UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
-----------------
[ ] 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2751350
--------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
300 Park Marina Circle, Redding, California 96001
-------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 226 2900
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
-------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold was
67,102,000 as of June 28, 2002.
The number of shares outstanding of common stock as of March 24, 2003, were
4,615,728.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for the 2003 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
- -------------------
Part I
- ------
Item 1 Description of Business 3
Item 2 Description of Properties 23
Item 3 Legal Proceedings 23
Item 4 Submission of Matters to a Vote of Security Holders 24
Part II
- -------
Item 5 Market for Registrant's Common Equity and Related
Stockholders Matters 24
Item 6 Selected Financial Data 25
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 7A Quantitative and Qualitative Disclosures About Market Risk 38
Item 8 Financial Statements and Supplementary Data 38
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 39
Part III
- --------
Item 10 Directors and Executive Officers of the Registrant; 39
Item 11 Executive Compensation 39
Item 12 Security Ownership of Certain Beneficial Owners and Management 39
Item 13 Certain Relationships and Related Transactions 40
Item 14 Controls and Procedures 40
Part IV
- -------
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K 42
Financial Statements 46
Signatures 76
2
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
- -------------------------------
Certain statements in this Annual Report on Form 10-K (excluding
statements of fact or historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Shasta
County; volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; the California power crisis; the U.S. "war on terrorism" and
military action by the U.S. in the Middle East, and changes in the securities
markets. Therefore, the information set forth herein should be carefully
considered when evaluating the business prospects of the Company and its
subsidiaries. See also "Certain Additional Business Risks" on pages 24 through
25 herein, and other risk factors discussed elsewhere in this Report.
General
- -------
North Valley Bancorp (the "Company") is a 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 completed its plan of reorganization with Six Rivers National Bank,
which now operates as a wholly owned subsidiary of North Valley Bancorp. Unless
otherwise noted, the information contained herein has been restated on a
historical basis as a pooling of interests as if the Company and Six Rivers
National Bank had been combined for all periods presented. On January 2, 2002,
Six Rivers National Bank became a California State chartered bank and in
conjunction with this charter conversion, changed its name to Six Rivers Bank.
The Company wholly owns its principal subsidiaries, North Valley Bank ("NVB"),
Six Rivers Bank ("SRB"), North Valley Trading Company ("Trading Company"), which
is inactive, Bank Processing, Inc. ("BPI"), a California corporation, and North
Valley Capital Trust 1. The sole subsidiary of NVB, which is inactive, is North
Valley Basic Securities (the "Securities Company").
At December 31, 2002, the Company had approximately 364 employees,
(which includes 343 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 fourteen banking offices in Shasta and Trinity Counties,
for which it has received all of the requisite regulatory approvals. The
headquarters office in Redding opened in February 1973. In October 1973, NVB
opened its Weaverville Office; in October 1974, its Hayfork Office; in January
1978, its Anderson Office; and in September 1979, its Enterprise Office (East
Redding). On December 20, 1982, NVB acquired the assets of two branches of the
Bank of California: one located in Shasta Lake and the other in Redding,
California. On June 1, 1985, NVB opened its Westwood Village Office in South
Redding. On November 27, 1995, NVB opened a branch located in Palo Cedro,
California. On October 14, 1997, NVB opened a branch located in Shasta Lake,
California. NVB opened two super-market branches in 1998 located in Cottonwood,
California, on January 20, 1998, and Redding, California, on September 8, 1998.
On May 11, 1998, NVB opened a Business Banking Center in Redding, California, to
provide banking services to business and professional clients. On August 13,
2001, the Business Banking Center, North Valley Bancorp Securities and the
3
Company's Administrative offices moved to a new location at 300 Park Marina
Drive in Redding, California. On August 5, 2002, NVB opened an Express Banking
Center located at 2245 Churn Creek Road in Redding.
Six Rivers National Bank was formed in 1989 as a national banking
association. On January 2, 2002, Six Rivers National Bank became a California
state-chartered bank and changed its name to Six Rivers Bank. SRB operates seven
full service offices in Eureka (2), Crescent City, Ferndale, Garberville,
McKinleyville and Willits. In 1997, SRB completed the purchase and conversion of
four branches of Bank of America which increased its presence from its original
market of Humboldt and Del Norte counties into Trinity County to the Northeast
and Mendocino County to the South. During the fourth quarter of 2000, the SRB
Weaverville branch was sold which was a condition to the closing of the plan of
reorganization with the Company. SRB 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. As a federally insured bank,
SRB is also subject to regulation by the FDIC and its deposits are insured by
the FDIC up to the legal limits thereupon. SRB 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 currently processing daily applications for the Company where
entries are captured and files updated by the "Information Technology, Inc.,
(ITI) banking system," which includes: Demand Deposits (DDA), Savings Deposits
(SAV), Central Information Files (CIF), Mortgage Loans/Installment
Loans/Commercial Loans (LAS), Individual Retirement Accounts (IRA), and
Financial Information Statements, i.e., General Ledger (FMS). These data
processing activities do not involve providing hardware or software to banking
clients.
At December 31, 2002, BPI had cash on-hand of approximately $237,000.
North Valley Capital Trust 1 is a Delaware business trust wholly-owned
by the Company and formed in 2001 for the exclusive purpose of issuing Company
obligated mandatorily redeemable cumulative trust preferred securities of
Subsidiary Grantor Trust holding solely junior subordinated debentures.
From August 18, 1995 through July 4, 2001, NVB maintained an agreement
with Linsco Private Ledger ("LPL") which furnished brokerage services and
standardized investment advice to Bank customers. On January 8, 2001, SRB and
NVB signed agreements with Essex National Securities ("Essex") whereby Essex
will provide brokerage services and standardized investment advice to SRB
customers at SRB's Main office located at 402 F Street, Eureka, California and
to NVB customers at NVB administrative offices located at 300 Park Marina Circle
in Redding, California. SRB and NVB share in the fees and commissions paid to
Essex on a pre-determined schedule. All investments recommended to Bank
customers appear on an approved list or are specially approved by Essex.
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. 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 34% have been made in calculating yields
on tax-exempt securities.
4
Average Balances and Tax-equivalent Net Interest Margin
-------------------------------------------------------
The following table sets forth the Company's consolidated condensed
average daily balances and the corresponding average yields received and average
rates paid of each major category of assets, liabilities, and stockholders'
equity for each of the past three years (in thousands).
2002 2001 2000
-------------------------------- -------------------------------- -----------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- --------- ------- --------- --------- ------- --------- --------- -------
Assets
Federal funds sold $ 22,504 $ 346 1.54% $ 20,814 $ 674 3.24% $ 14,330 $ 855 5.97%
Investments:
Taxable securities 76,930 4,200 5.46% 71,045 4,715 6.64% 82,812 5,604 6.77%
Non-taxable securities(1) 26,756 2,312 8.64% 27,594 2,468 8.94% 30,937 2,739 8.85%
FHLB & FRB stock 3,312 49 1.48% 2,000 47 2.35% 2,670 179 6.69%
Interest bearing deposits
in other financial
institutions 737 43 5.83% 2,072 73 3.52% 6,680 418 6.26%
--------- --------- ------- --------- --------- ------- --------- --------- -------
Total investments 107,735 6,603 6.11% 102,711 7,303 7.11% 123,099 8,940 7.26%
Total loans and leases (2)(3) 424,272 32,738 7.72% 378,190 32,671 8.64% 342,831 31,076 9.06%
--------- --------- ------- --------- --------- ------- --------- --------- -------
Total interest-earning
assets/interest income 554,511 $ 39,687 7.15% 501,715 $ 40,648 8.10% 480,260 $ 40,871 8.51%
Non-earning assets 71,656 66,422 56,289
Allowance for loan and
Lease losses (6,256) (5,335) (5,743)
--------- --------- ---------
Total assets $ 619,911 $ 562,802 $ 530,806
========= ========= =========
Liabilities and
Stockholders' equity
Transaction accounts $ 119,081 $ 1,008 0.85% $ 94,857 $ 1,439 1.52% $ $85,220 $ 1,478 1.73%
Savings and money market 131,354 1,536 1.17% 108,986 2,650 2.43% 108,411 3,608 3.33%
Time deposits 177,775 5,293 2.98% 202,721 10,463 5.16% 190,335 10,511 5.52%
Other borrowed funds 37,852 1,955 5.17% 15,106 923 6.12% 9,901 638 6.44%
--------- --------- ------- --------- --------- ------- --------- --------- -------
Total interest-bearing
liabilities/interest
expense 466,062 9,792 2.10% 421,670 15,475 3.67% 393,867 16,235 4.12%
Non-interest bearing
deposits 100,567 83,226 75,339
Other liabilities 6,703 7,056 8,540
--------- --------- ---------
Total liabilities 573,332 511,952 477,746
Stockholders' equity 46,579 50,850 53,060
--------- --------- ---------
Total liabilities and
stockholders equity $ 619,911 $ 562,802 $ 530,806
========= ========= =========
Net interest income / spread $ 29,895 5.05% $ 25,173 4.43% $ 24,636 4.39%
========= ======= ========= ======= ========= =======
Net interest margin (4) 5.39% 5.02% 5.13%
======= ======= =======
(1) Tax-equivalent basis
(2) Loans on nonaccrual status have been included in the computations of
average balances.
(3) Includes loan fees of $337 $509 and $327 for the years ended December 31,
2002, 2001 and 2000, respectively
(4) Net interest margin is determined by dividing net interest income by total
average interest earning assets.
5
Rate Volume Analysis of changes in Net Interest Income
The following table summarizes changes in net interest income resulting
from changes in average asset and liability balances (volume) and changes in
average interest rates. The change in interest due to both rate and volume has
been allocated to the change in volume (in thousands).
2002 Compared to 2001 2001 Compared to 2000
---------------------------------------- ----------------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
Interest income
Interest on fed funds sold $ 26 $ (354) $ (328) $ 210 $ (391) $ (181)
Interest on investments:
Taxable securities 321 (837) (516) (781) (108) (889)
Non-taxable securities (72) (84) (156) (299) 28 (271)
FHLB & FRB stock 19 (17) 2 (16) (116) (132)
Interest bearing deposits in
other financial institutions (78) 48 (30) (162) (183) (345)
---------- ---------- ---------- ---------- ---------- ----------
Total investments 190 (890) (700) (1,258) (379) (1,637)
Interest on loans and leases 3,556 (3,489) 67 3,055 (1,460) 1,595
---------- ---------- ---------- ---------- ---------- ----------
Total interest income $ 3,772 $ (4,733) $ (961) $ 2,007 $ (2,230) $ (223)
---------- ---------- ---------- ---------- ---------- ----------
Interest expense
Transaction accounts $ 205 $ (636) $ (431) $ 146 $ (185) $ (39)
Savings and money market 262 (1,376) (1,114) 14 (972) (958)
Time deposits (743) (4,427) (5,170) 641 (689) (48)
Other borrowed funds 1,175 (144) 1,031 317 (32) 285
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense $ 899 $ (6,583) $ (5,684) $ 1,118 $ (1,878) $ (760)
---------- ---------- ---------- ---------- ---------- ----------
Total change in net interest income $ 2,873 $ 1,850 $ 4,723 $ 889 $ (352) $ 537
========== ========== ========== ========== ========== ==========
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, 2002, 2001, and 2000.
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.
6
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
Cost Gains Losses (Fair Value)
---------- ---------- ---------- ----------
Available for sale securities:
December 31, 2002
Securities of U.S. government
agencies and corporations $ 11,220 $ 9 $ 11,229
Obligations of states and political subdivisions 23,580 1,138 $ (67) 24,651
Mortgage backed securities 59,915 1,108 (4) 61,019
Corporate securities 8,976 520 9,496
Other securities 4,088 (8) 4,080
---------- ---------- ---------- ----------
$ 107,779 2,775 $ (79) $ 110,475
========== ========== ========== ==========
December 31, 2001
Securities of U.S. government agencies
and corporations $ 1,991 $ 78 $ 2,069
Obligations of states and political subdivisions 28,085 1,074 $ (254) 28,905
Mortgage-backed securities 70,331 601 (81) 70,851
Corporate Securities 9,946 20 (241) 9,725
Other Securities 88 (12) 76
---------- ---------- ---------- ----------
$ 110,441 1,773 $ (588) $ 111,626
========== ========== ========== ==========
December 31, 2000
Securities of U.S. government agencies
and corporations $ 26,913 $ 42 $ (167) $ 26,788
Obligations of states and political subdivisions 2,671 21 (1) 2,691
Mortgage-backed securities 42,504 405 (232) 42,677
Corporate Securities 6,338 21 (458) 5,901
Other Securities 88 (21) 67
---------- ---------- ---------- ----------
$ 78,514 $ 489 $ (879) $ 78,124
========== ========== ========== ==========
Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized
Cost) Gains Losses Fair Value
---------- ---------- ---------- ----------
Held to maturity securities
December 31, 2002
Obligations of states and political subdivisions $ 1,455 $ 388 $ 1,843
========== ========== ========== ==========
December 31, 2001
Obligations of states and political subdivisions $ 1,455 $ 486 $ 1,941
========== ========== ========== ==========
December 31, 2000
Obligations of states and political subdivisions $ 25,811 $ 1,115 $ 26,926
========== ========== ========== ==========
The policy of the Company requires that management determine the
appropriate classification of securities at the time of purchase. If management
has the intent and the Company has the ability at the time of purchase to hold
securities until maturity, they are classified as investments held to maturity,
and carried at amortized cost. Securities to be held for indefinite periods of
time and not intended to be held to maturity are classified as available for
sale and carried at market value. Securities held for indefinite periods of time
include securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, resultant prepayment risk, and other related factors.
7
On January 1, 2001, the Company transferred $25,471,0000 of certain
securities from the held to maturity to the available for sale classification at
fair value upon adoption and as allowed by SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities. The unrealized gains on the
securities transferred were $1,115,000. The net unrealized gains and losses are
recorded net of tax within accumulated other comprehensive income, which is a
separate component of stockholders' equity.
The following table shows estimated fair value of our investment
securities (other than equity securities with a fair value of approximately
$4,080,000) by year of maturity as of December 31, 2002. Expected maturities may
differ from contractual maturities because borrowers may have the right to
prepay with or without penalty. Tax-equivalent adjustments have been made in
calculating yields on tax exempt securities.
Maturity Distribution and Yields of Investment Securities (in
thousands):
After One After Five
Within Through Five Through Ten After Ten
One Year Years Years Years Total
---------- ---------- ---------- ---------- ----------
Available for Sale Securities
Securities of U.S. government
agencies and corporations $ 1,507 $ 504 $ 3,000 $ 6,218 $ 11,229
Mortgage backed
Securities 11,677 16,390 80 32,872 61,019
Tax-exempt securities 925 8,596 4,738 9,369 23,628
Taxable municipal securities 1,023 1,023
Corporate securities 1,572 5,330 1,188 1,406 9,496
---------- ---------- ---------- ---------- ----------
Total securities available for
sale $ 15,681 $ 30,820 $ 9,006 $ 50,888 $ 106,395
========== ========== ========== ========== ==========
Weighted average yield 4.96% 6.62% 5.40% 4.73% 5.14%
---------- ---------- ---------- ---------- ----------
Held to Maturity Securities
Tax-exempt securities $ 1,843 $ 1,843
========== ==========
Weighted average yield 10.03% 10.03%
Loan and Lease Portfolio
The Company originates loans for business, consumer and real estate
activities and leases for equipment purchases. Such loans and leases are
concentrated in the primary markets in which the Company operates. Substantially
all loans are collateralized. Generally, real estate loans are secured by real
property. Commercial and other loans are secured by bank deposits or business or
personal assets and leases are generally secured by equipment. The Company's
policy for requiring collateral is through analysis of the borrower, the
borrower's industry and the economic environment in which the loan would be
granted. The loans are expected to be repaid from cash flows or proceeds from
the sale of selected assets of the borrower.
8
Major classifications of loans and leases at December 31 are summarized
as follows (in thousands):
2002 2001 2000 1999 1998
---------- ----------- ----------- ---------- ----------
Commercial, financial and agricultural $ 200,629 $ 148,412 $ 143,658 $ 130,606 $ 123,591
Real estate - construction 25,388 9,764 4,794 4,049 9,084
Real estate - mortgage(1) 104,590 109,830 100,937 82,202 89,865
Installment 87,710 113,970 105,393 92,973 64,777
Direct financing leases 1,795 3,454 5,183 5,395 5,585
Other 24,271 11,588 9,727 15,434 13,904
---------- ----------- ----------- ---------- ----------
Total loans and leases receivable 444,383 397,018 369,692 330,659 306,806
Allowance for loan and lease losses (6,723) (5,786) (4,964) (4,606) (4,704)
Deferred loan costs (fees) 183 (210) (69) (229) (517)
---------- ----------- ----------- ---------- ----------
Net loans and leases $ 437,843 $ 391,022 $ 364,659 $ 325,824 $ 301,585
========== ========== ========== ========== ==========
(1) Includes loans held for sale, as applicable
At December 31, 2002 and 2001, the Company serviced real estate loans
and loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $100,234,000 and $106,911,000
respectively.
The Company was contingently liable under letters of credit issued on
behalf of its customers for $2,461,000 and $2,817,000 at December 31, 2002 and
2001, respectively. At December 31, 2002, commercial and consumer lines of
credit, and real estate loans of approximately $28,637,000 and $37,938,000, were
undisbursed. At December 31, 2001, commercial and consumer lines of credit, and
real estate loans of approximately $38,876,000 and $18,210,000, were
undisbursed. These instruments involve, to varying degrees, elements of credit
and market risk more than the amounts recognized in the balance sheet. The
contractual or notional amounts of these transactions express the extent of the
Company's involvement in these instruments and do not necessarily represent the
actual amount subject to credit loss.
Maturity Distribution and Interest Rate Sensitivity of Loans and Commitments
- ----------------------------------------------------------------------------
The following table shows the maturity of certain loan categories and
commitments. Excluded categories are residential mortgages of 1-4 family
residences, installment loans and lease financing outstanding as of December 31,
2002. Also provided with respect to such loans and commitments are the amounts
due after one year, classified according to the sensitivity to changes in
interest rates (in thousands):
After One
Within Through After
One Year Five Years Five Years Total
---------- ---------- ---------- ----------
Commercial, financial and
Agricultural and installment $ 61,721 $ 138,016 $ 88,602 $ 288,339
Real Estate - construction 23,439 1,883 66 25,388
Undisbursed commitments 36,151 10,983 19,441 66,575
---------- ---------- ---------- ----------
Total $ 121,311 $ 150,882 $ 108,109 $ 380,302
========== ========== ========== ==========
Loans and commitments maturing after one year with:
Fixed interest rates $ 103,956 $ 108,109 $ 212,065
Variable interest rates 46,926 46,926
---------- ---------- ----------
Total $ 150,882 $ 108,109 $ 258,991
========== ========== ==========
9
Summary of Loan Loss Experience:
- --------------------------------
The disclosure required by this item are set forth in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of this Form 10K.
Certificates of Deposit
- -----------------------
Maturities of time certificates of deposit of $100,000 or more
outstanding at December 31, 2002 are summarized as follows (in thousands):
Remaining maturities:
Three months or less $ 11,951
Over three through twelve months 32,219
Over one year through three years 4,721
Over three years
------------
Total $ 48,891
============
As of December 31, 2002, the Company did not have any brokered
deposits. In general, it is the Company's policy not to accept brokered
deposits.
