SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
NORTH VALLEY BANCORP
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
NA
(2) Aggregate number of securities to which transaction applies: NA
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined): NA
(4) Proposed maximum aggregate value of transaction: NA
(5) Total fee paid: NA
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: NA
(2) Form, Schedule or Registration Statement No.: NA
(3) Filing Party: NA
(4) Date Filed: NA
[GRAPHIC OMITTED] NVB
North Valley Bancorp
November 26, 2007
Dear Fellow Shareholder:
This year, the Annual Meeting of shareholders was delayed due to the
anticipated merger of North Valley Bancorp with and into Sterling Financial
Corporation and related merger of North Valley Bank with and into Sterling
Savings Bank. A special meeting of shareholders was held on July 31, 2007 and
the proposed mergers were approved by a majority vote of the outstanding shares
of North Valley Bancorp common stock. Since the mergers were expected to be
finalized not later than November 30, 2007, the Proxy Statement/Prospectus sent
to the shareholders for that special meeting did not include an election of
directors or the ratification of the appointment of Perry-Smith LLP as
independent auditor for North Valley Bancorp for the 2007 fiscal year.
Consummation of the Sterling transactions requires the receipt of all necessary
regulatory approvals and the satisfaction of other closing conditions that are
customary for such transactions. As of this date, Sterling has not received the
necessary regulatory approvals. Therefore, in order to maintain compliance with
California law and the listing standards of the Nasdaq Global Select Market, the
Board of Directors has determined to bring the election of directors and the
ratification of the appointment of Perry-Smith LLP before the shareholders at an
Annual Meeting to be held on December 20, 2007. We encourage your support of the
Bank and the Board's proposals as described in the Proxy Statement for the
Annual Meeting. North Valley Bank continues to be a strong, progressive and
independent banking institution. The Bank values its customers, shareholders and
employees and maintains the goals of providing solid growth and returns. The key
to its continuing success is in recruiting the best employees possible and
providing the best service possible to its customers.
The growth of the Bank in recent years into newer markets and expanded
products for businesses and consumers alike has positioned the Bank as a
financial institution with a major presence in Northern California. North Valley
Bank continues to believe that this strategy will bring strong rewards to its
shareholders in the long term.
As a result of the changing market conditions, North Valley Bank
continues to react in positive ways to ensure strength and stability for the
benefit of its shareholders and customers. On behalf of our staff and the Board
of Directors we thank you for your continued support and look forward to seeing
many of our shareholders at the Annual Meeting on December 20, 2007, in Redding,
California.
Cordially,
/s/ J.M. Wells, Jr. /s/ Michael J. Cushman
- ---------------------------------- --------------------------------------
J.M. ("Mike") Wells, Jr. Michael J. Cushman
Chairman of the Board President and Chief Executive Officer
NORTH VALLEY BANCORP
300 Park Marina Circle
Redding, California 96001
Dear Shareholders:
The 2007 Annual Meeting of Shareholders of North Valley Bancorp will be
held at 4:00 p.m. on Thursday, December 20, 2007, in the Administrative Offices
of North Valley Bancorp, 300 Park Marina Circle, Redding, California. In
connection with the Annual Meeting, we are enclosing the following:
1. Notice of Annual Meeting of Shareholders
2 Proxy Statement
3. Proxy
4. 2006 Annual Report (Annual Report for the fiscal year ended
December 31, 2006 on Form 10-K and Amendment No. 1 to Annual
Report for the fiscal year ended December 31, 2006 on Form
10-K/A, as they were filed with the Securities and Exchange
Commission)
5. Quarterly Report for the period ended September 30, 2007 on
Form 10-Q, as filed with the Securities and Exchange
Commission.
We hope that you will attend the Annual Meeting.
We encourage you to read all of the enclosed materials carefully.
Whether or not you plan to attend the Annual Meeting in person, please
return the Proxy, properly completed and executed, as promptly as possible so
that your shares may be represented at the Annual Meeting.
As an added convenience, a shareholder can choose to vote by telephone
or by using the Internet as indicated on the Proxy. If you vote by telephone or
electronically through the Internet, you do not need to return the Proxy. Please
refer to the Proxy Statement for a more complete description of the procedures
for telephone and Internet voting.
We appreciate your support and look forward to seeing you at the Annual
Meeting on Thursday, December 20, 2007.
Cordially,
/s/ J. M. Wells, Jr.
- -------------------------------------
J. M. ("Mike") Wells, Jr.
Chairman of the Board
/s/ Michael J. Cushman
- -------------------------------------
Michael J. Cushman
President and Chief Executive Officer
NORTH VALLEY BANCORP
Notice of Annual Meeting of Shareholders
Thursday, December 20, 2007
4:00 p.m.
TO THE SHAREHOLDERS:
The Annual Meeting of Shareholders of North Valley Bancorp, a
California corporation (the "Corporation"), will be held in the Administrative
Offices of North Valley Bancorp, 300 Park Marina Circle, Redding, California, on
Thursday, December 20, 2007, at 4:00 p.m., for the following purposes:
1. To elect the following nominees as directors for a term of one
year:
Michael J. Cushman William W. Cox
Dante W. Ghidinelli Dolores M. Vellutini
Roger B. Kohlmeier Kevin D. Hartwick
2. To ratify the appointment of Perry-Smith LLP as Independent
Auditor for 2007.
3. To consider such other business as may properly come before
the Annual Meeting and any adjournment or postponement
thereof.
Section 15 of the By-laws of the Corporation provides for the
nomination of Directors, as follows:
Nomination for election of members of the Board of Directors may be
made by the Board of Directors or by any shareholder of any outstanding class of
capital stock of the Corporation entitled to vote for the election of directors.
Notice of intention to make any nominations shall be made in writing and shall
be delivered or mailed to the President of the Corporation not less than 21 days
nor more than 60 days prior to any meeting of shareholders called for election
of directors; provided however, that if less than 21 days notice of the meeting
is given to shareholders, such notice of intention to nominate shall be mailed
or delivered to the President of the Corporation not later than the close of
business on the tenth day following the day on which the notice of meeting was
mailed; provided further, that if notice of such meeting is sent by third-class
mail as permitted by Section 6 of these By-laws, no notice of intention to make
nominations shall be required. Such notification shall contain the following
information to the extent known to the notifying shareholder: (a) the name and
address of each proposed nominee; (b) the principal occupation of each proposed
nominee; (c) the number of shares of capital stock of the corporation owned by
each proposed nominee; (d) the name and residence address of the notifying
shareholder; and (e) the number of shares of capital stock of the Corporation
owned by the notifying shareholder. Nominations not made in accordance herewith
may, in the discretion of the Chairman of the meeting, be disregarded and upon
the Chairman's instructions, the inspectors of election can disregard all votes
cast for each such nominee.
2
Only shareholders of record at the close of business on November 9,
2007, are entitled to notice of and to vote at the Annual Meeting or any
adjournment thereof.
By Order of the Board of Directors,
/s/ Leo J. Graham
----------------------------
Leo J. Graham
Corporate Secretary
Redding, California
November 26, 2007
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. IF YOU VOTE BY TELEPHONE OR ELECTRONICALLY THROUGH THE INTERNET, AS
DESCRIBED IN THE PROXY STATEMENT ACCOMPANYING THIS NOTICE, YOU DO NOT NEED TO
RETURN THE PROXY.
3
NORTH VALLEY BANCORP
300 Park Marina Circle
Redding, California 96001
(530) 226-2900
PROXY STATEMENT
The enclosed proxy card (the "Proxy") is solicited on behalf of the
Board of Directors of North Valley Bancorp, a California corporation (the
"Corporation"), for use at the Annual Meeting of Shareholders to be held in the
Administrative Offices of North Valley Bancorp, 300 Park Marina Circle, Redding,
California, at 4:00 p.m., on Thursday, December 20, 2007, and any adjournment or
postponement thereof (the "Meeting"). Only shareholders of record at the close
of business on November 9, 2007, (the "Record Date") will be entitled to notice
of and to vote at the Meeting. At the close of business on the Record Date, the
Corporation had outstanding 7,374,884 shares of its common stock, no par value
(the "Common Stock"). These proxy materials are first being mailed to
shareholders on or about November 26, 2007.
On each matter submitted to a shareholder vote, each holder of Common
Stock will be entitled to one vote, in person or by proxy, for each share of
Common Stock outstanding in the holder's name on the books of the Corporation as
of the Record Date. At the 1998 Annual Meeting of Shareholders, the
Corporation's Articles of Incorporation were amended to provide that no holder
of any class of stock of the Corporation shall be entitled to cumulate votes in
connection with any election of Directors of the Corporation. Therefore, in the
election of Directors, each outstanding share of Common Stock is entitled to
cast one vote for as many separate nominees as there are Directors to be
elected. The nominees who receive the most votes for the number of positions to
be filled are elected Directors.
Shareholders may vote without attending the Meeting, whether their
shares of Common Stock are held in their names or through a broker, bank or
other nominee. Shareholders of record may vote by submitting a Proxy and the
instructions for voting by mail, by telephone or by using the Internet are set
forth on the Proxy. For shares held through a broker, bank or other nominee,
shareholders may vote by submitting their voting instructions to the broker,
bank or other nominee. Voting instructions may be given by telephone or by using
the Internet, if the broker, bank or other nominee makes those methods available
to the shareholder, in which case the procedures will be enclosed with the Proxy
Statement forwarded by the broker, bank or other nominee.
Any person submitting a Proxy in the form accompanying this Proxy
Statement has the power to revoke or suspend such Proxy prior to its exercise. A
Proxy is revocable prior to the Meeting by a written direction to the
Corporation, by a duly executed Proxy bearing a later date, delivered to the
Corporate Secretary of the Corporation, or by voting on a later date by
telephone or by using the Internet. A Proxy may also be revoked if the
shareholder is present and elects to vote in person at the Meeting.
Any shareholder may choose to vote shares of Common Stock by telephone
by calling the toll-free number (at no cost to the shareholder) indicated on the
Proxy. Telephone voting is available 24 hours per day. Easy to follow voice
prompts allow a shareholder to vote shares and to confirm that instructions have
been properly recorded. The Corporation's telephone voting procedures are
designed to authenticate the identity of shareholders by utilizing individual
control numbers. If a shareholder votes by telephone, there is no need to return
the Proxy.
Any shareholder may also choose to vote shares of Common Stock
electronically by using the Internet, as indicated on the Proxy. Internet voting
procedures are designed to authenticate the identity of a shareholder and to
4
confirm that instructions have been properly recorded. The Corporation believes
these procedures are consistent with the requirements of applicable law. If a
shareholder votes electronically by using the Internet, there is no need to
return the Proxy.
The Corporation will bear the entire cost of preparing, assembling,
printing and mailing proxy materials furnished by the Board of Directors to
shareholders. Copies of proxy materials will be furnished to brokerage houses,
fiduciaries and custodians to be forwarded to the beneficial owners of the
Common Stock. The Corporation will reimburse brokerage houses, fiduciaries,
custodians and others holding shares in their names or names of nominees or
otherwise for reasonable out-of-pocket expenses incurred in sending proxy
materials to the beneficial owners of such shares. In addition to the
solicitation of proxies by use of the mail, some of the officers, directors and
employees of the Corporation may (without additional compensation) solicit
proxies by telephone, Internet or personal interview, the costs of which the
Corporation will bear. The Corporation may, at its discretion, engage the
services of a proxy solicitation firm to assist in the solicitation of proxies.
The total expense of this solicitation will be borne by the Corporation and will
include reimbursement paid to brokerage firms and others for their expenses in
forwarding soliciting material and such expenses as may be paid to any proxy
solicitation firm engaged by the Corporation.
Shares of Common Stock will be voted as directed by the shareholder
submitting the Proxy, and, if no instructions are given on the Proxy, it will be
voted "FOR" the election of the nominees for Director recommended by the Board
of Directors, and "FOR" ratification of the appointment of Perry-Smith LLP as
Independent Auditor for the Corporation for the 2007 fiscal year, all as
described in the Proxy Statement; and, at the Proxy holders' discretion, on such
other matters, if any, which may properly come before the Meeting (including any
proposal to adjourn the Meeting). A majority of the shares entitled to vote,
represented either in person or by a properly executed Proxy, will constitute a
quorum at the Meeting. Abstentions and broker non-votes are each included in the
determination of the number of shares present and voting for purposes of
determining the presence of a quorum. Abstentions will be included in
tabulations of the votes cast on proposals presented to the shareholders and,
therefore, will have the effect of a negative vote. Broker non-votes will not be
counted for purposes of determining the number of votes cast for a proposal.
A COPY OF THE ANNUAL REPORT OF THE CORPORATION FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2006, INCLUDING AUDITED FINANCIAL STATEMENTS (the "ANNUAL
REPORT"), IS ENCLOSED WITH THESE PROXY MATERIALS. THE ANNUAL REPORT CONSISTS OF
THE ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 ON FORM 10-K AND
AMENDMENT NO. 1 TO ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 ON
FORM 10-K/A, AS THEY WERE FILED BY THE CORPORATION WITH THE SECURITIES AND
EXCHANGE COMMISSION. ALSO ENCLOSED WITH THESE PROXY MATERIALS IS A COPY OF THE
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2007 ON FORM 10-Q, AS FILED
BY THE CORPORATION WITH THE SECURITIES AND EXCHANGE COMMISSION. ADDITIONAL
COPIES OF THESE REPORTS ARE VAILABLE WITHOUT CHARGE UPON REQUEST TO THE
CORPORATE SECRETARY. THE CORPORATE SECRETARY MAY BE CONTACTED AT NORTH VALLEY
BANCORP, 300 PARK MARINA CIRCLE, REDDING, CALIFORNIA 96001.
5
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The By-laws of the Corporation provide a procedure for nomination for
election of members of the Board of Directors, which procedure is printed in
full on the Notice of Annual Meeting of Shareholders accompanying this Proxy
Statement. Nominations not made in accordance therewith may, in the discretion
of the Chairman of the Meeting, be disregarded, and, upon his instruction, the
inspectors of election shall disregard all votes cast for such nominee(s).
Section 16 of the Bylaws of the Corporation provides as follows:
"The directors shall be elected annually by the shareholders at the
annual meeting of the shareholders; provided, that if for any reason, the annual
meeting or an adjournment thereof is not held or the directors are not elected
thereat, then the directors may be elected at any special meeting of the
shareholders called and held for that purpose. The term of office of the
directors shall, except as provided in Section 17, begin immediately after their
election and shall continue until their respective successors are elected and
qualified. Notwithstanding the rule stated herein that directors shall be
elected annually, each director continuing to serve as such at the time of an
annual or special meeting of the shareholders shall nevertheless continue as a
director until the expiration of the term to which he or she was previously
elected by the shareholders, or until his or her prior death, resignation or
removal."
At the 2005 Annual Meeting of Shareholders of North Valley Bancorp held
on May 26, 2005, the Shareholders of the Company approved the 2005 Proxy
Statement Proposal No. 3, which amended the Articles of Incorporation and the
Bylaws of the Corporation so as to declassify the Board of Directors as
described in the 2005 Proxy Statement. As a result of those Shareholder approved
changes to the Articles and Bylaws of the Corporation, the following members of
the Board of Directors will stand for election at the 2007 Annual Meeting of
Shareholders for a one (1) year term, namely: Michael J. Cushman, Dante W.
Ghidinelli, Kevin D. Hartwick, Roger B. Kohlmeier, William W. Cox and Dolores M.
Vellutini. The current number of directors has been fixed by resolution of the
Board of Directors at nine (9). At the 2008 Annual Meeting of Shareholders, all
Directors of the Company will stand for election for a one (1) year term.
Thereafter, there will be no classification of Directors and all Directors will
stand for election each year.
Accordingly, six (6) Directors will be elected at the Meeting. All
Proxies will be voted for the election of the following nominees recommended by
the Board of Directors, unless authority to vote for the election of any
Director or all Directors is withheld. All of the nominees are incumbent
Directors.
Michael J. Cushman Kevin D. Hartwick William W. Cox
Dante W. Ghidinelli Roger B. Kohlmeier Dolores M. Vellutini
If any of the nominees should unexpectedly decline or be unable to act
as a Director, the Proxies may be voted for a substitute nominee to be
designated by the Board of Directors. The Board of Directors has no reason to
believe that any nominee will become unavailable and has no present intention to
nominate persons in addition to or in lieu of those named above. The six (6)
candidates receiving the highest number of votes will be elected.
6
The Board of Directors recommends a vote "FOR" each of the six (6)
nominees listed above: Michael J. Cushman, Dante W. Ghidinelli, Kevin D.
Hartwick, Roger B. Kohlmeier, William W. Cox, and Dolores M. Vellutini.
Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------
To the knowledge of the Company, no person or entity as of November 1,
2007, was the beneficial owner of more than five percent (5%) of the outstanding
shares of the Company's Common Stock.
