
reconsideration by the FASB, and some were changed in only minor ways. In
issuing SFAS No. 140, the FASB included issues and decisions that had been
addressed and determined since the original publication of SFAS No. 125.
SFAS No. 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001.
Management believes that adopting these components of SFAS No. 140 will not
have a material impact on the financial position or results of operations of
the Company. SFAS No. 140 must be applied prospectively. For recognition and
reclassification of collateral and for disclosures about securitizations and
collateral, this Statement was adopted as of December 31, 2000 and did not
have a material impact on the financial position or results of operations of
the Company.
RECLASSIFICATIONS - Certain amounts in 1999 and 1998 have been reclassified
to conform with the 2000 financial statement presentation.
2. BUSINESS COMBINATIONS
On October 11, 2000, Six Rivers National Bank was merged with North Valley
Bancorp with Six Rivers National Bank operating as a wholly owned subsidiary
of North Valley Bancorp. The merger resulted in the issuance of 2,075,546
shares of North Valley Bancorp's common stock based on a conversion ratio of
1.40 shares of North Valley Bancorp's common stock for each share of Six
Rivers National Bank common stock. The merger has been accounted under the
pooling of-interests method of accounting. All amounts in the accompanying
financial statements have been restated on a historical basis as if the
Companies had been combined for all periods presented.
Summarized results of the separate companies for the nine months ended
September 30, 2000, (unaudited) are included in the following table. These
nine month results are included in the consolidated results of operations
for the year ended December 31, 2000 presented in the accompanying
consolidated income statement.
COMPANY SRNB
NINE MONTHS ENDED SEPTEMBER 30, 2000 --------- ---------
Net interest income $ 11,162 $ 6,562
========= =========
Net income $ 3,634 $ 618
========= =========
F-8
Following is a reconciliation of the amounts of the net interest income and net
income previously reported for the years ended December 31 with restated
amounts:
1999 1998
-------- --------
Net interest income
As previously reported $ 13,411 $ 11,885
Acquired company 8,839 8,847
-------- --------
As restated $ 22,250 $ 20,732
======== ========
Net income
As previously reported $ 4,528 $ 4,085
Acquired company 1,216 (1,125)
-------- --------
As restated $ 5,744 $ 2,960
======== ========
3. RESTRICTED CASH BALANCES
The Company is subject to regulation by the Federal Reserve Board. The
regulations required the Company to maintain average cash reserve balances
on hand or at the Federal Reserve Bank of $4,497,000 and $3,872,000 at
December 31, 2000 and 1999. As compensation for check-clearing services,
additional compensating balances of $1,000,000 are required to be maintained
with the Federal Reserve Bank.
4. SECURITIES
At December 31, the amortized cost of securities and their approximate fair
value were as follows:
(in thousands) GROSS GROSS CARRYING
AMORTIZED UNREALIZED UNREALIZED AMOUNT
AVAILABLE FOR SALE SECURITIES: COST GAINS LOSSES (FAIR VALUE)
---------- ---------- ---------- ----------
DECEMBER 31, 2000
Securities of U.S. government
Agencies and corporations $ 48,546 $ 168 $ (368) $ 48,346
Obligations of states and political
Subdivisions 2,671 21 (1) 2,691
Mortgage backed securities 20,871 279 (31) 21,119
Corporate securities 6,338 21 (458) 5,901
Other securities 88 (21) 67
---------- ---------- ---------- ----------
$ 78,514 $ 489 $ (879) $ 78,124
========== ========== ========== ==========
DECEMBER 31, 1999
Securities of U.S. government
Agencies and corporations $ 38,611 $ 7 $ (1,296) $ 37,322
Obligations of states and political
Subdivisions 2,676 (34) 2,642
Mortgage backed securities 35,040 2 (464) 34,578
Corporate securities 14,634 (740) 13,894
Foreign debt securities 503 5 508
Other securities 139 6 (25) 120
---------- ---------- ---------- ----------
$ 91,603 $ 20 $ (2,559) $ 89,064
========== ========== ========== ==========
F-9
CARRYING
AMOUNT GROSS GROSS
(AMORTIZED UNREALIZED UNREALIZED
HELD TO MATURITY SECURITIES: COST) GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
DECEMBER 31, 2000
Obligation of states and political
Subdivisions $ 25,811 $ 1,115 -- $ 26,926
========== ========== ========== ==========
DECEMBER 31, 1999
Obligation of states and political
Subdivisions $ 29,616 $ 843 $ (102) $ 30,357
========== ========== ========== ==========
Gross realized gains on sales or calls of securities categorized as
available for sale securities were $203,000, $11,000 and $979,000 in 2000,
1999 and 1998. Gross realized losses on sales or calls of securities
categorized as available for sale securities were $934,000 in 2000. There
were no gross realized losses on sale of available for sale securities in
1999, or 1998.
Gross realized gains on calls of securities categorized as held to maturity
securities were $33,000, in 1999. There were no gross realized gains on
calls of held to maturity securities in 2000 and 1998. There were no gross
realized losses on calls of held to maturity securities in 2000, 1999, or
1998.
Scheduled maturities of held to maturity and available for sale securities
(other than equity securities with an amortized cost of approximately
$88,000 and a fair value of approximately $67,000) at December 31, 2000, are
shown below (in thousands). The Company invests in collateralized mortgage
obligations ("CMOs") issued by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation and Government National Mortgage
Association. Actual maturities of CMOs and other securities may differ from
contractual maturities because borrowers have the right to prepay mortgages
without penalty or call obligations with or without call penalties. The
Company uses the "Wall Street" consensus average life at the time the
security is purchased to schedule maturities of these CMOs and adjusts
scheduled maturities periodically based upon changes in the Wall Street
estimates.
HELD TO MATURITY AVAILABLE FOR SALE
SECURITIES SECURITIES
----------------------- -----------------------
AMORTIZED
COST FAIR VALUE
(CARRYING AMORTIZED (CARRYING
AMOUNT) FAIR VALUE COST AMOUNT)
---------- ---------- ---------- ----------
Due in 1 year or less $ 4,278 $ 4,317 $ 8,165 $ 8,164
Due after 1 year through 5 years 7,112 7,385 29,425 29,571
Due after 5 years through 10 years 7,688 8,129 15,742 15,470
Due after 10 years 6,733 7,095 25,094 24,852
---------- ---------- ---------- ----------
$ 25,811 $ 26,926 $ 78,426 $ 78,057
========== ========== ========== ==========
At December 31, 2000 and 1999, securities having fair value amounts of
approximately $28,507,000 and $34,903,000 were pledged to secure public
deposits, short-term borrowings, treasury tax, loans balances and for other
purposes required by law or contract.