Other Borrowed Funds
- --------------------
Other borrowings outstanding as of December 31, 2002 consist of a loan
from the Federal Reserve Bank ("FRB") in the form of Treasury Tax and Loan notes
which are generally required to be repaid within 30 days from the transaction
date as well as Federal Home Loan Bank ("FHLB") advances. The following table
summarizes these borrowings (in thousands):
2002 2001 2000
---------- ---------- ----------
Short-Term borrowings:
FHLB advances $ 23,500 $ 7,000 $ 13,400
FRB loan 89 254 122
Advances under credit lines 2,999
---------- ---------- ----------
Total Short-Term borrowings $ 23,589 $ 7,254 $ 16,521
========== ========== ==========
Long-Term Borrowings:
FHLB advances $ 9,299 $ 13,393 $ 480
---------- ---------- ----------
Total Long-Term borrowings $ 9,299 $ 13,393 $ 480
========== ========== ==========
The FHLB advances are collateralized by loans and securities pledged to
the FHLB. The following is a breakdown of rates and maturities (dollars in
thousands):
Short Term Long Term
---------- ----------
Amount $ 23,589 $ 9,299
Maturity 2003 2004-2005
Average Rates 2.40% 4.29%
10
The following table provides information related to the Company's short-term
borrowings under its security repurchase arrangements and lines of credit
for the periods indicated (in thousands):
Short-Term Borrowings
2002 2001 2000
---------- ---------- ----------
Average balance during the year $ 26,108 $ 1,957 $ 9,901
Average interest rate for the year 2.53% 5.00% 6.44%
Maximum month-end balance during the year $ 27,000 $ 18,100 $ 16,521
Average rate as of December 31, 2.40% 3.31% 6.18%
Company Obligated Mandatorily Redeemable Cumulative Trust Preferred Securities
Of Subsidiary Grantor Trust
- ---------------------------
The Company formed North Valley Capital Trust I as a special purpose
entity ("SPE") which is consolidated into the Company's financial statements.
North Valley Capital Trust I is a Delaware business trust wholly owned by the
Company and formed for the purpose of issuing Company obligated mandatorily
redeemable cumulative trust preferred securities of Subsidiary Grantor Trust
holding solely junior subordinated debentures. For financial reporting purposes,
the Subordinated Debentures and related trust investments in the Subordinated
Debentures have been eliminated in consolidation and the Trust Preferred
Securities are included in the consolidated balance sheet. Under applicable
regulatory guidelines all of the Trust Preferred Securities currently qualify as
Tier I capital.
During the third quarter of 2001, North Valley Capital Trust I issued
10,000 Trust Preferred Securities with a liquidation value of $1,000 for gross
proceeds of $10,000,000. The entire proceeds of the issuance were invested by
North Valley Capital Trust I in $10,000,000 aggregate principal amount of 10.25%
subordinated debentures due in 2031 (the Subordinated Debentures) issued by the
Company. The Subordinated Debentures represent the sole assets of North Valley
Capital Trust I. The Subordinated Debentures mature in 2031, bear interest at
the rate of 10.25%, payable semi-annually, and are redeemable by the Company at
a premium beginning on or after 2006 based on a percentage of the principal
amount of the Subordinated Debentures stipulated in the Indenture Agreement,
plus any accrued and unpaid interest to the redemption date. The Subordinated
Debentures are redeemable at 100 percent of the principal amount plus any
accrued and unpaid interest to the redemption date at any time on or after 2011.
The Trust Preferred Securities are subject to mandatory redemption to the extent
of any early redemption of the Subordinated Debentures and upon maturity of the
Subordinated Debentures on 2031.
Holders of the trust preferred securities are entitled to cumulative
cash distributions at an annual rate of 10.25% of the liquidation amount of
$1,000 per security. The Company has the option to defer payment of the
distributions for a period of up to five years, as long as the Company is not in
default in the payment of interest on the Subordinated Debentures. The Company
has guaranteed, on a subordinated basis, distributions and other payments due on
the trust preferred securities (the Guarantee). The Guarantee, when taken
together with the Company's obligations under the Subordinated Debentures, the
Indenture Agreement pursuant to which the subordinated Debentures were issued
and the Company's obligations under the Trust Agreement governing the subsidiary
trust, provide a full and unconditional guarantee of amounts due on the Trust
Preferred Securities.
Supervision and Regulation
- --------------------------
The common stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and the qualification
requirements of the California Corporate Securities Law of 1968, as amended. The
Company is also subject to the periodic reporting requirements of Section 13 of
the Securities Exchange Act of 1934, as amended, which include, but are not
limited to, the filing of annual, quarterly and other current reports with the
Securities and Exchange Commission.
NVB and SRB are both licensed by the California Commissioner of
Financial Institutions (the "Commissioner"), their deposits are insured by the
FDIC, and they have both chosen to become members of the Federal Reserve System.
Consequently, NVB and SRB are subject to the supervision of, and are regularly
examined by, the Commissioner and the Board of Governors of the Federal Reserve
System ("FRB" or "Board of Governors). Such supervision and regulation include
comprehensive reviews of all major aspects of the Bank's business and condition,
including its capital ratios, allowance for loan and lease losses and other
factors. However, no inference should be drawn that such authorities have
approved any such factors. NVB and SRB are required to file reports with the
Commissioner and the FRB and provide such additional information as the
Commissioner and the FRB may require.
11
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 SRB 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 SRB to affiliates, and (b) on investments by
NVB or SRB in affiliates' stock as collateral for loans to any borrower. The
Company and its subsidiaries are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
The Board of Governors, the OCC and the FDIC have adopted risk-based
capital guidelines for evaluating the capital adequacy of bank holding companies
and banks. The guidelines are designed to make capital requirements sensitive to
differences in risk profiles among banking organizations, to take into account
off-balance sheet exposures and to aid in making the definition of bank capital
uniform internationally. Under the guidelines, the Company and its banking
subsidiaries are required to maintain capital equal to at least 8.0% of its
assets and commitments to extend credit, weighted by risk, of which at least
4.0% must consist primarily of common equity (including retained earnings) and
the remainder may consist of subordinated debt, cumulative preferred stock, or a
limited amount of loan loss reserves. The Company and its banking subsidiaries
are subject to regulations issued by the Board of Governors, the OCC and the
FDIC, which require maintenance of a certain level of capital. These regulations
impose two capital standards: a risk-based capital standard and a leverage
capital standard.
Assets, commitments to extend credit and off-balance sheet items are
categorized according to risk and certain assets considered to present less risk
than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
Under the Board of Governors' risk-based capital guidelines, assets
reported on an institution's balance sheet and certain off-balance sheet items
are assigned to risk categories, each of which has an assigned risk weight.
Capital ratios are calculated by dividing the institution's qualifying capital
by its period-end risk-weighted assets. The guidelines establish two categories
of qualifying capital: Tier 1 capital (defined to include common shareholders'
equity and noncumulative perpetual preferred stock) and Tier 2 capital which
includes, among other items, limited life (and in case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserve for credit losses. Tier 2 capital may also include up
to 45% of the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if any, of
fair market value over the book value or historical cost of the investment
security). The federal regulatory agencies reserve the right to exclude all or a
portion of the unrealized gains upon a determination that the equity securities
are not prudently valued. Unrealized gains and losses on other types of assets,
such as bank premises and available-for-sale debt securities, are not included
in Tier 2 capital, but may be taken into account in the evaluation of overall
capital adequacy and net unrealized losses on available-for-sale equity
securities will continue to be deducted from Tier 1 capital as a cushion against
risk. Each institution is required to maintain a risk-based capital ratio
(including Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier
1 capital.
Under the Board of Governors' leverage capital standard, an institution
is required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. The Board of
12
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, 2002, NVB, SRB and the Company were in compliance with
the risk-based capital and leverage ratios described above. See Item 8,
Financial Statements and Supplementary Data and Note 19 to the Financial
Statements incorporated by reference, therein, for a listing of the Company's
risk-based capital ratios at December 31, 2002 and 2001.
The Board of Governors, the OCC and FDIC have adopted regulations
implementing a system of prompt corrective action pursuant to Section 38 of the
Federal Deposit Insurance Act and Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five
capital categories with the following characteristics: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater, and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater, and the institution does not meet
the definition of a "well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio less than 8%, a
Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less
than 4%; (4) "Significantly undercapitalized" - consisting of institutions with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of tangible equity
to total assets that is equal to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
13
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
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 and SRB is subject
to restrictions set forth in the California Financial Code, as well as
restrictions established by the FDIC. See Item 5 below for further information
regarding the payment of cash dividends by the Company, NVB and SRB.
14
The Patriot Act
- ---------------
On October 26, 2001, President Bush signed the USA Patriot Act (the
"Patriot Act"), which includes provisions pertaining to domestic security,
surveillance procedures, border protection, and terrorism laws to be
administered by the Secretary of the Treasury. Title III of the Patriot Act
entitled, "International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001" includes amendments to the Bank Secrecy Act which expand the
responsibilities of financial institutions in regard to anti-money laundering
activities with particular emphasis upon international money laundering and
terrorism financing activities through designated correspondent and private
banking accounts.
Effective December 25, 2001, Section 313(a) of the Patriot Act
prohibits any insured financial institution such as North Valley Bank and Six
Rivers Bank, from providing correspondent accounts to foreign banks which do not
have a physical presence in any country (designated as "shell banks"), subject
to certain exceptions for regulated affiliates of foreign banks. Section 313(a)
also requires financial institutions to take reasonable steps to ensure that
foreign bank correspondent accounts are not being used to indirectly provide
banking services to foreign shell banks, and Section 319(b) requires financial
institutions to maintain records of the owners and agent for service of process
of any such foreign banks with whom correspondent accounts have been
established.
Effective July 23, 2002, Section 312 of the Patriot Act creates a
requirement for special due diligence for correspondent accounts and private
banking accounts. Under Section 312, each financial institution that
establishes, maintains, administers, or manages a private banking account or a
correspondent account in the United States for a non-United States person,
including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where
necessary, enhanced, due diligence policies, procedures, and controls that are
reasonably designed to detect and record instances of money laundering through
those accounts.
The Company and its subsidiaries are not currently aware of any account
relationships between the Company and its subsidiaries and any foreign bank or
other person or entity as described above under Sections 313(a) or 312 of the
Patriot Act. The terrorist attacks on September 11, 2001 have realigned national
security priorities of the United States and it is reasonable to anticipate that
the United States Congress may enact additional legislation in the future to
combat terrorism including modifications to existing laws such as the Patriot
Act to expand powers as deemed necessary. The effects which the Patriot Act and
any additional legislation enacted by Congress may have upon financial
institutions is uncertain; however, such legislation would likely increase
compliance costs and thereby potentially have an adverse effect upon the
Company's results of operations.
The Sarbanes-Oxley Act of 2002
- ------------------------------
President George W. Bush signed the Sarbanes-Oxley Act of 2002 (the
"Act") on July 30, 2002, which responds to recent issues in corporate governance
and accountability. Among other matters, key provisions of the Act and rules
promulgated by the Securities and Exchange Commission pursuant to the Act
include the following:
o Expanded oversight of the accounting profession by creating a new
independent public company oversight board to be monitored by the SEC.
o Revised rules on auditor independence to restrict the nature of
non-audit services provided to audit clients and to require such
services to be pre-approved by the audit committee.
o Improved corporate responsibility through mandatory listing standards
relating to audit committees, certifications of periodic reports by the
CEO and CFO and making issuer interference with an audit a crime.
o Enhanced financial disclosures, including periodic reviews for largest
issuers and real time disclosure of material company information.
o Enhanced criminal penalties for a broad array of white collar crimes
and increases in the statute of limitations for securities fraud
lawsuits.
o Disclosure of whether a company has adopted a code of ethics that
applies to the company's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, and disclosure of any amendments
or waivers to such code of ethics. The disclosure obligation becomes
effective for fiscal years ending on or after July 15, 2003. The ethics
code must contain written standards that are reasonably designed to
deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships;
o Full, fair, accurate, timely, and understandable disclosure in reports
and documents that a registrant files with, or submits to, the
Securities and Exchange Commission and in other public communications
made by the registrant;
15
o Compliance with applicable governmental laws, rules and regulations;
o The prompt internal reporting to an appropriate person or persons
identified in the code of violations of the code; and
o Accountability for adherence to the code.
o Disclosure of whether a company's audit committee of its board of
directors has a member of the audit committee who qualifies as an
"audit committee financial expert." The disclosure obligation becomes
effective for fiscal years ending on or after July 15, 2003. To qualify
as an "audit committee financial expert," a person must have:
o An understanding of generally accepted accounting principles and
financial statements;
o The ability to assess the general application of such principles
in connection with the accounting for estimates, accruals and
reserves;
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth
and complexity of issues that can reasonably be expected to be
raised by the registrant's financial statements, or experience
actively supervising one or more persons engaged in such
activities;
o An understanding of internal controls and procedures for
financial reporting; and
o An understanding of audit committee functions.
o A person must have acquired the above listed attributes to be
deemed to qualify as an "audit committee financial expert"
through any one or more of the following:
o Education and experience as a principal financial officer,
principal accounting officer, controller, public accountant or
auditor or experience in one or more positions that involve the
performance of similar functions;
o Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant,
auditor or person performing similar functions;
o Experience overseeing or assessing the performance of companies
or public accountants with respect to the preparation, auditing
or evaluation of financial statements; or
o Other relevant experience.
The rule contains a specific safe harbor provision to clarify that the
designation of a person as an "audit committee financial expert" does not cause
that person to be deemed to be an "expert" for any purpose under Section 11 of
the Securities Act of 1933, as amended, or impose on such person any duties,
obligations or liability greater that the duties, obligations and liability
imposed on such person as a member of the audit committee and the board of
directors, absent such designation. Such a designation also does not affect the
duties, obligations or liability of any other member of the audit committee or
board of directors.
o A prohibition on insider trading during pension plan black-out periods.
o Disclosure of off-balance sheet transactions.
o A prohibition on personal loans to directors and officers.
o Conditions on the use of non-GAAP (generally accepted accounting
principles) financial measures.
o Standards on professional conduct for attorneys requiring attorneys
having an attorney-client relationship with a company, among other
matters, to report "up the ladder" to the audit committee, another
board committee or the entire board of directors certain material
violations.
o Expedited filing requirements for Form 4 reports of changes in
beneficial ownership of securities reducing the filing deadline to
within 2 business days of the date a transaction triggers an obligation
to report.
o Accelerated filing requirements for Forms 10-K and 10-Q by public
companies which qualify as "accelerated filers" to be phased-in over a
four year period reducing the filing deadline for Form 10-K reports
from 90 days after the fiscal year end to 60 days and Form 10-Q reports
from 45 days after the fiscal quarter end to 35 days.
o Disclosure concerning website access to reports on Forms 10-K, 10-Q and
8-K, and any amendments to those reports, by "accelerated filers" as
soon as reasonably practicable after such reports and material are
filed with or furnished to the Securities and Exchange Commission.
o Proposed rules requiring national securities exchanges and national
securities associations to prohibit the listing of any security whose
issuer does not meet audit committee standards established pursuant to
the Act. These proposed rules would establish audit committee:
o Independence standards for members;
o Responsibility for selecting and overseeing the issuer's
independent accountant;
o Responsibility for handling complaints regarding the issuer's
accounting practices;
o Authority to engage advisers; and
o Funding requirements for the independent auditor and outside
advisers engaged by the audit committee.
16
The proposed audit committee rules provide a one-year phase-in period
for compliance. The Securities and Exchange Commission must adopt final rules by
April 26, 2003.
The effect of the Act upon the Company is uncertain; however, it is
likely that the Company will incur increased costs to comply with the Act and
the rules and regulations promulgated pursuant to the Act by the Securities and
Exchange Commission and other regulatory agencies having jurisdiction over the
Company. The Company does not currently anticipate, however, that compliance
with the Act and such rules and regulations will have a material adverse effect
upon its financial position or results of its operations or its cash flows.
The California Corporate Disclosure Act
- ---------------------------------------
On September 28, 2002, California Governor Gray Davis signed into law
the California Corporate Disclosure Act (the "CCD Act"), which became effective
January 1, 2003. The CCD Act requires publicly traded corporations incorporated
or qualified to do business in California to disclose information about their
past history, auditors, directors and officers. The CCD Act requires the Company
to disclose:
o The name of the a company's independent auditor and a description of
services, if any, performed for the company during the previous 24 months;
o The annual compensation paid to each director and executive officer,
including stock or stock options not otherwise available to other company
employees;
o A description of any loans made to a director at a "preferential" loan rate
during the previous 24 months, including the amount and terms of the loans;
o Whether any bankruptcy was filed by a company or any of its directors or
executive officers within the previous 10 years;
o Whether any director or executive officer of a company has been convicted
of fraud during the previous 10 years; and
o Whether a company violated any federal securities laws or any securities or
banking provisions of California law during the previous 10 years for which
the company was found liable or fined more than $10,000.
The Company does not currently anticipate that compliance with the CCD Act
will have a material adverse effect upon its financial position or results of
its operations or its cash flows.
Competition
- -----------
At June 30, 2002, the competing commercial and savings banks in
competition with the Company, NVB and SRB, had thirty-two banking offices in
Shasta and Trinity Counties where NVB operates its fourteen banking offices and
there were fifty-two competing offices of commercial and savings bank offices in
Del Norte, Mendocino and Humboldt Counties where SRB operates its seven banking
offices. Additionally, the Company competes with thrifts and, to a lesser
extent, credit unions, finance companies and other financial service providers
for deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services and international banking which the Company is
not authorized nor prepared to offer currently. The Company has arranged with
correspondent banks and with others to provide some of these services for their
customers. For borrowers requiring loans in excess of each subsidiary bank's
legal lending limit, the Company has offered, and intend to offer in the future,
such loans on a participating basis with correspondent banks and with other
independent banks, retaining the portion of such loans which is within the
applicable lending limits. As of December 31, 2002, NVB's and SRB's aggregate
legal lending limits to a single borrower and such borrower's related parties
were $5,274,000 and $2,869,000 on an unsecured basis and $8,789,000 and
$4,781,000 on a fully secured basis, based on regulatory capital of $35,140,000
and $18,166,000, 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
17
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 SRB. 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.
Banking is a business that depends heavily on net interest income. Net
interest income is defined as the difference between the interest rate paid to
obtain deposits and other borrowings and the interest rate received on loans
extended to customers and on securities held in each subsidiary bank's
portfolio. Commercial banks compete with savings and loan associations, credit
unions, other financial institutions and other entities for funds. For instance,
yields on corporate and government debt securities and other commercial paper
affect the ability of commercial banks to attract and hold deposits. Commercial
banks also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
The net interest income of the Company, and to a large extent, its
earnings, are affected not only by general economic conditions, both domestic
and foreign, but also by the monetary and fiscal policies of the United States
as set by statutes and as implemented by federal agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession by its
open market operations in United States government securities, adjustments in
the amount of interest free reserves that banks and other financial institutions
are required to maintain, and adjustments to the discount rates applicable to
borrowing by banks from the Federal Reserve Board. These activities influence
the growth of bank loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and timing of any future
changes in monetary policies and their impact on the Company are not
predictable.
In 1996, pursuant to Congressional mandate, the FDIC reduced bank
deposit insurance assessment rates to a range from $0 to $0.27 per $100 of
deposits, dependent upon a bank's risk. Based upon the above risk-based
assessment rate schedule, NVB's and SRB's current capital ratios and NVB's and
SRB's current levels of deposits, NVB and SRB anticipate no change in the
assessment rate applicable during 2003 from that in 2002.
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.
18
Prior to the FSMA, significant restrictions existed on the affiliation
of banks with securities firms and on the direct conduct by banks of securities
dealing and underwriting and related securities activities. Banks were also
(with minor exceptions) prohibited from engaging in insurance activities or
affiliating with insurers. The FSMA removes these restrictions and substantially
eliminates the prohibitions under the Bank Holding Company Act on affiliations
between banks and insurance companies. Bank holding companies, which qualify as
financial holding companies through an application process, can now insure,
guarantee, or indemnify against loss, harm, damage, illness, disability, or
death; issue annuities; and act as a principal, agent, or broker regarding such
insurance services.
In order for a commercial bank to affiliate with a securities firm or
an insurance company pursuant to the FSMA, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Board of Governors a certification to such effect and a declaration
that it elects to become a financial holding company. The amendment of the Bank
Holding Company Act now permits financial holding companies to engage in
activities, and acquire companies engaged in activities, that are financial in
nature or incidental to such financial activities. Financial holding companies
are also permitted to engage in activities that are complementary to financial
activities if the Board of Governors determines that the activity does not pose
a substantial risk to the safety or soundness of depository institutions or the
financial system in general. These standards expand upon the list of activities
"closely related to banking" which have to date defined the permissible
activities of bank holding companies under the Bank Holding Company Act.