Ownership Table
- ---------------
The following table sets forth certain information regarding ownership
of the Company's Common Stock with respect to each Director of the Company and
North Valley Bank, and each current executive officer named in the Summary
Compensation Table on page 19, as well as for all other Executive Officers of
the Company and North Valley Bank and for all current Directors and Executive
Officers as a group. All of the shares of Common Stock of the Company shown in
the following table are owned both of record and beneficially, except as
indicated in the notes to the table, as of November 9, 2007. The table should be
read with the understanding that more than one person may be the beneficial
owner or possess certain attributes of beneficial ownership with respect to the
same securities. Therefore, careful attention should be given to the footnote
references set forth in the column "Percent of Class." For the purpose of this
disclosure and the disclosure of ownership of shares by management, shares are
considered to be "beneficially" owned if the person has or shares the power to
vote or direct the voting of the shares, the power to dispose of or direct the
disposition of the shares, or the right to acquire beneficial ownership (as so
defined) within 60 days of November 9, 2007.
7
BENEFICIAL PERCENT OF
BENEFICIAL OWNER POSITION OWNERSHIP(1) CLASS(2)
- ---------------- -------- ----------- ----------
William W. Cox(6) Director, 61,793 *
North Valley Bancorp
North Valley Bank
Michael J. Cushman(5) President and Chief 185,738 2.47%
Executive Officer and Director,
North Valley Bancorp
North Valley Bank
Royce L. Friesen (3) Director, 227,217 3.07%
North Valley Bancorp
North Valley Bank
Dante W. Ghidinelli(3)(7) Director, 272,163 3.67%
North Valley Bancorp
North Valley Bank
Leo J. Graham(5) General Counsel and 9,443 *
Corporate Secretary
North Valley Bancorp
North Valley Bank
Kevin D. Hartwick(3)(8) Director, 241,328 3.25%
North Valley Bancorp
North Valley Bank
Roger B. Kohlmeier (3) Director, 207,562 2.81%
North Valley Bancorp
North Valley Bank
Gary S. Litzsinger(5) Executive Vice President 6,522 *
and Chief Risk Officer
North Valley Bancorp
North Valley Bank
Scott R. Louis(5) Executive Vice President 2,797 *
and Chief Operating Officer
North Valley Bancorp
North Valley Bank
Martin A. Mariani Director, 15,633 *
North Valley Bancorp
North Valley Bank
Roger D. Nash(5) Executive Vice President 7,120 *
and Chief Credit Officer
North Valley Bancorp
North Valley Bank
Dolores M. Vellutini Director, 291,787 3.93%
(3)(9) North Valley Bancorp
North Valley Bank
Kevin R. Watson(5) Executive Vice President 5,440 *
and Chief Financial Officer
North Valley Bancorp
North Valley Bank
J.M.("Mike") Wells, Jr. (10) Chairman, 168,597 2.27%
North Valley Bancorp
North Valley Bank
----------------------------------
All Directors and Executive 846,505 10.80%
Officers as a group (14 persons)
(12) (13) (14)
8
(1) Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared voting
and investment power with a spouse, sole investment and voting power is
held by the beneficial owner of all shares unless noted otherwise. Includes
stock options granted pursuant to the North Valley Bancorp 1989 Director
Stock Option Plan, the North Valley Bancorp 1998 Employee Stock Incentive
Plan and the North Valley Bancorp 1999 Director Stock Option Plan with:
49,200 shares exercisable within 60 days of November 9, 2007 by Mr. Cox,
158,201 shares exercisable within 60 days of November 9, 2007 by Mr.
Cushman; 27,000 shares exercisable within 60 days of November 9, 2007 by
Mr. Friesen; 49,500 shares exercisable within 60 days of November 9, 2007
by Mr. Ghidinelli; 8,791 shares exercisable within 60 days of November 9,
2007 by Mr. Graham; 53,801 shares exercisable within 60 days of November 9,
2007 by Mr. Hartwick; 6,380 shares exercisable within 60 days of November
9, 2007 by Mr. Litzsinger; 2,620 shares exercisable within 60 days of
November 9, 2007 by Mr. Louis; 7,120 shares exercisable within 60 days of
November 9, 2007 by Mr. Nash; 53,801 shares exercisable within 60 days of
November 9, 2007 by Ms. Vellutini; 5,440 shares exercisable within 60 days
of November 9, 2007 by Mr. Watson; and 43,000 shares exercisable within 60
days of November 9, 2007 by Mr. Wells;. Includes shares allocated under the
North Valley Bancorp Employee Stock Ownership Plan through December 31,
2006, with: 2,880 shares allocated to Mr. Cushman, 502 shares allocated to
Mr. Graham, 142 shares allocated to Mr. Litzsinger and 177 shares allocated
to Mr. Louis.
(2) Includes stock options exercisable within 60 days of November 9, 2007. An
"*" indicates less than one percent.
(3) Includes 171,327 shares representing 2.32% of the total shares outstanding
as of November 9, 2007 for each of Messrs. Friesen, Ghidinelli, Hartwick,
Kohlmeier and Ms. Vellutini relative to the North Valley Bancorp Employee
Stock Ownership Plan. Messrs. Friesen, Ghidinelli, Hartwick, Kohlmeier and
Ms. Vellutini constitute the ESOP Administrative Committee and have
authority to instruct the ESOP Trustee, Delaware Charter Guarantee & Trust
Company, conducting business as Principal Trust Company, with regard to
voting of these shares. Messrs. Friesen, Ghidinelli, Hartwick, Kohlmeier
and Ms. Vellutini, as members of the Administrative Committee, disclaim
beneficial ownership with respect to all of those shares. Mr. Cushman, Mr.
Graham, Mr. Litzsinger, and Mr. Louis are participants in the ESOP.
(4) Intentionally omitted.
(5) Michael J. Cushman is President and Chief Executive Officer of North Valley
Bancorp and North Valley Bank; Kevin R. Watson is Executive Vice President
and Chief Financial officer of North Valley Bancorp and North Valley Bank;
Scott R. Louis is Executive Vice President and Chief Operating Officer of
North Valley Bancorp and North Valley Bank; Roger D. Nash is Executive Vice
President and Chief Credit Officer of North Valley Bancorp and North Valley
Bank; Gary S. Litzsinger is Executive Vice President and Chief Risk Officer
of North Valley Bancorp and North Valley Bank; Leo J. Graham is General
Counsel and Corporate Secretary of North Valley Bancorp and North Valley
Bank.
(6) Includes 915 shares held by Mr. Cox's spouse and as to which Mr. Cox
disclaims beneficial ownership.
(7) Includes 20,861 shares held by Mr. Ghidinelli as trustee for the Balma
Grandchildren Trust.
(8) Includes 420 shares held in custodian accounts for Mr. Hartwick's children.
9
(9) Includes 210 shares held by Ms. Vellutini's spouse and 12,695 shares held
by Ms. Vellutini's son and as to which Ms. Vellutini disclaims beneficial
ownership.
(10) Includes 115,795 shares held by The Wells Family Trust, of which Mr. Wells
is trustee. Includes 1,750 shares held by Mr. Wells' spouse and as to which
Mr. Wells disclaims beneficial ownership. Includes 8,052 shares held by the
Estate of Jean M. Wells, of which Mr. Wells is the executor.
(11) Intentionally omitted.
(12) This group includes all current Executive Officers and Directors of the
Company and its subsidiary, North Valley Bank.
(13) See footnotes 5, 6, 8, 9 and 10. Excludes 171,327 shares representing 2.32%
of total shares outstanding relative to Messrs. Friesen, Ghidinelli,
Hartwick, Kohlmeier and Ms. Vellutini as the Administrative Committee of
the ESOP. Includes 11,700 shares subject to options exercisable within 60
days of November 9, 2007 by the Directors under the 1989 Director Stock
Option Plan; 264,602 shares subject to options exercisable within 60 days
of November 9, 2007 by the Directors under the 1999 Director Stock Option
Plan; and 188,552 shares subject to options exercisable within 60 days of
November 9, 2007 by Messrs. Cushman, Graham, Litzsinger, Louis, Nash and
Watson under the 1998 Employee Stock Incentive Plan.
(14) In calculating the percentage of ownership, all shares which the identified
person has the right to acquire by the exercise of options are deemed to be
outstanding for the purpose of computing the percentage of class owned by
such person, but are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person.
Certain information with respect to the six (6) nominees for Director
of the Corporation is provided below:
William W. Cox, CRE, CCI, (age 60), a Director of the Corporation since
February 1997, has been owner and President of Cox Real Estate Consultants,
Inc., since April 1996. From October 1987 to August 1996, he was President and
50% owner of Haedrich & Cox, Inc., a real estate brokerage company.
Michael J. Cushman (age 52), a Director of the Corporation since
February 1999, is President and Chief Executive Officer of the Corporation and
its subsidiary, North Valley Bank. Mr. Cushman served as Senior Vice President
and Chief Business Banking Officer of North Valley Bank from March 1998 to
February 1999. From March 1995 through March 1998, he was a self-employed
investor. From November of 1994 through March of 1995, Mr. Cushman served as
Vice President of Tri-Counties Bank, which acquired Country National Bank in
November of 1994 where Mr. Cushman had served as President and Chief Executive
Officer since September of 1992.
Dante W. Ghidinelli (age 59), a Director of the Corporation since 1993,
has been a Certified Public Accountant and partner with Nystrom & Company LLP
since 1974.
Kevin D. Hartwick (age 46), a Director of the Corporation since October
2000, has been a Certified Public Accountant and managing partner with Cholwell
Benz & Hartwick in Crescent City, California, since 1989.
10
Roger B. Kohlmeier (age 67), a Director of the Corporation since August
2004, was founding President and Chief Executive Officer of Bank of Woodland
which changed its name to Business & Professional Bank at which time he retired
but continued on as Director until its sale to U.S. Bank of California in 1997.
He is a graduate of California Polytechnic University of San Luis Obispo and is
actively involved with the Economic Development Council and Woodland Health
Care.
Dolores M. Vellutini (age 70), a Director of the Corporation since
October 2000, has been owner and President of Eureka Baking Company in Eureka,
California, since 1988. In addition, she is a developer and the owner of
Vellutini Properties in Eureka, California.
Certain information with respect to the continuing Directors and the
current Executive Officers of the Corporation and its subsidiary, North Valley
Bank, is provided below:
Royce L. Friesen, RPh. (age 68), a Director of the Corporation since
May 1999, is Chairman of the Board of Owens Healthcare in Redding, California,
having previously served as President, Chief Executive Officer and owner since
1968. Owens Healthcare, a management company, was formed to provide support and
coordination among ten retail and home care pharmacies located throughout
Northern California.
Martin A. Mariani (age 51), a Director of the Corporation since August
2004, is a partner in Mariani Nut Company of Winters, California. He graduated
from the University of California, Davis in 1978.
J. M. ("Mike") Wells, Jr. (age 67), is Chairman and a founding member
of the Board of Directors of the Corporation. Mr. Wells was formerly a member of
the law firm of Wells, Small & Selke, a Law Corporation, located in Redding,
California. Mr. Wells had practiced law with that firm starting in 1972.
Executive Officers
- ------------------
Kevin R. Watson (age 42), has served as Executive Vice President and
Chief Financial Officer of the Corporation and its subsidiary since March 2006.
Prior to that, he served as Chief Financial Officer at Calnet Business Bank in
Sacramento from January 2004 to March 2006. Prior to Calnet Business Bank, his
experience includes serving as the Chief Financial Officer of California
Independent Bancorp and Feather River State Bank from April 2001 to January
2004.
Scott R. Louis (age 57), has served as Executive Vice President and
Chief Operations Officer of the Corporation and its subsidiary since October
2005. Prior to that, he served as Senior Vice President and Chief Operating
Officer since joining the Corporation in April 2005. Prior to joining the
Corporation, Mr. Louis served as First Vice President for Farmers and Merchants
Bank in Lodi, California. Mr. Louis began his financial services career with
Bank of America in 1971.
Roger D. Nash (age 59), has served as Executive Vice President and
Chief Credit Officer of the Corporation and its subsidiary since September 2006.
Prior to that, he served as Chief Lending Officer of the Corporation and its
subsidiary since joining the Corporation in October 2005. Prior to that, he
served 35 years at Bank of America, most recently as Senior Vice
President/Senior Client Manager in Visalia, California. While at Bank of
America, he also served as Senior Vice President/Credit Risk Manager and as
Senior Vice President in Business Lending.
11
Gary S. Litzsinger (age 51), has served as Executive Vice President and
Chief Risk Officer of the Corporation and its subsidiary since October 2005.
Prior to that, he served as Senior Vice President and Chief Risk Officer since
joining the Corporation in July, 2004. Prior to joining the Corporation, Mr.
Litzsinger served as Director of Audit and Risk Management for Humboldt Bancorp
and Audit Manager for California Federal Savings Bank in Sacramento. He began
his audit career in 1990 and obtained his California CPA license in 1994.
Leo J. Graham (age 56), has served as the Corporate Secretary and
General Counsel of the Corporation and its subsidiary since January 2004. Mr.
Graham was formerly a member of the law firm of Wells, Small & Selke, a Law
Corporation, located in Redding, California. Mr. Graham had practiced law with
that firm starting in 1978.
None of the Corporation's Directors is a director of any other company
that is subject to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended. There are no family relationships between any
of the Directors and Executive Officers of the Corporation.
12
GOVERNANCE OF THE CORPORATION
Code of Business Conduct and Ethics
- -----------------------------------
The Board of Directors of North Valley Bancorp believes the
cornerstones of our business are honesty, truthfulness, integrity and ethics.
In keeping with this belief, the Board of Directors has adopted a Code
of Business Conduct and Ethics, which applies to the Board of Directors and the
officers and employees of the Corporation and its subsidiary. The North Valley
Bancorp Code of Business Conduct and Ethics is available through the
Shareholders Relations link on the Corporation's website at www.novb.com. A copy
of the Code of Business Conduct and Ethics may be obtained without charge by
submitting a request to the Corporate Secretary, P.O. Box 994630, Redding, CA
96099-4630.
Director Independence
- ---------------------
The Board of Directors of the Corporation has evaluated the
independence of each of the members of the Board of Directors in accordance with
applicable laws and regulations including the provisions of the Sarbanes-Oxley
Act of 2002 ("SOX"), the rules and regulations of the Securities and Exchange
Commission (the "SEC") and the corporate governance listing standards of the
NASDAQ National Market ("NASDAQ").
The Board of Directors has determined that a majority of the Board of
Directors is comprised of "Independent Directors" within the requirements of
SOX, SEC and NASDAQ regulations. The Board of Directors has further determined
that Director Michael J. Cushman, who is employed as the President and Chief
Executive Officer of the Corporation, is not independent.
Committees of the Board of Directors
- ------------------------------------
The Board of Directors of the Corporation has established the following
committees of the Board: Audit, Nominating, Compensation and Executive/Corporate
Governance.
On the date of this Proxy Statement, the members of the Board and the
Committees of the Board on which they serve are as follows:
EXECUTIVE/
AUDIT NOMINATING COMPENSATION CORPORATE GOVERNANCE
DIRECTOR COMMITTEE COMMITTEE COMMITTEE COMMITTEE
- ------------------------------ -------------- --------------- ------------- -----------------------
William W. Cox (1) * * *
Michael J. Cushman *
Royce L. Friesen * ** ** *
Dante W. Ghidinelli (2) ** *
Kevin D. Hartwick (2) *
Roger B. Kohlmeier *
Martin A. Mariani * *
Dolores M. Vellutini *
J. M. ("Mike") Wells, Jr. * * * **
(2)(3)
* Member
** Chairman
13
(1) Mr. Cox is the Chairman of the Director's Loan Committee of North Valley
Bank.
(2) Mr. Ghidinelli, Mr. Hartwick and Mr. Wells also serve on the Director's
Loan Committee of North Valley Bank.
(3) Mr. Wells as Chairman of the Corporation sits on all Board Committees.
Audit Committee
- ---------------
The functions of the Audit Committee are more particularly described in
the Audit Committee Charter, which is attached to this Proxy Statement as
Appendix A. The Board of Directors has determined that Chairman Dante W.
Ghidinelli and Director Kevin D. Hartwick each qualify as a result of their
accounting backgrounds as an Audit Committee Financial Expert as defined under
the SOX, the SEC regulations and the NASDAQ listing standards. The Audit
Committee met six (6) times in 2006 and has met five (5) times through November
9, 2007. For more information, see the "Audit Committee Report" on page 40.
Nominating Committee
- --------------------
In 2004, the Board of Directors adopted a Nominating Committee Charter
and appointed the initial members of the Nominating Committee. All of the
members are "independent" within the requirements of SOX, SEC and NASDAQ. The
functions of the Nominating Committee are more particularly described in the
Nominating Committee Charter, which is attached to this Proxy Statement as
Appendix B.
The Nominating Committee Charter includes a policy for consideration of
candidates proposed by shareholders. Any recommendations by shareholders will be
evaluated by the Nominating Committee in the same manner as any other
recommendation and in each case in accordance with the Nominating Committee
Charter. Shareholders that desire to recommend candidates for consideration by
the Nominating Committee should mail or deliver written recommendations to the
Nominating Committee addressed as follows: North Valley Bancorp Nominating
Committee, P.O. Box 994630, Redding, CA 96099-4630. Each recommendation should
include the experience of the candidate that qualifies the candidate for
consideration as a potential director for evaluation by the Nominating
Committee. Shareholders who wish to nominate a candidate for election to the
Corporation's Board of Directors, as opposed to recommending a potential nominee
for consideration by the Nominating Committee, are required to comply with the
advance notice and any other requirements of the Corporation's Bylaws,
applicable laws and regulations.