F-10
5. LOANS AND LEASES
The Company originates loans for business, consumer and real estate
activities and leases for equipment purchases. Such loans and leases are
concentrated in Shasta, Humboldt, Mendocino, Trinity, Del Norte Counties and
neighboring communities. Substantially all loans are collateralized.
Generally, real estate loans are secured by real property. Commercial and
other loans are secured by bank deposits, real estate or business or
personal assets. Leases are generally secured by equipment. The Company's
policy for requiring collateral reflects the Company's analysis of the
borrower, the borrower's industry and the economic environment in which the
loan would be granted. The loans and leases are expected to be repaid from
cash flows or proceeds from the sale of selected assets of the borrower.
Major classifications of loans and leases at December 31 were as follows:
2000 1999
-------- --------
Commercial $ 53,617 $ 49,925
Real estate - commercial 90,041 80,681
Real estate - construction 4,794 4,049
Real estate - mortgage 100,937 81,330
Installment 105,393 92,973
Direct financing leases 5,183 5,395
Other 9,727 15,434
-------- --------
Total loans and leases receivable 369,692 329,787
Less:
Allowance for loan and lease losses 4,964 4,606
Deferred loan fees 69 229
-------- --------
Net loans and leases $364,659 $324,952
======== ========
At December 31, 2000 and 1999, the Company serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $136,641,000 and $154,158,000.
Certain real estate loans receivable are pledged as collateral for available
borrowings with the FHLB. Pledged loans totaled $38,235,000 and $26,340,000
at December 31, 2000 and 1999.
The components of the Company's leases receivable as of December 31 are
summarized below (in thousands):
2000 1999
-------- --------
Future minimum lease payments $ 5,202 $ 5,505
Residual interests 283
Initial direct costs (34) 26
Unearned income (268) (136)
-------- --------
$ 5,183 $ 5,395
======== ========
Future minimum lease payments receivables are as follows (in thousands):
2001 $ 1,485
2002 1,175
2003 838
2004 717
2005 and thereafter 987
--------
Total $ 5,202
========
There are no contingent rental payments included in income for 2000, 1999
and 1998.
F-11
Changes in the allowance for loan and lease losses for the years ended
December 31, were as follows (in thousands):
2000 1999 1998
--------- --------- ---------
Balance, beginning of year $ 4,606 $ 4,704 $ 2,861
Provision charged to operations 1,670 1,262 5,334
Loans charged off (1,677) (2,065) (3,710)
Recoveries 365 705 219
--------- --------- ---------
Balance, end of year $ 4,964 $ 4,606 $ 4,704
========= ========= =========
6. IMPAIRED AND NONPERFORMING LOANS AND LEASES
At December 31, 2000 and 1999, the recorded investment in loans and leases
for which impairment has been recognized was approximately $811,000 and
$2,774,000. Of the 2000 balance, approximately $811,000 has a related
valuation allowance of $400,000. Of the 1999 balance, approximately
$2,774,000 has a related valuation allowance of $613,000. For the years
ended December 31, 2000, 1999 and 1998, the average recorded investment in
loans and leases for which impairment has been recognized was approximately
$1,376,000, $4,180,000 and $5,645,000. During the portion of the year that
the loans and leases were impaired the Company recognized interest income of
approximately $124,000, $207,000 and $292,000 for cash payments received in
2000, 1999 and 1998.
Nonperforming loans and leases at December 31 were as follows (in
thousands):
2000 1999
--------- ---------
Nonaccrual loans and leases $ 780 $ 2,145
Restructured loans 601
Loans and leases 90 days past due but
still accruing interest 561 223
--------- ---------
Total nonperforming loans and leases $ 1,341 $ 2,969
========= =========
If interest on nonaccrual loans and leases had been accrued, such income
would have approximated $139,000 in 2000, $349,000 in 1999 and $407,000 in
1998. Interest income of $124,000 in 2000, $207,000 in 1999, and $292,000 in
1998 was recorded when it was received on the nonaccrual loans and leases.
At December 31, 2000, there were no commitments to lend additional funds to
borrowers whose loans and leases were classified as nonaccrual.
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows (in thousands):
2000 1999
--------- ---------
Land $ 2,063 $ 1,885
Buildings and improvements 6,994 6,724
Furniture, fixtures and equipment 7,233 9,431
Leasehold improvement 540 626
--------- ---------
16,830 18,666
Accumulated depreciation and amortization (7,207) (9,169)
--------- ---------
$ 9,623 $ 9,497
========= =========
F-12
8. OTHER ASSETS
Major classifications of other assets at December 31 were as follows (in
thousands):
2000 1999
--------- ---------
Cash surrender value of life insurance policies $ 16,990 $ 5,227
Deferred taxes 2,266 2,250
Prepaid expenses 974 1,313
Other 1,655 2,127
--------- ---------
Total $ 21,885 $ 10,917
========= =========
9. DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $47,484,000 and $47,162,000 at December 31, 2000 and
1999. Interest expense incurred on such time certificates of deposit was
$2,242,000, $2,028,000 and $1,869,000 for the years ended December 31, 2000,
1999 and 1998.