One further effect of the Act is to require that federal financial
institution and securities regulatory agencies prescribe regulations to
implement the policy that financial institutions must respect the privacy of
their customers and protect the security and confidentiality of customers'
non-public personal information. These regulations will require, in general,
that financial institutions (1) may not disclose non-public personal information
of customers to non-affiliated third parties without notice to their customers,
who must have opportunity to direct that such information not be disclosed; (2)
may not disclose customer account numbers except to consumer reporting agencies;
and (3) must give prior disclosure of their privacy policies before establishing
new customer relationships.
The Company, NVB, and SRB have not determined whether they may seek to
acquire and exercise new powers or activities under the FSMA, and the extent to
which competition will change among financial institutions affected by the FSMA
has not yet become clear.
Certain legislative and regulatory proposals that could affect the
Company and banking business in general are periodically introduced before the
United States Congress, the California State Legislature and Federal and state
government agencies. It is not known to what extent, if any, legislative
proposals will be enacted and what effect such legislation would have on the
structure, regulation and competitive relationships of financial institutions.
It is likely, however, that such legislation could subject the Company and its
subsidiary banks to increased regulation, disclosure and reporting requirements
and increase competition and the Company's cost of doing business.
In addition to legislative changes, the various federal and state
financial institution regulatory agencies frequently propose rules and
regulations to implement and enforce already existing legislation. It cannot be
predicted whether or in what form any such rules or regulations will be enacted
or the effect that such and regulations may have on the Company and its
subsidiary banks.
The effect of the Act upon corporations is uncertain; however, it is
likely that compliance costs may increase as corporations modify procedures if
required to conform to the provisions of the Act. The Company does not currently
anticipate that compliance with the Act will have a material effect upon its
financial position or results of its operations or its cash flows.
Discharge of Materials into the Environment
- -------------------------------------------
Compliance with federal, state and local regulations regarding the
discharge of materials into the environment may have a substantial effect on the
capital expenditure, earnings and competitive position of the Company in the
19
event of lender liability or environmental lawsuits. Under federal law,
liability for environmental damage and the cost of cleanup may be imposed upon
any person or entity that is an "owner" or "operator" of contaminated property.
State law provisions, which were modeled after federal law, are substantially
similar. Congress established an exemption under Federal law for lenders from
"owner" and/or "operator" liability, which provides that "owner" and/or
"operator" do not include "a person, who, without participating in the
management of a vessel or facility, holds indicia of ownership primarily to
protect his security interests in the vessel or facility."
In the event that the Company was held liable as an owner or operator
of a toxic property, it could be responsible for the entire cost of
environmental damage and cleanup. Such an outcome could have a serious effect on
the Company's consolidated financial condition depending upon the amount of
liability assessed and the amount of cleanup required.
The Company takes reasonable steps to avoid loaning against property
that may be contaminated. In order to identify possible hazards, the Company
requires that all fee appraisals contain a reference to a visual assessment of
hazardous waste by the appraiser. Further, on loans proposed to be secured by
industrial, commercial or agricultural real estate, an Environmental
Questionnaire must be completed by the borrower and any areas of concern
addressed. Additionally, the borrower is required to review and sign a Hazardous
Substance Certificate and Indemnity at the time the note is signed.
If the investigation reveals and if certain warning signs are
discovered, but it cannot be easily ascertained, that an actual environmental
hazard exists, the Company may require that the owner/buyer of the property, at
his/her expense, have an Environmental Inspection performed by an insured,
bonded environmental engineering firm acceptable to the Company.
California Power Crisis
- -----------------------
During 2001, the State of California experienced serious periodic
electric power shortages. It is uncertain whether or when these shortages will
occur again. The Company and its subsidiaries could be materially and adversely
affected either directly or indirectly by a severe electric power shortage if
such a shortage caused any of its critical data processing or computer systems
and related equipment to fail, or if the local infrastructure systems such as
telephone systems should fail, or the Company's and its subsidiaries'
significant vendors, suppliers, service providers, customers, borrowers, or
depositors are adversely impacted by their internal systems or those of their
respective customers or suppliers. Material increases in the expenses related to
electric power consumption and the related increase in operating expense could
also have an adverse effect on the Company's future results of operations.
Certain Additional Business Risks
- ---------------------------------
The Company's business, financial condition and operating results can
be impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
The Company and its subsidiaries are dependent on the successful
recruitment and retention of highly qualified personnel. Business banking, one
of the Company's principal lines of business, is dependent on relationship
banking, in which Company personnel develop professional relationships with
small business owners and officers of larger business customers who are
responsible for the financial management of the companies they represent. If
these employees were to leave the Company and become employed by a local
competing bank, the Company could potentially lose business customers. In
addition, the Company relies on its customer service staff to effectively serve
the needs of its consumer customers. Since overall employment levels are near
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 4,634,094 were
outstanding at December 31, 2002. Pursuant to its stock option plans, at
December 31, 2002, the Company had outstanding options to purchase 676,865
shares of Company Common Stock. As of December 31, 2002, 730,672 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.
20
A large portion of the loan portfolio of the Company is dependent on
real estate. At December 31, 2002, real estate served as the principal source of
collateral with respect to approximately 57% of the Company's loan portfolio. A
worsening of current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available-for-sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value for Company Common Stock. Acts of nature, including fires,
earthquakes and floods, which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also negatively impact the
Company's financial condition.
The Company is subject to certain operations risks, including, but not
limited to, data processing system failures and errors and customer or employee
fraud. The Company maintains a system of internal controls to mitigate against
such occurrences and maintains insurance coverage for such risks, but should
such an event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
The terrorist actions on September 11, 2001, and thereafter, plus
military actions taken by the United States in Afghanistan, Iraq and elsewhere,
have had significant adverse effects upon the United States economy. Whether
terrorist activities in the future and the actions taken by the United States
and its allies in combating terrorism on a worldwide basis will adversely impact
the Company, and the extent of such impact, is uncertain. However, such events
have had and may continue to have an adverse effect on the economy in the
company's market areas. Such continued economic deterioration could adversely
affect the company's future results of operations by, among other matters,
reducing the demand for loans and other products and services offered by the
company, increasing nonperforming loans and the amounts reserved for loan
losses, and causing a decline in the Company's stock price.
Recent Accounting Pronouncements
- --------------------------------
On January 1, 2002, the Company adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 addresses the financial accounting and reporting for business combinations
and requires the use of a single method to account for business combinations
- --the purchase method of accounting--for all business combinations initiated
after June 30, 2001. The Company accounted for its acquisition of SRB in 2000
under the pooling-of-interests method of accounting for business combinations
but will not be allowed to account for future acquisitions under such method. In
addition, SFAS No. 141 requires that intangible assets be recognized as assets
apart from goodwill if they meet one of two criteria, the contractual-legal
criterion or the separability criterion. Pursuant to SFAS No. 142, goodwill and
other intangible assets that have indefinite useful lives will be evaluated
periodically for impairment rather than amortized. Because the Company has not
previously accounted for an acquisition under the purchase method of accounting,
the adoption of these accounting standards did not have a material effect on the
Company's consolidated financial position or its operations or its cash flows.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. This Statement, which addresses financial accounting and
reporting matters for the acquisition of all or part of a financial institution,
applies to all such transactions except those between two or more mutual
enterprises. This statement removes acquisitions of financial institutions,
other than transactions between two or more mutual enterprises, from the scope
of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions, and related interpretations. This Statement requires a financial
institution to apply SFAS No. 144 and evaluate long-term customer relationship
intangible assets (core deposit intangibles) for impairment. Under SFAS No. 72,
a financial institution may have recorded an unidentifiable intangible asset
arising from a business combination. If certain criteria in SFAS No. 147 are
met, the amount of the unidentifiable intangible asset will be reclassified to
goodwill upon adoption of this Statement and any amortization amounts that were
incurred after the adoption of SFAS No. 142 must be reversed. Reclassified
goodwill would then be measured for impairment under the provisions of SFAS No.
142. Provisions of this Statement are applicable on or after October 1, 2002.
The acquisition of certain branches by SRB prior to its acquisition by the
Company had been accounted for under the standards of SFAS No. 72. The Company
will continue to amortize its core deposit intangible that arose from the branch
acquisition. In management's opinion, the adoption of this Statement did not
have a material effect on the Company's consolidated financial position or
results of its operations and its cash flows.
21
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123. This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reporting containing financial
statements for interim periods beginning after December 15, 2002. Because the
Company accounts for the compensation cost associated with its stock option plan
under the intrinsic value method, the alternative methods of transition will not
apply to the Company. The additional disclosure requirements of the statement
are included in these financial statements. In management's opinion, the
adoption of this Statement did not have a material impact on the Company's
consolidated financial position or results of its operations or its cash flows.
22
ITEM 2. DESCRIPTION OF PROPERTIES
- ---------------------------------
The Company's principal executive and administrative office is located
in a leased building at 300 Park Marina Circle, Redding, Shasta County,
California.
The following table sets forth information about the Company's
premises:
Description Office Type Owned/Leased
- ----------------------------- ------------------------------- -----------------
North Valley Bank:
Redding Branch Owned
Westwood Branch Leased
Shasta Lake Branch Owned
Country Club Branch Owned
Weaverville Branch Owned
Hayfork Branch Owned
Buenaventura Supermarket Branch Leased
Anderson Branch Owned
Enterprise Branch Owned
Cottonwood Supermarket Branch Leased
Palo Cedro Branch Leased
Churn Creek Branch Owned
Redding Warehouse Storage Facility Leased
Park Marina Circle Administrative/Limited Use Leased
Branch
Park Marina Limited Used Branch Leased
BPI Data Processing/Administrative Owned
Six Rivers Bank:
Eureka Mall Branch Leased
McKinleyville Branch Leased
Crescent City Branch Owned
Eureka Downtown Branch Owned
Ferndale Branch Owned
Garberville Branch Leased
Willits Branch Owned
In November 2000, SRB was required to divest of its Weaverville branch
office as a condition of regulatory approval of the plan of reorganization
between the Company and SRB. All of the deposits and certain loans were sold in
the transaction and the property is now being leased to another financial
institution, which currently operates the property as a branch office.
From time to time, the Company through NVB and SRB 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.
23
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
with the Nasdaq Stock Market in April 1998.
The following table summarizes the Common Stock high and low trading
prices traded during the two year period ended December 31, 2002 as reported on
the Nasdaq Stock Market and the cash dividends declared on the common stock
during the same period. All per share data has not been retroactively restated
to give effect for the three-for-two stock split approved by the Board of
Directors on March 11, 2003 and payable in the form of a stock dividend to
shareholders of record on April 15, 2003.
Price of Common Cash Dividends
Stock Declared
--------------------------- ---------------
High Low
------------ ------------
Quarter Ended:
March 31, 2001 $ 13.75 $ 12.13 $ 0.10
June 30, 2001 14.95 12.00 0.10
September 30, 2001 14.50 12.50 0.10
December 31, 2001 13.97 13.05 0.10
March 31, 2002 $ 16.60 $ 13.53 $ 0.12
June 30, 2002 17.27 15.81 0.12
September 30, 2002 17.00 15.05 0.12
December 31, 2002 18.11 15.55 0.14
The Company had approximately 988 shareholders of record as of March
18, 2003.
The Company's primary source of funds for payment of dividends to its
shareholders is the receipt of dividends from NVB and SRB. The payment of
dividends by a California State chartered bank is subject to various legal and
regulatory restrictions. See "Supervision and Regulation" in Item 1, Description
of Business, for information related to shareholder and dividend matters
including information regarding certain limitations on payment of dividends.
24
ITEM 6. SELECTED FINANCIAL DATA
North Valley Bancorp & Subsidiaries
(dollars in thousands except per share data)
FOR THE YEAR ENDED DECEMBER 31 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Net interest income $ 29,110 $ 24,336 $ 23,731 $ 22,250 $ 20,732
Net income $ 8,064 $ 6,666 $ 3,088 $ 5,744 $ 2,960
Performance ratios:
Return on average assets 1.30% 1.18% 0.58% 1.13% 0.62%
Return on average equity 17.31% 13.11% 5.82% 11.35% 6.00%
Capital Ratios:
Risk based capital:
Tier 1 (4% Minimum Ratio) 11.33% 11.57% 13.05% 13.37% 12.77%
Total (8% Minimum Ratio) 12.58% 12.82% 14.30% 14.44% 13.82%
Leverage Ratio 8.59% 8.37% 9.73% 9.27% 8.77%
BALANCE SHEET DATA AT DECEMBER 31
Assets $ 655,770 $ 594,973 $ 540,221 $ 521,073 $ 499,598
Investment securities and
federal funds sold $ 133,330 $ 132,881 $ 105,235 $ 133,280 $ 152,873
Net loans (including loans held for sale) $ 437,843 $ 391,022 $ 364,659 $ 325,824 $ 301,585
Deposits $ 555,053 $ 514,278 $ 460,291 $ 452,697 $ 442,813
Stockholders' equity $ 50,029 $ 43,678 $ 54,857 $ 51,841 $ 48,700
COMMON SHARE DATA
Net income (1)
Basic $ 1.72 $ 1.25 $ .53 $ 1.00 $ .52
Diluted $ 1.67 $ 1.23 $ .53 $ .99 $ .51
Book value (2) $ 10.80 $ 9.39 $ 9.45 $ 8.97 $ 8.49
Dividend payout ratio 28.96% 31.50% 54.86% 25.81% 46.72%
Shares Outstanding 4,634,094 4,651,056 5,805,416 5,780,997 5,736,519
SUMMARY OF OPERATIONS
Total interest income $ 38,902 $ 39,811 $ 39,966 $ 36,279 $ 35,383
Total interest expense 9,792 15,475 16,235 14,029 14,651
---------- ---------- ---------- ---------- ----------
Net interest income 29,110 24,336 23,731 22,250 20,732
Provision for loan and lease losses 1,795 1,370 1,670 1,262 5,334
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and lease losses 27,315 22,966 22,061 20,988 15,398
Total non interest income 9,313 8,852 6,872 5,368 5,690
Total non interest expense 24,728 22,090 24,236 18,281 17,300
---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 11,900 9,728 4,697 8,075 3,788
Provision for income taxes 3,836 3,062 1,609 2,331 828
---------- ---------- ---------- ---------- ----------
Net Income $ 8,064 $ 6,666 $ 3,088 $ 5,744 $ 2,960
========== ========== ========== ========== ==========
(1) Net income per share amounts have been adjusted to give effect to a two for
one stock split on October 15, 1998.
(2) Represents stockholders' equity divided by the number of shares of common
stock outstanding at the end of the period indicated.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------
Certain statements in this Form 10-K (excluding statements of fact or
historical financial information) involve forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in Banking industry increases significantly; changes in the
interest rate environment reduce margins; general economic conditions, either
nationally or regionally, are less favorable than expected, resulting in, among
other things, a deterioration in credit quality and an increase in the provision
for possible loan losses; changes in the regulatory environment; changes in
business conditions, particularly in the Northern California region; volatility
of rate sensitive deposits; operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; the
California power crises; the U.S. "war on terrorism" and military action by the
U.S. in the Middle East, and changes in the securities markets.
Critical Accounting Policies
- ----------------------------
General
North Valley Bancorp's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within our financial statements is,
to a significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. We use historical loss factors as one factor in determining the
inherent loss that may be present in our loan portfolio. Actual losses could
differ significantly from the historical factors that we use. Other estimates
that we use are related to the expected useful lives of our depreciable assets.
In addition, GAAP itself may change from one previously acceptable method to
another method. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (1) Statement of Financial Accountings Standards (SFAS) No. 5
"Accounting for Contingencies", which requires that losses be accrued when they
are probable of occurring and estimable; and (2) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued on
impaired loans (as defined) based on the differences between the value of
collateral, present value of future cash flows or values that are observable in
the secondary market and the loan balance.
Our allowance for loan losses has three basic components: the formula
allowance, the specific allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses an historical loss view as an
indicator of future losses and as a result could differ from the loss incurred
in the future. However, since this history is updated with the most recent loss
information, the errors that might otherwise occur are mitigated. The specific
allowance uses various techniques to arrive at an estimate of loss. Historical
loss information, expected cash flows and fair market value of collateral are
used to estimate those losses. The use of these values is inherently subjective
and our actual losses could be greater or less than the estimates. The
unallocated allowance captures losses that are attributable to various economic
events, industry or geographic sectors whose impact on the portfolio have
occurred but have yet to be recognized in either the formula or specific
allowances. For further information regarding our allowance for loan losses, see
page 11.
26
Overview
- --------
North Valley Bancorp (the "Company") is a multi-bank holding company for
North Valley Bank ("NVB"), and Six Rivers Bank ("SRB") both state-chartered
banks. NVB operates out of its main office located at 300 Park Marina Circle,
Redding, CA 96001, with fourteen branches, which include two supermarket
branches in Shasta and Trinity Counties in Northern California. SRB operates
seven branches located in Del Norte, Mendocino and Humboldt Counties. The
Company operates as three business segments; North Valley Bank, Six Rivers Bank
and Other. Management analyzes the operations of NVB, SRB and Other separately.
Other consists of Bancorp and BPI, both of which provide services to NVB and
SRB. Management allocates the costs of Bancorp and BPI to NVB and SRB based
primarily on usage through a variety of statistical data. NVB and SRB are
separately chartered institutions each with its own Board of Directors and
regulated independently of each other. The Company's principal business consists
of attracting deposits from the general public and using the funds to originate
commercial, real estate and installment loans to customers, who are
predominately small and middle market businesses and middle income individuals.
The Company's primary source of revenues is interest income from its loan and
investment securities portfolios. The Company is not dependent on any single
customer for more than ten percent of its revenues.
Earnings Summary
- ----------------
2002 2001 2000
---------- ---------- ----------
For the year ended December 31,
(in thousands except per share amounts)
Net interest income $ 29,110 $ 24,336 $ 23,731
Provision for loan and lease losses (1,795) (1,370) (1,670)
Noninterest income 9,313 8,852 6,872
Noninterest expense (24,728) (22,090) (24,236)
Provision for income taxes (3,836) (3,062) (1,609)
---------- ---------- ----------
Net income $ 8,064 $ 6,666 $ 3,088
========== ========== ==========
Earnings Per Share
Basic $ 1.72 $ 1.25 $ 0.53
========== ========== ==========
Diluted $ 1.67 $ 1.23 $ 0.53
========== ========== ==========
Return on Average Assets 1.30% 1.18% 0.58%
Return on Average Equity 17.31% 13.11% 5.82%
For the year ended December 31, 2002, the Company recorded net income
of $8,064,000 as compared to $6,666,000 for the same period in 2001 and
$3,088,000 in 2000. On a per share basis, diluted earnings per share was $1.67
for the year ended December 31, 2002 compared to $1.23 for the same period in
2001 and $0.53 for the same period in 2000.
The increase in net income for the year ended December 31, 2002 over
2001 was primarily due to an increase in net interest income of $4,774,000. This
was due to lower interest rates as interest expense fell from $15,475,000 in
2001 to $9,792,000 in 2002, a decrease of $5,683,000 or 36.7%. The increase in
net interest income was partially offset by and increase in non -interest
expense which increased from $22,090,000 in 2001 to $24,728,000 in 2002.
For the year ended December 31, 2002, the Company paid or declared
quarterly dividends totaling $2,335,000 to stockholders of the Company. The
Company's return on average total assets and average stockholders' equity were
1.30% and 17.31% for the period ended December 31, 2002, compared with 1.18% and
13.11% for the same period in 2001 and .58% and 5.82% for the same period in
2000.
Segment Information
- -------------------
The Company operates as three business segments: North Valley Bank, Six
Rivers Bank and Other. Management analyzes the operations of NVB, SRB and Other
separately. Other consists of Bancorp and BPI, both of which provide services to
NVB and SRB. Other also includes all eliminating entries for inter-company
revenue and expense items required for consolidation. For the year ended
December 31, 2002, total revenues increased at both NVB and SRB but decreased in
the Other segment. This was due to overall loan and deposit growth as well as
27
growth in non-interest income. Most notably, total revenues at NVB grew by
$5,587,000 or 24.8%. This was due primarily to an increase in net interest
income of $4,728,000 as well as gains on sales of both loans and securities of
$570,000 which occurred in 2002. Net income at NVB increased from $5,878,000 in
2001 to $7,295,000 in 2002, and increase of $1,417,000 or 24.1%. Total assets
increased at NVB by $49,532,000 or 12.4% from 2001 to 2002.