Compensation Committee
- ----------------------
In 2004, the Board of Directors formed a Compensation Committee
comprised solely of independent directors. This Committee reviews and recommends
to the Board of Directors salaries, performance-based incentives, both annual
and long term, and other matters relating to Compensation of the Executive
Officers.
The Compensation Committee also reviews and approves various other
compensation policies and matters. The Compensation Committee held two (2)
meetings in 2006 and has held one (1) meeting through November 9, 2007. For more
information, see the "Report of the Compensation Committee" on page 36.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
During the fiscal year 2006, Mr. Michael J. Cushman participated in
deliberations of the Corporation's Board of Directors concerning executive
officer compensation for all Executive Officers, excluding himself.
14
Executive/Corporate Governance Committee
- ----------------------------------------
The Corporation has an Executive/Corporate Governance Committee which
functions to review, evaluate and make decisions on actions that are required
between the regular meetings of the Board of Directors. In addition, this
Committee functions to review and recommend to the Board of Directors
principles, policies and procedures affecting the Board of Directors and its
operation and effectiveness. The Committee further oversees the evaluation of
the Board of Directors and its effectiveness. The Committee met three (3) times
in 2006 and has not held a meeting through November 9, 2007.
Meetings of the Board of Directors
- ----------------------------------
During 2006, the Board of Directors held four (4) regularly scheduled
meetings and six (6) special meetings and has held four (4) regularly scheduled
meetings and nine (9) special meetings through November 9, 2007. In 2006, each
Director attended at least 75% of the aggregate of the total number of meetings
of the Board of Directors (held during the period for which he or she was a
Director) and the total number of meetings of Committees of the Board of
Directors on which such Director served (during the periods that he or she
served).
The Corporation encourages the members of its Board of Directors to
attend the Corporation's annual meeting of shareholders each year. All but two
of the Directors attended the Corporation's annual meeting of shareholders held
in 2006. All of the Directors of the Corporation attended the special meeting of
shareholders held in July 2007.
Shareholder Communications with Directors
- -----------------------------------------
A shareholder who wishes to communicate directly with the Board of
Directors, a Committee of the Board or an individual Director should send it to:
Board of Directors (or Committee Name or Director's Name)
c/o Corporate Secretary
North Valley Bancorp
P.O. Box 994630
Redding, California 96099-4630
The Corporate Secretary has been instructed to forward such
correspondence to the Board Committee or individual as addressed as soon as
practicable. If it is marked "Personal and Confidential", it will only be
forwarded to the addressee. The Board has instructed the Corporate Secretary,
prior to forwarding any correspondence, to review such correspondence and, in
his discretion, not to forward certain items if they are deemed of a commercial
or frivolous nature or otherwise inappropriate for the Board's consideration.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Corporation's Directors and Executive Officers and
persons who own more than 10% of a registered class of the Corporation's equity
securities to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Corporation. Officers, Directors and greater
than 10% shareholders are required by the SEC to furnish the Corporation with
copies of all Section 16(a) forms they file.
15
To the Corporation's knowledge, based solely on a review of such
reports furnished to the Corporation and written representations that no other
reports were required, during the fiscal year ended December 31, 2006, all
Section 16(a) filing requirements applicable to its officers, Directors and 10%
shareholders were complied with on a timely basis except for Ms. Vellutini and
Mr. Watson who each failed to file one Form 4 on a timely basis. All Section
16(a) filing requirements in 2007 were complied with on a timely basis.
16
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
- ------------
The Board of Directors of North Valley Bancorp strives to ensure that
its compensation plan is consistent with the strategic goals and objectives of
the Company and maintains the standards of good corporate governance.
Philosophy
- ----------
All of the Company's compensation programs are designed to attract and
retain key employees, motivating them to achieve and rewarding them for superior
performance. Different programs are geared to short and longer-term performance
with the goal of increasing stockholder value over the long term. Executive
compensation programs impact all employees by setting general levels of
compensation and helping to create an environment of goals, rewards and
expectations. North Valley Bancorp believes the performance of every employee is
important to its success and recognizes the importance of executive compensation
and incentive programs to achieve improved performance.
North Valley Bancorp believes that the compensation of its executives
should reflect their success as a management team, rather than individuals, in
attaining key operating objectives, such as growth of deposits, loans,
maintaining credit quality, growth of operating earnings and earnings per share
and growth or maintenance of market share and long-term competitive advantage,
and ultimately, in attaining an increased market price for its stock. North
Valley Bancorp believes that the performance of the executives in managing the
Company, considered in light of general economic and specific company, industry
and competitive conditions, should be the basis for determining their overall
compensation. North Valley Bancorp also believes that their compensation should
not be based on the short-term performance of the Company stock, whether
favorable or unfavorable, but rather that the price of the Company stock will,
in the long-term, reflect its operating performance, and ultimately, the
management of the Company by its executives. North Valley Bancorp seeks to have
the long-term performance of the Company stock reflected in executive
compensation through stock option awards.
Overview of Compensation and Process
- ------------------------------------
Elements of compensation for our executives include: salary, bonus,
stock option awards, deferred compensation plans, salary continuation plan,
health, disability and life insurance, and perquisites. Base salaries are set
for our Executive Officers at the regularly scheduled winter meeting of the
Compensation Committee. At this meeting, the Compensation Committee also reviews
and recommends the management incentive plan for the new fiscal year (the
"Executive Discretionary Incentive Plan") and recommends stock option awards for
the Company's Executive Officers and certain other eligible employees.
At the beginning of each fiscal year, it has been the practice of the
Compensation Committee to review the history of all the elements of each
Executive Officer's total compensation over previous years and compare the
compensation of the Executive Officers with that of the executive officers in an
appropriate market place and industry comparison group. Typically, the Chief
Executive Officer makes compensation recommendations to the Compensation
Committee with respect to the Executive Officers who report to him. Such
Executive Officers are not present at the time of these deliberations. The
Chairman of the Board then makes compensation recommendations to the
Compensation Committee with respect to the Chief Executive Officer, who is
absent from that meeting. The Compensation Committee may accept or adjust such
recommendations.
17
North Valley Bancorp chooses to pay each element of compensation in
order to attract and retain the necessary executive talent, reward annual
performance and provide incentive for their balanced focus on long-term
strategic goals as well as short-term performance. The amount of each element of
compensation is determined by or under the direction of the Compensation
Committee, which uses the following factors to determine the amount of salary
and other benefits to pay each Executive Officer:
o Performance against corporate and individual objectives for
the previous year;
o Value of their unique skills and capabilities to support
long-term performance of the Company;
o Achievement of strategic objectives;
o Earnings per share;
o Deposits and/or loan growth; and
o Any of the above measures compared to peer or other companies.
These elements fit into our overall compensation objectives by helping
to secure the future potential of our operations, facilitating our strategic
plan, providing proper compliance and regulatory compliance, and helping to
create a cohesive team. Actual performance measures for the Executive Officers
will be chosen by the Compensation Committee. During 2006, a benefits attorney
was engaged to review non-qualified deferred compensation plans and to recommend
changes to those plans to make them conform with IRS regulations and regulatory
requirements and, further, to advise with regard to best practices concerning
the structure and implementation of those plans.
EXECUTIVE COMPENSATION
Base Salary
- -----------
It is the goal of the Company's Compensation Committee to establish
salary compensation for its Executive Officers based on the Company's operating
performance relative to comparable peer companies over a three-year to five-year
period. North Valley Bancorp believes this gives it the opportunity to attract
and retain talented managerial employees, both at the senior executive level and
below.
Bonus
- -----
The Executive Discretionary Incentive Plan is designed to reward the
Company's Executives for the achievement of short-term financial goals,
including increases in performance against peer banks, the achievement of
short-term and long-term strategic goals, and overall financial performance of
the Company. It is the Company's general philosophy that management be rewarded
for their performance as a team in the attainment of these goals, rather than
individually. North Valley Bancorp believes that this is important to aligning
our Executive Officers and promoting teamwork among them. Bonus percentages for
Executive Officers were initially proposed by a compensation consultant based on
analysis of peer banks and industry sector considerations. Those basic
percentages, which are discretionary with the Compensation Committee, have
generally been followed. Those percentages are as follows: for Executive
Officers other than the Chief Executive Officer, the range is 10% - 40% of base
salary; and for the Chief Executive Officer, the range is 10% - 50% of base
salary. Similarly, Executive Officers are eligible for discretionary incentive
stock option awards based on the following percentages: for Executive Officers
other than the Chief Executive Officer, the range is 0% - 5% of base salary as
the number of options considered for award; and for the Chief Executive Officer,
the range is 0% - 6% of base salary as the number of options considered for
award.
18
Although each Executive Officer is eligible to receive an award at the
discretion of the Compensation Committee, the granting of the award as to any
individual or officer as a group is first at the discretion of the Chief
Executive Officer and then, based on his recommendation, at the discretion of
the Compensation Committee and full Board. The Committee may choose whether to
award the bonus and decides on the actual level of the award in light of all
relevant factors after completion of the fiscal year.
The following Summary Compensation Table sets forth the compensation of
the President and Chief Executive Officer (Principal Executive Officer) and the
Executive Vice President and Chief Financial Officer (Principal Financial
Officer) of the Company and the other most highly compensated Executive Officers
for services in all capacities to the Company and its subsidiary during 2006:
SUMMARY COMPENSATION TABLE
CHANGE IN
PENSION
VALUE AND
NON-EQUITY NONQUALIFIED
INCENTIVE DEFERRED
STOCK OPTION PLAN COMPENSATION ALL OTHER
SALARY BONUS AWARDS AWARDS COMPENSATION EARNINGS COMPENSATION TOTAL
NAME AND PRINCIPAL POSITION YEAR (1)($) (2)($) ($) (3)($) ($) (4)($) (5)($) ($)
- --------------------------------- ---- --------- -------- ------ -------- ------------ ------------ ------------ ---------
Michael J. Cushman 2006 $ 275,625 $124,000 - $ 65,065 - $ 285,059 $ 16,704 $ 766,453
President and Chief
Executive Officer
Kevin R. Watson (6) 2006 $ 150,000 $ 63,000 - $ 16,362 - - $ 8,230 $ 237,592
Executive Vice President
and Chief Financial Officer
Scott R. Louis 2006 $ 140,000 $ 49,000 - $ 2,531 - $ 17,391 $ 10,082 $ 219,004
Executive Vice President
and Chief Operating Officer
Roger D. Nash 2006 $ 140,000 $ 49,000 - $ 10,054 - $ 24,777 $ 7,030 $ 230,861
Executive Vice President
and Chief Credit Officer
Gary S. Litzsinger 2006 $ 104,800 $ 36,380 - $ 11,839 - $ 13,741 $ 5,182 $ 171,942
Executive Vice President
and Chief Risk Officer
Leo J. Graham 2006 $ 163,950 $ 57,382 - $ 16,535 - $ 142,294 $ 10,833 $ 390,994
General Counsel and
Corporate Secretary
Eric J. Woodstrom (7) 2006 $ 116,028 $ 40,000 - $ 24,529 - $ 124,246 $ 131,802 $ 436,605
Former Executive Vice President
and Chief Credit Officer
(1) Base salary includes 401(k) Plan and Executive Deferred Compensation Plan
("EDCP") contributions made by the officers.
(2) These bonus amounts were paid in 2007 attributable to 2006 performance.
(3) The amount reported in this column is the dollar amount recognized for
financial statement reporting purposes for 2006 in accordance with FAS
123(R). The assumptions used to calculate FAS 123(R) fair value are
described in footnote 1 to our consolidated financial statements included
in our Annual Report on Form 10-K.
19
(4) The amounts in this column represent the increase in the actuarial net
present value of all future retirement benefits under the individual's
salary continuation plan and the above-market or preferential earnings on
any nonqualified deferred compensation. The above-market rate is determined
by using the amount above 120% of the Federal long-term rate. For 2006, the
interest rate paid was 9.30%, and the above-market rate was determined to
be 5.98%.
(5) Included in this column are perquisites described hereafter in the table
under the heading "Perquisites."
(6) Mr. Watson joined the Company in March 2006. His annual base salary for
2006 was set at $180,000. The amount shown reflects base salary paid in
2006.
(7) Eric Woodstrom's employment contract dated January 2001 ended on October 6,
2007. He received $113,147 for severance, pro-rata bonus, and vacation pay
pursuant to his employment contract. The amount is included in the "All
Other Compensation" column.
Perquisites
Executive Officers who participated in the North Valley Bancorp 401(k)
Plan received matching funds, as did all employees of the Company who
participated in the Plan. All of the Company's employees and named Executive
Officers are eligible to participate in the Company's ESOP Plan. Named Executive
Officers, in addition, are eligible to receive health and insurance benefits the
same as all other employees of the Company. In addition, named Executive
Officers are eligible to participate in executive and key employee deferred
compensation plans as discussed hereafter. Named Executive Officers also have
certain perquisites as follows:
20
CLUB 401K
AUTO MEMBERSHIPS & MATCHING
ALLOWANCE DUES CONTRIBUTION ESOP TOTAL
NAME AND PRINCIPAL POSITION ($) ($) ($) ($) ($)
- ---------------------------------- --------- ------------- ------------- --------- ---------
Michael J. Cushman $ 2,350 $ 3,540 $ 3,850 $ 6,964 $ 16,704
President and Chief
Executive Officer
Kevin R. Watson $ 4,750 $ 3,480 - - $ 8,230
Executive Vice President
and Chief Financial Officer
Scott R. Louis $ 1,850 $ 3,540 $ 4,692 - $ 10,082
Executive Vice President
and Chief Operating Officer
Roger D. Nash $ 1,450 $ 3,480 $ 2,100 - $ 7,030
Executive Vice President
and Chief Credit Officer
Gary S. Litzsinger $ 1,450 - $ 3,732 - $ 5,182
Executive Vice President
and Chief Risk Officer
Leo J. Graham - $ 3,480 $ 2,459 $ 4,894 $ 10,833
General Counsel and
Corporate Secretary
Eric J. Woodstrom $ 4,500 $ 2,220 $ 5,710 $ 6,225 $ 18,655
Former Executive Vice President
and Chief Credit Officer
Stock Option Plan
- -----------------
North Valley Bancorp intends that its stock option award program is the
primary vehicle for offering long-term incentives and rewarding its Executive
Officers and key employees. The Company also regards its stock option award
program as a key retention tool. This is a very important factor in its
determination of the type of option award to grant and the number of underlying
shares that are granted in connection with that award. Because of the direct
relationship between the value of an option and the market price of the
Company's common stock, North Valley Bancorp has always believed that granting
stock options is the best method of motivating the Executive Officers to manage
the Company in a manner that is consistent with the interests of the Company and
its shareholders.
Timing of Grants
- ----------------
Stock options to the Company's Executive Officers and other key
employees are typically granted annually in conjunction with the review of the
individual performance of its Executive Officers. This review takes place at the
regularly scheduled meeting of the Compensation Committee, which is held in
conjunction with the quarterly meeting of the Board in January following the
fiscal year under consideration. Grants to newly hired employees are effective
21
on the date of grant as consideration for the hiring of the new employee. The
exercise price of all stock options is set at the closing price of the day of
the grant.
2006 GRANTS OF PLAN-BASED AWARDS TABLE
ALL OTHER ALL OTHER
STOCK OPTION GRANT DATE
ESTIMATED FUTURE PAYOUTS ESTIMATED FUTURE PAYOUTS AWARDS: AWARDS: EXERCISE FAIR
UNDER NON-EQUITY UNDER EQUITY NUMBER OF NUMBER OF OR BASE VALUE OF
INCENTIVE PLAN AWARDS INCENTIVE PLAN AWARDS SHARES OF SECURITIES PRICE OF STOCK AND
-------------------------- -------------------------- STOCK OR UNDERLYING OPTION OPTION
GRANT THRESHOLD TARGET MAXIMUM THRESHOLD TARGET MAXIMUM UNITS OPTIONS AWARDS AWARDS
NAME DATE ($) ($) ($) (#) (#) (#) (#) (1)(#) (2)($/SH) (3)($)
- ------------------ -------- --------- ------ ------- --------- ------ ------- ---------- ---------- --------- ----------
Michael J. Cushman 02/03/06 - - - - - - - 14,963 $ 17.95 $ 63,179
Kevin R. Watson 04/27/06 - - - - - - - 10,000 $ 16.38 $ 38,969
Scott R. Louis - - - - - - - - - - -
Roger D. Nash - - - - - - - - - - -
Gary S. Litzsinger 02/03/06 - - - - - - - 2,856 $ 17.95 $ 12,060
Leo J. Graham 02/03/06 - - - - - - - 4,200 $ 17.95 $ 17,733
Eric J. Woodstrom 02/03/06 - - - - - - - 6,078 $ 17.95 $ 25,663
(1) Options granted under the 1998 Employee Stock Incentive Plan (the "1998
Plan") were either incentive options or non-statutory options and became
exercisable in accordance with a vesting schedule established at the time
of grant. Vesting cannot extend beyond ten years from the date of grant.
Upon a change in control of North Valley Bancorp, all outstanding options
under the 1998 Plan will become fully vested and exercisable. Options
granted under the 1998 Plan are adjusted to protect against dilution in the
event of certain changes in North Valley Bancorp's capitalization,
including stock splits and stock dividends. All options granted to the
named Executive Officers are incentive stock options and have an exercise
price equal to the fair market value of North Valley Bancorp common stock
on the date of grant.