At December 31, 2000, the scheduled maturities of all time deposits was as
follows (in thousands):
YEARS AMOUNT
----- ----------
2001 $ 171,548
2002 12,242
2003 5,180
2004 496
2005 and thereafter --
----------
$ 189,466
==========
10. LINES OF CREDIT
At December 31, 2000, the Company had the following lines of credit with
correspondent banks to purchase federal funds (in thousands):
TYPE AMOUNT EXPIRATION
---------------------------------- -------- ----------------
Unsecured $ 8,500 July 31, 2001
Unsecured $ 3,000 None
Secured:
First deeds of trust on eligible
1- 4 unit residential loans $ 26,413 Quarterly
First deeds of trust on eligible
commercial real estate loans $ 11,822 January 21, 2001
F-13
11. BORROWINGS
As of December 31, 2000, the Company had $16,399,000 outstanding in
overnight borrowings from the Federal Home Loan Bank of San Francisco
("FHLB") and through correspondent banks. Other borrowings outstanding as of
December 31, 2000 consist of a loan from the FRB in the form of Treasury Tax
and Loan notes and generally are required to be repaid within 30 days from
the transaction date as well as a term note from the FHLB which matures in
2005 and is secured by certain real estate loans. The following table
summarizes these borrowings (in thousands):
2000 1999 1998
------- ------- -------
Long-Term Borrowings:
FHLB loan, fixed rate of 6.55% $ 480 $ 562 $ 638
FHLB loan, fixed rate of 4.37% 5,000
------- ------- -------
Total Long-Term borrowings $ 480 $ 5,562 $ 638
======= ======= =======
Short-Term borrowings:
FHLB $13,400 $ 4,400
FRB loan 122 603 $ 39
Correspondent bank 2,999
------- ------- -------
Total Short-Term borrowings $16,521 $ 5,003 $ 39
======= ======= =======
The following table provides information related to the Company's short-term
borrowings under its federal funds purchased, security repurchase
arrangements and lines of credit for the periods indicated:
Short-Term Borrowings
2000 1999 1998
-------- -------- --------
Average balance during the year $ 9,901 $ 7,831 $ 1,311
Average interest rate for the year 6.44% 4.83% 5.80%
Maximum month-end balance during the year $ 16,521 $ 5,003 $ 1,518
Average rate as of December 31, 6.18% 4.02% 5.49%
12. INCOME TAXES
The provision for income taxes for the years ended December 31, was as
follows (in thousands):
2000 1999 1998
--------- --------- ---------
Currently payable:
Federal $ 1,945 $ 1,235 $ 193
State 554 230 564
--------- --------- ---------
Total 2,499 1,465 757
--------- --------- ---------
Deferred taxes (benefits):
Federal (622) 553 303
State (268) 313 (232)
--------- --------- ---------
Total (890) 866 71
--------- --------- ---------
Total $ 1,609 $ 2,331 $ 828
========= ========= =========
F-14
The effective federal tax rate for the years ended December 31, differs from
the statutory tax rate as follows:
Federal income tax at statutory rates 35.0% 35.0% 35.0%
State income taxes net of federal
income tax benefit 4.0% 4.4% 5.9%
Tax exempt income (15.0%) (8.5%) (20.5%)
Merger and integration costs 11.6% -- --
Other (1.3%) (2.0%) 1.5%
------- ------- -------
34.3% 28.9% 21.9%
======= ======= =======
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):
2000 1999
--------- ---------
Deferred tax assets:
Accrued pension obligation $ 812 $ 735
Allowance for loan losses 1,394 1,223
Deferred compensation 696 622
Alternative minimum tax credit 35 180
Deferred loan fee income 61 96
Net operating loss carryforward 521
Unrealized loss on securities available for sale 162 1,036
Other 173
--------- ---------
Total deferred tax assets 3,333 4,413
--------- ---------
Deferred tax liabilities:
Other 249
Tax depreciation in excess of book depreciation 268 183
Mark to market adjustment 177 1,145
OMSR adjustment 212 249
FHLB stock dividend 124 98
Deferred loan fee costs 255 234
California franchise tax 31 5
--------- ---------
Total deferred tax liabilities 1,067 2,163
--------- ---------
Net deferred tax asset $ 2,266 $ 2,250
========= =========
The Company believes that it is more likely than not that it will realize
the above deferred tax assets in the future periods; therefore, no valuation
allowance has been provided against its deferred tax assets.
13. RETIREMENT AND DEFERRED COMPENSATION PLANS
Substantially all employees with at least one year of service participate in
a Company-sponsored employee stock ownership plan (ESOP). The Company made
contributions to the ESOP of $60,000 in 2000, 1999 and 1998. At December 31,
2000, the ESOP owned approximately 172,000 shares of the Company's stock.
The Company maintains a 401(k) plan covering employees who have completed
1,000 hours of service during a 12-month period and are aged 21 or older.
Voluntary employee contributions are partially matched by the Company. The
Company made contributions to the Plan for the years ended December 31,
2000, 1999 and 1998 of $43,000, $34,000, and $26,000, respectively.
F-15
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 $1,536,000 and $1,424,000 as of December 31, 2000 and 1999,
respectively, is included in accrued interest and other liabilities.
The Company has a supplemental retirement plan for directors and a
supplemental executive retirement plan covering key executives. These plans
are nonqualified defined benefit plans and are unsecured and unfunded. The
Company has purchased insurance on the lives of the participants and intends
to use the cash values of these policies ($16,990,000 and $5,227,000 at
December 31, 2000 and 1999, respectively) to pay the retirement obligations.
The accrued pension obligation of $2,253,000 and $2,150,000 as of December
31, 2000 and 1999, respectively, is included in accrued interest and other
liabilities.
The following table sets forth the unqualified supplemental retirement
defined benefit pension plans status at December 31 (in thousands):
2000 1999
--------- ---------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year $ (2,362) $ (2,605)
Service cost (116) (61)
Interest cost (175) (164)
Benefits paid 195 219
Actuarial gain (loss) (104) 267
Plan amendments (22) (18)
Acquisitions/Divestitures SRNB (94)
--------- ---------
Projected benefit obligation at end of year (2,678) (2,362)
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year
Fair value of plan assets at end of year
FUNDING
Funded (unfunded) status (2,678) (2,362)
Unrecognized transitional amount 125 150
Unrecognized prior service cost 415 426
Unrecognized net actuarial (gain) loss 25 (77)
--------- ---------
Net amount recognized (accrued pension cost) $ (2,113) $ (1,863)
========= =========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.45% 7.36%
Rate of compensation increase (supplemental
executive retirement plan only) 6.00% 6.00%
Expected return on plan assets N/A N/A
F-16
The elements of pension costs for the unqualified supplemental retirement
defined benefit pension plans at December 31 are as follows (in thousands):
2000 1999 1998
------ ------ ------
COMPONENTS OF NET PERIODIC BENEFITS COST
Service cost $ 116 $ 61 $ 38
Interest cost 175 164 153
Amortization of net obligation at transition 25 25 25
Amortization of prior service cost 33 31 31
Recognized net actuarial loss 1 4 5
------ ------ ------
Net periodic benefit cost $ 350 $ 285 $ 252
====== ====== ======
THE NET PERIODIC PENSION COST WAS DETERMINED
USING THE FOLLOWING ASSUMPTIONS
Discount rate 7.45% 7.36% 6.41%
Rate of compensation increase (supplemental
executive retirement plan only) 6.00% 6.00% 6.00%
Expected return on plan assets N/A N/A N/A
14. STOCK BASED COMPENSATION
During 2000 and 1999, each director was awarded 600 shares of common stock,
resulting in an additional 4,200 shares being issued each year. Compensation
cost related to these awards was recognized based on the fair value of the
shares at the date of award.