Total revenues at SRB increased slightly from $10,473,000 in 2001 to
$10,928,000 in 2002, a 4.3% increase. Net income remained relatively flat from
2001 to 2002, increasing 4.8%. All other areas of non-interest income for SRB
grew in a similar fashion to the Company's results. The growth in revenues at
SRB was primarily due to net interest income which increased by $633,000 or
7.9%. Total assets at SRB increased from $199,166,000 at December 31, 2001 to
$221,920,000 in 2002. Total deposits at SRB increased from $165,666,000 at
December 31, 2001 to $169,785,000 at December 31, 2002. Total loans at SRB grew
from $127,935,000 at December 31, 2001 to $142,035,000 at December 31, 2002.
Total revenues in Other decreased from $218,000 in 2001 to a loss of $589,000
primarily due to the interest expense associated with the Company's Trust
Preferred Securities.
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 SRB Other Total
---------- ----------- ----------- ----------
Year ended December 31, 2002:
Total revenues $ 28,084 $ 10,928 $ (589) $ 38,423
Net income (loss) $ 7,295 $ 1,496 $ (727) $ 8,064
Interest income $ 26,897 $ 12,003 $ 2 $ 38,902
Interest expense $ 5,456 $ 3,319 $ 1,017 $ 9,792
Depreciation and amortization $ 1,020 $ 1,062 $ 85 $ 2,167
Provision for loan and lease losses $ 1,575 $ 220 $ $ 1,795
Total assets $ 443,642 $ 221,920 $ 208 $ 655,770
Year ended December 31, 2001:
Total revenues $ 22,497 $ 10,473 $ 218 $ 33,188
Net income (loss) $ 5,878 $ 1,427 $ (639) $ 6,666
Interest income $ 26,369 $ 13,403 $ 39 $ 39,811
Interest expense $ 9,656 $ 5,352 $ 467 $ 15,475
Depreciation and amortization $ 765 $ 813 $ 20 $ 1,598
Provision for loan and lease losses $ 1,010 $ 360 $ $ 1,370
Total assets $ 394,110 $ 199,166 $ 1,697 $ 594,973
Year ended December 31, 2000:
Total revenues $ 21,444 $ 9,258 $ (99) $ 30,603
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
Provision for loan and lease losses $ 900 $ 770 $ $ 1,670
Total assets $ 339,144 $ 200,281 $ 796 $ 540,221
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, 2002, net
interest income was $29,110,000 compared to $24,336,000 for 2001 and $23,731,000
for 2000. The increase in net interest income in 2002 of $4,774,000 was
primarily due to a decrease in interest expense of $5,683,000 outpacing the
decrease in interest income of $909,000. The dramatically lower interest rate
environment had a much larger impact on the Company's cost of funds than the
28
impact on yields on earning assets during 2002. Average interest-earning assets
increased by $46,082,000 from 2001 to 2002 but the average yield on those
assets, on a tax equivalent basis, decreased from 8.10% in 2001 to 7.15% in 2002
resulting in a decrease in interest income of $909,000. Average interest-bearing
liabilities also increased, from $421,670,000 in 2001 to $466,062,000 in 2002.
This increase in interest-bearing liabilities added to interest expense but was
more than offset by the reduction in the average rate paid on interest-bearing
liabilities which decreased from 3.67% in 2001 to 2.10% in 2002 resulting in the
overall reduction in interest expense of $5,683,000. The increase in net
interest income from 2000 to 2001 of $605,000 was primarily due to a decrease in
interest income of $155,000 coupled with a larger decrease in interest expense
of $760,000 due to all of the same reasons outlined in the discussion about
2002, but to a lesser extent.
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, 2002 was 5.39%
as compared to 5.02% for the same period in 2001 and 5.13% in 2000. The increase
in the NIM in 2002 was a result of a decrease in average yields on
interest-earning assets of .94% coupled with a decrease in the average rate paid
on interest bearing liabilities of 1.57%.
Noninterest Income
- ------------------
Total noninterest income increased $461,000 to $9,313,000 for the year
ended December 31, 2002 from $8,852,000 for the same period in 2001 and
$6,872,000 in 2000. This increase in 2002 is primarily the result of an increase
in service charges on deposit accounts of $403,000, gains on sales of loans of
$456,000 in 2002, gains on sales and calls of securities of $221,000 in 2002 and
an increase of $265,000 in earnings on cash surrender value of life insurance
policies, partially offset by other fees and charges which decreased by $366,000
and other income which decreased by $495,000. Service charges increased due to
growth in demand deposits and savings accounts. Other fees and charges decreased
due to the termination of data processing services provided by BPI to two other
local financial institutions. Gains on sales of loans of $456,000 during 2002
were due to sales of conforming 15- and 30-year fixed rate mortgages. During the
third quarter of 2002, the Company began to sell new production conforming first
trust deed mortgage loans into the secondary market and retaining the servicing
on these loans. This is part of a strategy to maintain a consistent, beneficial
mix within the loan portfolio while also maintaining a relatively shorter
duration within the loan portfolio due to the current low interest rate
environment. While this strategy may serve to slightly reduce the overall yield
on earning assets, the benefit is that when rates do start to move back up, the
Company will be in a better position to respond to rate changes and maintain a
consistent net interest margin.
Other income decreased from $1,255,000 in 2001 to $760,000 in 2002.
Included in other income for 2001 is a $447,000 gain on sale of SRB's
Weaverville, California branch. This branch divestiture was a requirement by
regulators to effect the merger with SRB in 2000.
29
Noninterest Expense
- -------------------
The following table is a summary of the Company's noninterest expense for the
periods indicated:
2002 2001 2000
---------- ---------- ----------
(in thousands)
Salaries & employee benefits $ 12,480 $ 11,394 $ 10,205
Equipment expense 1,554 1,483 1,748
Occupancy expense 1,873 1,274 1,423
Professional services 886 786 1,101
ATM & online banking expense 906 626 684
Printing & supplies 640 570 472
Postage 535 491 414
Messenger expense 403 338 316
Data processing expenses 192 292 294
Merger & integration expense 358 3,169
Other 5,259 4,478 4,410
---------- ---------- ----------
Total noninterest expenses $ 24,728 $ 22,090 $ 24,236
========== ========== ==========
Total noninterest expense increased $2,638,000 to $24,728,000 for the
year ended December 31, 2002, from $22,090,000 for the same period in 2001 and
24,236,000 in 2000. The increase in 2002 was primarily a result of a $1,086,000
increase in salaries and benefits, an increase in occupancy expense associated
with the new administrative facility in Redding and NVB's new Churn Creek
Branch. ATM and online banking expense increased in 2002 due to increased
transaction activity. Other expense increased due to an increase in amortization
of intangibles at SRB of $282,000 and increased levels of operational and
overdraft losses at NVB and SRB primarily associated with the Company's free
checking account program.
In 2001, total noninterest expense decreased $2,146,000 to $22,090,000
from $24,236,000 in 2000. The decrease in 2001 was primarily a result of the
$2,811,000 decrease in merger-related charges from $3,169,000 in 2000 to
$358,000 in 2001. This decrease was offset by an increase in salaries and
employee benefits expense in 2001 of $1,189,000 compared to 2000 due to an
increase in staffing levels, an increase in salary continuation plan expense and
$141,000 in severance costs. Equipment expense decreased in 2001 from 2000 due
to expenses incurred in 2000 related to the write off of certain redundant
equipment from the merger with SRB.
Income Taxes
- ------------
The provision for income taxes for the year ended December 31, 2002 was
$3,836,000 as compared to $3,062,000 for the same period in 2001 and $1,609,000
for 2000. The effective income tax rate for state and federal income taxes was
32.2%, for the year ended December 31, 2002 compared to 31.5% for the same
period in 2001 and 34.3% for the same period in 2000. The difference in the
effective tax rate compared to the statutory tax rate (42.05%) is primarily the
result of the Company's investment in municipal securities and the earnings from
cash surrender value of life insurance policies. Interest earned on municipal
securities and earnings on life insurance policies are both exempt from federal
income tax and therefore lower the Company's effective tax rate. The decrease in
the effective tax rate for 2001 was due to the merger-related charges incurred
in 2000, most of which are not tax deductible
Impaired, Nonaccrual, Past Due and Restructured Loans and Leases, and Other Non
performing Assets
- -----------------
The Company considers a loan or lease impaired if, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan 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.
30
At December 31, 2002 and 2001, the recorded investment in loans and
leases for which impairment has been recognized was approximately $1,452,000 and
$867,000. Of the 2002 balance, approximately $730,000 has a related valuation
allowance of $365,000. Of the 2001 balance, approximately $408,000 has a related
valuation allowance of $218,000. For the years ended December 31, 2002, 2001 and
2000, the average recorded investment in loans and leases for which impairment
has been recognized was approximately $948,000, $613,000 and $1,376,000. During
the portion of the year that the loans and leases were impaired, the Company
recognized interest income of approximately $63,000, $76,000 and $124,000 for
cash payments received in 2002, 2001 and 2000.
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):
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Nonaccrual loans and leases $ 1,452 $ 867 $ 780 $ 2,145 $ 5,203
Loans 90 days past due but still accruing interest 864 848 561 223 368
Restructured loans 601 242
Other real estate owned 55 287 341 699 929
--------- --------- --------- --------- ---------
Total nonperforming assets $ 2,371 $ 2,002 $ 1,682 $ 3,668 $ 6,742
========= ========= ========= ========= =========
If interest on nonaccrual loans and leases had been accrued, such
income would have approximated $81,000 in 2002, $69,000 in 2001 and $139,000 in
2000. Interest income of $63,000 in 2002, $76,000 in 2001 and $124,000 in 2000
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, 2002, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonaccrual.
31
Allowance for Loan and Lease Losses
- -----------------------------------
The following table summarizes the Company's loan and lease loss
experience for the years ended December 31 (dollars in thousands):
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Average loans and leases outstanding $ 424,272 $ 378,190 $ 342,831 $ 313,169 $ 278,037
Allowance for loan and lease losses
at beginning of period 5,786 4,964 4,606 4,704 2,861
Loans and leases charged off:
Commercial, financial and agricultural 271 213 1,276 1,105 2,904
Real Estate - construction 3
Real Estate - mortgage 7 27 53 105 35
Installment 924 610 269 788 735
Other 22 72 79 67 33
---------- ---------- ---------- ---------- ----------
Total loans and leases charged off 1,224 922 1,677 2,065 3,710
Recoveries of loans and leases
previously charged off:
Commercial, financial and agricultural 209 194 262 244 59
Real Estate - construction
Real Estate - mortgage 1 1 32 12
Installment 156 169 89 422 144
Other 10 14 7 4
---------- ---------- ---------- ---------- ----------
Total recoveries of loans and leases
previously charged off 366 374 365 705 219
---------- ---------- ---------- ---------- ----------
Net loans and leases charged off 858 548 1,312 1,360 3,491
Provisions for loan and lease losses 1,795 1,370 1,670 1,262 5,334
---------- ---------- ---------- ---------- ----------
Balance of allowance for loan and lease
losses at end of period $ 6,723 $ 5,786 $ 4,964 $ 4,606 $ 4,704
========== ========== ========== ========== ==========
Ratio of net charge-offs to average loans
and leases outstanding 0.20% 0.15% 0.38% 0.43% 1.26%
Allowance for loan and lease losses to
total loans and leases 1.52% 1.46% 1.34% 1.39% 1.54%
The allowance for loan and lease losses is established through a
provision for loan and lease losses based on management's evaluation of the
risks inherent in the loan and lease portfolio, including unused commitments to
provide financing. In determining levels of risk, management considers a variety
of factors, including, but not limited to, asset classifications, economic
trends, industry experience and trends, geographic concentrations, estimated
collateral values, historical loan and lease loss experience, and the Company's
underwriting policies. The allowance for loan losses is maintained at an amount
management considers adequate to cover losses in loans and leases receivable,
which are considered probable and estimable. While management uses the best
information available to make these estimates, future adjustments to allowances
may be necessary due to economic, operating, regulatory, and other conditions
that may be beyond the Company's control. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan and lease losses. Such agencies may require the
Company to recognize additions to the allowance based on judgements different
from those of management.
32
The allowance for loan and lease losses is comprised of three primary
types of allowances:
1. Formula Allowance
Formula allowances are based upon loan loss factors that reflect
management's estimate of the inherent loss in various segments of or pools
within the loan and lease portfolio. The loss factor is multiplied by the
portfolio segment (e.g. multifamily permanent mortgages) balance (or credit
commitment, as applicable) to derive the formula allowance amount. The loss
factors are updated periodically by the Company to reflect current information
that has an effect on the amount of loss inherent in each segment.
2. Specific Allowance
Specific allowances are established in cases where management had
identified significant conditions or circumstances related to an individually
impaired credit. In other words, these allowances are specific to the loss
inherent in a particular loan. The amount for a specific allowance is calculated
in accordance with SFAS No. 114, "Accounting By Creditors For Impairment Of A
Loan".
3. Unallocated Allowance
The Company maintains an unallocated loan and lease loss allowance that
is based upon management's evaluation of conditions that are not directly
measured in the determination of the formula and specific allowances. The
evaluation of inherent loss with respect to these conditions is subject to a
higher degree of uncertainty because they are not identified with specific
problem credits or historical performance of loan and lease portfolio segments.
The conditions evaluated in connection with the unallocated allowance at
December 31, 2002 included the following, which existed at the balance sheet
date:
General Factors:
o General business and economic conditions affecting the Company's
key lending areas
o Real estate values in California
o Loan volumes and concentrations
o Seasoning of the loan portfolio
o Status of the current business cycle
o Specific industry or market conditions within portfolio segments
At December 31, 2002, the allowance for loan losses was comprised of
$5,625,000 in formula allowance and $1,098,000 in unallocated allowance. The
$5,625,000 in formula allowance reflects management's estimate of the inherent
loss in various pools or segments in the portfolio, and includes adjustments for
general economic conditions, trends in the portfolio, changes in the mix of the
portfolio and the level of formula allowance is consistent from 2001 to 2002.
The $1,098,000 in unallocated allowance at December 31, 2002, reflects
a decrease from $1,216,000 at December 31, 2001 due to the Company's
consideration of the following factors, as well as more general factors
including the slowing economy, increased layoffs and unemployment, and consumer
and business reactions to the events of September 11, 2001 and beyond:
o The recent potential adverse effects of a decline in tourism impacting
the hospitality that is a significant component of the economies within
our service area;
o Slight increases in local unemployment and personal bankruptcies which
may have an impact on our retail consumer portfolio;
o Continued changes in the mix of our loan portfolio toward increased
emphasis on commercial business and real estate lending.
33
Management anticipates that as the Company continues to implement its strategic
plan the Company will:
o generate further growth in loans receivable held for investment
o emphasize the origination and purchase of income property real estate
loans
o continue expansion of commercial business lending
As a result, future provisions will be required and the ratio of the
allowance for loan losses to loans outstanding may change. Experience across the
financial services industry indicates that commercial business and income
property loans may present greater risks than residential real estate loans, and
therefore should be accompanied by suitably higher levels of reserves.
The following table shows the allocation of the Company's Allowance and
the percent of loans in each category to the total loans at December 31
(dollars in thousands).
2002 2001 2000
------------------------- ------------------------- -------------------------
Allowance % Allowance % Allowance %
For of for of For of
Losses Loans Losses Loans Losses Loans
---------- ---------- ---------- ---------- ---------- ----------
Loan Categories:
Commercial, financial
Agricultural $ 3,070 45.2% $ 2,141 37.4% $ 2,953 38.9%
Real Estate-construction 325 5.7% 165 2.5% 93 1.3%
Real Estate-mortgage 390 23.5% 238 27.7% 258 27.3%
Installment 1,608 19.7% 1,922 28.7% 1,181 28.5%
Other 232 5.9% 104 3.7% 54 4.0%
Unallocated 1,098 % 1,216 % 425 %
---------- ---------- ---------- ---------- ---------- ----------
Total $ 6,723 100.0% $ 5,786 100.0% $ 4,964 100.0%
========== ========== ========== ========== ========== ==========
Liquidity and Interest Rate Sensitivity
- ---------------------------------------
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors and borrowers.
Collection of principal and interest on loans, the pay-downs and maturities of
investment securities, deposits with other banks, customer deposits and short
term borrowing, when needed, are primary sources of funds that contribute to
liquidity. Unused lines of credit from correspondent banks to provide federal
funds for $13,500,000 as of December 31, 2002 were available to provide
liquidity. The Company has a revolving unsecured line of credit for $3,000,000
with a correspondent bank as of December 31, 2002. In addition, NVB and SRB are
both members of the Federal Home Loan Bank ("FHLB") System providing an
additional line of credit of $64,601,000 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
$13,187,000 secured by first deeds of trust on eligible commercial real estate
loans. As of December 31, 2002, borrowings of $32,799,000 were outstanding with
the FHLB, $89,000 with the FRB and $10,000,000 was outstanding in the form of
Company obligated mandatorily redeemable cumulative trust preferred securities.
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 $167,747,000 and
$161,745,000 (or 25.6% and 27.1% of total assets) at December 31, 2002 and
December 31, 2002, respectively. Total liquid assets for December 31, 2002 and
December 31, 2001 include investment securities of $1,455,000 classified as held
to maturity based on the Company's intent and ability to hold such securities to
maturity.
34
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 $506,162,000 and $460,054,000 at December 31,
2002 and December 31, 2001, 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
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,
35
the Company will adjust the interest rates on the certificates and loans to try
to match up demand for similar maturities. The Company can then partially fill
in mismatches by purchasing securities or borrowing funds from the FHLB with the
appropriate maturity or repricing characteristics.
Basis Risk
- ----------
The third interest-related risk, basis risk, arises from the fact that
interest rates rarely change in a parallel or equal manner. The interest rates
associated with the various assets and liabilities differ in how often they
change, the extent to which they change, and whether they change sooner or later
than other interest rates. For example, while the repricing of a specific asset
and a specific liability may occur at roughly the same time, the interest rate
on the liability may rise one percent in response to rising market rates while
the asset increases only one-half percent. While the Company would appear to be
evenly matched with respect to mismatch risk, it would suffer a decrease in net
interest income. This exposure to basis risk is the type of interest risk least
able to be managed, but is also the least dramatic. Avoiding concentration in
only a few types of assets or liabilities is the best means of increasing the
chance that the average interest received and paid will move in tandem. The
wider diversification means that many different rates, each with their own
volatility characteristics, will come into play.
Net Interest Income and Net Economic Value Simulations
- ------------------------------------------------------
To quantify the extent of all of these risks both in its current
position and in transactions it might make in the future, the Company uses
computer modeling to simulate the impact of different interest rate scenarios on
net interest income and on net economic value. Net economic value or the market
value of portfolio equity is defined as the difference between the market value
of financial assets and liabilities. These hypothetical scenarios include both
sudden and gradual interest rate changes, and interest rate changes in both
directions. This modeling is the primary means the Company uses for interest
rate risk management decisions.
The hypothetical impact of sudden interest rate shocks applied to the
Company's asset and liability balances are modeled quarterly. The results of
this modeling indicate how much of the Company's net interest income and net
economic value are "at risk" (deviation from the base level) from various sudden
rate changes. Although interest rates normally would not change in this sudden
manner, this exercise is valuable in identifying risk exposures. The results for
the Company's November 30, 2002 balances indicates unusual results for changes
in net interest income over a one-year period given the same interest rate
shocks. These results indicate that net interest income will be lower over the
next twelve-month period whether or not interest rates rise or fall. Conversely,
the change in net economic value is positive in either rate scenario. This is
due to the fact that because interest rates are so low, rates on certain
administered-rate deposit products cannot decrease by 2.0% and in some cases,
cannot even decrease by 0.75%. If rates cannot be lowered by 2.0% in a
simulation environment on a substantial portion of deposit liabilities, interest
expense will not decrease as fast as interest income, thus causing net interest
income to decrease. Although these results indicate a decrease in net interest
income in either scenario, this decrease, at approximately 1% of net interest
income, is not material and indicates that the Company is well-positioned to
withstand any future changes in interest rates.