(2) The exercise price was determined based upon the closing price of North
Valley Bancorp common stock as reported on the NASDAQ Global Select Market
on the grant date.
(3) The Black-Scholes option-pricing model was used to estimate the grant date
fair value of the options in this column. Use of this model should not be
construed as an endorsement of its accuracy. All stock option pricing
models require predictions about the future movement of the stock price.
Options awarded on February 3, 2006 were valued at $4.22/share in
accordance with FAS 123(R), and options awarded on April 27, 2006 were
valued at $3.90/share in accordance with FAS 123(R). The assumptions used
to develop the February 3, 2006 grant date valuations were: risk-free rate
of return of 4.5%, dividend rate of 2.3%, volatility rate of 29.6%, and an
average term of 6.25 years. The assumptions used to develop the April 27,
2006 grant date valuations were: risk-free rate of return of 4.98%,
dividend rate of 2.3%, volatility rate of 28.7%, and an average term of
6.25 years. The real value of the options in this table will depend on the
actual performance of the Company's common stock during the applicable
period and the fair market value of the Company's common stock on the date
the options are exercised.
Outstanding Equity Awards At Fiscal Year-End
- --------------------------------------------
The following table summarizes information about the options, warrants
and rights and other equity compensation under the Company's equity plans as of
December 31, 2006.
22
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
OPTION AWARDS STOCK AWARDS
--------------------------------------------------------------- ---------------------------------------------
EQUITY
INCENTIVE
PLAN
EQUITY AWARDS:
INCENTIVE MARKET OR
EQUITY PLAN PAYOUT
INCENTIVE AWARDS: VALUE OF
PLAN NUMBER OF UNEARNED
NUMBER OF NUMBER OF AWARDS: MARKET UNEARNED SHARES,
SECURITIES SECURITIES NUMBER OF NUMBER OF VALUE OF SHARES, UNITS OR
UNDERLYING UNDERLYING SECURITIES SHARES OR SHARES OR UNITS OR OTHER
UNEXERCISED UNEXERCISED UNDERLYING UNITS OF UNITS OF OTHER RIGHTS
OPTIONS OPTIONS UNEXERCISED OPTION OPTION STOCK THAT STOCK THAT RIGHTS THAT
(#) (#) UNEARNED EXERCISE EXPIRATION HAVE NOT HAVE NOT THAT HAVE HAVE NOT
-------------------------- OPTIONS PRICE DATE VESTED VESTED NOT VESTED VESTED
NAME EXERCISABLE UNEXERCISABLE (#) ($) (#) ($) (#) ($)
- ------------------ ----------- ------------- ----------- -------- ---------- ---------- ---------- ---------- ---------
Michael J. Cushman 37,500(1) - - $ 10.63 8/19/2008 - - - -
33,750(2) - - $ 8.58 2/16/2009 - - - -
14,859(3) - - $ 8.87 4/26/2011 - - - -
10,638(4) - - $ 9.40 1/24/2012 - - - -
15,000(5) - - $ 10.24 7/25/2012 - - - -
15,120(6) 3,780(6) - $ 13.06 1/30/2013 - - - -
7,200(7) 4,800(7) - $ 15.72 1/20/2014 - - - -
5,985(8) 8,978(8) - $ 19.86 1/20/2015 - - - -
2,992(9) 11,971(9) - $ 17.95 2/3/2016 - - - -
Kevin R. Watson 2,000(10) 8,000(10) - $ 16.38 4/27/2016 - - - -
Scott R. Louis 1,000(11) 1,500(11) - $ 17.63 4/28/2015 - - - -
Roger D. Nash 4,000(12) 6,000(12) - $ 17.00 10/20/2015 - - - -
Gary S. Litzsinger 2,400(13) 1,600(13) - $ 16.18 8/5/2014 - - - -
800(8) 1,200(8) - $ 19.86 1/20/2015 - - - -
571(9) 2,285(9) - $ 17.95 2/3/2016 - - - -
Leo J. Graham 3,000(7) 2,000(7) - $ 15.72 1/20/2014 - - - -
1,200(8) 1,800(8) - $ 19.86 1/20/2015 - - - -
840(9) 3,360(9) - $ 17.95 2/3/2016 - - - -
Eric J. Woodstrom 15,000(14) - - $ 7.25 1/4/2007 - - - -
4,527(3) - - $ 8.87 1/4/2007 - - - -
3,383(4) - - $ 9.40 1/4/2007 - - - -
15,000(5) - - $ 10.24 1/4/2007 - - - -
2,431(15) - - $ 19.86 1/4/2007 - - - -
(1) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 100% were vested at August 19, 2002.
(2) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 100% were vested at February 16, 2003.
(3) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 100% were vested at April 26, 2005.
(4) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 100% were vested at January 24, 2006.
(5) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 100% were vested at July 25, 2006.
(6) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 80% were vested at January 30, 2006 with the remaining
vesting to occur on January 30, 2007.
(7) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 60% were vested at January 20, 2006 with the remaining
vesting to occur on January 20, 2007 and 2008.
(8) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 40% were vested at January 20, 2006 with the remaining
vesting to occur on January 20, 2007, 2008 and 2009.
(9) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 20% were vested at February 3, 2006 with the remaining
vesting to occur on February 3, 2007, 2008, 2009 and 2010.
(10) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 20% were vested at April 27, 2006 with the remaining
vesting to occur on April 27, 2007, 2008, 2009 and 2010.
(11) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 40% were vested at April 28, 2006 with the remaining
vesting to occur on April 28, 2007, 2008 and 2009.
(12) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 40% were vested at October 20, 2006 with the remaining
vesting to occur on October 20, 2007, 2008 and 2009.
(13) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 60% were vested at August 5, 2006 with the remaining
vesting to occur on August 5, 2007 and 2008.
(14) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 100% were vested at October 18, 2003.
(15) These stock options vest 20% at grant date and vest 20% per year over the
next four years; 100% were vested at October 6, 2006.
23
Options Exercised and Stock Vested
- ----------------------------------
The following table summarizes information with respect to stock option
awards exercised and restricted stock and restricted stock unit awards vested
during fiscal year 2006 for each of the named executive officers.
OPTION EXERCISES AND STOCK VESTED TABLE
OPTION AWARDS STOCK AWARDS
------------------------- -------------------------
NUMBER OF NUMBER OF
SHARES VALUE SHARES VALUE
ACQUIRED ON REALIZED ON ACQUIRED ON REALIZED ON
EXERCISE EXERCISE VESTING VESTING
NAME (#) ($) (#) ($)
- ------------------ ----------- ----------- ----------- -----------
Michael J. Cushman - - - -
Kevin R. Watson - - - -
Scott R. Louis - - - -
Roger D. Nash - - - -
Gary S. Litzsinger - - - -
Leo J. Graham - - - -
Eric J. Woodstrom 10,755 $ 40,256 - -
Equity Compensation Plan Information
- ------------------------------------
The following table summarizes information about the options, warrants,
and rights and other equity compensation under the Company's equity plans as of
December 31, 2006.
EQUITY COMPENSATION PLANS
NUMBER OF NUMBER OF
SECURITIES TO BE WEIGHTED- SECURITIES
ISSUED UPON THE AVERAGE REMAINING
EXERCISE OF EXERCISE PRICE AVAILABLE FOR
OUTSTANDING OF OUTSTANDING FUTURE ISSUANCE
OPTIONS, OPTIONS, UNDER EQUITY
WARRANTS, AND WARRANTS, AND COMPENSATION
RIGHTS RIGHTS PLANS
PLAN CATEGORY (#) ($) (#)
- ------------------------------------- ---------------- ------------------ ------------------
Equity Compensation Plans approved
by security holders (1) 778,712 $ 9.77 1,212,531
Equity Compensation Plans not
approved by security holders None N/A N/A
---------------- ------------------ ------------------
Total 778,712 $ 9.77 1,212,531
24
(1) Includes options to purchase shares of Company common stock under the
following shareholder-approved plans: North Valley Bancorp 1989 Director
Stock Option Plan, North Valley Bancorp 1998 Employee Stock Incentive Plan,
and North Valley Bancorp 1999 Director Stock Option Plan.
Employment Agreements
- ---------------------
The Company entered into an Employment Agreement with Michael J.
Cushman in 2001. The Company entered into an Employment Agreement with Leo J.
Graham in 2004, revised in 2006. The Company entered into Employment Agreements
with Gary S. Litzsinger, Scott R. Louis and Roger D. Nash during 2005. The
Company entered into an Employment Agreement with Kevin R. Watson in 2006.
The Employment Agreement entered into in 2001 with Mr. Cushman had an
initial term of three years with annual renewals. The Employment Agreement
entered into with Mr. Watson in 2006 has an initial term of one year. After the
initial term, all Employment Agreements provide that they will be extended for
additional one-year periods, or be at will, unless either the employee or the
employer gives notice of non-renewal before the end of the term or extended
term. All of the above employment agreements have been extended at their annual
anniversary dates upon the same terms and conditions, except for Mr. Cushman
whose agreement was extended at the end of its three year anniversary upon the
same terms and conditions.
Under the terms of the Employment Agreements, all Executive Officers
are eligible to participate in the Executive Deferred Compensation Plan and the
Salary Continuation Agreements (see discussion below) and other benefits
available to all other employees of the Company.
All Executive Officers are entitled to severance pay upon termination
by the Company without cause in an amount ranging from six month's to 24 month's
current base salary, except Mr. Cushman who is also entitled to a pro rata share
of the prior year's annual incentive compensation.
POST-EMPLOYMENT COMPENSATION
Salary Continuation Agreements
- ------------------------------
The Salary Continuation Agreements provide for five general classes of
benefits for Executive Officers, which benefits vest over a period of eight (8)
to ten (10) years with credit for prior service or as determined by the Chief
Executive Officer and the Board of Directors:
(1) Normal Retirement Benefits. The normal retirement benefit is
calculated to provide a target benefit in the amount equal to sixty percent
(60%) of the executive's compensation at the time of retirement (age 65) or a
lesser amount as determined by the Chief Executive Officer and the Board of
Directors.
(2) Early Termination Benefit. The early termination benefit is
the vested portion of the target retirement benefit.
(3) Disability Benefit. The disability benefit is a Disability
Lump Sum Benefit specified in the agreement for the plan year immediately
preceding the disability, payable only upon total disability as defined in the
agreement.
25
(4) Death Benefit. The death benefit is an amount determined by a
formula that takes into account the number of years of service and the
anticipated compensation level at the age of retirement.
(5) Change of Control Benefit. The change of control benefit is an
amount determined as follows: Executive's Fully Vested Present Value Benefit
payable at age 65 for the current plan year plus two times the Executive's
current Plan Year Compensation, except as to the Chief Executive Officer, 2.99
times plan year compensation. This benefit is payable only in the event of a
change in control as defined in the agreement and is limited by the provisions
of Internal Revenue Code section 280(g).
In consulting with compensation consultant, Clark Consulting, the
Company determined that it would be more cost effective for the Company to
acquire prepaid policies of insurance to fund these anticipated future
obligations than to pay annual premiums. The Company, as a result of acquiring
the prepaid policies, will have cash values in the policies in excess of the
amount paid for those policies.
The Company and the Executive Officers who have Salary Continuation
Agreements have entered into split dollar life insurance agreements in
connection with the life insurance policies obtained by the Company on their
lives.
The following table illustrates the approximate annual retirement
income that may become payable to a key employee credited with the number of
years of service shown, assuming that benefits commence at age 65 and are
payable in the form of an annuity for the employee's life or for 20 years
(whichever is greater):
ANNUAL RETIREMENT INCOME
YEARS OF CREDITED SERVICE
FINAL AVERAGE
COMPENSATION 1 2 3 4 5
- ------------- ---------- ---------- ---------- ---------- ----------
$ 100,000 $ 6,000 $ 12,000 $ 18,000 $ 24,000 $ 30,000
120,000 7,200 14,400 21,600 28,800 36,000
140,000 8,400 16,800 25,200 33,600 42,000
160,000 9,600 19,200 28,800 38,400 48,000
180,000 10,800 21,600 32,400 43,200 54,000
200,000 12,000 24,000 36,000 48,000 60,000
250,000 15,000 30,000 45,000 60,000 75,000
300,000 18,000 36,000 54,000 72,000 90,000
FINAL AVERAGE
COMPENSATION 6 7 8 9 10
- ------------- ---------- ---------- ---------- ---------- ----------
$ 100,000 $ 36,000 $ 42,000 $ 48,000 $ 54,000 $ 60,000
120,000 43,200 50,400 57,600 64,800 72,000
140,000 50,400 58,800 67,200 75,600 84,000
160,000 57,600 67,200 76,800 86,400 96,000
180,000 64,800 75,600 86,400 97,200 108,000
200,000 72,000 84,000 96,000 109,000 121,000
250,000 90,000 105,000 120,000 135,000 150,000
300,000 108,000 126,000 144,000 162,000 180,000
Mr. Cushman began accruing retirement benefits under his Salary
Continuation Agreement effective January 1, 2001, and is fully vested. Messrs.
Watson, Louis, Nash, Litzsinger, and Graham began accruing retirement benefits
under their Salary Continuation Agreements effective as shown on the Plan
Participation Exhibit 1 to the Salary Continuation Plan as filed as Exhibit
99.136 to the Current Report filed on Form 8-K with the Securities Exchange
Commission on June 15, 2007.
26
As of December 31, 2006, the Company's aggregate accrued obligations
under the Salary Continuation Agreements were $4,403,000 (includes obligations
to retirees under old plans).
PENSION BENEFITS TABLE
NUMBER OF
YEARS PRESENT VALUE
CREDITED OF ACCUMULATED PAYMENTS DURING
NAME PLAN NAME SERVICE BENEFIT LAST FISCAL YEAR
- ------------------ ------------------------ --------- -------------- ----------------
Michael J. Cushman Salary Continuation Plan 8 $ 327,041 -
Kevin R. Watson Salary Continuation Plan 1 - -
Scott R. Louis Salary Continuation Plan 1 $ 19,139 -
Roger D. Nash Salary Continuation Plan 1 $ 23,817 -
Gary S. Litzsinger Salary Continuation Plan 2 $ 29,512 -
Leo J. Graham Salary Continuation Plan 3 $ 155,695 -
Executive Deferred Compensation Plan
- ------------------------------------
The Executive Deferred Compensation Plan ("EDCP"), adopted by the
Directors of the Company and its subsidiary effective January 1, 2001 and
restated effective January 1, 2006, is a nonqualified executive benefit plan in
which the eligible executive voluntarily elects to defer some or all of his or
her current compensation in exchange for the Company's promise to pay a deferred
benefit. The deferred compensation is credited with interest under the plan and
the accrued liability is paid to the executive at retirement. Unlike a 401(k)
plan or a pension plan, an EDCP is a nonqualified plan. Accordingly, this plan
is selectively made available to certain highly compensated employees and
executives without regard to the nondiscrimination requirements of qualified
plans. The EDCP is also an unfunded plan, which means there are no specific
assets set aside to fund the plan. The Company has purchased life insurance
policies in order to provide for payment of its obligations under the Executive
Deferred Compensation Plan, but the executive has no rights under the plan
beyond those of a general creditor of the plan sponsor. The deferred amount is
not taxable income to the individual and is not a tax-deductible expense to the
plan sponsor.
The EDCP is embodied in a written agreement between the plan sponsor
and the executive selected to participate in the plan. The agreement includes
provisions that indicate the benefits to be provided at retirement or in the
event of death, disability, or termination of employment prior to retirement.
The agreement provides for full vesting of deferred amounts since the executive
is setting aside his or her current compensation. If the individual leaves, the
account balance would be paid according to the terms specified in the agreement.
If the individual were to die prior to or during retirement, the promised
benefits would be paid to the individual's beneficiary or estate.
27
As of December 31, 2006, the Company's accrued obligations under the
executive deferred compensation plans were $287,000.
NONQUALIFIED DEFERRED COMPENSATION TABLE
EXECUTIVE REGISTRANT AGGREGATE AGGREGATE AGGREGATE
CONTRIBUTIONS IN CONTRIBUTIONS IN EARNINGS IN LAST WITHDRAWALS/ BALANCE AT LAST
LAST FISCAL YEAR LAST FISCAL YEAR FISCAL YEAR DISTRIBUTIONS FISCAL YEAR-END
NAME ($) ($) (1)($) ($) ($)
- ------------------------------ ---------------- ---------------- ---------------- ---------------- ----------------
Michael J. Cushman - - $ 5,509 - $ 61,643
Kevin R. Watson - - - - -
Scott R. Louis $ 44,605 - $ 2,905 - $ 47,510
Roger D. Nash $ 50,000 - $ 2,642 - $ 52,642
Gary S. Litzsinger $ 6,000 - $ 467 - $ 6,467
Leo J. Graham - - $ 621 - $ 6,897
(1) Earnings credited to the accounts are based upon the terms of the Deferred
Compensation Plan. The rate credited for 2006 was 9.30%.