Under the Company's stock option plans as of December 31, 2000, 520,347
shares of the Company's common stock remained available for grants to
directors and employees of the Bank. Under the Director Plan, options may
not be granted at a price less than 85% of fair market value at the date of
the grant. Under the Employee Plan, options may not be granted at a price
less than the fair market value at the date of the grant. Under both plans,
options may be exercised over a ten year term and vest ratably over four
years from the date of the grant. A summary of stock options follows:
EXERCISE
OPTIONS PRICE
--------- ---------
Outstanding, Janaury 1, 1998 189,245 $ 6.63
166,605 exercisable at weighted average price of $6.54
Granted 138,150 13.13
Exercised (12,288) 7.73
Expired or canceled (45,280) 7.44
--------- ---------
Outstanding, December 31, 1998 269,827 9.80
209,705 exercisable at weighted average price of $8.69
Granted 408,100 11.21
Exercised (38,338) 9.92
Expired or canceled (30,780) 8.96
--------- ---------
Outstanding, December 31, 1999 608,809 10.78
251,807 exercisable at weighted average price of $9.69
Granted 14,900 7.49
Exercised (24,419) 4.55
Expired or canceled (28,556) 12.88
--------- ---------
Outstanding, December 31, 2000 570,734 10.87
========= =========
314,234 exercisable at weighted average price of $10.42
F-17
Information about stock options outstanding at December 31, 2000 is
summarized as follows:
AVERAGE EXERCISE EXERCISE
RANGE OF REMAINING PRICE OF PRICE OF
EXERCISE OPTIONS CONTRACTUAL OPTIONS OPTIONS OPTIONS
PRICES OUTSTANDING LIFE (YEARS) OUTSTANDING EXERCISABLE EXERCISABLE
------------- ----------- ------------ ----------- ----------- -----------
$ 3.35 3,300 1 $ 3.35 3,300 $ 3.35
$ 5.10 6,000 4 $ 5.10 6,000 $ 5.10
$ 6.09- 6.68 53,747 4 $ 6.43 53,747 $ 6.43
$ 8.04- 8.44 30,569 7 $ 8.26 30,569 $ 3.84
$ 9.14- 9.88 31,300 8 $ 9.71 11,700 $ 5.07
$ 10.00-10.875 234,800 8 $ 10.34 91,200 $ 10.34
$ 12.41-12.875 166,018 8 $ 12.76 90,718 $ 6.67
$ 15.94 45,000 7 $ 15.94 27,000 $ 15.94
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plan. Under the intrinsic value method, no compensation
cost has been recognized for its stock option grants except for the
differences between the fair value at the date of grant and the exercise
price of 85% of fair value for the Director Plan. SFAS No. 123, Accounting
for Stock-Based Compensation requires disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of 1995. Had compensation cost for the grants been determined
based upon the fair value method, the Company's net income and earnings per
share would have been adjusted to the pro forma amounts indicated below.
2000 1999 1998
------- ------- -------
Net income:
As reported $ 3,088 $ 5,744 $ 2,960
Pro forma $ 2,901 $ 5,542 $ 2,883
Basic earnings per common share:
As reported $ 0.53 $ 1.00 $ 0.52
Pro forma $ 0.50 $ 0.96 $ 0.50
Diluted earnings per common and equivalent share:
As reported $ 0.53 $ 0.99 $ 0.51
Pro forma $ 0.50 $ 0.95 $ 0.50
The fair value of the options granted during 2000, 1999 and 1998 is
estimated as $62,000, $926,000, and $359,000 on the date of grant using a
binomial option-pricing model with the following assumptions: $0.40 annual
dividend, volatility of 23.13%, 22.31%, and 21.89%, risk-free interest rate
of 6.00%, 5.00%, and 5.40%, assumed forfeiture rate of zero, and an expected
life of seven years in 2000 and 1999, and six years in 1998. The weighted
average per share fair value of the 2000, 1999 and 1998 awards was $4.14,
$2.27, and $2.60.
F-18
15. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common
stock.
There was no difference in the numerator used in the calculation of basic
earnings per share and diluted earnings per share. The denominator used in
the calculation of basic earnings per share and diluted earnings per share
for each of the years ended December 31 is reconciled as follows:
2000 1999 1998
------ ------ ------
CALCULATION OF BASIC EARNINGS PER SHARE
Numerator - net income $3,088 $5,744 $2,960
Denominator - weighted average common shares outstanding 5,794 5,758 5,718
------ ------ ------
Basic earnings per share $ 0.53 $ 1.00 $ 0.52
====== ====== ======
CALCULATION OF DILUTED EARNINGS PER SHARE
Numerator - net income $3,088 $5,744 $2,960
Denominator:
Weighted average common shares outstanding 5,794 5,758 5,718
Dilutive effect of outstanding options 38 52 33
------ ------ ------
Weighted average common shares outstanding -
Diluted 5,832 5,810 5,751
------ ------ ------
Diluted earnings per share $ 0.53 $ 0.99 $ 0.51
====== ====== ======
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in a number of legal actions arising from normal
business activities. Management, based upon the advice of legal counsel,
believes that the ultimate resolution of all pending legal actions will not
have a material effect on the financial statements.
The Company has operating leases for certain premises and equipment. Rent
expense for the years ended December 31, 2000, 1999 and 1998 was $383,000,
$355,000 and $280,000.