Shocked by -2% Shocked by +2%
Net interest income -1.1% -0.9%
Net economic value 20.0% 1.5%
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, 2002 as Compared to December 31, 2001
- ----------------------------------------------------------------------------
Total assets at December 31, 2002, were $655,770,000 compared to
December 31, 2001 assets of $594,973,000. Increases in average total deposits of
$38,987,000 and average borrowings of $22,746,000 were used to fund a
$46,082,000 increase in average total loans and an increase in average
investment securities and federal funds sold of $6,714,000.
36
Investment securities and federal funds sold remained relatively flat
from 2001 to 2002 and totaled $133,330,000 at December 31, 2002, compared to
$132,881,000 at December 31, 2001.
During 2002, net loans increased 12.0% to $437,843,000 from
$391,022,000 at December 31, 2001. Loans are the Company's largest component of
earning assets. The Company's average loan to deposit ratio increased slightly
to 80.6% in 2002 compared to 77.2% in 2001. The increase was attributed to the
allocation of more resources solely focused on loan origination and the
establishment of more automated underwriting processes.
During 2002, total deposits increased 7.9% to $555,053,000 compared to
$514,278,000 at December 31, 2001. This growth occurred across all deposit
categories except time certificates which declined $23,427,000 or 12.0%.
Noninterest bearing demand and savings deposits increased $50,781,000 or 22.7%.
The increase was due to a significant number of new accounts opened during 2002,
which is attributed to the continued success of our "high performance checking
program".
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 $50,029,000 as
of December 31, 2002, as compared to $43,678,000 at December 31, 2001. The
increase was primarily as a result of net income of $8,064,000 partially offset
by the payment of cash dividends of $2,335,000 and the payment of $1,055,000
used to repurchase the Company's common stock. Under the Company's Stock
Repurchase Plans, 63,102 shares were repurchased in 2002 at an average price of
$16.72 and 1,188,500 shares of common stock were repurchased in 2001 for
$17,115,000 at an average price of $14.40. At December 31, 2002, there were
116,500 shares remaining to repurchase under the Plans. Under current
regulations, management believes that the Company meets all capital adequacy
requirements (dollars in thousands).
Minimum For
Capital Adequacy
Capital Ratio Purposes
---------- ---------- ----------
Company:
Tier 1 capital
(to average assets) $ 55,455 8.59% 4.00%
Tier 1 capital
(to risk weighted assets) $ 55,455 11.33% 4.00%
Total capital
(to risk weighted assets) $ 61,581 12.58% 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 2.0%
at December 31, 2002) reduces both the potential of inflated earnings resulting
from understated depreciation and the potential understatement of absolute asset
values.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Derivative financial instruments include futures, forwards, interest rate swaps,
option contracts, and other financial instruments with similar characteristics
or embedded features. The Company currently has not entered into any
freestanding derivative contracts and did not identify any embedded derivatives
requiring bifurcation at December 31, 2002 or 2001. However, the Company is
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and letters of credit. These
instruments involve to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates and generally require collateral from the
borrower. Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party up to a stipulated
amount and with specified terms and conditions.
Commitments to extend credit and letters of credit are not recorded as
an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by
management. Interest rate risk is the potential of economic losses due to future
interest rate changes. Please see "Interest Rate Sensitivity" on previous pages
for a more detailed description.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The Financial Statements required by this item are set forth following
Item 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, 2002. Earnings per share data has been retroactively restated to
give effect to the three-for-two split approved by the Board of Directors on
March 11, 2003, to be paid in the form of a stock dividend to shareholders of
record on April 15, 2003.
For the Quarter Ended
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
(in thousands) 2002 2002 2002 2002 2001 2001 2001 2001
-------- -------- -------- -------- -------- -------- -------- --------
Interest income $ 9,491 $ 9,895 $ 9,853 $ 9,663 $ 9,930 $ 9,814 $ 10,193 $ 9,874
-------- -------- -------- -------- -------- -------- -------- --------
Interest expense 2,774 2,488 2,259 2,271 4,175 4,019 3,840 3,441
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 6,717 7,407 7,594 7,392 5,755 5,795 6,353 6,433
Provision for loan and
lease losses 420 575 380 420 220 300 420 430
Noninterest income 2,270 2,162 2,217 2,664 1,823 2,192 2,055 2,782
Noninterest expense 6,036 6,066 6,154 6,472 5,215 5,398 5,526 5,951
-------- -------- -------- -------- -------- -------- -------- --------
Income before provision
for income taxes 2,531 2,928 3,277 3,164 2,143 2,289 2,462 2,834
Provision for income
taxes 783 1,020 1,151 882 674 688 773 927
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 1,748 $ 1,908 $ 2,126 $ 2,282 $ 1,469 $ 1,601 $ 1,689 $ 1,907
======== ======== ======== ======== ======== ======== ======== ========
Earnings Per Share
Basic $ 0.37 $ 0.41 $ 0.46 $ 0.49 $ 0.25 $ 0.28 $ 0.33 $ 0.41
======== ======== ======== ======== ======== ======== ======== ========
Diluted $ 0.36 $ 0.40 $ 0.44 $ 0.47 $ 0.25 $ 0.27 $ 0.33 $ 0.40
======== ======== ======== ======== ======== ======== ======== ========
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------
The firm of Deloitte & Touche LLP served the registrant, North Valley Bancorp
(the Company") as independent public accountants for the 2001 fiscal year. On
June 6, 2002, the Board of Directors of the Company approved the recommendation
of the Audit Committee of the Board of Directors to change the Company's
certifying accountant from Deloitte & Touche, LLP to Perry-Smith LLP. The
Company engaged Perry-Smith LLP as the Company's independent public accountants
for the fiscal year 2002, effective as of June 6, 2002.
Deloitte & Touche LLP was notified on June 6, 2002 that they were dismissed as
the Company's independent public accountants effective June 6, 2002. The audit
reports of Deloitte & Touche LLP on the consolidated financial statements of the
Company and its subsidiaries as of and for the fiscal years ended December 31,
2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles.
During the Company's two fiscal years in the period ended December 31, 2001, and
any subsequent interim period through June 6, 2002, there were no disagreements
between the Company and Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Deloitte
& Touche LLP, would have caused it to make reference to the subject matter of
the disagreement in connection with its reports.
During the fiscal years ending December 31, 2001 and 2000, and the
interim period between December 31, 2001, and June 6, 2002, the Company did not
consult with Perry-Smith LLP regarding any of the matters or events set forth in
Item 304(a)(2)(i) and (ii) of Regulation S-K.
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 2003 Annual Meeting of Shareholders of the
Company to be filed with the Securities and Exchange Commission (the
"Commission") entitled "Election of Directors" (not including the share
information included in the beneficial ownership tables nor the footnotes
thereto nor the subsections entitled "Committees of the Board of Directors",
"Compensation Committee Interlocks and Insider Participation" and "Meetings of
the Board of Directors") and the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by this item is incorporated by reference from
the section of the Company's Definitive Proxy Statement for the 2003 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 2003 Annual Meeting
of Shareholders of the Company to be filed with the Commission, entitled
"Election of Directors - Security Ownership of Certain Beneficial Owners and
Management", as to share information in the tables of beneficial ownership and
footnotes thereto and "Securities Authorized for Issuance Under Equity
Compensation Plan."
39
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 2003 Annual
Meeting of Shareholders to be filed with the Commission, entitled "Certain
Relationships and Related Transactions".
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------
Annual Evaluation of the Company's Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of filing of this Report on Form 10-K, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" (Disclosure Controls), and its "internal
controls and procedures for financial reporting" (Internal Controls). This
evaluation (the Controls Evaluation) was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO). Rules adopted by the SEC require that in this
section of the Annual Report we present the conclusions of the CEO and the CFO
about the effectiveness of our Disclosure Controls and Internal Controls based
on and as of the date of the Controls Evaluation.
CEO and CFO Certifications. Appearing immediately following the Signatures
section of this Annual Report there are two separate forms of "Certifications"
of the CEO and the CFO. The first form of Certification is required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certification). This section of the Annual Report which you are currently
reading is the information concerning the Controls Evaluation referred to in the
Section 302 Certifications and this information should be read in conjunction
with the Section 302 Certifications for a more complete understanding of the
topics presented.
Disclosure Controls and Internal Controls. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this Annual Report, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's (SEC) rules and forms. Disclosure Controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Internal Controls are procedures which
are designed with the objective of providing reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation. Our Internal Controls are also evaluated on an
ongoing basis by our outsourced External Audit Function, by other personnel in
our Finance organization and by our independent auditors in connection with
their audit and review activities. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls and our Internal Controls and
to make modifications as necessary; our intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including with improvements and corrections) as conditions
warrant. Among other matters, we sought in our evaluation to determine whether
there were any "significant deficiencies" or "material weaknesses" in the
40
Company's Internal Controls, or whether the Company had identified any acts of
fraud involving personnel who have a significant role in the company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of the Annual Report. In the professional auditing literature,
"significant deficiencies" are referred to as "reportable conditions"; these are
control issues that could have a significant adverse effect on the ability to
record, process, summarize and report financial data in the financial
statements. A "material weakness" is defined in the auditing literature as a
particularly serious reportable condition where the internal control does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud may occur in amounts that would be material in relation to the financial
statements and not be detected within a timely period by employees in the normal
course of performing their assigned functions. We also sought to deal with other
controls matters in the Controls Evaluation, and in each case if a problem was
identified, we considered what revision, improvement and/or correction to make
in accord with our on-going procedures.
Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, our Disclosure Controls are
effective to ensure that material information relating to the Company and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented in conformity with
generally accepted accounting principles.
41
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------
(a) The following documents are filed as part of the report:
1. Financial Statements:
2. Exhibits: See Index to Exhibits at page 74.
(b) Reports on Form 8-K during the quarter ended December 31, 2002
Filed October 22, 2002 - Press release - Earnings for the
quarter ended September 30, 2002.
Filed December 10, 2002 - Press release - Declaration of cash
dividend of $0.14 per share
(c) Exhibits
See Index to Exhibits at page 74 of this Annual Report on Form
10-K, which is incorporated herein by reference.
(d) Financial Statement Schedules
Not applicable.
42
INDEPENDENT AUDITOR'S REPORT
The Stockholders
and Board of Directors
North Valley Bancorp and Subsidiaries
We have audited the accompanying consolidated balance sheet of North Valley
Bancorp and subsidiaries (the "Company") as of December 31, 2002 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company for the years ended December
31, 2001 and 2000 were audited by other auditors whose report, dated January 31,
2002, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
Valley Bancorp and subsidiaries as of December 31, 2002 and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ PERRY-SMITH LLP
Sacramento, California
January 21, 2003, except Note 24 as to which the date is March 11, 2003
44
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
North Valley Bancorp
Redding, California
We have audited the accompanying consolidated balance sheet of North Valley
Bancorp and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the two years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our 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, 2001, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2001
in conformity with accounting principles generally accepted in the United States
of America.
/s/ DELOITTE & TOUCHE LLP
Sacramento, California
January 31, 2002
45
NORTH VALLEY BANCORP AND SUBSIDIARIES NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEET DECEMBER 31, 2002 AND
2001 (In thousands except share amounts)
- --------------------------------------------------------------------------------
2002 2001
---------- ----------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 33,900 $ 26,575
Federal funds sold and repurchase agreements 21,400 19,800
---------- ----------
Total cash and cash equivalents 55,300 46,375
Interest bearing deposits in other financial institutions 517 2,289
Investment securities:
Available for sale, at fair value 110,475 111,626
Held to maturity, at amortized cost 1,455 1,455
Loans and leases, net of allowance for loan and lease losses of $6,723 and
$5,786 and deferred loan costs (fees) of $183 and $(210) at
December 31, 2002 and 2001 437,843 391,022
Premises and equipment, net of accumulated depreciation and amortization 13,156 10,294
amortization indent
Other real estate owned 55 287
FHLB and FRB stock and other securities 3,258 2,213
Core deposit and other intangibles, net 2,772 3,252
Accrued interest receivable 2,589 3,184
Other assets 28,350 22,976
---------- ----------
TOTAL ASSETS $ 655,770 $ 594,973
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 108,140 $ 94,719
Interest-bearing:
Demand accounts 142,432 37,937
Savings 132,373 186,087
Time certificates 172,108 195,535
---------- ----------
Total deposits 555,053 514,278
Other borrowed funds 32,888 20,647
Accrued interest payable and other liabilities 7,800 6,370
Company obligated mandatorily redeemable cumulative
trust preferred securities of subsidiary grantor trust 10,000 10,000
---------- ----------
Total liabilities 605,741 551,295
---------- ----------
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
4,634,094 and 4,651,056 at December 31, 2002 and 2001 25,112 24,538
Retained earnings 23,260 18,383
Accumulated other comprehensive income, net of tax 1,657 757
---------- ----------
Total stockholders' equity 50,029 43,678
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 655,770 $ 594,973
========== ==========
See notes to consolidated financial statements
46
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands except share and per share amounts)
- --------------------------------------------------------------------------------
2002 2001 2000
---------- ---------- ----------
INTEREST INCOME:
Loans including fees $ 32,575 $ 32,326 $ 30,699
Lease financing 163 345 378
Securities:
Taxable 4,292 4,835 6,200
Exempt from federal taxes 1,526 1,631 1,834
Federal funds sold and repurchase agreements 346 674 855
---------- ---------- ----------
Total interest income 38,902 39,811 39,966
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 7,837 14,551 15,598
Company obligated mandatorily redeemable cumulative trust preferred
securities of subsidiary grantor trust 1,028 467
Other borrowings 927 457 637
---------- ---------- ----------
Total interest expense 9,792 15,475 16,235
---------- ---------- ----------
NET INTEREST INCOME 29,110 24,336 23,731
PROVISION FOR LOAN AND LEASE LOSSES 1,795 1,370 1,670
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 27,315 22,966 22,061
---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 6,030 5,627 4,493
Other fees and charges 761 1,127 1,094
Earnings on cash surrender value of life insurance policies 1,085 820
Gain on sale of loans 456 4 45
Gain (loss) on sale or calls of securities 221 19 (731)
Gain on sale of shares of demutualized life insurance company 1,138
Other 760 1,255 833
---------- ---------- ----------
Total noninterest income 9,313 8,852 6,872
---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 12,480 11,394 10,205
Equipment expense 1,873 1,483 1,748
Occupancy expense 1,554 1,274 1,423
Merger and integration expense 358 3,169
Other 8,821 7,581 7,691
---------- ---------- ----------
Total noninterest expenses 24,728 22,090 24,236
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 11,900 9,728 4,697
PROVISION FOR INCOME TAXES 3,836 3,062 1,609
---------- ---------- ----------
NET INCOME $ 8,064 $ 6,666 3,088
========== ========== ==========
EARNINGS PER SHARE:
Basic $ 1.72 $ 1.25 $ 0.53
========== ========== ==========
Diluted $ 1.67 $ 1.23 $ 0.53
========== ========== ==========
PROFORMA EARNINGS PER SHARE (Note 24):
Basic $ 1.15 $ 0.84 $ 0.36
========== ========== ==========
Diluted $ 1.11 $ 0.82 $ 0.35
========== ========== ==========
See notes to consolidated financial statements
47
NORTH VALLEY BANCORP AND SUSBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands except share amounts)
- --------------------------------------------------------------------------------
Accumulated
Other
Common Stock Comprehensive Retained Comprehensive
Shares Amount Income Earnings Income (Loss) Total
--------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2000 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 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
Stock-based compensation expense 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
Comprehensive income:
Net income $ 6,666 6,666 6,666
Other comprehensive income,
net of tax of $604:
Unrealized gain on available
for sale securities, net of
reclassification adjustment of $13 930 930 930
-----------
Total comprehensive income $ 7,596
===========
Stock options exercised 34,140 251 251
Stock-based compensation expense 189 189
Repurchase of common shares (1,188,500) (6,203) (10,912) (17,115)
Cash dividends on common stock (2,100) (2,100)
--------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 4,651,056 24,538 18,383 757 43,678
Comprehensive income:
Net income $ 8,064 8,064 8,064
Other comprehensive income,
net of tax of $612:
Unrealized gain on available
for sale securities, net of
reclassification adjustment of $153 900 900 900
-----------
Total comprehensive income $ 8,964
===========
Stock options exercised 46,140 339 339
Stock based compensation expense 378 378
Tax benefit derived from the exercise
of stock options 60 60
Repurchase of common shares (63,102) (203) (852) (1,055)
Cash dividends on common stock (2,335) (2,335)
--------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 4,634,094 $ 25,112 $ 23,260 $ 1,657 $ 50,029
========= =========== =========== =========== ===========
See notes to consolidated financial statements.
48
NORTH VALLEY BANCORP & SUBSIDIARIES
CONSOLDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
- --------------------------------------------------------------------------------
2002 2001 2000
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,064 $ 6,666 $ 3,088
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,476 1,268 1,518
Amortization of premium on securities 211 131 116
Amortization/writedown of core deposit intangible 480 199 971
Provision for loan and lease losses 1,795 1,370 1,670
Loss on sale/writedown of other real estate owned 277
(Gain) loss on sale or calls of securities (221) (19) 731
Gain on sales of shares of demutualized life insurance company (1,138)
Gain on sale of loans (456) (4) (45)
Benefit for deferred taxes (1,325) (544) (890)
Stock-based compensation expense 378 189 208
Effect of changes in:
Accrued interest receivable 595 554 (352)
Other assets (4,657) (1,197) (10,920)
Accrued interest payable and other liabilities 1,304 (1,576) 1,893
---------- ---------- ----------
Net cash provided by (used in) operating activities 7,644 7,037 (2,873)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of other real estate owned 300 328 627
Purchases of available for sale securities (60,707) (75,888) (27,002)
Proceeds from sales of available for sale securities 21,633 20,845 24,344
Proceeds from maturities/calls of available for sale securities 41,560 47,365 15,136
Purchases of held to maturity securities (970)
Proceeds from maturities/calls of held to maturity securities 4,792
Proceeds from sale of shares of demutualized life insurance company 1,138
Net change in FHLB and FRB stock and other securities (860) (58) 143
Net change in interest bearing deposits in other financial institutions 1,772 (583) 6,162
Proceeds from sales of loans 49,129 219 3,540
Net increase in loans and leases (97,357) (28,222) (44,546)
Purchases of premises and equipment- net (4,338) (1,939) (1,644)
---------- ---------- ----------
Net cash used in investing activities (48,868) (37,933) (18,280)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 40,775 53,987 7,594
Proceeds from issuance of Company obligated mandatorily redeemable
cumulative trust preferred securities of subsidiary grantor trust 10,000
Net change in other borrowed funds 12,241 3,646 6,436
Cash dividends paid (2,151) (2,226) (1,485)
Repurchase of common shares (1,055) (17,115)
Cash received for stock options exercised 339 251 111
---------- ---------- ----------
Net cash provided by financing activities 50,149 48,543 12,656
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,925 17,647 (8,497)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 46,375 28,728 37,225
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 55,300 $ 46,375 $ 28,728
========== ========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 9,895 $ 15,310 $ 16,299
========== ========== ==========
Income taxes $ 4,990 $ 3,431 $ 2,469
========== ========== ==========
Noncash investing and financing activities:
Transfer from loans to other real estate owned $ 68 $ 274 $ 546
========== ========== ==========
Transfer of investment securities from held to maturity to available
for sale $ 25,471
========== ========== ==========
Cash dividends declared $ 652 $ 468 $ 580
========== ========== ==========
See notes to consolidated financial statements
49
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - North Valley Bancorp is a multi-bank holding company
registered with and subject to regulation and supervision by the Board of
Governors of the Federal Reserve System. North Valley Bancorp was
incorporated in 1980 in the State of California for the purpose of acquiring
North Valley Bank ("NVB") in a one-bank holding company reorganization. NVB
was organized in 1972 as a California state-chartered bank. On October 11,
2000, the Company completed its plan of reorganization with Six Rivers
National Bank ("SRNB"), which then became a wholly-owned subsidiary of North
Valley Bancorp. This reorganization was completed under the
pooling-of-interests method of accounting for business combinations and all
amounts have been restated on a historical basis as if the companies had
been combined at the beginning of all periods presented. In January 2002,
SRNB converted from a national association to a California state-chartered
bank and changed its name to Six Rivers Bank ("SRB"). During 2001, the
Company formed North Valley Capital Trust I which is a Delaware statutory
business trust formed for the exclusive purpose of issuing and selling trust
preferred securities. Bank Processing, Inc., a wholly-owned subsidiary of
North Valley Bancorp, currently provides data processing services to the
Company.