Change in Control Agreements
- ----------------------------
In the event of a sale, dissolution or liquidation of the Company or a
merger or a consolidation in which the Company is not the surviving or resulting
Company, a "change in control" occurs. The Corporation entered into an Agreement
and Plan of Merger dated April 10, 2007, pursuant to which the Corporation would
merge with and into Sterling Financial Corporation, a Washington corporation,
with Sterling being the surviving corporation. A special meeting of the
Corporation shareholders was held on July 31, 2007, and the principal terms of
this proposed merger were approved by majority vote of the outstanding shares.
However, consummation of the merger currently remains subject to certain other
conditions, including the receipt of all necessary regulatory approvals. There
can be no assurance as to when, or if, the proposed merger with Sterling
Financial Corporation will occur, but if it does, it will constitute a "change
of control" under the terms of the Employment Agreements entered into by and
between the Corporation and the Executive Officers.
All Executive Officers are, upon a change in control of the Company,
entitled under their Employment Agreements to receive the "change in control"
benefits described in their Salary Continuation Agreements (see discussion
below).
All options outstanding under the 1989 Director Stock Option Plan, the
1998 Employee Stock Incentive Plan and the 1999 Director Stock Option Plan which
at the time are not fully vested may, nonetheless, under the terms of the
relevant agreement of merger or consolidation or plan of sale, liquidation or
dissolution, be entitled to be exercised as if they were fully (100 percent)
vested. Summary information regarding each Company stock option plan is set
forth below.
The North Valley Bank Executive Deferred Compensation Agreement and
North Valley Bank Executive Salary Continuation Agreement provide for the
acceleration of the payment of benefits to Executive Officers thereunder upon a
change in control of the Company. Summary information regarding each such
agreement is set forth below (same as disclosed in Amendment No. 1 to Annual
Report for the fiscal year ended December 31, 2006 on Form 10-K/A, as filed with
the Securities and Exchange Commission).
28
POTENTIAL PAYMENTS UPON TERMINATION RELATED TO A CHANGE IN CONTROL
AMOUNT PAYABLE
NAME PAYMENT BASIS (1)
- -------------------- -------------------------------------------------------------------------------------- ----------------
Michael J. Cushman Payment of Three-times current Salary plus 3-year Average Bonus and Accelerated
vesting of Salary Continuation Plan $ 2,725,798
Kevin R. Watson Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting
of Salary Continuation Plan $ 1,010,411
Scott R. Louis Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting
of Salary Continuation Plan $ 541,772
Roger D. Nash Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting
of Salary Continuation Plan $ 589,262
Gary S. Litzsinger Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting
of Salary Continuation Plan $ 518,909
Leo J. Graham Payment of Two-times current Salary plus 3-year Average Bonus and Accelerated vesting
of Salary Continuation Plan $ 1,369,487
(1) The amount payable is limited as the Agreements limit the amount of payment
to any named executive officer as a result of a change in control,
including the value of acceleration of any equity awards and salary
continuation plans, to the maximum amount permissible to avoid an "excess
parachute payment" under Section 280(g) of the Internal Revenue Code.
DIRECTOR COMPENSATION
Director Deferred Fee Plan
- --------------------------
The Director Deferred Fee Plan ("DDFP"), adopted by the Directors of
the Company and its subsidiary effective January 1, 2001 and restated effective
January 1, 2006, is a nonqualified director benefit plan in which the eligible
director voluntarily elects to defer some or all of his or her current fees in
exchange for the Company's promise to pay a deferred benefit. The deferred fees
are credited with interest under the plan and the accrued liability is paid to
the director at retirement. Unlike a 401(k) plan or a pension plan, a DDFP is a
nonqualified plan. Accordingly, this plan is only made available to outside
directors without regard to the nondiscrimination requirements of qualified
plans. The DDFP is also an unfunded plan, which means there are no specific
assets set aside to fund the plan. The Company has purchased life insurance
policies in order to provide for payment of its obligations under the Director
Deferred Fee Plan, but the director has no rights under the plan beyond those of
a general creditor of the plan sponsor. The deferred amount is not taxable
income to the individual and is not a tax-deductible expense to the plan
sponsor.
The Company and the Directors who have DDFP Agreements have entered
into split dollar life insurance agreements in connection with the life
insurance policies obtained by the Company and its subsidiary on their lives.
The DDFP is embodied in a written agreement between the plan sponsor
and the director selected to participate in the plan. The agreement includes
provisions that indicate the benefits to be provided at retirement or in the
event of death, disability, or termination of Board membership prior to
retirement. The agreement provides for full vesting of deferred amounts since
the director is setting aside his or her current fees. If the individual leaves,
the account balance would be paid according to the terms specified in the
agreement. If the individual were to die prior to or during retirement, the
promised benefits would be paid to the individual's beneficiary or estate.
As of December 31, 2006, the Company's aggregate accrued obligations
under the Directors Deferred Fee Plan were $2,351,000.
29
Components of Director Compensation
- -----------------------------------
North Valley Bancorp reviews the level of compensation of our
non-employee directors on an annual basis. To determine whether the current
level of compensation for its non-employee directors is appropriate, North
Valley Bancorp has historically obtained data from a number of different sources
including:
o Publicly available data describing director compensation in
peer companies;
o Data provided by the California Banker's Association with
regard to director compensation;
o Information obtained directly from other companies.
During 2006 and 2007, each Director (other than the Chairman) of North
Valley Bancorp was paid $3,000 per quarterly meeting of the Board of Directors
and each Director (other than the Chairman) of North Valley Bank was paid $500
per monthly meeting of the Board of Directors. Payments per Loan Committee
meeting of North Valley Bank during 2006 were $250 per meeting. The Chairman of
the Board of Directors of the Company was paid $5,000 per quarterly meeting and
the Chairman of the Board of Directors of North Valley Bank was paid $850 per
Board of Directors meeting during 2006 and 2007. The Chairman of the Loan
Committee was paid $350 per meeting during 2006. The Chairman of the Audit
Committee was paid a quarterly fee of $1,000 during 2006 and 2007. The Chairman
of the Compensation Committee was paid a quarterly fee of $850 during 2006 and
2007.
Commencing in 1998, each non-employee Director of the Company has
received an award of 900 shares of Common Stock as part of his or her annual
retainer as a Director pursuant to the 1998 Employee Stock Incentive Plan. Each
award is fully vested when granted to the outside Director. The Directors of the
Corporation received a pro rata award of 375 shares of Common Stock as part of
their annual retainer in 2007.
During 2006, cash compensation paid to Directors of the Company totaled
$49,100 and payment of additional Director Compensation of $157,100 was deferred
under the DDFP. During 2007 cash compensation paid to Directors of the
Corporation totaled $18,700 and payment of additional Director Compensation of
$150,200 was deferred under the DDFP. In 2006, the Directors of the Company also
received 900 annual retainer shares at $17.09 totaling $123,048. In 2007, the
Directors of the Holding Company received a pro rata annual retainer of 375
shares at $22.03 totaling $66,090. Directors electing coverage under the group
health insurance plan available to employees of the Company have been required
to pay 100% of their health insurance premiums since January 1989.
The following table sets forth information with regard to compensation
earned by non-employee Directors in 2006. Compensation earned by employee
Directors is described in the "Executive Compensation" section above.
30
DIRECTOR COMPENSATION TABLE
CHANGE IN
PENSION
VALUE AND
NON-EQUITY NONQUALIFIED
FEES EARNED INCENTIVE DEFERRED
OR PAID IN STOCK OPTION PLAN COMPENSATION ALL OTHER
CASH AWARDS AWARDS COMPENSATION EARNINGS COMPENSATION TOTAL
NAME (1) (2)($) ($) ($) ($) (3)($) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<c> <c> <c>
William W. Cox $ 21,500 $ 15,381 -- -- $ 8,406 -- $ 45,287
Royce L. Friesen $ 21,400 $ 15,381 -- -- $ 5,312 -- $ 42,093
Dante W. Ghidinelli $ 24,500 $ 15,381 -- -- $ 4,180 -- $ 44,061
Kevin D. Hartwick $ 20,250 $ 15,381 -- -- $ 3,950 -- $ 39,581
Roger B. Kohlmeier $ 21,850 $ 15,381 -- -- -- -- $ 37,231
Martin A. Mariani $ 19,000 $ 15,381 -- -- $ 197 -- $ 34,578
Dolores M. Vellutini $ 18,000 $ 15,381 -- -- $ 3,615 -- $ 36,996
J.M. Wells, Jr. $ 36,200 $ 15,381 -- -- $ 18,661 -- $ 70,242
(1) Includes only directors who served during 2006.
(2) Includes cash payments made to directors of North Valley Bancorp for
meetings attended during 2006.
(3) The amounts in this column represent the above-market or preferential
earnings on any nonqualified compensation. The above-market rate is
determined by using the amount above 120% of the Federal long-term rate.
For 2006, the interest rate paid was 9.30%, and the above-market rate was
determined to be 5.98%.
The following table shows the aggregate number of stock awards and
option awards outstanding for each non-employee director as of December 31,
2006. There were no stock awards or stock options granted to non-employee
directors during 2006 or 2007.
AGGREGATE STOCK AGGREGATE OPTION GRANT DATE FAIR
AWARDS AWARDS VALUE OF STOCK AND
OUTSTANDING AS OF OUTSTANDING AS OPTION AWARDS MADE
12/31/06 OF 12/31/06 DURING 2006
NAME (#) (1)(#) ($)
- ------------------------- ------------------ ------------------ ------------------
William W. Cox - 49,200 $ 15,381
Royce L. Friesen - 27,000 $ 15,381
Dante W. Ghidinelli - 49,500 $ 15,381
Kevin D. Hartwick - 53,801 $ 15,381
Roger B. Kohlmeier - - $ 15,381
Martin A. Mariani - - $ 15,381
Dolores M. Vellutini - 53,801 $ 15,381
J.M. Wells, Jr. - 43,000 $ 15,381
(1) All outstanding director stock options are 100% vested.
31
North Valley Bancorp 1989 Director Stock Option Plan
- ----------------------------------------------------
Under the North Valley Bancorp 1989 Director Stock Option Plan, as
amended (the "1989 Director Plan"), which was adopted by the Board of Directors
in December 1989 and by the shareholders of the Company at the 1990 Annual
Meeting, each member of the Board of Directors, including employees who are
Directors, automatically received every January a nonstatutory stock option to
purchase 1,000 shares of the Company's Common Stock. Effective upon adoption of
the North Valley Bancorp 1999 Director Stock Option Plan, no further grants of
options have been made or will be made under the 1989 Director Plan. Pursuant to
the 1989 Director Plan, as of November 9, 2007, there were outstanding options
to purchase 11,700 shares of Common Stock.
Options granted under the 1989 Director Plan vest immediately as to
20%, with an additional 20% vesting on each of the first four anniversary dates
following the date of grant. Such options are exercisable for a period of 10
years from the date of grant at a price which shall be 85% of the fair market
value of the Company's Common Stock on the date of grant. The exercise price can
be paid by cash, certified check, official bank check or the equivalent thereof
acceptable to the Company. Options granted pursuant to the 1989 Director Plan
automatically expire three months after termination of service as a Director for
any reason other than cause, death or disability. In the case of termination of
service due to death or disability, such options terminate one year from the
date of such termination of service. In the event that service as a Director is
terminated for cause, the options granted pursuant to the Director Plan expire
30 days after such termination.
The 1989 Director Plan is presently administered by the Board of
Directors, which has the authority to delegate some or all of its duties to a
committee of the Board of Directors appointed for this purpose, which committee
must be composed of not less than three members of the Board of Directors. This
committee is generally authorized to administer the 1989 Director Plan in all
respects, subject to the express terms of the 1989 Director Plan.
The 1989 Director Plan provides for adjustment of and changes in the
shares of Common Stock reserved for issuance in the event certain changes occur
or in the event of the sale, dissolution or liquidation of the Company or any
reorganization, merger or consolidation of the Company.
North Valley Bancorp 1998 Employee Stock Incentive Plan
- -------------------------------------------------------
The North Valley Bancorp 1998 Employee Stock Incentive Plan (the "Stock
Incentive Plan") was adopted by the Board of Directors in February 1998 and
approved by the shareholders of the Company at the 1998 Annual Meeting. The
Stock Incentive Plan provides for awards in the form of options (which may
constitute incentive stock options or non-statutory stock options to key
employees) and also provides for the award of shares of Common Stock to outside
directors. The shares of Common Stock authorized to be awarded as options under
the Stock Incentive Plan consist of 600,000 shares increased in an amount equal
to 2% of shares outstanding each year, commencing January 1, 1999. The Stock
Incentive Plan defines "key employee" as a common-law employee of the Company,
its parent or any subsidiary of the Company, an "outside director," or a
consultant or advisor who provides services to the Company, its parent or any
subsidiary of the Company. For purposes of the Stock Incentive Plan, an "outside
director" is defined as a member of the Board who is not a common-law employee
of the Company, its parent or any subsidiary of the Company.
Pursuant to the Stock Incentive Plan, as of November 9, 2007, there
were outstanding options to purchase 411,441 shares of Company Common Stock,
with 932,382 shares remaining available for grant.
32
The award in 2006 of 900 shares and 375 shares awarded in 2007 of
Common Stock to each outside director as an annual retainer under the Plan is
fully taxable at the time of the grant. The Company receives a compensation
expense deduction in the same amount. If the outside director disposes of the
Common Stock prior to 12 months after the date of grant, any gain (or loss) will
be a short-term capital gain. If the shares are held for longer than 12 months,
any gain (or loss) will be taxed at long-term capital gain rates.
The Stock Incentive Plan is administered by a committee of the Board of
Directors. As of November 9, 2007, the Committee members are Royce L. Friesen,
Dante W. Ghidinelli, Kevin D. Hartwick, Roger B. Kohlmeier and Dolores M.
Vellutini. The Committee must have a membership composition which enables the
Stock Incentive Plan to qualify under SEC Rule 16b-3 with regard to the grant of
options or other rights under the Stock Incentive Plan to persons who are
subject to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Subject to the requirements of applicable law, the Committee
may designate persons other than members of the Committee to carry out its
responsibilities and may prescribe such conditions and limitations as it may
deem appropriate, except that the Committee may not delegate its authority with
regard to the selection for participation of or the granting of options or
determining awards or other rights under the Stock Incentive Plan to persons
subject to Section 16 of the Exchange Act.
In the event that the Company is a party to a merger or other
reorganization, outstanding options and stock awards shall be subject to the
agreement of merger or reorganization. Such agreement may provide, without
limitation, for the assumption of outstanding options by the surviving
corporation or its parent, for their continuation by the Company (if the Company
is a surviving corporation), for accelerated vesting and accelerated expiration,
or for settlement in cash.
North Valley Bancorp 1999 Director Stock Option Plan
- ----------------------------------------------------
On April 1, 1999, the Board of Directors adopted the North Valley
Bancorp 1999 Director Stock Option Plan (the "1999 Director Stock Option Plan"),
pursuant to which all members of the Board of Directors are eligible for the
award of non-statutory stock options to purchase shares of the Company's Common
Stock. Non-statutory stock options are options not intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.
The 1999 Director Stock Option Plan replaced the existing North Valley
Bancorp 1989 Director Stock Option Plan, as amended (the "1989 Director Plan")
and was approved by the shareholders at the 1999 Annual Meeting.
The 1999 Director Stock Option Plan is administered by the Board of
Directors. All awards of options are at the discretion of the Board of
Directors. The Board of Directors has the authority to delegate some or all of
its duties in administering the 1999 Director Stock Option Plan to a committee
of the Board of Directors appointed for this purpose, composed of not less than
two members of the Board of Directors who qualify as non-employee directors. The
body administering the 1999 Director Stock Option Plan is generally authorized
to administer such Plan in all respects, subject to the express terms of such
Plan, including the full power to make all determinations necessary or advisable
for its administration.
All members of the Board of Directors of the Company and its
subsidiary, including employees of the Company who are directors, are eligible
to participate in the 1999 Director Stock Option Plan. As of November 9, 2007,
there were nine directors eligible to participate in the 1999 Director Stock
Option Plan.
33
Shares covered by options granted pursuant to the 1999 Director Stock
Option Plan are authorized but unissued shares of the Company's Common Stock.
The maximum aggregate number of shares of Common Stock which may be optioned and
sold under the 1999 Director Stock Option Plan is equal to ten percent of the
total shares of the Company's Common Stock issued and outstanding from time to
time. As of November 9, 2007, there were options outstanding under the 1999
Director Stock Option Plan for the purchase of 338,983 shares of Common Stock.
On the same date, there were 7,374,884 shares of Common Stock issued and
outstanding. Thus, as of November 9, 2007, a total of 225,767 shares of Common
Stock were available for the grant of additional options under the 1999 Director
Stock Option Plan.
The 1999 Director Stock Option Plan includes provisions for adjustment
of and changes in the shares reserved for issuance in the event that the shares
of Common Stock of the Company are changed into or exchanged for a different
number of kind of shares of stock or other securities of the Company or other
corporation, whether by reason or reorganization, merger, consolidation,
recapitalization, reclassification, stock dividend, stock split or other
changes.
The 1999 Director Stock Option Plan also includes provisions regarding
the sale, dissolution or liquidation of the Company and any reorganization,
merger or consolidation in which the Company is not the surviving or resulting
corporation. If the Company is not the surviving or resulting corporation, the
Board of Directors shall have the power to terminate all options under the 1999
Director Stock Option Plan, provided that each optionee shall have the right
prior to the effective date of such sale, dissolution, liquidation,
reorganization, merger or consolidation to exercise any outstanding option in
full, without regard to the option's vesting schedule.