The following schedule represents the Company's noncancelable future minimum
scheduled lease payments at December 31, 2000 (in thousands):
2001 $ 307
2002 307
2003 256
2004 184
2005 and thereafter 323
-------
Total $ 1,377
=======
F-19
NVB was contingently liable under letters of credit issued on behalf of its
customers in the amount of $2,817,000 and $2,366,000 at December 31, 2000
and 1999. At December 31, 2000, commercial and consumer lines of credit, and
real estate loans of approximately $29,704,000 and $14,642,000 were
undisbursed. At December 31, 1999, commercial and consumer lines of credit,
and real estate loans of approximately $27,995,000 and $15,815,000 were
undisbursed.
Loan commitments are typically contingent upon the borrower meeting certain
financial and other covenants and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments
are expected to expire without being drawn upon, the total commitments do
not necessarily represent future cash requirements. The Company evaluates
each potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt
securities, equity securities or business or personal assets.
Standby letters of credit are conditional commitments written by the Company
to guarantee the performance of a customer to a third party. These
guarantees are issued primarily relating to inventory purchases by the
Company's commercial and technology division customers and such guarantees
are typically short term. Credit risk is similar to that involved in
extending loan commitments to customers and the Company, accordingly, uses
evaluation and collateral requirements similar to those for loan
commitments. Virtually all of such commitments are collateralized.
These instruments involve, to varying degrees, elements of credit and market
risk in excess of the amounts recognized in the balance sheet and do not
necessarily represent the actual amount subject to credit loss. However, at
December 31, 2000 and 1999, no losses are anticipated as a result of these
commitments.
17. RELATED PARTY TRANSACTIONS
At December 31, 2000 and 1999, certain officers, directors and their
associates and principal shareholders were indebted to the Company for loans
made on substantially the same terms, including interest rates and
collateral, as comparable transactions with unaffiliated parties.
A summary of activity for the years ended December 31, 2000 and 1999 is as
follows (in thousands; renewals are not reflected as either new loans or
repayments):
2000 1999
--------- ---------
Beginning Balance $ 3,920 2,988
Borrowings 128 1,673
Repayments (79) (707)
Directors or officers no longer
associated with the Company (50) (34)
--------- ---------
Ending Balance $ 3,919 $ 3,920
========= =========
18. REGULATORY MATTERS
The Company, NVB and SRNB are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and, possibly,
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company, NVB and SRNB must meet specific
capital guidelines that involve quantitative measures of the Company's,
NVB's and SRNB's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's, NVB's and
SRNB's capital amounts and NVB's prompt corrective action classification are
also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company, NVB and SRNB to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
F-20
the regulations) to risk-weighted assets (as defined) and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2000, that the Company, NVB and SRNB meet all capital adequacy
requirements to which they are subject.
The most recent notifications from the Federal Deposit Insurance Corporation
for NVB and SRNB as of December 31, 2000 and 1999, categorized NVB and SRNB
as well capitalized under the regulatory framework for prompt correction
action. To be categorized as well capitalized NVB and SRNB must maintain
minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed NVB's or and SRNB's
category.
During 1998, as a result of a regulatory examination, the OCC asserted that
SRNB committed a lending limit violation regarding a loan that had been
submitted to, but not yet received approval for, a guarantee by the United
States Department of Agriculture (USDA). SRNB received approval for the
guarantee from the USDA during February 1999.
On April 12, 1999, the OCC required SRNB to enter into a Consent Order (the
"Order"). The Order required that SRNB formulate and implement a plan to
strengthen its policies and procedures relative to its loan administration,
credit and collateral exceptions, classified assets, allowances for loan
losses and violations of law related to lending limits. The Board of
Directors adopted an action plan detailing the actions necessary to comply
with the Order.
Effective July 20, 2000, the OCC found SRNB to be in compliance with all
aspects of the Order and therefore, terminated the Order.
The Company's actual capital amounts (in thousands) and ratios are also
presented, respectively, in the following tables.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
MINIMUM MINIMUM MINIMUM MINIMUM
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- ----- --------- -----
COMPANY As of December 31, 2000:
Total capital
(to risk weighted assets) $ 56,415 14.30% $ 31,571 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 51,482 13.05% $ 15,785 4.00% N/A N/A
Tier I capital
(to average assets) $ 51,482 9.73% $ 21,161 4.00% N/A N/A
As of December 31, 1999:
Total capital
(to risk weighted assets) $ 52,512 14.44% $ 29,095 8.00% N/A N/A
Tier I capital
(to risk weighted assets) $ 48,637 13.37% $ 14,548 4.00% N/A N/A
Tier I capital
(to average assets) $ 48,637 9.27% $ 20,989 4.00% N/A N/A
NORTH VALLEY BANK
As of December 31, 2000:
Total capital
(to risk weighted assets) $ 37,830 13.96% $ 21,686 8.00% $ 27,108 10.00%
Tier I capital
(to risk weighted assets) $ 34,912 12.88% $ 10,843 4.00% $ 16,265 6.00%
Tier I capital
(to average assets) $ 34,912 10.51% $ 13,290 4.00% $ 16,613 5.00%
As of December 31, 1999:
Total capital
(to risk weighted assets) $ 34,477 14.70% $ 18,759 8.00% $ 23,449 10.00%
Tier I capital
(to risk weighted assets) $ 32,217 13.74% $ 9,379 4.00% $ 14,069 6.00%
Tier I capital
(to average assets) $ 32,217 10.20% $ 12,640 4.00% $ 15,800 5.00%
F-21
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------- -------------------
MINIMUM MINIMUM MINIMUM MINIMUM
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- ----- --------- -----
SIX RIVERS NATIONAL BANK
As of December 31, 2000:
Total capital
(to risk weighted assets) $ 16,492 13.16% $ 10,022 8.0% $ 12,528 10.0%
Tier I capital
(to risk weighted assets) $ 14,920 11.91% $ 5,011 4.0% $ 7,517 6.0%
Tier I capital
(to average assets) $ 14,920 7.61% $ 7,844 4.0% $ 9,805 5.0%
As of December 31, 1999:
Total capital $ 17,114 13.24% $ 10,337 8.0% $ 12,921 10.0%
(to risk weighted assets)
Tier I capital
(to risk weighted assets) $ 15,499 11.99% $ 5,169 4.0% $ 7,753 6.0%
Tier I capital
(to average assets) $ 15,499 7.44% $ 8,330 4.0% $ 10,412 5.0%
Under federal and California state banking laws, dividends paid by NVB and
SRNB to the Company in any calendar year may not exceed certain limitations
without the prior written approval of the appropriate bank regulatory
agency. At December 31, 2000, the amount not restricted for payment of
dividends without prior written approval was approximately $9,986,000.