North Valley Bancorp and subsidiaries (the "Company") operates as three
business segments defined as the Company's two wholly owned banking
subsidiaries, North Valley Bank and Six Rivers Bank providing banking
services to the Company's clients in Northern California, and all other
activities, which primarily consist of the Holding Company and Bank
Processing, Inc. The Company's principal business consists of attracting
deposits from the general public and using the funds to originate
commercial, real estate and installment loans to customers, who are
predominately small and middle market businesses and middle income
individuals. The Company's primary source of revenues is interest income
from its loan and investment securities portfolios. The Company is not
dependent on any single customer for more than ten percent of the Company's
revenues. Collectively, NVB and SRB operate 18 branches, including two
supermarket branches, in Northern California.
General - The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America and
to prevailing practices within the banking industry.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The more significant accounting and reporting policies are discussed below.
Consolidation - The consolidated financial statements include North Valley
Bancorp and its wholly owned subsidiaries: North Valley Bank ("NVB") and its
wholly owned subsidiary, North Valley Basic Securities; Six Rivers Bank
("SRB"); Bank Processing, Inc. ("BPI"); North Valley Capital Trust I and
North Valley Trading Company. North Valley Trading Company and North Valley
Basic Securities did not have any activity in 2002, 2001 and 2000. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents - For the purposes of the consolidated statement
of cash flows, cash and cash equivalents have been defined as cash, demand
deposits with correspondent banks, cash items, settlements in transit, and
federal funds sold and repurchase agreements. Generally, federal funds are
sold for one-day periods and repurchase agreements are sold for eight to
fourteen-day periods. Cash equivalents have remaining terms to maturity of
three months or less from the date of acquisition.
50
Investment Securities - The Company accounts for its investment securities
as follows:
Trading securities are carried at fair value. Changes in fair value are
included in noninterest income. The Company did not have any securities
classified as trading at December 31, 2002 and 2001.
Available for sale securities are carried at fair value and represent
securities not classified as trading securities nor as held to maturity
securities. Unrealized gains and losses resulting from changes in fair
value are recorded, net of tax, 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 and Leases - Loans and leases are reported at the principal amount
outstanding, net of unearned income, including deferred loan fees and the
allowance for loan and lease losses.
Interest on loans is calculated using the simple interest method on the
daily balance of the principal amount outstanding.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either
when reasonable doubt exists as to the full and timely collection of
interest or principal, or when a loan becomes contractually past due by 90
days or more with respect to interest or principal. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected is
reversed against current period interest income. Income on such loans is
then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans when, in the judgment of management, the loans are estimated to
be fully collectible as to both principal and interest.
Direct financing leases are carried net of unearned income. Income from
leases is recognized by a method that approximates a level yield on the
outstanding net investment in the lease.
Deferred Loan Fees - Loan fees and certain related direct costs to originate
loans are deferred and amortized to income by a method that approximates a
level yield over the contractual life of the underlying loans.
Allowance for Loan and Lease Losses - The allowance for loan and lease
losses is established through a provision for loan and lease losses charged
to operations. Loans and leases are charged against the allowance for loan
and lease losses when management believes that the collectibility of the
principal is unlikely or, with respect to consumer installment loans,
according to an established delinquency schedule. Management attributes
formula reserves to different types of loans using percentages, which are
based upon perceived risk associated with the portfolio and underlying
collateral, historical loss experience, and vulnerability to changing
economic conditions, which may affect the collectibility of the loans.
Specific reserves are allocated for impaired loans and leases which have
experienced a decline in internal grading, and when management believes
additional loss exposure exists. The unallocated allowance is based upon
management's evaluation of various conditions that are not directly measured
in the determination of the formula and specific allowances. The evaluation
of inherent losses with respect to these conditions is subject to a higher
degree of uncertainty because they are not identified with specific problem
credits or portfolio segments. Although the allowance for loan and lease
losses is allocated to various portfolio segments, it is general in nature
and is available for the loan and lease portfolio in its entirety. The
allowance is an amount that management believes will be adequate to absorb
losses inherent in existing loans and leases 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.
51
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.
Core Deposit and Other Intangibles - These assets represent the excess of
the purchase price over the fair value of the tangible net assets acquired
from the branch acquisition by SRB and are being amortized by the
straight-line method. In November 2000, as a condition to receiving
regulatory approval for the merger, SRB was required to divest its
Weaverville branch office which resulted in the write off of approximately
$727,000 of the core deposit and other intangibles 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. Upon the sale of these loans, the
Company's investment in each loan is allocated between the servicing
retained and the loan, based on the relative fair value of each portion. The
gain (loss) is recognized at the time of sale based on the difference
between the sale proceeds and the allocated carrying value of the related
loans sold. The fair value of the contractual servicing is reflected as a
servicing asset, which is amortized over the period of estimated net
servicing income using a method approximating the interest method. The
servicing asset is included in other assets on the balance sheet, and is
evaluated for impairment on a periodic basis.
Income Taxes - The Company applies an asset and liability method in
accounting for deferred income taxes. Deferred tax assets and liabilities
are calculated by applying applicable tax laws to the differences between
the financial statement basis and the tax basis of assets and liabilities.
The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
Merger and Integration Expenses - Merger and integration expenses represent
incremental direct costs associated with the merger with SRB and consist
primarily of transaction costs for professional services including
investment banking, legal and accounting. 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 December 31, 2000 and
paid in January 2001.
Stock-Based Compensation - At December 31, 2002, the Company has three
stock-based compensation plans, the North Valley Bancorp 1989 Director Stock
Option Plan, the 1998 Employee Stock Incentive Plan and the 1999 Director
Stock Option Plan, which are described more fully in Note 15. The Company
accounts for these plan under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in
net income under the Employee Plan, as all options granted under this plan
had an exercise price equal to the market value of the underlying common
stock on the date of grant. Compensation expense is recognized in the
financial statements for the 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 Plans.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation. Pro forma adjustments to the Company's
net earnings and earnings per share are disclosed during the years in which
the options become vested.
52
2002 2001 2000
---------- ---------- ----------
Net income:
As reported $ 8,064 $ 6,666 $ 3,088
Add: total stock-based compensation expense included in net
income, net of tax 176 73 98
Deduct: total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects (397) (239) (197)
---------- ---------- ----------
Pro forma $ 7,843 $ 6,500 $ 2,989
========== ========== ==========
Basic earnings per common share:
As reported $ 1.72 $ 1.25 $ 0.53
Pro forma $ 1.67 $ 1.22 $ 0.52
Diluted earnings per common and equivalent share:
As reported $ 1.67 $ 1.23 $ 0.53
Pro forma $ 1.64 $ 1.20 $ 0.51
Weighted average fair value of options
granted during the year $ 3.47 $ 3.75 $ 4.14
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following assumptions:
2002 2001 2000
---------- ---------- ----------
Dividend yield 2.83% 2.50% 2.27%
Expected volatility 20.99% 22.03% 23.13%
Risk-Free interest rate 5.00% 5.00% 6.00%
Expected option life 7 years 7 years 7 years
- --------------------------------------------------------------------------------
Disclosures About Segments of an Enterprise - The Company uses the
"management approach" for reporting business segment information. The
management approach is based on the segments within a company used by the
chief operating decision-maker for making operating decisions and assessing
performance. Reportable segments are to based on such factors as products
and services, geography, legal structure or any other manner by which a
company's management distinguishes major operating units. Utilizing this
approach, management has determined that the Company has three reportable
segments: NVB, SRB and Other.
Comprehensive Income - Comprehensive income includes net income and other
comprehensive income, which represents the change in its net assets during
the period from nonowner sources. The components of other comprehensive
income for the Company include the unrealized gain or loss on
available-for-sale securities and adjustments to the minimum pension
liability and are presented net of tax.
Derivative Instruments And Hedging Activities - Effective January 1, 2001,
the Company adopted Statement of Financial Accounting Standards ("SFAS") No
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments
and hedging activities. Upon adoption, the Company transferred certain
securities from the held to maturity to the available for sale
classification at fair value. The adoption of this statement did not have
any other impact on the Company's consolidated financial position or results
of operations or cash flows. The Company did not enter into freestanding
derivative contracts during 2002 and did not identify any embedded
derivatives requiring bifurcation and separate valuation at December 31,
2002 and 2001.
New Accounting Pronouncements - On January 1, 2002, the Company adopted SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 addresses the financial accounting and
reporting for business combinations and requires the use of a single method
to account for business combinations--the purchase method of accounting--for
all business combinations initiated after June 30, 2001. The Company
accounted for its acquisition of SRB in 2000 under the pooling-of-interests
53
method of accounting for business combinations but will not be allowed to
account for future acquisitions under such method. In addition, SFAS No. 141
requires that intangible assets be recognized as assets apart from goodwill
if they meet one of two criteria, the contractual-legal criterion or the
separability criterion. Pursuant to SFAS No. 142, goodwill and other
intangible assets that have indefinite useful lives will be evaluated
periodically for impairment rather than amortized. Because the Company has
not previously accounted for an acquisition under the purchase method of
accounting, the adoption of these accounting standards did not have a
material effect on the Company's consolidated financial position or its
operations or its cash flows.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. This Statement, which addresses financial accounting
and reporting matters for the acquisition of all or part of a financial
institution, applies to all such transactions except those between two or
more mutual enterprises. This Statement removes acquisitions of financial
institutions, other than transactions between two or more mutual
enterprises, from the scope of SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and related interpretations.
This Statement requires a financial institution to apply SFAS No. 144 and
evaluate long-term customer relationship intangible assets (core deposit
intangibles) for impairment. Under SFAS No. 72, a financial institution may
have recorded an unidentifiable intangible asset arising from a business
combination. If certain criteria in SFAS No. 147 are met, the amount of the
unidentifiable intangible asset will be reclassified to goodwill upon
adoption of this Statement and any amortization amounts that were incurred
after the adoption of SFAS No. 142 must be reversed. Reclassified goodwill
would then be measured for impairment under the provisions of SFAS No. 142.
Provisions of this Statement are applicable on or after October 1, 2002. The
acquisition of certain branches by SRB prior to its acquisition by the
Company had been accounted for under the standards of SFAS No. 72. The
Company will continue to amortize the core deposit intangible that arose
from the branch acquisition. In management's opinion, the adoption of this
Statement did not have a material effect on the Company's consolidated
financial position or its operations and its cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reporting containing
financial statements for interim periods beginning after December 15, 2002.
Because the Company accounts for the compensation cost associated with its
stock option plans under the intrinsic value method, the alternative methods
of transition will not apply to the Company. The additional disclosure
requirements of the statement are included in these financial statements. In
management's opinion, the adoption of this Statement did not have a material
impact on the Company's consolidated financial position or results of its
operations or its cash flows.
Reclassifications - Certain amounts in 2001 and 2000 have been reclassified
to conform with the 2002 financial statement presentation.
2. BUSINESS COMBINATIONS
On October 11, 2000, Six Rivers Bank was merged with North Valley Bancorp
with Six Rivers 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 Bank common
stock. The merger has been accounted under the pooling-of-interests method
of accounting.
3. RESTRICTED CASH BALANCES
The Company is subject to regulation by the Federal Reserve Board. The
regulations required the Company to maintain certain cash reserve balances
on hand or at the Federal Reserve Bank. At December 31, 2002 and 2001, the
Company had reserves of $8,319,000 and $6,694,000. As compensation for
check-clearing services, additional compensating balances of $2,500,000 at
December 31, 2002 are required to be maintained with the Federal Reserve
Bank.
54
4. INVESTMENT SECURITIES
At December 31, the amortized cost of investment securities and their
approximate fair value were as follows:
(in thousands) Gross Gross Carrying
Amortized Unrealized Unrealized Amount
Available for sale securities: Cost Gains Losses (Fair Value)
---------- ---------- ---------- ----------
December 31, 2002
Securities of U.S. government $ 11,220 $ 9 $ $ 11,229
agencies and corporations
Obligations of states and political 23,580 1,138 (67) 24,651
subdivisions
Mortgage-backed securities 59,915 1,108 (4) 61,019
Corporate securities 8,976 520 9,496
Other securities 4,088 (8) 4,080
---------- ---------- ---------- ----------
$ 107,779 $ 2,775 $ (79) $ 110,475
========== ========== ========== ==========
December 31, 2001
Securities of U.S. government
agencies and corporations $ 1,991 $ 78 $ $ 2,069
Obligations of states and political
subdivisions 28,085 1,074 (254) 28,905
Mortgage-backed securities 70,331 601 (81) 70,851
Corporate securities 9,946 20 (241) 9,725
Other securities 88 (12) 76
---------- ---------- ---------- ----------
$ 110,441 $ 1,773 $ (588) $ 111,626
========== ========== ========== ==========
Carrying
Amount Gross Gross
(Amortized Unrealized Unrealized
Held to maturity securities: Cost) Gains Losses Fair Value
---------- ---------- ---------- ----------
December 31, 2002
Obligation of states and political
subdivisions $ 1,455 $ 388 $ 1,843
========== ========== ========== ==========
December 31, 2001
Obligation of states and political
subdivisions $ 1,455 $ 486 $ 1,941
========== ========== ========== ==========
Gross realized gains on sales or calls of securities categorized as
available for sale securities were $266,000, $70,000 and $203,000 in 2002,
2001 and 2000. Gross realized losses on sales or calls of securities
categorized as available for sale securities were $45,000, $51,000 and
$934,000 in 2002, 2001 and 2000.
There were no gross realized gains or losses on calls of held to maturity
securities in 2002, 2001 and 2000.
On January 1, 2001, the Company transferred $25,471,000 of certain
securities from the held to maturity to the available for sale
classification at fair value upon adoption and as allowed by SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The unrealized
gains on the securities transferred were $1,115,000. The net unrealized
gains and losses are recorded, net of tax, within accumulated other
comprehensive income, which is a separate component of stockholders' equity.
Contractual maturities of held to maturity and available for sale securities
(other than equity securities with an amortized cost of approximately
$4,088,000 and a fair value of approximately $4,080,000) at December 31,
2002, 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.
55
Held to Available for
Maturity Securities Sale Securities
------------------------- -------------------------
Amortized
Cost Fair Value
(Carrying Amortized (Carrying
(in thousands) Amount) Fair Value Cost Amount)
---------- ---------- ---------- ----------
Due in 1 year or less $ 15,119 $ 15,681
Due after 1 year through 5 years 29,617 30,820
Due after 5 years through 10 years 8,459 9,006
Due after 10 years $ 1,455 $ 1,843 50,496 50,888
---------- ---------- ---------- ----------
$ 1,455 $ 1,843 $ 103,691 $ 106,395
========== ========== ========== ==========
At December 31, 2002 and 2001, securities having fair value amounts of
approximately $65,052,000 and $39,185,000 were pledged to secure public
deposits, short-term borrowings, treasury tax and loan balances and for
other purposes required by law or contract.
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 and Del Norte Counties
and neighboring communities. Substantially all loans are collateralized.
Generally, real estate loans are secured by real property. Commercial and
other loans are secured by bank deposits, real estate or business or
personal assets. Leases are generally secured by equipment. The Company's
policy for requiring collateral reflects the Company's analysis of the
borrower, the borrower's industry and the economic environment in which the
loan would be granted. The loans and leases are expected to be repaid from
cash flows or proceeds from the sale of selected assets of the borrower.
Major classifications of loans and leases at December 31 were as follows:
(in thousands) 2002 2001
---------- ----------
Commercial $ 40,683 $ 49,248
Real estate - commercial 159,946 99,164
Real estate - construction 25,388 9,764
Real estate - mortgage 104,590 109,830
Installment 87,710 113,970
Direct financing leases 1,795 3,454
Other 24,271 11,588
---------- ----------
Total loans and leases receivable 444,383 397,018
Allowance for loan and lease losses (6,723) (5,786)
Deferred loan costs (fees) 183 (210)
---------- ----------
Net loans and leases $ 437,843 $ 391,022
========== ==========
At December 31, 2002 and 2001, the Company serviced real estate loans and
loans guaranteed by the Small Business Administration which it had sold to
the secondary market of approximately $100,234,000 and $106,911,000.
Certain real estate loans receivable are pledged as collateral for available
borrowings with the FHLB and FRB. Pledged loans totaled $102,299,000 and
$93,679,000 at December 31, 2002 and 2001.
56
The components of the Company's leases receivable as of December 31 are
summarized below (in thousands):
2002 2001
---------- ----------
Future minimum lease payments $ 1,884 $ 3,336
Residual interests 136 417
Initial direct costs (24) (32)
Unearned income (201) (267)
---------- ----------
$ 1,795 $ 3,454
========== ==========
Future minimum lease payments are as follows (in thousands):
2003 $ 728
2004 602
2005 258
2006 157
2007 and thereafter 139
----------
Total $ 1,884
==========
There are no contingent rental payments included in income for 2002, 2001
and 2000.
Changes in the allowance for loan and lease losses for the years ended
December 31, were as follows (in thousands):
2002 2001 2000
---------- ---------- ----------
Balance, beginning of year $ 5,786 $ 4,964 $ 4,606
Provision charged to operations 1,795 1,370 1,670
Loans charged off (1,224) (922) (1,677)
Recoveries 366 374 365
---------- ---------- ----------
Balance, end of year $ 6,723 $ 5,786 $ 4,964
========== ========== ==========
6. IMPAIRED AND NONPERFORMING LOANS AND LEASES
At December 31, 2002 and 2001, the recorded investment in impaired loans and
leases was approximately $1,452,000 and $867,000. Of the 2002 balance,
approximately $730,000 has a related valuation allowance of $365,000. Of the
2001 balance, approximately $408,000 has a related valuation allowance of
$218,000. For the years ended December 31, 2002, 2001 and 2000, the average
recorded investment in impaired loans and leases was approximately $948,000,
$613,000 and $1,376,000. During the portion of the year that the loans and
leases were impaired, the Company recognized interest income of approximately
$63,000, $76,000 and $124,000 for cash payments received in 2002, 2001 and 2000.
Nonperforming loans and leases include all such loans that are either in
nonaccrual status or are 90 days past due as to principal or interest but still
accrue interest because such loans are well-secured or in the process of
collection. Nonperforming loans and leases at December 31 are summarized as
follows (in thousands):
2002 2001
---------- ---------
Nonaccrual loans and leases $ 1,452 $ 867
Loans 90 days past due but still accruing interest 864 848
---------- ---------
Total nonperforming loans $ 2,316 $ 1,715
========== =========
Interest income forgone on nonaccrual loans and leases approximated $81,000 in
2002, $69,000 in 2001 and $139,000 in 2000.
At December 31, 2002, there were no commitments to lend additional funds to
borrowers whose loans or leases were classified as nonaccrual.