Options granted under the 1999 Director Stock Option Plan may only be
non-statutory stock options. Each option will be 20 percent exercisable or
"vested" immediately upon the date of grant and will become further vested at
the rate of 20 percent on each of the first four anniversary dates thereafter.
Options are exercisable for a period of ten years after the date of grant. The
exercise price for the options will be 85 percent of the fair market value of
the shares on the date of grant, as determined by the Board of Directors. So
long as the Company's Common Stock is traded on the NASDAQ Stock Market, such
fair market value shall be equal to the last transaction price quoted for such
date on the NASDAQ Stock Market.
Each option granted under the 1999 Director Stock Option Plan has a
termination date of ten years after the date of grant. In addition, each option
automatically expires three months after termination of service as a director
other than for cause, except that in the case of termination of service due to
mandatory retirement, death or disability, an option will remain in effect
unchanged. If a director is removed from the Board of Directors for cause, the
option will expire 30 days after such termination of service.
The Board of Directors may amend, suspend or terminate the 1999
Director Stock Option Plan at any time and for any reason. Any amendment is
subject to the approval of the shareholders of the Company only to the extent
required by applicable laws or regulations. No amendment or termination may
adversely affect the rights of an optionee under a previously awarded option,
without the optionee's consent.
No taxable income is recognized by an optionee upon the award of a
non-statutory stock option under the 1999 Director Stock Option Plan. The
exercise of a non-statutory stock option awarded under the 1999 Director Stock
Option Plan results in the realization of ordinary income to the optionee in an
amount equal to the difference between the exercise price and the fair market
value of the shares on the date of exercise. For federal income tax purposes,
the Company will be entitled to a compensation expense deduction in the same
amount. The 1999 Director Stock Option Plan allows an optionee to satisfy any
withholding tax requirement in connection with the exercise of an option by the
34
withholding of shares from the total number of shares issuable upon exercise of
the option or by the delivery to the Company of shares of Company Common Stock
that have been held by the optionee for at least six months. Any such
arrangement must be acceptable to the Company.
35
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee consists of the following members of the
Company's Board of Directors: Royce L. Friesen (Chairman), William W. Cox and
Martin A. Mariani. All members of the Committee are independent as defined under
the Sarbanes Oxley Act of 2002, the rules and regulations of the Securities and
Exchange Commission and the corporate governance listing standards of the NASDAQ
Stock Market.
The Compensation Committee reviews and recommends to the Board of
Directors, salaries, performance based incentives, both annual and long-term,
and other matters relating to the compensation of the Chief Executive Officer
and the Chief Executive Officer's recommendations as to Executive Officers,
taking into consideration non-salary based benefits in the form of Company paid
expenses for car allowances and club memberships. The Committee determines the
base salary for the Chief Executive Officer by: (1) examining the Company's
performance against its preset goals, (2) examining the Company's performance
within the banking industry, (3) evaluating the overall performance of the Chief
Executive Officer, and (4) comparing the base salary of the Chief Executive
Officer to that of other chief executive officers in the banking industry in the
Company's market area. In January 2007, the Committee recommended, and the Board
approved, the following executive salaries effective February 1, 2007: Mr.
Cushman's annual salary of $286,650; Mr. Watson's annual salary of $187,200; Mr.
Louis' annual salary of $154,000; Mr. Nash's annual salary of $154,000; Mr.
Litzsinger's annual salary of $111,100, and Mr. Graham's annual salary of
$170,500.
The members of the Compensation Committee have reviewed and discussed
the foregoing Compensation Discussion and Analysis with management and, based on
such review and discussion, the Compensation Committee has recommended to the
Board of Directors that the Compensation Discussion and Analysis be included in
the North Valley Bancorp Annual Report on Form 10-K for the year ended December
31, 2006.
Submitted by:
Royce L. Friesen, Chairman
William W. Cox
Martin A. Mariani
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
During the fiscal year 2006, Michael J. Cushman participated in
deliberations of the Company's Board of Directors concerning executive officer
compensation for all Executive Officers, excluding himself.
36
Performance Graph
- -----------------
The following graph compares our cumulative total stockholder return
since December 31, 2001 with the NASDAQ Composite Index, the SNL $500 million -
$1 billion Bank Index, and SNL Western Bank Index. The graph assumes that the
value of the investment in our common stock and each index (including
reinvestment of dividends) was $100.00 on December 31, 2001.
[GRAPHIC CHART OMITTED]
PERIOD ENDING
---------------------------------------------------------------------------
INDEX 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
- --------------------------- ---------- ---------- ---------- ---------- ---------- ----------
North Valley Bancorp $ 100.00 $ 135.75 $ 176.94 $ 230.52 $ 216.11 $ 229.28
NASDAQ Composite $ 100.00 $ 68.76 $ 103.67 $ 113.16 $ 115.57 $ 127.58
SNL $500M-$1B Bank Index $ 100.00 $ 127.67 $ 184.09 $ 208.62 $ 217.57 $ 247.44
SNL Western Bank Index $ 100.00 $ 109.41 $ 148.21 $ 168.43 $ 175.36 $ 197.86
Market Information
- ------------------
The North Valley Bancorp common stock is listed and trades on the
NASDAQ Global Select Market System under the symbol "NOVB." The shares were
first listed with the NASDAQ Stock Market in April 1998. The table below
summarizes the Common Stock high and low trading prices traded during the two
year period ended December 31, 2006, and the first three quarters of 2007, as
reported on the NASDAQ Stock Market, and the cash dividends declared on the
common stock during the same period.
37
PRICE OF CASH
COMMON STOCK DIVIDENDS
---------------------------- DECLARED
HIGH LOW ------------
------------ ------------
2007
- ----
First Quarter $ 26.00 $ 17.57 $ 0.10
Second Quarter 25.65 21.51 0.10
Third Quarter 24.32 17.47 0.10
2006
- ----
First Quarter $ 18.03 $ 17.41 $ 0.10
Second Quarter 18.00 15.90 0.10
Third Quarter 17.71 15.75 0.10
Fourth Quarter 18.98 17.25 0.10
2005
- ----
First Quarter $ 19.96 $ 18.90 $ 0.10
Second Quarter 19.00 16.75 0.10
Third Quarter 19.52 17.08 0.10
Fourth Quarter 18.10 14.86 0.10
The Company had approximately 836 registered shareholders of record as
of November 9, 2007.
The Company's primary source of funds for payment of dividends to its
shareholders is the receipt of dividends from NVB. The payment of dividends by a
California State chartered bank is subject to various legal and regulatory
restrictions. See Note 19 to the Consolidated Financial Statements included in
the Annual Report on Form 10-K for the year ended December 31, 2006, for
information related to dividend matters including information regarding certain
limitations on payment of dividends.
38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Related Persons
- ---------------------------------
The Company has a policy that it does not enter into any transactions
covered under Item 404 of Regulation S-K with the exception of loans made by
North Valley Bank (see "Indebtedness of Management" below). There have been no
transactions, or series of similar transactions, during 2006, or any currently
proposed transaction, or series of similar transactions, to which the Company or
North Valley Bank was or is to be a party, in which the amount involved exceeded
or will exceed $120,000 and in which any director, director-nominee or executive
officer of the Company or North Valley Bank, or any shareholder owning of record
or beneficially 5% or more of North Valley Bancorp common stock, or any member
of the immediate family of any of the foregoing persons, had, or will have, a
direct or indirect material interest.
Indebtedness of Management
- --------------------------
Through its banking subsidiary, North Valley Bank, the Company has had
and expects in the future to have banking transactions, including loans and
other extensions of credit, in the ordinary course of its business with many of
the Company's Directors, Executive Officers, holders of five percent or more of
the Company's Common Stock and members of the immediate family of any of the
foregoing persons, including transactions with corporations or organizations of
which such persons are directors, officers or controlling shareholders, on
substantially the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with unrelated persons.
Management believes that in 2006 such loan transactions did not involve more
than the normal risk of collectibility or present other unfavorable features.
All loans and other extensions of credit made by North Valley Bank to the
Directors and Executive Officers of the Company and North Valley Bank are made
in compliance with the applicable restrictions of Section 22 of the Federal
Reserve Act and Regulation O of the Board of Governors of the Federal Reserve
System.
Director Independence
- ---------------------
The Board of Directors of the Company has evaluated the independence of
each of the members of the Board of Directors in accordance with applicable laws
and regulations including the provisions of the Sarbanes-Oxley Act of 2002
("SOX"), the rules and regulations of the Securities and Exchange Commission
(the "SEC") and the corporate governance listing standards of the NASDAQ Stock
Market ("NASDAQ").
The Board of Directors has determined that a majority of the Board of
Directors is comprised of "Independent Directors" within the requirements of
SOX, SEC and NASDAQ regulations. The Board of Directors has further determined
that Director Michael J. Cushman, who is employed as the President and Chief
Executive Officer of the Company and North Valley Bank, is not independent.
39
REPORT OF THE AUDIT COMMITTEE
The Audit Committee consists of the following members of the
Corporation's Board of Directors: Dante W. Ghidinelli (Chairman), Royce L.
Friesen, Kevin D. Hartwick, Roger B. Kohlmeier and Dolores M. Vellutini. All
members of the Committee are independent as defined under SOX, the SEC
Regulations and NASDAQ listing standards. Both Chairman Dante W. Ghidinelli and
Mr. Kevin D. Hartwick have been, as a result of their accounting backgrounds
determined to be qualified as an Audit Committee Financial Expert as defined
under SOX, the SEC Regulations and NASDAQ listing standards. The Committee
operates under a written charter adopted by the Board of Directors, which is
included in this Proxy Statement as Appendix A. The Audit Committee, in addition
to its other functions, recommends to the Board of Directors, subject to
shareholder ratification, the selection of the Corporation's independent
accountants.
Management is responsible for the Corporation's internal controls and
the financial reporting process. The independent accountants are responsible for
performing an independent audit of the Corporation's consolidated financial
statements in accordance with generally accepted accounting principles and to
issue a report thereon. The Audit Committee's responsibility is to monitor and
oversee these processes.
The Committee assists the Board of Directors in fulfilling its
responsibility for oversight of the quality and integrity of the accounting,
auditing, internal control and financial reporting practices of the Corporation.
The Committee's primary responsibilities include the following: (1) serve as an
independent and objective party to monitor the Corporation's financial reporting
process and internal control system; (2) review and evaluate the audit efforts
of the Corporation's independent accountants and internal audit department; (3)
evaluate the Corporation's quarterly financial performance as well as its
compliance with laws and regulations; (4) oversee management's establishment and
enforcement of financial policies and business practices; and (5) facilitate
communication among the independent auditors, financial and senior management,
counsel, the internal audit department and the Board of Directors.
The Audit Committee has been updated quarterly on management's process
to assess the adequacy of the Corporation's system of internal control over
financial reporting, the framework used to make the assessment and management's
conclusions on the effectiveness of the Corporations internal control over
financial reporting. The Audit Committee has also discussed with the independent
auditor the Corporation's internal control assessment process, management's
assessment with respect thereto and the independent auditor's evaluation of the
Corporation's system of internal control over financial reporting.
It is not the duty or the responsibility of the Committee to conduct
auditing or accounting reviews. Therefore, the Committee has relied, without
further independent verification, on management's representation that the
financial statements have been prepared with integrity and objectivity and in
conformity with accounting principles generally accepted in the United States of
America and on the representations of the independent auditors included in their
report on the Corporation's financial statements. Furthermore, the Committee's
discussions with management and the independent auditors do not provide the
Committee with any other independent basis to determine or assure that the
Corporation's financial statements are presented in accordance with generally
accepted accounting principles, that the audit of the Corporation's financial
statements has been carried out in accordance with generally accepted auditing
standards or that the Corporation's independent auditors are in fact
"independent."
The Committee has reviewed and discussed the audited financial
statements of the Corporation for the fiscal year ended December 31, 2006 with
the Corporation's management. The Committee has discussed with Perry-Smith LLP,
40
the Corporation's Independent Registered Public Accounting Firm, the matters
required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees). The Committee has also received the
written disclosures and the letter from Perry-Smith LLP required by Independence
Standards Board Standard No. 1 (Independence Discussion with Audit Committees)
and the Committee has discussed the independence of Perry-Smith LLP with that
firm and based upon such information has determined that Perry-Smith LLP is
independent.
The Committee has recommended to the Board of Directors that the
Corporation's audited financial statements be included in the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 2006, for
filing with the Securities and Exchange Commission and has recommended
ratification of Perry-Smith LLP as the Independent Auditor for the Corporation
for the fiscal year 2007.
Submitted by:
Dante W. Ghidinelli (Chairman)
Royce L. Friesen
Kevin D. Hartwick
Roger B. Kohlmeier
Dolores M. Vellutini
41
INDEPENDENT AUDITOR
The firm of Perry-Smith LLP served the Company as the Independent
Registered Public Accounting Firm for the fiscal year ended December 31, 2006,
continuing through 2007. Perry-Smith LLP was recommended by the Audit Committee
of the Board of Directors to serve as the Independent Registered Public
Accounting Firm for the 2006 fiscal year, and the Board of Directors and
shareholders of the Company approved the Audit Committee recommendation. The
Audit Committee of the Board of Directors of the Company approved each
professional service rendered by Perry-Smith LLP during the fiscal year 2006.
During the period covering the fiscal years ended December 31, 2006 and
2005, Perry-Smith LLP performed the professional services described below. No
other services were provided in 2006 and 2005.
Description 2006 2005
- ----------- --------- ---------
Audit Fees (1) $ 238,000 $ 208,000
Audit-Related Fees (2) $ 21,000 $ 21,100
Tax Fees (3) $ 51,800 $ 42,900
(1) Audit fees consist of fees for professional services rendered for the audit
of the Company's consolidated financial statements, audit of internal
control over financial reporting, review of consolidated financial
statements included in the Company's quarterly reports and services
normally provided by the independent auditor in connection with statutory
and regulatory filings or engagements.
(2) Audit-related fees represent fees for the audit of the Company's employee
benefit plans.
(3) Tax fees consist primarily of compliance fees for the preparation of tax
returns.
The Audit Committee of the Board of Directors has reviewed and
discussed the audited financial statements of the Company for the fiscal year
ended December 31, 2006. The Audit Committee has discussed with Perry-Smith LLP,
the Company's Independent Registered Public Accounting Firm, the matters
required to be discussed under Statement on Auditing Standards No. 61, as
amended by Statement on Auditing Standards No. 90 (communications with audit
committees). The Audit Committee has also received the written disclosures and
the letter from Perry-Smith LLP required by Independence Standards Board
Standard No. 1 (independence discussions with audit committees), and the Audit
Committee has discussed the independence of Perry-Smith LLP with that firm and
based upon such information has determined that Perry-Smith LLP is independent.
The Audit Committee consists of the following members of the Company's
Board of Directors: Dante W. Ghidinelli (Chairman), Royce L. Friesen, Kevin D.
Hartwick, Roger B. Kohlmeier and Dolores M. Vellutini. All members of the
Committee are independent as defined under SOX, the SEC Regulations and NASDAQ
listing standards. Both Chairman Dante W. Ghidinelli and Mr. Kevin D. Hartwick
have been, as a result of their accounting backgrounds determined to be
qualified as an Audit Committee Financial Expert as defined under SOX, the SEC
Regulations and NASDAQ listing standards. The Audit Committee has recommended to
the Board of Directors that the Company's audited financial statements be
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 for filing with the Securities and Exchange Commission.
42
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
The firm of Perry-Smith LLP, which served the Corporation as
Independent Registered Accounting Firm for the 2006 fiscal year, has been
recommended by the Audit Committee of the Board of Directors of the Corporation
as the Corporation's Independent Registered Accounting Firm for the 2007 fiscal
year. Perry-Smith LLP has no interest, financial or otherwise, in the
Corporation. All Proxies will be voted for the ratification of the appointment
of Perry-Smith LLP, unless authority to vote for the ratification of such
selection is withheld or an abstention is noted. If Perry-Smith LLP should for
any reason decline or be unable to act as Independent Auditor, the Proxies will
be voted for a substitute independent public accounting firm to be designated by
the Audit Committee.
The Audit Committee of the Board of Directors of the Corporation
approved each professional service rendered by Perry-Smith LLP during the 2006
fiscal year and considered whether the provision of non-audit services is
compatible with maintaining their independence.
Required Approval
- -----------------
The approval of the ratification of the appointment of Perry-Smith LLP
as the Corporation's Independent Registered Accounting Firm for the 2007 fiscal
year requires the affirmative vote of the holders of a majority of the shares
present or represented by Proxy and voting at the Meeting.
Recommendation of Management
- ----------------------------
The Board of Directors has approved the recommendation of the Audit
Committee of the Board of Directors that Perry-Smith LLP be appointed to serve
as the Corporation's Independent Registered Accounting Firm for the year 2007
and recommends a vote "FOR" ratification of the appointment of Perry-Smith LLP.
A representative of Perry-Smith LLP is expected to attend the Meeting
and will have the opportunity to make a statement if he or she desires to do so
and will respond to appropriate questions from shareholders present at the
Meeting.