Similar restrictions apply to the amounts and terms of loans, advances and
other transfers of funds from NVB and SRNB to the Company.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by using available
market information and appropriate valuation methodologies. Although
management uses its best judgment in assessing fair value, there are
inherent weaknesses in any estimating technique that may be reflected in the
fair values disclosed. The fair value estimates are made at a discrete point
in time based on relevant market data, information about the financial
instruments, and other factors. Estimates of fair value of instruments
without quoted market prices are subjective in nature and involve various
assumptions and estimates that are matters of judgment. Changes in the
assumptions used could significantly affect these estimates. Fair value has
not been adjusted to reflect changes in market conditions subsequent to
December 31, 2000, therefore, estimates presented herein are not necessarily
indicative of amounts which could be realized in a current transaction.
The following estimates and assumptions were used as of December 31, 2000
and 1999 to estimate the fair value of each class of financial instruments
for which it is practicable to estimate that value.
(a) CASH AND CASH EQUIVALENTS - The carrying amount represents a reasonable
estimate of fair value.
(b) INTEREST BEARING DEPOSIT IN OTHER FINANCIAL INSTITUTIONS - The carrying
amount represents a reasonable estimate of fair value.
F-22
(c) SECURITIES - Held to maturity securities are based on quoted market
prices, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Available for sale securities are carried at fair value, FHLB, Federal
Reserve Bank, and other securities are based on the carrying amount
which represents a reasonable estimate of fair value.
(d) LOANS AND LEASES AND LOANS HELD FOR SALE - Commercial loans, residential
mortgages, construction loans and direct financing leases, are segmented
by fixed and adjustable rate interest terms, by maturity, and by
performing and nonperforming categories.
The fair value of performing loans and leases is estimated by
discounting contractual cash flows using the current interest rates at
which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. Assumptions regarding
credit risk, cash flow, and discount rates are judgmentally determined
using available market information. The fair value of loans held for
sale is estimated based on correct market information for similar loans.
The fair value of nonperforming loans and leases and loans and leases
delinquent more than 30 days is estimated by discounting estimated
future cash flows using current interest rates with an additional risk
adjustment reflecting the individual characteristics of the loans.
(e) CASH SURRENDER VALUE OF LIFE INSURANCE - The carrying amount represents
a reasonable estimate of fair value.
(f) DEPOSIT LIABILITIES - Noninterest bearing and interest bearing demand
deposits and savings accounts are payable on demand and are assumed to
be at fair value. The fair value of the demand deposit intangible has
not been included as a component of the fair value estimate. Time
deposits are based on the discounted value of contractual cash flows.
The discount rate is based on rates currently offered for deposits of
similar size and remaining maturities.
(g) OTHER BORROWED FUNDS - The fair value of other borrowed funds is
estimated by discounting the contractual cash flows using the current
interest rate at which similar borrowing for the same remaining
maturities could be made.
(h) FEDERAL FUNDS PURCHASED - The carrying amount represents a reasonable
estimate of fair value.
(i) COMMITMENTS TO FUND LOANS/STANDBY LETTERS OF CREDIT - The fair values of
commitments are estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. The
differences between the carrying value of commitments to fund loans or
stand by letters of credit and their fair value is not significant and
therefore not included in the following table.
2000 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
FINANCIAL ASSETS
Cash and cash equivalents $ 28,728 $ 28,728 $ 37,225 $ 37,225
FHLB, FRB and other securities $ 2,155 $ 2,155 $ 2,298 $ 2,298
Interest bearing deposit in other
financial institutions $ 1,706 $ 1,706 $ 8,125 $ 8,125
Securities:
Available for sale $ 78,124 $ 78,124 $ 89,064 $ 89,064
Held to maturity $ 25,811 $ 26,926 $ 29,616 $ 30,357
Loans and leases and loans held
for sale $364,659 $366,650 $324,952 $320,380
Cash surrender value of life $ 16,990 $ 16,990 $ 5,227 $ 5,227
insurance
FINANCIAL LIABILITIES
Deposits $460,291 $456,203 $452,697 $452,827
Other borrowed funds $ 602 $ 602 $ 6,165 $ 6,165
Federal funds purchased $ 16,399 $ 16,399 $ 4,400 $ 4,400
F-23
20. SEGMENT REPORTING
The Company operates as three business segments; North Valley Bank, Six
Rivers National Bank and Other. Management analyzes the operations of NVB,
SRNB and Other separately. Other consists of Bancorp and BPI, both of which
provide services to NVB and SRNB. Management allocates the costs of Bancorp
and BPI to NVB and SRNB based primarily on usage through a variety of
statistical data. NVB and SRNB are separately chartered institutions each
with its own Board of Directors and regulated independently of each other.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes not
including nonrecurring gains or losses.
The Company derives a majority of its revenues from interest income and the
chief operating decision maker relies primarily on net interest revenue to
assess the performance of the segments and make decisions about resources to
be allocated to the segment. Therefore, the segments are reported below
using net interest income for the years ended December 31. Other revenue
represents noninterest income, exclusive of the net gain (loss) on sales of
available-for-sale securities, which is not allocated to the segments.
The Company does not have operating segments other than those reported.
Parent company financial information is included in the Other category in
the disclosures below along with the activity of BPI and represents the
Company's Other operating segment.
The Company does not have a single external customer from which it derives
10 percent or more of its revenues and operates in one geographical area.