57
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31 are
summarized as follows (in thousands):
2002 2001
---------- ----------
Land $ 2,559 $ 2,594
Buildings and improvements 7,448 7,132
Furniture, fixtures and equipment 12,262 8,061
Leasehold improvement 552 522
Construction in progress 238 442
---------- ----------
23,059 18,751
Accumulated depreciation and amortization (9,903) (8,457)
---------- ----------
$ 13,156 $ 10,294
========== ==========
8. OTHER ASSETS
Major classifications of other assets at December 31 were as follows (in
thousands):
2002 2001
---------- ----------
Cash surrender value of life insurance policies $ 21,383 $ 17,632
Deferred taxes 2,995 2,161
Prepaid expenses 927 1,084
Other 3,045 2,099
---------- ----------
Total $ 28,350 $ 22,976
========== ==========
9. DEPOSITS
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $48,891,000 and $54,224,000 at December 31, 2002 and
2001. Interest expense incurred on such time certificates of deposit was
$1,335,000, $2,606,000 and $2,242,000 for the years ended December 31, 2002,
2001 and 2000. At December 31, 2002, the scheduled maturities of all time
deposits was as follows (in thousands):
Years Amount
2003 $ 156,549
2004 12,276
2005 3,121
2006 81
2007 and thereafter 81
----------
$ 172,108
==========
10. LINES OF CREDIT
At December 31, 2002, the Company had the following lines of credit with
correspondent banks to purchase federal funds (in thousands):
Type Amount Expiration
Unsecured $ 10,500 July 31, 2003
Unsecured 6,000 Annually
Secured:
First deeds of trust on eligible
1- 4 unit residential loans 64,601 Quarterly
First deeds of trust on eligible
commercial real estate loans 13,187 Monthly
58
11. BORROWING ARRANGEMENTS
Other borrowings outstanding as of December 31, 2002 consist of a loan from the
FRB in the form of Treasury Tax and Loan notes which are generally required to
be repaid within 30 days from the transaction date as well as FHLB advances. The
following table summarizes these borrowings (in thousands):
2002 2001 2000
---------- ---------- ----------
Short-term borrowings:
FHLB advances $ 23,500 $ 7,000 $ 13,400
FRB loan 89 254 122
Advances under credit lines 2,999
---------- ---------- ----------
Total short-term borrowings $ 23,589 $ 7,254 $ 16,521
========== ========== ==========
Long-term borrowings:
FHLB advances $ 9,299 $ 13,393 $ 480
---------- ---------- ----------
Total long-term borrowings $ 9,299 $ 13,393 $ 480
========== ========== ==========
Total borrowed funds $ 32,888 $ 20,647 $ 17,001
========== ========== ==========
The FHLB advances are collateralized by loans and securities pledged to the
FHLB. The following is a breakdown of rates and maturities (dollars in
thousands):
Short Term Long Term
---------- ----------
Amount $ 23,589 $ 9,299
Maturity 2003 2004-2005
Average Rate 2.40% 4.29%
12. COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF SUBSIDIARY GRANTOR TRUST
The Company formed North Valley Capital Trust I as a special purpose entity
("SPE") which is consolidated into the Company's financial statements. North
Valley Capital Trust I is a Delaware business trust wholly owned by the Company
and formed for the purpose of issuing Company obligated mandatorily redeemable
cumulative trust preferred securities of Subsidiary Grantor Trust holding solely
junior subordinated debentures.
During the third quarter of 2001, North Valley Capital Trust I issued 10,000
Trust Preferred Securities with a liquidation value of $1,000 for gross proceeds
of $10,000,000. The entire proceeds of the issuance were invested by North
Valley Capital Trust I in $10,000,000 aggregate principal amount of 10.25%
subordinated debentures due in 2031 (the Subordinated Debentures) issued by the
Company. The Subordinated Debentures represent the sole assets of North Valley
Capital Trust I. The Subordinated Debentures mature in 2031, bear interest at
the rate of 10.25%, payable semi-annually, and are redeemable by the Company at
a premium beginning during or after 2006 based on a percentage of the principal
amount of the Subordinated Debentures stipulated in the Indenture Agreement,
plus any accrued and unpaid interest to the redemption date. The Subordinated
Debentures are redeemable at 100 percent of the principal amount plus any
accrued and unpaid interest to the redemption date at any time on or after 2011.
The Trust Preferred Securities are subject to mandatory redemption to the extent
of any early redemption of the Subordinated Debentures and upon maturity of the
Subordinated Debentures on 2031.
Holders of the trust preferred securities are entitled to cumulative cash
distributions at an annual rate of 10.25% of the liquidation amount of $1,000
per security. The Company has the option to defer payment of the distributions
for a period of up to five years, as long as the Company is not in default in
the payment of interest on the Subordinated Debentures. The Company has
guaranteed, on a subordinated basis, distributions and other payments due on the
trust preferred securities (the Guarantee). The Guarantee, when taken together
with the Company's obligations under the Subordinated Debentures, the Indenture
Agreement pursuant to which the subordinated Debentures were issued and the
Company's obligations under the Trust Agreement governing the subsidiary trust,
provide a full and unconditional guarantee of amounts due on the Trust Preferred
Securities.
59
The Subordinated Debentures and related trust investment in the Subordinated
Debentures have been eliminated in consolidation for financial reporting
purposes and the Trust Preferred Securities are reflected as outstanding in the
accompanying consolidated financial statements. Under applicable regulatory
guidelines, all of the Trust Preferred Securities currently qualify as Tier I
capital. Deferred costs related to the Subordinated Debentures, which are
included in other assets in the accompanying consolidated balance sheet, totaled
$316,000 and $329,000 at December 31, 2002 and 2001, respectively. Amortization
of the deferred costs was $11,000 and $6,000 for the years ended December 31,
2002 and 2001, respectively.
13. INCOME TAXES
The provision for income taxes for the years ended December 31, was as
follows (in thousands):
2002 2001 2000
-------- -------- --------
Currently payable:
Federal $ 4,022 $ 2,852 $ 1,945
State 1,139 754 554
-------- -------- --------
Total 5,161 3,606 2,499
-------- -------- --------
Deferred tax (benefit):
Federal (881) (437) (622)
State (444) (107) (268)
-------- -------- --------
Total (1,325) (544) (890)
-------- -------- --------
Total provision for income taxes $ 3,836 $ 3,062 $ 1,609
======== ======== ========
The effective federal tax rate for the years ended December 31, differs from
the statutory tax rate as follows:
2002 2001 2000
-------- -------- --------
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% 4.0%
Tax exempt income (7.1%) (6.1%) (15.0%)
Merger and integration costs 11.6%
Other .3% (1.8%) (1.3%)
-------- -------- --------
32.2% 31.5% 34.3%
======== ======== ========
60
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):
2002 2001
-------- --------
Deferred tax assets:
Allowance for loan losses $ 2,460 $ 1,649
Accrued pension obligation 898 768
Deferred compensation 841 763
Mark to market adjustment 610 531
Stock-based compensation 240
California franchise tax 4 42
-------- --------
Total deferred tax assets 5,053 3,753
-------- --------
Deferred tax liabilities:
Tax depreciation in excess of book depreciation 407 513
Unrealized gain on securities available for sale 978 487
FHLB stock dividend 243 145
Originated mortgage servicing rights 199 139
Deferred loan fee costs 85
Other 231 223
-------- --------
Total deferred tax liabilities 2,058 1,592
-------- --------
Net deferred tax asset $ 2,995 $ 2,161
======== ========
The Company believes that it is more likely than not that it will realize
the above deferred tax assets in future periods; therefore, no valuation
allowance has been provided against its deferred tax assets.
14. RETIREMENT AND DEFERRED COMPENSATION PLANS
Substantially all employees with at least one year of service participate in
a Company-sponsored employee stock ownership plan (ESOP). The Company made
contributions to the ESOP for the years ended December 31, 2002, 2001 and
2000 of $104,000, $60,000 and $60,000. At December 31, 2002, the ESOP owned
approximately 138,348 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,
2002, 2001 and 2000 of $74,000, $45,000 and $43,000, respectively.
The Company has a nonqualified executive deferred compensation plan for key
executives and directors. Under this plan, participants voluntarily elect to
defer a portion of their salary, bonus or fees and the Company is required
to credit these deferrals with interest. The Company's deferred compensation
obligation of $1,982,000 and $1,895,000 as of December 31, 2002 and 2001,
respectively, is included in accrued interest payable and other liabilities.
The Company has a supplemental retirement plan for key executives and a
supplemental retirement plan for retired executives and directors. These
plans are nonqualified defined benefit plans and are unsecured and unfunded.
The Company has purchased insurance on the lives of the participants and
intends to use the cash values of these policies ($21,383,000 and
$17,632,000 at December 31, 2002 and 2001, respectively) to pay the
retirement obligations. The accrued pension obligation of $2,526,000 and
$2,363,000 as of December 31, 2002 and 2001, respectively, is included in
accrued interest payable and other liabilities.
61
The following tables set forth the status of the nonqualified supplemental
retirement defined benefit pension plans status at or for the year ended
December 31 (in thousands):
2002 2001
---------- ----------
Change in projected benefit obligation
--------------------------------------
Projected benefit obligation at beginning of year $ (2,159) $ (2,678)
Service cost (184) (70)
Interest cost (154) (178)
Actuarial gain 1 197
Benefits paid 206 222
---------- ----------
Projected benefit obligation at end of year $ (2,290) $ (2,507)
========== ==========
Change in plan assets
---------------------
Fair value of plan assets at beginning of year
Employer contribution $ 206 $ 222
Benefits paid (206) (222)
---------- ----------
Fair value of plan assets at end of year $ $
========== ==========
Funding
-------
Unfunded status $ (2,290) $ (2,507)
Unrecognized actuarial gain (411) (73)
Unrecognized prior service cost 299 330
Unrecognized net transition obligation 75 100
---------- ----------
Net amount recognized (accrued pension cost) $ (2,327) $ (2,150)
========== ==========
Assumptions used in computing the unfunded status and net periodic benefit
costs were:
Discount rate 7.50% 7.50%
Expected return on assets N/A N/A
Rate of compensation increase (supplemental executive retirement plan only) 6.00% 6.00%
2002 2001 2000
---------- ---------- ----------
Components of net periodic benefits cost
Service cost $ 184 $ 70 $ 116
Interest cost 154 178 175
Amortization of net obligation at transition 25 25 25
Prior service amortization 31 31 33
Recognized net actuarial (gain) loss (11) (32) 1
---------- ---------- ----------
Net periodic benefit cost $ 383 $ 272 $ 350
========== ========== ==========
15. STOCK-BASED COMPENSATION
During 2002, 2001, and 2000, each director was awarded 600 shares of common
stock, resulting in an additional 5,400, 5,400 and 4,200 shares being
issued. Compensation cost related to these awards was recognized based on
the fair value of the shares at the date of award.
62
Under the Company's stock option plans as of December 31, 2002, 730,672
shares of the Company's common stock are available for future grants to
directors and employees of the Company. Under the Director Plans, options
may not be granted at a price less than 85% of fair market value at the date
of the grant. Under the Employee Plan, options may not be granted at a price
less than the fair market value at the date of the grant. Under both plans,
options may be exercised over a ten year term and vest ratably over four
years from the date of the grant. A summary of stock options follows:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- ----------
Outstanding, January 1, 2000 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)
Granted 114,701 12.27
Exercised (34,140) 8.93
Expired or canceled (26,053) 12.23
---------- ----------
Outstanding, December 31, 2001 625,242 11.10
(402,941 exercisable at weighted average price of $10.86)
Granted 98,079 14.23
Exercised (46,140) 7.52
Expired or canceled (316) 6.19
---------- ----------
Outstanding, December 31, 2002 676,865 $ 11.85
(450,937 exercisable at weighted average price of $11.34) ========== ==========
Information about stock options outstanding at December 31, 2002 is
summarized as follows:
Average Average
Average Exercise Exercise
Range of Remaining Price of Price of
Exercise Options Contractual Options Options Options
Prices Outstanding Life (Years) Outstanding Exercisable Exercisable
$ 5.10 3,000 1 $ 5.10 3,000 $ 5.10
$ 6.09-6.66 31,479 2 $ 6.47 31,479 $ 6.47
$ 8.04-8.44 15,318 5 $ 8.15 15,318 $ 8.15
$ 9.14-9.88 28,000 6 $ 9.77 18,400 $ 9.72
$ 10.00-10.875 225,910 6 $ 10.34 176,728 $ 10.33
$ 11.37 60,000 8 $ 11.37 24,000 $ 11.37
$ 12.41-12.875 126,978 6 $ 12.78 108,078 $ 12.77
$ 13.30-13.375 48,501 8 $ 13.33 19,399 $ 13.33
$ 14.10 21,929 9 $ 14.10 4,385 $ 14.10
$ 15.36-15.94 115,750 8 $ 15.59 50,150 $ 15.78
16. 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.
63
There was no difference in the numerator used in the calculation of basic
earnings per share and diluted earnings per share. The denominator used in
the calculation of basic earnings per share and diluted earnings per share
for each of the years ended December 31 is reconciled as follows (in
thousands):
2002 2001 2000
---------- ---------- ----------
Calculation of Basic Earnings Per Share
Numerator - net income $ 8,064 $ 6,666 $ 3,088
Denominator - weighted average common shares outstanding 4,694 5,322 5,794
---------- ---------- ----------
Basic earnings per share $ 1.72 $ 1.25 $ 0.53
========== ========== ==========
Calculation of Diluted Earnings Per Share
Numerator - net income $ 8,064 $ 6,666 $ 3,088
Denominator:
Weighted average common shares outstanding 4,694 5,322 5,794
Dilutive effect of outstanding options 136 111 38
---------- ---------- ----------
Weighted average common shares outstanding -
Diluted 4,831 5,433 5,832
---------- ---------- ----------
Diluted earnings per share $ 1.67 $ 1.23 $ 0.53
========== ========== ==========
17. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal actions arising from normal business
activities. Management, based upon the advice of legal counsel, believes
that the ultimate resolution of all pending legal actions will not have a
material effect on the Company's financial position or results of its
operations or its cash flows.
The Company has operating leases for certain premises and equipment. Rent
expense for such leases for the years ended December 31, 2002, 2001 and 2000
was $577,000, $365,000 and 383,000.
The following schedule represents the Company's noncancelable future minimum
scheduled lease payments at December 31, 2002 (in thousands):
2003 $ 506
2004 485
2005 474
2006 451
2007 and thereafter 754
----------
Total $ 2,670
==========
The Company was contingently liable under letters of credit issued on behalf
of its customers in the amount of $2,461,000 and $1,817,000 at December 31,
2002 and 2001. At December 31, 2002, commercial and consumer lines of
credit, and real estate loans of approximately $28,637,000 and $37,938,000
were undisbursed. At December 31, 2001, commercial and consumer lines of
credit, and real estate loans of approximately $38,876,000 and $18,210,000
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
64
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, 2002 and 2001, no losses are anticipated as a result of these
commitments.
In management's opinion, a concentration exists in real estate-related loans
which represent approximately 65% and 50% of the Company's loan portfolio at
December 31, 2002 and 2001, respectively. Although management believes such
concentrations to have no more than the normal risk of collectibility, a
substantial decline in the economy in general, or a decline in real estate
values in the Company's primary market areas in particular, could have an
adverse impact on collectibility of these loans. However, personal and
business income represents the primary source of repayment for a majority of
these loans.
18. RELATED PARTY TRANSACTIONS
At December 31, 2002 and 2001, 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, 2002 and 2001 is as
follows (in thousands; renewals are not reflected as either new loans or
repayments):
2002 2001
---------- ----------
Beginning Balance $ 4,317 $ 3,919
Borrowings 1,502 1,599
Repayments (2,255) (1,201)
---------- ----------
Ending Balance $ 3,563 $ 4,317
========== ==========
19. REGULATORY MATTERS
The Company, NVB and SRB are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and, possibly,
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company, NVB and SRB must meet specific
capital guidelines that involve quantitative measures of the Company's,
NVB's and SRB's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's, NVB's and
SRB's capital amounts and NVB's and SRB's prompt corrective action
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company, NVB and SRB to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December
31, 2002, that the Company, NVB and SRB meet all capital adequacy
requirements to which they are subject.
The most recent notifications from the Federal Deposit Insurance Corporation
for NVB and SRB as of December 31, 2002 and 2001, categorized NVB and SRB as
well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized NVB and SRB must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as
set forth in the table below. There are no conditions or events since that
notification that management believes have changed NVB's or SRB's category.
65
The Company's, NVB's and SRB's actual capital amounts (in thousands) and ratios
are also presented, respectively, in the following tables.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ---------------------- ----------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
Company
As of December 31, 2002:
Total capital
(to risk weighted
assets) $ 61,581 12.58% $ 39,157 8.00% N/A N/A
Tier 1 capital
(to risk weighted
assets) $ 55,455 11.33% $ 19,578 4.00% N/A N/A
Tier 1 capital
(to average assets) $ 55,455 8.59% $ 25,815 4.00% N/A N/A
As of December 31, 2001:
Total capital
(to risk weighted
assets) $ 54,959 12.82% $ 34,285 8.00% N/A N/A
Tier 1 capital
(to risk weighted
assets) $ 49,587 11.57% $ 17,142 4.00% N/A N/A
Tier 1 capital
(to average assets) $ 49,587 8.37% $ 23,701 4.00% N/A N/A
North Valley Bank
As of December 31, 2002:
Total capital
(to risk weighted
assets) $ 41,380 12.12% $ 27,316 8.00% $ 34,146 10.00%
Tier 1 capital
(to risk weighted
assets) $ 37,192 10.89% $ 13,658 4.00% $ 20,487 6.00%
Tier 1 capital
(to average assets) $ 37,192 8.61% $ 17,279 4.00% $ 21,598 5.00%
As of December 31, 2001:
Total capital
(to risk weighted
assets) $ 35,140 11.75% $ 23,920 8.00% $ 29,900 10.00%
Tier 1 capital
(to risk weighted
assets) $ 31,913 10.67% $ 11,960 4.00% $ 17,940 6.00%
Tier 1 capital
(to average assets) $ 31,913 8.13% $ 15,698 4.00% $ 19,622 5.00%
Six Rivers Bank
As of December 31, 2002:
Total capital
(to risk weighted
assets) $ 18,958 13.03% $ 11,641 8.00% $ 14,551 10.00%
Tier 1 capital
(to risk weighted
assets) $ 17,130 11.77% $ 5,821 4.00% $ 8,731 6.00%
Tier 1 capital
(to average assets) $ 17,130 8.24% $ 8,316 4.00% $ 10,394 5.00%
As of December 31, 2001:
Total capital
(to risk weighted
assets) $ 18,166 14.17% $ 10,258 8.00% $ 12,822 10.00%
Tier 1 capital
(to risk weighted
assets) $ 16,551 12.91% $ 5,129 4.00% $ 7,693 6.00%
Tier 1 capital
(to average assets) $ 16,551 8.35% $ 7,932 4.00% $ 9,914 5.00%
66
Under federal and California state banking laws, dividends paid by NVB and
SRB to the Company in any calendar year may not exceed certain limitations
without the prior written approval of the appropriate bank regulatory
agency. At December 31, 2002, the amount not restricted for payment of
dividends without prior written approval was approximately $5,365,000.
Similar restrictions apply to the amounts and terms of loans, advances and
other transfers of funds from NVB and SRB to the Company.
20. OTHER NONINTEREST EXPENSES
The major classifications of other noninterest expenses for the years ended
December 31 were as follows (in thousands):
2002 2001 2000
---------- ---------- ----------
Professional services $ 886 $ 786 $ 1,101
ATM & on-line banking expense 906 626 684
Printing, supplies and postage 1,175 1,061 886
Marketing expense 1,058 1,108 882
Amortization of intangibles 525 243 301
Other 4,271 3,757 3,837
---------- ---------- ----------
$ 8,821 $ 7,581 $ 7,691
========== ========== ==========
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by
using available market information and appropriate valuation methodologies.
Although management uses its best judgment in assessing fair value, there
are inherent weaknesses in any 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 financial
instruments without quoted market prices are subjective in nature and
involve various assumptions and estimates that are matters of judgment.
Changes in the assumptions used could significantly affect these estimates.
Estimates of fair value have not been adjusted to reflect changes in market
conditions subsequent to December 31, 2002; therefore, estimates presented
herein are not necessarily indicative of amounts which could be realized in
a current transaction.
The following assumptions were used as of December 31, 2002 and 2001 to
estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value.
(a) Cash and Cash Equivalents - The carrying amount represents a reasonable
estimate of fair value.