SHAREHOLDER PROPOSALS
The Corporation's 2008 Annual Meeting of Shareholders is scheduled for
May 22, 2008. Shareholder proposals must be received by the Corporation no later
than March 1, 2008, to be considered for inclusion in the Proxy Statement and
Proxy for the 2008 Annual Meeting of Shareholders. Management of the Corporation
will have discretionary authority to vote proxies obtained by it in connection
with any shareholder proposal not submitted on or before the March 1, 2008,
deadline. The Corporation has entered into an Agreement and Plan of Merger dated
April 10, 2007, pursuant to which the Corporation would merge with and into
Sterling Financial Corporation, a Washington corporation, with Sterling being
the surviving corporation. If this proposed merger is consummated, no Annual
Meeting of the Shareholders of North Valley Bancorp will be held in 2008.
43
OTHER MATTERS
The Board of Directors knows of no other matters which will be brought
before the Meeting, but if such matters are properly presented to the Meeting,
Proxies solicited hereby will be voted in accordance with the judgment of the
persons holding such Proxies. All shares represented by duly executed Proxies
will be voted at the Meeting.
By Order of the Board of Directors,
/s/ Leo J. Graham
-----------------------------------
Leo J. Graham
Corporate Secretary
Redding, California
November 26, 2007
44
APPENDIX A
----------
AUDIT COMMITTEE CHARTER
1. General Purpose:
The Audit Committee of North Valley Bancorp ("Bancorp") is a committee
comprised of at least three independent directors of North Valley Bancorp and
will include an independent director from each of Bancorp's subsidiary banks.
The Audit Committee will represent the Bancorp and all of its subsidiary banks,
(the "Company"), for purpose of Audit Committee functions. The purpose of the
Audit Committee is to act on behalf of the Bancorp and Banks' Boards of
Directors in fulfilling the Boards' oversight responsibilities with respect to:
1) The integrity of the Company's financial statements, financial
reporting processes and systems of internal control regarding finance,
accounting, security, regulatory and legal compliance;
2) The independence, qualifications and performance of the
Company's independent auditors;
3) The performance of the Company's internal audit function and
internal auditor;
4) Communications among the independent auditors, management, the
internal auditing department, and the Boards of Directors;
5) Procedures for (a) the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal accounting
controls or auditing matters and (b) the confidential, anonymous submission by
the Company's employees of concerns regarding accounting or auditing matters;
and
6) Performance of Risk Management Program and of Chief Risk
Officer.
2. Statement of Policy:
The Audit Committee shall provide assistance to the directors of the
Boards in fulfilling their responsibilities to the shareholders, potential
shareholders, and investment community related to accounting, reporting
practices, and the quality and integrity of the financial reports of the
Company. While the Audit Committee will not attempt to correct problems
independently, they will function as an informed, vigilant and effective monitor
of the Company's reporting process and internal controls. In so doing, it is the
responsibility of the Audit Committee to maintain free and open means of
communication between the directors, the independent auditors, the internal
auditors, and the management of the Company. In addition, the Audit Committee
shall have the authority to engage independent counsel and other advisors, as it
determines necessary to carry out these duties, and the Company shall provide
appropriate funding, as determined by the Audit Committee, for payment of
compensation to such counsel or advisors. The Audit Committee representative
shall report regularly to the Bancorp and Banks' Boards of Directors so as to
keep the individual Bancorp and Banks' Boards up to date on the activities of
the Audit Committee in assisting the Boards' with their oversight
responsibilities.
3. Member Independence and Qualifications:
All members of the Audit Committee shall satisfy the independence and
experience requirements of the Securities and Exchange Commission (SEC) and the
Nasdaq National Market (NASDAQ) applicable to audit committee members as in
effect from time to time, when and as required by the SEC and NASDAQ. All
45
members of the Audit Committee shall be able to read and understand fundamental
financial statements, including a balance sheet, income statement and statement
of cash flows and shall not have participated in the preparation of the
financial statements of the Bancorp or any current subsidiary of the Bancorp at
any time during the prior three years. At least one member of the Audit
Committee shall have experience or background sufficient to meet the NASDAQ
financial sophistication requirements and would also meet the definition of an
audit committee financial expert under the Securities Exchange Act of 1934, as
amended.
4. Member Compensation:
The members of the committee may not, other than in his or her capacity
as a member of the audit committee, the board of directors, or any other board
committee (i) accept any consulting, advisory, or other compensatory fee from
Company or its affiliates or (ii) be an affiliated person of Company or its
subsidiary. Compensation for committee membership will be as set by the North
Valley Bancorp Board of Directors.
5. Responsibilities Related to Registered Public Accounting Firms and
Audit Firms:
The Audit Committee shall be directly responsible for the appointment,
evaluation, termination, compensation, and oversight of the work of any
registered public accounting firm ("Independent Auditor"), or any audit firm
employed by the Company and each such firm shall report directly to the Audit
Committee. The Audit Committee's retention of any Independent Auditor firm shall
be subject to the applicable vote of shareholders.
The Audit Committee shall explicitly approve the engagement of the
Independent Auditor for all audit and permissible non-audit related services,
including compensation to be paid therefore or the engagement for such services
may be entered into pursuant to pre-approval policies and procedures established
by the Audit Committee, provided such policies are detailed as to the particular
service, the Audit Committee is informed of the particular service, and such
polices and procedures do not include delegation of the Audit Committee's
responsibilities under the Securities Exchange Act of 1934, as amended, to
management, provided that with respect to services other than audit, review or
attest services, no pre-approval is required if all of the following conditions
are met: (i) the aggregate amount of all such services accounts for no more than
5% of the total revenues paid to the Independent Auditor during the fiscal year
in which the services are provided; (ii) such services were not recognized by
the Company to be non-audit services at the time of engagement; and (iii) such
services are promptly brought to the attention of the Audit Committee and
approved prior to the completion of the audit by the Audit Committee (or one or
more members delegated pursuant to the following sentence). The Audit Committee
may delegate its authority to grant pre-approvals to one or more members of the
Audit Committee, provided that the decisions of any Audit Committee member to
whom authority is delegated to grant pre-approvals is presented to the full
Audit Committee at its next meeting.
The Audit Committee shall obtain and review, at least annually, a
formal written statement from the Independent Auditor delineating: (1) the
internal quality control procedures of the Independent Auditor; (2) material
issues raised by the Independent Auditor's most recent quality-control review;
(3) steps taken to deal with the material issues raised in the quality-control
review; and (4) all relationships between the Independent Auditor, and Bancorp
and/or its affiliates, consistent with the Financial Accounting Standards Board
Standard No. 1. The Audit Committee will consider and discuss with the
Independent Auditor any disclosed relationships or services that could affect
the Independent Auditor's objectivity and independence, and assess and otherwise
take appropriate action to oversee the independence of the Independent Auditor.
46
The Audit Committee shall ensure the rotation of the lead audit partner
and the "concurring or reviewing partner" every five years, and consider the
adoption of a policy of rotating the Independent Auditor on a regular basis.
The Audit Committee shall meet with the Independent Auditor prior to
the commencement of an audit to discuss the scope, planning and staffing of the
audit.
The Audit Committee shall consider and, if deemed appropriate, adopt a
policy regarding Audit Committee pre-approval of employment by the Company of
individuals formerly employed by the Independent Auditor.
The Audit Committee shall evaluate the cooperation received by the
Independent Auditor during their audit examination, including any significant
difficulties with the audit or any restrictions on the scope of their activities
or access to required records, data and information.
The Audit Committee shall discuss with the Independent Auditor and
management any conflicts or disagreements between management and the Independent
Auditor regarding financial reporting, accounting practices or policies and
shall be responsible for resolving any conflicts regarding financial reporting.
The Audit Committee shall confer with the Independent Auditor and with
senior management regarding the scope, adequacy and effectiveness of internal
auditing and financial reporting controls in effect, and any special steps taken
in the event of material control deficiencies.
6. Oversight of the Integrity of the Financial Statements:
Upon completion of the audit, the Audit Committee shall review and
discuss with the Independent Auditor and management the annual audited financial
statements and make related recommendations in connection with Bancorp's 10-K
filings.
The Audit Committee shall review and discuss with the Independent
Auditor and management the quarterly financial statements prior to Bancorp's
10-Q filings, and any other matters required to be communicated to the Audit
Committee by the Independent Auditor under Statement on Auditing Standards No.
61. The Chairperson or a member of the Audit Committee may represent the entire
Audit Committee for purposes of this discussion.
The Audit Committee shall discuss with management and the Independent
Auditor significant issues that arise regarding accounting principles and
financial statement presentation, including the adoption of new, or material
changes to existing, critical accounting policies or to the application of those
policies, the potential effect of alternative accounting polices available under
GAAP, the potential impact of regulatory and accounting initiatives and any
other significant reporting issues and judgments.
The Audit Committee shall discuss with the Independent Auditor and
management significant financial reporting issues and judgments made in
connection with the preparation of Bancorp's financial statements.
47
7. Oversight of Internal Audit Function and Internal Auditor / Risk
Management Program and Chief Risk Officer:
The Audit Committee shall review the appointment, performance, and
termination of the Chief Risk Officer and Internal Auditor, who shall meet with
the Audit Committee on a regular basis, attend meetings of the Audit Committee,
and report regularly on the activities of the Audit and Risk Management
function.
The Audit Committee shall approve the annual Audit and Risk Management
Plan to assure the comprehensive coverage of significant risk areas.
The Audit Committee shall discuss with management, and, as appropriate,
the Independent Auditor, the Company's major financial and other risk exposures
and the steps management has taken to monitor and control such exposures,
including the Company's risk assessment and risk management policies.
The Audit Committee shall review significant Audit and Risk Review
Reports ("Reports") and/or recommendations prepared by Audit and Risk Management
and review management's responses to the Reports and/or recommendations.
The Audit Committee shall discuss material legal matters with the
General Counsel of the holding company and subsidiary banks, including matters
reflected in the Quarterly Litigation Report.
The Audit Committee shall review and approve the quarterly allowances
for loan and lease losses and reports of Internal Auditors and communicate said
reports to Bancorp and Bank Boards of Directors.
The Audit Committee shall review with the Independent Auditor any
management or internal control letter issued or, to the extent practicable,
proposed to be issued by the Independent Auditor and management's response, if
any, to such letter.
The Audit Committee shall review the results of management's efforts to
monitor compliance with the programs and policies designed to ensure adherence
to applicable laws and regulations, as well as to its Code of Ethics, including
review and approval of insider and affiliated-party transactions.
The Audit Committee shall prepare the report required by the rules of
the Securities and Exchange Commission to be included in Bancorp's annual proxy
statement.
The Audit Committee shall review and assess the adequacy of this
charter annually and recommend any proposed changes to the Bancorp's Board for
approval.
8. Compliance Oversight Responsibilities:
Obtain from the Independent Auditor assurance that Section 10a(b) of
the Exchange Act has not been implicated.
The Audit Committee shall have oversight responsibility for the Banks'
compliance with the Community Reinvestment Act. The Audit Committee shall review
and approve the Banks' performance under this Act and recommend appointment by
the appropriate Bank Board of the Community Reinvestment Act Officer.
48
In the event that a Suspicious Activity Report ("SAR") must be filed,
in accordance with the Bank Secrecy Act and Bank policy, the SAR must be
reviewed at the next scheduled meeting of the Audit Committee. In the event that
the SAR involves an insider, or is of a significant dollar amount or impact to
any of the Banks, a recommendation by the Bank's legal counsel will be presented
to the Audit Committee, who will determine whether presentation to the full
Board is necessary.
The Audit Committee shall have the authority to appoint the Bank
Secrecy Act Officer and the Bank Security Officer.
9. Complaints:
The Audit Committee shall establish procedures for the receipt,
retention and treatment of complaints received by the Company regarding
accounting, internal accounting controls or auditing matters, including the
confidential and anonymous submission by employees of concerns regarding
questionable accounting or auditing matters. Specifically, employees of the
Company will be instructed that they may submit confidential, anonymous concerns
regarding questionable accounting or auditing matters to the Chairperson of the
Audit Committee without fear of retaliation, as outlined in the Code of Ethics /
Code of Business Conduct and Ethics Policy.
10. Meetings:
Regular and special meetings of the Audit Committee will be held at the
time and place as the Audit Committee deems necessary and appropriate and at
least on a quarterly basis.
11. Minutes:
The Secretary of the Audit Committee will maintain minutes and other
relevant records of the meetings and activities of the Audit Committee. The
minutes will be available for review by the Board and any regulatory agency
having jurisdiction over the affairs of Bancorp or the Banks. In the event of
any meeting in Executive Session or otherwise where the Secretary is not
present, the Chair will designate an Acting Secretary of the Audit Committee for
the purpose of recording the minutes of actions taken at the meeting or
Executive Session thereof.
12. Voting:
Every act consented to by a majority of the Audit Committee members
present at a meeting (at which quorum is present) will be regarded as an act of
the Audit Committee, unless other consent is required pursuant to this Charter,
the Articles of Incorporation or By-Laws of Bancorp or Banks or applicable law.
13. Telephone Conference Meetings:
Members of the Audit Committee may participate in a meeting through use
of conference telephone or similar communication equipment, so long as all
members participating in the meetings can hear one another. Participation in a
meeting pursuant to this paragraph constitutes presence in person at the
meeting.
14. Amendments:
This Charter of the Audit Committee may be amended only by a resolution
of Bancorp's Board.
49
APPENDIX B
----------
NOMINATING COMMITTEE CHARTER
PURPOSE
The purpose of the Nominating Committee is to assist the Board of
Directors by (a) establishing criteria for candidates and identifying,
evaluating and recommending candidates, including candidates proposed by
shareholders, for election to the Board of Directors, and (b) periodically
reviewing and making recommendations on the composition of the Board of
Directors.
COMMITTEE MEMBERSHIP
The Nominating Committee shall be comprised of at least three
independent directors appointed annually by the independent members of the Board
of Directors, who shall appoint one member of the Committee to act as its
Chairman. The independent members of the Board of Directors may remove members
of the Committee, with or without cause. Director independence shall be
determined in accordance with applicable rules of the Securities and Exchange
Commission and the NASDAQ Marketplace Rules.
NOMINATION PROCESS
1. The Nominating Committee shall, as it deems appropriate, identify,
evaluate and interview individuals who may be qualified to be members
of the Board of Directors.
2. Each candidate evaluated by the Nominating Committee shall be required
to complete one or more questionnaires and provide such additional
information as the Nominating Committee shall deem necessary or
appropriate. Such information shall include a personal financial
statement and background information concerning the candidate. The
Nominating Committee shall have the authority to retain independent
advisors (including legal and accounting advisors) to assist the
members of the committee in carrying out their responsibilities and
duties. The Committee shall have the sole authority to approve the
terms of any such engagement, including the payment of fees.
3. Candidates shall be evaluated based on the criteria established by the
Nominating Committee which may include (a) satisfactory results of any
background investigation, (b) experience and expertise, (c) financial
resources, (d) time availability, (e) community involvement, and (f)
such other criteria as the Nominating Committee may determine to be
relevant. Candidates selected for consideration, as nominees must meet
with the Nominating Committee and thereafter with the Board of
Directors.
4. Any candidate nominated for election to the Board of Directors must (a)
be recommended to the Board of Directors by the unanimous vote of
approval of the members of the Nominating Committee and (b) receive a
majority of votes in favor of nomination from the independent members
of the Board of Directors.
5. Each existing member of the Board of Directors whose term is ending
must be evaluated for nomination for re-election by the Nominating
Committee. This review will include review of attendance,
participation, continuing education, investment in shares, business
development and community involvement. In lieu of the information
50
required to be provided by new candidates for election to the Board of
Directors described above in paragraph 2, the Nominating Committee may
rely upon the information contained in the most recent annual Directors
and Officers Questionnaire completed by the existing member of the
Board of Directors, subject to such additional updated information as
the Nominating Committee may deem appropriate. Such existing member of
the Board of Directors must receive a majority of votes in favor of
nomination from the independent members of the Board of Directors
(excluding such existing member).
MEETINGS
The Nominating Committee shall meet at least annually and such other
times as it may deem appropriate, to evaluate and recommend to the Board of
Directors nominees for election at the Annual Meeting of Shareholders prior to
distribution of the Corporation's proxy solicitation materials or to fill
vacancies in accordance with the Corporation's bylaws.
MINUTES
The Nominating Committee shall maintain written minutes of each meeting
of the committee and such minutes shall be distributed to each member of the
committee and shall be distributed to the other members of the Board of
Directors.
CONFLICTS
Any conflicts between the provisions of this Charter and the provisions
of the Corporation's bylaws shall be resolved in favor of the bylaw provisions
and nothing contained herein shall be construed as an amendment of the
Corporation's bylaws.
51
To All Participants in the
North Valley Bancorp Employee Stock Ownership Plan
regarding the
Annual Meeting of Shareholders of North Valley Bancorp
on December 20, 2007
The 2007 annual meeting of the shareholders of North Valley Bancorp
will be held at 4:00 p.m., local time, on Thursday, December 20, 2007, at the
Administrative Offices of North Valley Bancorp, 300 Park Marina Drive, Redding,
California 96001. At the meeting, the shareholders will be asked to vote on the
following matters:
o To elect the following nominees as directors for a term of one
year:
Michael J. Cushman William W. Cox
Dante W. Ghidinelli Dolores M. Vellutini
Roger B. Kohlmeier Kevin D. Hartwick
o To ratify the appointment of Perry-Smith LLP as Independent
Auditor for 2007.
o To consider such other business as may properly come before
the Annual Meeting and any adjournment or postponement
thereof.