F-24
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the years
ended December 31, follows:
NVB SRNB OTHER TOTAL
--------- --------- --------- ---------
Year ended December 31, 2000:
Total revenues $ 30,236 $ 16,036 $ 566 $ 46,838
Net income (loss) $ 5,850 $ (1,630) $ (1,132) $ 3,088
Interest income $ 24,546 $ 15,392 $ 28 $ 39,966
Interest expense $ 9,457 $ 6,778 $ 16,235
Depreciation and amortization $ 638 $ 1,967 $ 2,605
Total assets $ 337,925 $ 200,281 $ 2,015 $ 540,221
Year ended December 31, 1999:
Total revenues $ 24,858 $ 16,265 $ 524 $ 41,647
Net income (loss) $ 4,745 $ 1,216 $ (217) $ 5,744
Interest income $ 21,628 $ 14,634 $ 17 $ 36,279
Interest expense $ 8,230 $ 5,795 $ 4 $ 14,029
Depreciation and amortization $ 855 $ 533 $ 1,388
Total assets $ 311,894 $ 208,263 $ 916 $ 521,073
Year ended December 31, 1998:
Total revenues $ 23,113 $ 16,511 $ 1,449 $ 41,073
Net income Profit (loss) $ 3,566 $ (1,125) $ 519 $ 2,960
Interest income $ 20,416 $ 14,917 $ 50 $ 35,383
Interest expense $ 8,572 $ 6,068 $ 11 $ 14,651
Depreciation and amortization $ 526 $ 537 $ 605 $ 1,668
Total assets $ 293,278 $ 203,235 $ 3,085 $ 499,598
21. PARENT COMPANY ONLY - CONDENSED FINANCIAL INFORMATION
The condensed financial statements of North Valley Bancorp are presented
below (in thousands except share amounts):
NORTH VALLEY BANCORP
CONDENSED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
----------------------------------------------------------------------------
ASSETS 2000 1999
--------- ---------
Cash and cash equivalents $ 939 $ 455
Available for sale securities at fair value 67 120
Investments in subsidiaries 53,920 51,150
Dividend receivable 372
Other assets 607 115
--------- ---------
Total $ 55,533 $ 52,212
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividend payable $ 580 $ 371
Other liabilities 96
Stockholders' equity 54,857 51,841
--------- ---------
Total $ 55,533 $ 52,212
========= =========
F-25
NORTH VALLEY BANCORP
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
----------------------------------------------------------------------------
2000 1999 1998
------- ------- -------
INCOME:
Dividends from subsidiaries $ 2,950 $ 372 $ 645
Other income 32 14 963
------- ------- -------
Total income 2,982 386 1,608
EXPENSE:
Legal and accounting 73 102 112
Other 640 81 101
Merger and acquisition expense 773 149
Taxes (312) (67) 210
------- ------- -------
Total expense 1,174 265 423
------- ------- -------
Income before equity in undistributed
income of subsidiaries 1,808 121 1,185
Equity in undistributed income of subsidiaries 1,280 5,623 1,775
------- ------- -------
Net income 3,088 5,744 2,960
Other comprehensive income, net of tax 1,269 (1,461) (668)
------- ------- -------
Total comprehensive income $ 4,357 $ 4,283 $ 2,292
======= ======= =======
NORTH VALLEY BANCORP
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
----------------------------------------------------------------------------------------------
2000 1999 1998
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,088 $ 5,744 $ 2,960
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Equity in undistributed income of subsidiaries (1,280) (5,623) (1,775)
Gain on sale of available for sale securities (4) (913)
Effect of changes in:
Other assets (558) (18) (355)
Other liabilities 96 (135) 139
Dividends receivable 372 (372)
------- ------- -------
Net cash provided by (used in) operating activities 1,714 (404) 56
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities (582)
Proceeds from sale of available for sale securities 56 76 2,591
Payments from subsidiaries (120)
------- ------- -------
Net cash provided by (used in) investing activities (64) 76 2,009
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (1,485) (1,850) (645)
Compensation expense on stock options / grants 208
Stock options exercised 111 301 358
------- ------- -------
Net cash used in financing activities (1,166) (1,549) (287)
------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 484 (1,877) 1,778
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 455 2,332 554
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 939 $ 455 $ 2,332
======= ======= =======
F-26
INDEX OF EXHIBITS
SEQUENTIAL
EXHIBIT NO. EXHIBIT NAME PAGE NO
- ----------- ------------ -----------
2(a) Agreement and Plan of Reorganization and Merger, *
dated as of October 3, 1999 (incorporated by
reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the
Commission on October 12, 1999).
2(b) Addendum to Agreement and Plan of Reorganization *
and Merger dated as of September 25, 2000
(incorporated by reference from Exhibit 2.7 to
the Company's Current Report on Form 8-K filed
with the Commission on September 29, 2000).
3(a) Amended and Restated Articles of Incorporation of *
North Valley Bancorp (incorporated by reference
from Exhibit 3(i) to the Company's Quarterly
Report on Form 10-Q filed with the Commission for
the period ended June 30, 1998).
3(b) Certificate of Amendment of Amended and Restated 38
Articles of Incorporation of North Valley Bancorp
3(c) By-laws of North Valley Bancorp, as amended and *
restated (incorporated by reference from Exhibit
3(ii) to the Company's Quarterly Report on Form
10-Q filed with the Commission for the period
ended June 30, 1998).
10(a) Shareholder Protection Rights Agreement, dated *
September 9, 1999 (incorporated by reference from
Exhibit 4 to the Company's Current Report on Form
8-K filed with the Commission on September 23,
1999).
10(b) North Valley Bancorp 1989 Employee Stock Option *
Plan, as amended (incorporated by reference from
Exhibit 4.1 to Post-Effective Amendment No. One
to the Company's Registration Statement on Form
S-8 (No. 33-32787) filed with the Commission on
December 26, 1989). **
10(c) North Valley Bancorp 1989 Employee Nonstatutory *
Stock Option Agreement (incorporated by reference
from Exhibit 4.3 to Post-Effective Amendment No.
One to the Company's Registration Statement on
Form S-8 (No. 33-32787) filed with the Commission
on December 26, 1989). **
10(d) North Valley Bancorp 1989 Director Stock Option *
Plan, as amended (incorporated by reference from
Exhibit 4.2 to Post-Effective Amendment No. One
to the Company's Registration Statement on Form
S-8 (No. 33-32787) filed with the Commission on
December 26, 1989). **
10(e) North Valley Bancorp 1989 Director Nonstatutory *
Stock Option Agreement (incorporated by reference
from Exhibit 4.4 to Post-Effective Amendment No.
One to the Company's Registration Statement on
Form S-8 (No. 33-32787) filed with the Commission
on December 26, 1989). **
10(f) Employee Stock Ownership Plan, as amended and *
restated as of January 1, 1987 (incorporated by
reference from Exhibit 10(x) to the Company's
Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 1993).