(b) Interest Bearing Deposits in Other Financial Institutions - The carrying
amount represents a reasonable estimate of fair value.
(c) Securities - The fair value of held to maturity securities are based on
quoted market prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities. Available for sale securities are carried at fair
value. The carrying value of FHLB, Federal Reserve Bank, and other
securities 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 market information for similar loans.
The fair value of nonperforming loans and leases is estimated by
discounting estimated future cash flows using current interest rates
with an additional risk adjustment reflecting the individual
characteristics of the loans.
67
(e) Cash Surrender Value of Life Insurance - The carrying amount represents
a reasonable estimate of fair value.
(f) Deposit Liabilities - Noninterest-bearing and interest-bearing demand
deposits and savings accounts are payable on demand and their carrying
values are assumed to be at fair value. The fair value of the core
deposit intangible has not been included as a component of the fair
value estimate. The fair value of time deposits is based on the
discounted value of contractual cash flows. The discount rate is based
on rates currently offered for deposits of similar size and remaining
maturities.
(g) Other Borrowed Funds - The fair value of other borrowed funds is
estimated by discounting the contractual cash flows using the current
interest rate at which similar borrowings for the same remaining
maturities could be made.
(h) Trust Preferred Securities-The fair value of the Trust Preferred
Securities is estimated by discounting the contractual cash flows using
the current interest rate at which similar securities with the same
remaining maturity could be made.
(j) Commitments to Fund Loans/Standby Letters of Credit - The fair values of
commitments are estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. The
differences between the carrying value of commitments to fund loans or
stand by letters of credit and their fair value is not significant and
therefore not included in the following table.
2002 2001
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
FINANCIAL ASSETS
Cash and cash equivalents $ 55,300 $ 55,300 $ 46,375 $ 46,375
FHLB, FRB and other securities $ 3,258 $ 3,258 $ 2,213 $ 2,213
Interest bearing deposits in other
financial institutions $ 517 $ 517 $ 2,289 $ 2,289
Securities:
Available for sale $ 110,475 $ 110,475 $ 111,626 $ 111,626
Held to maturity $ 1,455 $ 1,843 $ 1,455 $ 1,941
Loans and leases and loans held
for sale $ 437,843 $ 439,199 $ 391,022 $ 397,927
Cash surrender value of life
insurance $ 21,383 $ 21,383 $ 17,632 $ 17,632
FINANCIAL LIABILITIES
Deposits $ 555,053 $ 550,715 $ 514,278 $ 512,755
Other borrowed funds $ 32,888 $ 33,185 $ 20,647 $ 20,647
Trust preferred securities $ 10,000 $ 10,800 $ 10,000 $ 10,000
22. SEGMENT REPORTING
The Company operates as three business segments: North Valley Bank, Six
Rivers Bank and Other. Management analyzes the operations of NVB, SRB and
Other separately. Other consists of Bancorp and BPI, both of which provide
services to NVB and SRB. Other also includes all eliminating entries for
inter-company revenue and expense items required for consolidation.
Management allocates the costs of Bancorp and BPI to NVB and SRB based
primarily on usage through a variety of statistical data. NVB and SRB are
separately chartered institutions each with its own Board of Directors and
regulated independently of each other.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes not
including nonrecurring gains or losses.
The Company derives a majority of its revenues from interest income and the
chief operating decision maker relies primarily on net interest revenue to
assess the performance of the segments and make decisions about resources to
be allocated to the segment. Therefore, the segments are reported below
using net interest income for all periods presented. Other revenue
represents noninterest income, exclusive of the net gain (loss) on sales of
available-for-sale securities, which is not allocated to the segments.
68
The Company does not have operating segments other than those reported.
Parent company financial information is included in the Other category in
the disclosures below, along with the activity of BPI, and represents the
Company's Other operating segment.
The Company does not have a single external customer from which it derives
10 percent or more of its revenues and operates in one geographical area.
Information about reportable segments, and the reconciliation of such
information to the consolidated financial statements as of and for the years
ended December 31, follows (in thousands):
NVB SRB Other Total
------------ -------------- ------------- ------------
Year ended December 31, 2002:
Total revenues $ 28,084 $ 10,928 $ (589) $ 38,423
Net income (loss) $ 7,295 $ 1,496 $ (727) $ 8,064
Interest income $ 26,897 $ 12,003 $ 2 $ 38,902
Interest expense $ 5,456 $ 3,319 $ 1,017 $ 9,792
Depreciation and amortization $ 1,020 $ 1,062 $ 85 $ 2,167
Provision for loan and lease losses $ 1,575 $ 220 $ $ 1,795
Total assets $ 443,642 $ 221,920 $ 208 $ 655,770
Year ended December 31, 2001:
Total revenues $ 22,497 $ 10,473 $ 218 $ 33,188
Net income (loss) $ 5,878 $ 1,427 $ (639) $ 6,666
Interest income $ 26,369 $ 13,403 $ 39 $ 39,811
Interest expense $ 9,656 $ 5,352 $ 467 $ 15,475
Depreciation and amortization $ 765 $ 813 $ 20 $ 1,598
Provision for loan and lease losses $ 1,010 $ 360 $ $ 1,370
Total assets $ 394,110 $ 199,166 $ 1,697 $ 594,973
Year ended December 31, 2000:
Total revenues $ 21,444 $ 9,258 $ (99) $ 30,603
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
Provision for loan and lease losses $ 900 $ 770 $ $ 1,670
Total assets $ 339,144 $ 200,281 $ 796 $ 540,221
69
23. PARENT COMPANY ONLY - CONDENSED FINANCIAL INFORMATION
The condensed financial statements of North Valley Bancorp are presented
below (in thousands):
CONDENSED BALANCE SHEET
DECEMBER 31, 2002 AND 2001
----------------------------------------------------------------------------
2002 2001
---------- ----------
ASSETS
Cash and cash equivalents $ 1,032 $ 1,174
Available for sale securities at fair value 80 75
Investments in subsidiaries 59,329 53,054
Other assets 2,161 1,717
---------- ----------
Total $ 62,602 $ 56,020
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividend payable $ 652 $ 468
Subordinated debentures 10,000 10,000
Other liabilities 1,921 1,874
Stockholders' equity 50,029 43,678
---------- ----------
Total $ 62,602 $ 56,020
========== ==========
CONDENSED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
----------------------------------------------------------------------------
2002 2001 2000
---------- ---------- ----------
INCOME:
Dividends from subsidiaries $ 3,400 $ 9,200 $ 2,950
Other income 8,019 5,351 32
---------- ---------- ----------
Total income 11,419 14,551 2,982
EXPENSE:
Salaries and employee benefits 5,307 4,353
Legal and accounting 677 609 73
Other 3,240 1,574 640
Merger and acquisition expense 85 773
Tax benefit (490) (528) (312)
---------- ---------- ----------
Total expense 8,734 6,093 1,174
---------- ---------- ----------
Income before equity in undistributed income
of subsidiaries 2,685 8,458 1,808
Equity in undistributed income of subsidiaries 5,379 (1,792) 1,280
---------- ---------- ----------
Net income 8,064 6,666 3,088
Other comprehensive income, net of tax 900 930 1,269
---------- ---------- ----------
Total comprehensive income $ 8,964 $ 7,596 $ 4,357
========== ========== ==========
70
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
------------------------------------------------------------------------
2002 2001 2000
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,064 $ 6,666 $ 3,088
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed income of subsidiaries (5,379) 1,792 (1,280)
Gain on sale of available for sale securities (4)
Stock-based compensation expense 378 189 208
Effect of changes in:
Other assets (445) (1,114) (558)
Other liabilities 107 1,792 96
Dividends receivable 372
---------- ---------- ----------
Net cash provided by operating activities 2,725 9,325 1,922
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available for sale securities 56
Payments from subsidiaries (120)
---------- ---------- ----------
Net cash used in investing activities (64)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,151) (2,226) (1,485)
Proceeds from issuance of Company obligated
Mandatorily redeemable cumulative trust
Preferred securities of subsidiary grantor trust 10,000
Repurchase of common shares (1,055) (17,115)
Stock options exercised 339 251 111
---------- ---------- ----------
Net cash used in financing activities (2,867) (9,090) (1,374)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (142) 235 484
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,174 939 455
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,032 $ 1,174 $ 939
========== ========== ==========
24. SUBSEQUENT EVENT
On March 11, 2003, the Board of Directors declared a three-for-two stock
split payable May 15, 2003 to shareholders of record on April 15, 2003.
References to shares outstanding, weighted average shares outstanding, per
share amounts, ESOP shares, option shares and the related exercise prices
included in the accompanying consolidated financial statements and notes
have not been restated to reflect the three-for-two stock split with the
exception of proforma earnings per share as disclosed on the consolidated
statement of income.
71
INDEX OF EXHIBITS
Exhibit No. Exhibit Name Sequential Page No
- ----------- ------------ ------------------
2(a) Agreement and Plan of Reorganization and Merger, dated as of October 3, 1999 *
(incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K
filed with the Commission on October 12, 1999).
2(b) Addendum to Agreement and Plan of Reorganization and Merger dated as of September 25, *
2000 (incorporated by reference from Exhibit 2.7 to the Company's Current Report on Form
8-K filed with the Commission on September 29, 2000).
3(a) Amended and Restated Articles of Incorporation of North Valley Bancorp (incorporated by *
reference from Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q filed with
the Commission for the period ended June 30, 1998).
3(b) Certificate of Amendment of Amended and Restated Articles of Incorporation of North *
Valley Bancorp (incorporated by reference from Exhibit 3(b) to the Company's Annual
Report on Form 10-K filed with the Commission for the year ended December 31, 2001.)
3(c) By-laws of North Valley Bancorp, as amended and restated (incorporated by reference from *
Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q filed with the Commission
for the period ended June 30, 1998).
4(a) Amended and Restated Declaration of Trust (North Valley Capital Trust I) dated July 16, *
2001. (incorporated by reference from Exhibit 4(a) to the Company's Annual Report on
Form 10-K filed with the Commission for the year ended December 31, 2001.)
4(b) Indenture dated July 16, 2001. (incorporated by reference from Exhibit 4(b) to the *
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2001.)
4(c) Junior Subordinated Debt security of North Valley Bancorp (incorporated by *
reference from Exhibit 4(c) to the Company's Annual Report on Form 10-K filed with
the Commission for the year ended December 31, 2001.)
4(d) Guarantee Agreement (North Valley Bancorp) dated July 16, 2001 (incorporated by *
reference from Exhibit 4(d) to the Company's Annual Report on Form 10-K filed with
the Commission for the year ended December 31, 2001.)
10(a) Shareholder Protection Rights Agreement, dated September 9, 1999 (incorporated by *
reference from Exhibit 4 to the Company's Current Report on Form 8-K filed with the
Commission on September 23, 1999).
10(b) North Valley Bancorp 1989 Employee Stock Option Plan, as amended (incorporated by *
reference from Exhibit 4.1 to Post-Effective Amendment No. One to the Company's
Registration Statement on Form S-8 (No. 33-32787) filed with the Commission on December
26, 1989). **
10(c) North Valley Bancorp 1989 Employee Nonstatutory Stock Option Agreement (incorporated by *
reference from Exhibit 4.3 to Post-Effective Amendment No. One to the Company's
Registration Statement on Form S-8 (No. 33-32787) filed with the Commission on December
26, 1989). **
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). **
72
Exhibit No. Exhibit Name Sequential Page No
- ----------- ------------ ------------------
10(f) Employee Stock Ownership Plan, as amended and restated as of January 1, 1987 *
(incorporated by reference from Exhibit 10(x) to the company's Annual Report on Form
10-K filed with the commission for the year ended December 31, 1993).**
10(g) Amendment No. 3 to Employee Stock Ownership Plan (incorporated by reference from Exhibit *
10(ee) to the Company's Annual Report on Form 10-KSB filed with the Commission for the
year ended December 31, 1994). **
10(h) Amendment No. 4 to Employee Stock Ownership Plan, dated August 19, 1997 (incorporated by *
reference from Exhibit 10 (kk) to the Company's Annual Report on Form 10-KSB filed with
the Commission for the year ended December 31, 1997). **
10(i) Supplemental Executive Retirement Plan (incorporated by reference from Exhibit 10(i) to *
the Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 1988). **
10(j) Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10(j) to *
the Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 1988). **
10(k) Supplemental Retirement Plan for Directors (incorporated by reference from Exhibit 10(k) *
to the Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 1988). **
10(l) Legal Services Agreement 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, 2001, between North Valley Bancorp and *
J. M. Wells, Jr., Attorney at Law (incorporated by reference from Exhibit 10(m) to the
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2002.)
10(n) 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). **
73
Exhibit No. Exhibit Name Sequential Page No
- ----------- ------------ ------------------
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). **
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 July 26, *
2001 (incorporated by reference from Exhibit 99.1 to the Company's Registration
Statement on Form S-8 (No. 333-65950) filed with the Commission on July 26, 2001. **
10(v) North Valley Bancorp 1999 Director Stock Option Plan (incorporated by reference from *
Exhibit 99.1 to the Company's Registration Statement on Form S-8 (No. 333-65948) filed
with the Commission on July 26, 2001. **
10(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 executed in December 2000 between *
North Valley Bank and each of Michael J. Cushman, Sharon L. Benson, Jack R. Richter and
Eric J. Woodstrom. (incorporated by reference from Exhibit 10(y) to the Company's Annual
Report on Form 10-K filed with the Commission for the year ended December 31, 2001). **
10(z) Form of Executive Deferred Compensation Agreement executed in December 2000 between Six *
Rivers Bank and Margie L. Plum (incorporated by reference from Exhibit 10(z) to the
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2001). **
10(aa) Form of Director Deferred Fee Agreement executed in December 2000 between North Valley *
Bank and each of Rudy V. Balma, William W. Cox, Royce L. Friesen, Dan W. Ghidinelli,
Thomas J. Ludden, Douglas M. Treadway and J.M. Wells, Jr. (incorporated by reference
from Exhibit 10aa) to the Company's Annual Report on Form 10-K filed with the Commission
for the year ended December 31, 2001). **
10(bb) Form of Director Deferred Fee Agreement executed in December 2000 between Six Rivers *
Bank and each of Kevin D. Hartwick, William T. Kay, Jr., J. Michael McGowan, Warren L.
Murphy and Dolores M. Vellutini. (incorporated by reference from Exhibit 10(bb) to the
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2001). **
10(cc) Form of Employment Agreement executed in January 2001 between North Valley Bancorp and *
each of Michael J. Cushman, Jack R. Richter, Eric J. Woodstrom, Edward J. Czajka and
Sharon L. Benson. (incorporated by reference from Exhibit 10(cc) to the Company's Annual
Report on Form 10-K filed with the Commission for the year ended December 31, 2001). **
10(dd) Employment Agreement executed in May 2001 between Six Rivers National Bank and Russell *
Harris. (incorporated by reference from Exhibit 10(dd) to the Company's Annual Report on
Form 10-K filed with the Commission for the year ended December 31, 2001). **
74
Exhibit No. Exhibit Name Sequential Page No
- ----------- ------------ ------------------
10(ee) Form of Salary Continuation Agreement executed in October 2001 between North Valley *
Bancorp and each of Michael J. Cushman, Jack R. Richter, Eric J. Woodstrom, Edward J.
Czajka and Sharon L. Benson. (incorporated by reference from Exhibit 10(ee) to the
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2001). **
10(ff) Park Marina Lease dated July 23, 2001, between The McConnell Foundation and North Valley *
Bancorp for 300 Park Marina Circle, Redding, California 96001. (incorporated by
reference from Exhibit 10(ff) to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001).
10(gg) Form of Salary Continuation Agreement executed in October 2001 between Six Rivers *
National Bank and each of Russell Harris and Margie L. Plum. (incorporated by reference
from Exhibit 10(gg) to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001).**
10(hh) Form of Executive Deferred Compensation Agreement executed in January 2001 between North *
Valley Bank and Edward J. Czajka. (incorporated by reference from Exhibit 10(hh) to the
Company's Annual Report on Form 10-K filed with the Commission for the year ended
December 31, 2001). **
10(ii) Form of Executive Deferred Compensation Agreement executed December 2001 between North *
Valley Bank and each of Michael J. Cushman, Sharon L. Benson, Jack R. Richter, Edward J.
Czajka and Eric J. Woodstrom. Section 3.1.2 amended on all agreements. (incorporated by
reference from Exhibit 10(ii) to the Company's Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2001).**
10(jj) Form of Executive Deferred Compensation Agreement executed January 2002, between Six *
Rivers National Bank and Russell Harris. Agreement includes amended Section 3.1.2.
(incorporated by reference from Exhibit 10(jj) to the Company's Annual Report on Form
10-K filed with the Commission for the year ended December 31, 2001). **
10(kk) Form of Director Deferred Fee Agreement executed December 2001, between North Valley *
Bank and each of Rudy V. Balma, William W. Cox, Royce L. Friesen, Dan W. Ghidinelli,
Thomas J. Ludden, Douglas M. Treadway and J.M. Wells, Jr. Section 3.1.2 amended on all
agreements. (incorporated by reference from Exhibit 10(kk) to the Company's Annual Report
on Form 10-K filed with the Commission for the year ended December 31, 2001). **
10(ll) Director Deferred Fee Agreement executed December 2001, between Six Rivers National Bank *
and each of Kevin D. Hartwick, William T. Kay, Jr., John J. Gierek, Jr., Warren L.
Murphy and Dolores M. Vellutini. Section 3.1.2 amended on all agreements. (incorporated
by reference from Exhibit 10(ll) to the Company's Annual Report on Form 10-K filed with
the Commission for the year ended December 31, 2001). **
10(mm) Information services contract with Information Technology, Inc., dated June 17, 2002 79
21 List of Subsidiaries. 103
23.1 Consent of Perry-Smith LLP 104
23.2 Consent of Deloitte & Touche LLP 105
99.34 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 with Respect to 106
The North Valley Bancorp Annual Report on Form 10-K for the year ended December 31, 2002
- ----------------------------------
* Previously filed.
** Indicates management contract or compensatory plan or arrangement.
75
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH VALLEY BANCORP
By: /s/ MICHAEL J. CUSHMAN
---------------------------
Michael J. Cushman
President and Chief Executive Officer
/s/ EDWARD J. CZAJKA
---------------------------
Edward J. Czajka
Executive Vice President & Chief Financial Officer
DATE: March 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
/s/ RUDY V. BALMA Director March 27, 2003
- ------------------------------- --------
Rudy V. Balma
/s/ MICHAEL J. CUSHMAN Director March 27, 2003
- ------------------------------- --------
Michael J. Cushman
/s/ WILLIAM W. COX Director March 27, 2003
- ------------------------------- --------
William W. Cox
/s/ ROYCE L. FRIESEN Director March 27, 2003
- ------------------------------- --------
Royce L. Friesen
/s/ DAN W. GHIDINELLI Director March 27, 2003
- ------------------------------- --------
Dan W. Ghidinelli
/s/ THOMAS J. LUDDEN Director March 27, 2003
- ------------------------------- --------
Thomas J. Ludden
/s/ DOUGLAS M. TREADWAY Director March 27, 2003
- ------------------------------- --------
Douglas M. Treadway
/s/ KEVIN D. HARTWICK Director March 27, 2003
- ------------------------------- --------
Kevin D. Hartwick
/s/ DOLORES M. VELLUTINI Director March 27, 2003
- ------------------------------- --------
Dolores M. Vellutini
/s/ J. M. WELLS, JR. Director March 27, 2003
- ------------------------------- --------
J. M. Wells, Jr.
76
CERTIFICATIONS*
I, Michael J. Cushman, certify that:
1. I have reviewed this annual report on Form 10-K of North Valley Bancorp
(the Registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 27, 2003
/s/ MICHAEL J. CUSHMAN
- --------------------------------
Michael J. Cushman
President, Chief Executive Officer
(Principal Executive Officer)
77
CERTIFICATIONS*
I, Edward J. Czajka, certify that:
1. I have reviewed this annual report on Form 10-K of North Valley Bancorp
(the Registrant);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 27, 2003
/s/ EDWARD J. CZAJKA
- --------------------------------
Edward J. Czajka
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
78