**
34
SEQUENTIAL
EXHIBIT NO. EXHIBIT NAME PAGE NO
- ----------- ------------ -----------
10(g) Amendment No. 3 to Employee Stock Ownership Plan *
(incorporated by reference from Exhibit 10(ee) to
the Company's Annual Report on Form 10-KSB filed
with the Commission for the year ended December
31, 1994). **
10(h) Amendment No. 4 to Employee Stock Ownership Plan, *
dated August 19, 1997 (incorporated by reference
from Exhibit 10 (kk) to the Company's Annual
Report on Form 10-KSB filed with the Commission
for the year ended December 31, 1997). **
10(i) Supplemental Executive Retirement Plan *
(incorporated by reference from Exhibit 10(i) to
the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December
31, 1988). **
10(j) Executive Deferred Compensation Plan *
(incorporated by reference from Exhibit 10(j) to
the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December
31, 1988). **
10(k) Supplemental Retirement Plan for Directors *
(incorporated by reference from Exhibit 10(k) to
the Company's Annual Report on Form 10-K filed
with the Commission for the year ended December
31, 1988). **
10(l) Legal Services Agreement with Wells, Wingate, *
Small & Graham (incorporated by reference from
Exhibit 10(q) to the Company's Annual Report on
Form 10-K filed with the Commission for the year
ended December 31, 1987).
10(m) Legal Services Agreement dated as of January 1, 40
2001, between North Valley Bancorp and J. M.
Wells, Jr., Attorney at Law
10(n) Sales Agreement with Federated Securities Corp. *
(incorporated by reference from Exhibit 10(gg) to
the Company's Annual Report on Form 10-KSB filed
with the Commission for the year ended December
31, 1995).
10(o) Linsco/Private Ledger, Inc. Full Service *
Brokerage Agreement (incorporated by reference
from Exhibit 10(hh) to the Company's Annual
Report on Form 10-KSB filed with the Commission
for the year ended December 31, 1995).
10(p) Executive Deferred Compensation Plan, effective *
January 1, 1989, restated April 1, 1995
(incorporated by reference from Exhibit 10(dd) to
the Company's Annual Report on Form 10-KSB filed
with the Commission for the year ended December
31, 1997). **
10(q) Directors' Deferred Compensation Plan, effective *
April 1, 1995 (incorporated by reference from
Exhibit 10(ee) to the Company's Annual Report on
Form 10-KSB filed with the Commission for the
year ended December 31, 1997). **
10(r) Umbrella TrustTM for Directors, effective April *
1, 1995 (incorporated by reference from Exhibit
10(ff) to the Company's Annual Report on Form
10-KSB filed with the Commission for the year
ended December 31 1997). **
10(s) Umbrella TrustTM for Executives, effective April *
1, 1995 (incorporated by reference from Exhibit
10(gg) to the Company's Annual Report on Form
10-KSB filed with the Commission for the year
ended December 31, 1997). **
35
SEQUENTIAL
EXHIBIT NO. EXHIBIT NAME PAGE NO
- ----------- ------------ -----------
10(t) Indemnification Agreement (incorporated by *
reference from Exhibit 10 to the Company's
Quarterly Report filed with the Commission for
the period ended June 30, 1998).
10(u) North Valley Bancorp 1998 Employee Stock *
Incentive Plan, as amended through September 9,
1999 (incorporated by reference from Exhibit 10
to the Company's Current Report on Form 8-K filed
with the Commission on September 23, 1999). **
10(v) North Valley Bancorp 1999 Director Stock Option *
Plan (incorporated by reference from Annex A to
the Company's Definitive Proxy Statement filed
with the Commission on April 23, 1999). **
10(w) Amendment No. Two to the North Valley Bancorp *
1989 Director Stock Option Plan (incorporated by
reference from Exhibit 10(v) to the Company's
Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 1998).
**
10(x) Branch Purchase and Assumption Agreement dated as *
of September 15, 2000, between North Valley
Bancorp and Scott Valley Bank (incorporated by
reference from Exhibit 99.19 to the Company's
Current Report on Form 8-K filed with the
Commission on September 29, 2000).
10(y) Form of Executive Deferred Compensation Agreement 43
executed in December 2000 between North Valley
Bank and each of Michael J. Cushman, Sharon L.
Benson, Jack R. Richter and Eric J. Woodstrom. **
10(z) Form of Executive Deferred Compensation Agreement 53
executed in December 2000 between Six Rivers
National Bank and Margie L. Plum. **
10(aa) Form of Director Deferred Fee Agreement executed 63
in December 2000 between North Valley Bank and
each of Rudy V. Balma, William W. Cox, Royce L.
Friesen, Dan W. Ghidinelli, Thomas J. Ludden,
Douglas M. Treadway and J.M. Wells, Jr. **
10(bb) Form of Director Deferred Fee Agreement executed 73
in December 2000 between Six Rivers National Bank
and each of Kevin D. Hartwick, William T. Kay,
Jr., J. Michael McGowan, Warren L. Murphy and
Dolores M. Vellutini. **
21 List of Subsidiaries. 83
23 Consent of Deloitte & Touche LLP 84
------------------------------
* Previously filed.
** Indicates management contract or compensatory plan or
arrangement.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH VALLEY BANCORP
By: /s/ MICHAEL J. CUSHMAN
-------------------------------------
Michael J. Cushman
President and Chief Executive Officer
/s/ EDWARD J. CZAJKA
-------------------------------------
Edward J. Czajka
Senior Vice President & Chief Financial Officer
DATE: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
/s/ MICHAEL J. CUSHMAN Director March 29, 2001
- ---------------------------
Michael J. Cushman
/s/ WILLIAM W. COX Director March 29, 2001
- ---------------------------
William W. Cox
/s/ ROYCE L. FRIESEN Director March 29, 2001
- ---------------------------
ROYCE L. FRIESEN
/s/ DAN W. GHIDINELLI Director March 29, 2001
- ---------------------------
Dan W. Ghidinelli
/s/ THOMAS J. LUDDEN Director March 29, 2001
- ---------------------------
Thomas J. Ludden
/s/ DOUGLAS M. TREADWAY Director March 29, 2001
- ---------------------------
Douglas M. Treadway
/s/ KEVIN D. HARTWICK Director March 29, 2001
- ---------------------------
Kevin D. Hartwick
/s/ DELORES M. VELLUTINI Director March 29, 2001
- ---------------------------
Delores M. Vellutini
/s/ J. M. WELLS, JR. Director March 29, 2001
- ---------------------------
J. M. Wells, Jr.
37