Along with this letter, you are receiving the Notice of Annual Meeting
of Shareholders of North Valley Bancorp and the Proxy Statement dated November
26, 2007, being sent to all shareholders of record as of November 9, 2007 (the
"Record Date" for the Annual Meeting). All shares of North Valley common stock
held under the North Valley Bancorp Employee Stock Ownership Plan ("ESOP") will
be voted at the annual meeting by the ESOP trustee, in accordance with the
instructions of the ESOP participants as described in this letter.
Voting Instructions. Because shares of North Valley Bancorp common
stock are credited to your ESOP account, you have the right to instruct the
trustee, Delaware Charter Guarantee and Trust Company, conducting business as
Principal Trust Company (the "Trustee"), how to vote those shares at the annual
meeting of shareholders. The Trustee is the owner of record of the shares held
for your account in the ESOP. The Trustee is the person entitled to vote your
shares, but will vote them in accordance with your instructions.
Voting Instructions Card. You are also receiving with this letter a
voting instructions card, to be completed, signed and sent to the Trustee in
order to provide the Trustee with instructions regarding the voting of the
shares in your ESOP account. A postage paid return envelope, addressed to the
Trustee, is being provided for your convenience. The Trustee will tabulate the
votes indicated by your instructions and the instructions of the other ESOP
participants and will then vote your shares and the other ESOP shares as
described in this letter. YOUR VOTE IS IMPORTANT. YOU SHOULD CAREFULLY REVIEW
THE NOTICE OF ANNUAL MEETING AND THE PROXY STATEMENT BEING PROVIDED WITH THIS
LETTER BEFORE COMPLETING, SIGNING AND SENDING YOUR VOTING INSTRUCTIONS CARD TO
THE TRUSTEE.
Please note that this request for voting instructions is separate from
any proxy request that you may receive with respect to any other holdings of
North Valley Bancorp common stock that you may have outside the ESOP.
If the voting instructions card is properly completed, signed and
returned, the Trustee will vote the shares allocated to your ESOP account in
accordance with your directions. Please note the following:
o If your card is signed and returned without a voting instruction, the
Trustee will vote your ESOP shares in the same proportion as all the shares held
by the ESOP that are allocated to ESOP participant accounts for which voting
instructions have been received.
o If your card is not returned or is returned unsigned, the Trustee will
vote your ESOP shares in the same proportion as all the shares held by the ESOP
that are allocated to ESOP participant accounts for which voting instructions
have been received.
o The Trustee will vote all shares held by the ESOP which are not
allocated to a participant's account in the same proportion as allocated shares
for which instructions have been received.
o If you instruct the Trustee to abstain from voting, the Trustee will
abstain from voting your ESOP shares and your shares will not be voted.
o With respect to fractional shares, the Trustee may pool the results of
the voting instructions received from all ESOP participants to whom fractional
shares have been allocated and vote such shares accordingly.
o Participants may revoke their voting instructions by executing and
delivering to the Trustee a revised duly executed card no later than December
18, 2007.
Confidentiality. Your voting instructions card should be returned to
the Trustee, as follows: Principal Trust Company, P.O. Box 8963, Wilmington, DE
19899-9737. If you have questions, you may contact the Trustee at telephone
(800) 547-7754. Your voting instructions and other communications with the
Trustee will be kept confidential and not disclosed to North Valley Bancorp
except as may be required by law.
ERISA. The actions taken by the Trustee in regard to the voting of the
shares of North Valley Bancorp common stock in your ESOP account are governed by
the fiduciary duties and requirements of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). The Trustee will vote the shares in
accordance with your instructions and the procedures summarized in this letter
unless, based on the advice of its legal counsel, the Trustee concludes that to
do so would be improper or contrary to ERISA or applicable guidance of the
United States Department of Labor.
Deadline to Provide Instructions. The Trustee must have ample time to
tabulate instructions and to deliver the aggregate votes on behalf of the ESOP
participants on or before the date of the annual meeting of shareholders of
North Valley Bancorp. The annual meeting is scheduled to be held on December 20,
2007. Thus, YOUR VOTING INSTRUCTIONS CARD SHOULD BE RECEIVED BY THE TRUSTEE NO
LATER THAN DECEMBER 18, 2007.
PROXY
-----
NORTH VALLEY BANCORP
ESOP Voting Instructions
Solicited by the Trustee of the North Valley Bancorp Employee Stock Ownership
Plan for the Annual Meeting of Shareholders of North Valley Bancorp
to be held on December 20, 2007
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders of North Valley Bancorp and the accompanying Proxy Statement dated
November 26, 2007, and hereby instructs Delaware Charter Guarantee and Trust
Company, conducting business as Principal Trust Company ("Principal Trust
Company"), as Trustee of the North Valley Bancorp Employee Stock Ownership Plan
("ESOP"), to vote in person or by proxy all of the shares of Common Stock of
North Valley Bancorp credited to the ESOP account of the undersigned at the
Annual Meeting of Shareholders of North Valley Bancorp to be held on Thursday,
December 20, 2007, at the Administrative Offices of North Valley Bancorp, 300
Park Marina Circle, Redding, California 96001, at 4:00 p.m., or at any
postponement or adjournment thereof, upon the matters set forth in the Notice of
Annual Meeting of Shareholders of North Valley Bancorp and the accompanying
Proxy Statement dated November 26, 2007, as indicated on the other side of this
card.
If this card is properly completed, signed and returned to the Trustee
no later than December 18, 2007, the shares allocated to your ESOP account will
be voted by the Trustee in accordance with your instructions. Your instructions
may be amended or revoked at any time, provided that you deliver a later-dated,
superseding, properly completed and signed voting instruction card to the
Trustee not later than such date. Please note the following:
o If your card is signed and returned without a voting instruction, the
Trustee will vote your ESOP shares in the same proportion as all the shares held
by the ESOP that are allocated to ESOP participant accounts for which voting
instructions have been received.
o If your card is not returned or is returned unsigned, the Trustee will
vote your ESOP shares in the same proportion as all the shares held by the ESOP
that are allocated to ESOP participant accounts for which voting instructions
have been received.
o If you instruct the Trustee to abstain from voting, the Trustee will
abstain from voting your ESOP shares and your shares will not be voted.
(continued and to be signed on the other side)
1. To elect as Directors the nominees set forth below:
[ ] FOR [ ] WITHHOLD
AUTHORITY
01 Michael J. Cushman
02 Dante W. Ghidinelli
03 Kevin D. Hartwick
04 Roger B. Kohlmeier
05 William W. Cox
06 Dolores M. Vellutini
(Instruction: To withhold authority to vote for any nominee, strike a line
through the nominee's name on the list above.)
2. To ratify the appointment of Perry-Smith LLP as Independent Auditor for
2007.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion the proxy holders are authorized to vote upon such
other business as may properly come before the meeting.
PLEASE COMPLETE, SIGN AND RETURN THIS CARD TO PRINCIPAL TRUST COMPANY,
TRUSTEE, IN THE ENCLOSED POSTAGE-PAID ENVELOPE NO LATER THAN DECEMBER 18, 2007.
Dated:__________________________________
_________________________________________
Signature
_________________________________________
Name of ESOP Participant
Exhibit 1
Copy - as this report was filed on November 9, 2007
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 2007.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly 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 ID Number)
of incorporation or organization)
300 Park Marina Circle, Redding, CA 96001
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (530) 226-2900
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods 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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - 7,374,884 shares as of November 7, 2007.
INDEX
NORTH VALLEY BANCORP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--September 30, 2007 and December 31, 2006 3
Condensed Consolidated Statements of Income--For the three and nine months ended
September 30, 2007 and 2006 4
Condensed Consolidated Statements of Cash Flows--For the nine months ended
September 30, 2007 and 2006 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 28
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
- --------------------------------------------------------------------------------
September 30, December 31,
2007 2006
------------- ------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 28,333 $ 30,826
Federal funds sold - 10,670
------------- ------------
Total cash and cash equivalents 28,333 41,496
Investment securities available for sale, at fair value 108,616 133,571
Investment securities held to maturity, at amortized cost 52 82
Loans and leases 717,436 659,793
Less: Allowance for loan and lease losses (9,602) (8,831)
------------- ------------
Net loans and leases 707,834 650,962
Premises and equipment, net 12,933 13,797
Accrued interest receivable 3,820 3,838
Other real estate owned 902 902
FHLB and FRB stock and other securities 5,635 5,495
Bank-owned life insurance policies 30,256 29,483
Core deposit intangibles, net 1,399 1,886
Goodwill 15,187 15,187
Other assets 9,937 8,974
------------- ------------
TOTAL ASSETS $ 924,904 $ 905,673
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 170,457 $ 194,842
Interest-bearing 565,982 555,446
------------- ------------
Total deposits 736,439 750,288
Other borrowed funds 65,590 37,500
Accrued interest payable and other liabilities 10,625 10,433
Subordinated debentures 31,961 31,961
------------- ------------
Total liabilities 844,615 830,182
------------- ------------
Commitments and Contingencies (Note H)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: authorized 5,000,000 shares; none
outstanding - -
Common stock, no par value: authorized 20,000,000 shares; outstanding
7,374,464 and 7,300,914 at September 30, 2007 and December 31, 2006 40,212 39,202
Retained earnings 42,562 38,626
Accumulated other comprehensive loss, net of tax (2,485) (2,337)
------------- ------------
Total stockholders' equity 80,289 75,491
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 924,904 $ 905,673
============= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).
3
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands except per share data)
- --------------------------------------------------------------------------------
For the three months ended September 30,
2007 2006
---------- ----------
INTEREST INCOME:
Interest and fees on loans and leases $ 13,790 $ 12,899
Interest on investments:
Taxable interest income 1,045 1,330
Nontaxable interest income 236 257
Interest on Federal funds sold and repurchase agreements 12 20
---------- ----------
Total interest income 15,083 14,506
---------- ----------
INTEREST EXPENSE:
Deposits 3,760 2,782
Subordinated debentures 611 611
Other borrowings 467 603
---------- ----------
Total interest expense 4,838 3,996
---------- ----------
NET INTEREST INCOME 10,245 10,510
PROVISION FOR LOAN AND LEASE LOSSES 850 555
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 9,395 9,955
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 1,791 1,723
Other fees and charges 939 902
Earnings on cash surrender value of life insurance policies 333 309
Gain on sale of loans 34 171
Other 253 493
---------- ----------
Total noninterest income 3,350 3,598
---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 5,306 5,407
Occupancy expense 773 772
Furniture and equipment expense 499 533
Other 2,903 3,147
---------- ----------
Total noninterest expenses 9,481 9,859
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,264 3,694
PROVISION FOR INCOME TAXES 1,044 775
---------- ----------
NET INCOME $ 2,220 $ 2,919
========== ==========
Per Share Amounts
Basic Earnings Per Share $ 0.30 $ 0.40
========== ==========
Diluted Earnings Per Share $ 0.29 $ 0.39
========== ==========
Cash Dividends Per Common Share $ 0.10 $ 0.10
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).
4
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands except per share data)
- --------------------------------------------------------------------------------
For the nine months ended September 30,
2007 2006
---------- ----------
INTEREST INCOME:
Interest and fees on loans and leases $ 39,622 $ 36,862
Interest on investments:
Taxable interest income 3,437 4,285
Nontaxable interest income 729 800
Interest on Federal funds sold and repurchase agreements 391 196
---------- ----------
Total interest income 44,179 42,143
---------- ----------
INTEREST EXPENSE:
Deposits 10,624 6,913
Subordinated debentures 1,829 1,843
Other borrowings 1,052 1,789
---------- ----------
Total interest expense 13,505 10,545
---------- ----------
NET INTEREST INCOME 30,674 31,598
PROVISION FOR LOAN AND LEASE LOSSES 850 925
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 29,824 30,673
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 5,122 4,806
Other fees and charges 2,797 2,334
Earnings on cash surrender value of life insurance policies 942 889
Gain on sale of loans 131 336
Loss on sale or calls on securities (36) (3)
Other 698 1,049
---------- ----------
Total noninterest income 9,654 9,411
---------- ----------
NONINTEREST EXPENSES:
Salaries and employee benefits 16,340 16,458
Occupancy expense 2,296 2,255
Furniture and equipment expense 1,552 1,610
Other 10,255 9,432
---------- ----------
Total noninterest expenses 30,443 29,755
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 9,035 10,329
PROVISION FOR INCOME TAXES 2,891 2,987
---------- ----------
NET INCOME $ 6,144 $ 7,342
========== ==========
Per Share Amounts
Basic Earnings Per Share $ 0.84 $ 0.99
========== ==========
Diluted Earnings Per Share $ 0.80 $ 0.95
========== ==========
Cash Dividends Per Common Share $ 0.30 $ 0.30
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).
5
NORTH VALLEY BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
- --------------------------------------------------------------------------------
For the nine months ended September 30,
2007 2006
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,144 $ 7,342
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,668 1,753
Amortization of premium on securities 63 72
Amortization of core deposit intangible 487 488
Provision for loan and lease losses 850 925
Loss on sale or calls on securities 36 3
Gain on sale of loans (131) (336)
Gain on sale of premises and equipment (3) (217)
FHLB stock dividends (146) (169)
Stock-based compensation expense 270 227
Excess tax benefit from exercise of stock options (92) (175)
Effect of changes in:
Accrued interest receivable 18 (165)
Other assets (1,628) (391)
Accrued interest payable and other liabilities 284 (505)
---------- ----------
Net cash provided by operating activities 7,820 8,852
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities - 62
Proceeds from maturities/calls of available for sale securities 24,635 26,406
Net change in FHLB and FRB stock and other securities - 338
Net increase in loans and leases (57,590) (41,236)
Proceeds from sales of premises and equipment 3 329
Purchases of premises and equipment (804) (1,000)
---------- ----------
Net cash used in investing activities (33,756) (15,101)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (13,849) 14,205
Net increase (decrease) in other borrowed funds 28,090 (18,400)
Cash dividends paid (2,208) (2,204)
Repurchase of common stock - (5,270)
Exercise of stock options, including tax benefit 740 519
---------- ----------
Net cash provided by (used in) financing activities 12,773 (11,150)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (13,163) (17,399)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 41,496 56,094
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,333 $ 38,695
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest $ 14,180 $ 10,922
Income taxes $ 2,865 $ 4,075
The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).
6
NORTH VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
North Valley Bancorp and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X
of the Securities and Exchange Commission. Accordingly, certain information and
notes required by accounting principles generally accepted in the United States
of America for annual financial statements are not included herein. Management
believes that the disclosures are adequate to make the information not
misleading. In the opinion of management, all adjustments (consisting solely of
normal recurring adjustments) considered necessary for a fair presentation of
the results for the interim periods presented have been included. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2006. Operating results for the three and nine months ended
September 30, 2007 are not necessarily indicative of the results that may be
expected for any subsequent period or for the year ended December 31, 2007.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries North Valley Bank ("NVB"), North
Valley Trading Company, which is inactive and North Valley Bank Scholarship
Fund, Inc., which is also inactive. Significant intercompany items and
transactions have been eliminated in consolidation. North Valley Capital Trust
I, North Valley Capital Trust II, North Valley Capital Trust III and North
Valley Capital Statutory Trust IV are unconsolidated subsidiaries formed solely
for the purpose of issuing trust preferred securities.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Management has determined that since all of the banking products and
services offered by the Company are available in each branch of NVB, all
branches are located within the same economic environment and management does
not allocate resources based on the performance of different lending or
transaction activities, it is appropriate to aggregate NVB branches and report
them as a single operating segment. No single customer accounts for more than 10
percent of revenues for the Company or NVB.
NOTE B - ANNOUNCED PLAN OF MERGER
As reported on the Company's Current Report on Form 8-K, filed with the
Commission on April 11, 2007 (the "April Current Report"), the Company has
entered into an Agreement and Plan of Merger dated April 10, 2007 (the "Merger
Agreement") pursuant to which the Company would merge with and into Sterling
Financial Corporation, a Washington corporation ("Sterling"), with Sterling
being the surviving corporation. A copy of the Merger Agreement (together with
certain other information regarding the proposed merger) is provided in the
April Current Report. Consummation of the merger requires approval of the
Company's shareholders, and is subject to certain other conditions specified in
the Merger Agreement, including the receipt of all necessary regulatory
approvals and the satisfaction of other closing conditions that are customary
for such transactions.
A special meeting of the Company shareholders was held on July 31, 2007,
and the principal terms of the Merger Agreement, including the proposed merger
of the Company with and into Sterling, were approved by majority vote of the
outstanding shares of the common stock of the Company.
On October 26, 2007, Sterling filed a Current Report on Form 8-K
announcing that it appears unlikely that the pending merger will be completed
during the fourth quarter of 2007. Sterling has revised its expectation for
regulatory approval based upon recent conversations with the Federal Deposit
Insurance Corporation (the "FDIC"). Sterling has been asked by the FDIC to
strengthen its internal regulatory compliance program to ensure that Sterling's
infrastructure is keeping pace with its growth rate. The FDIC also informed
Sterling that, at this time, it cannot advise Sterling when or if the pending
application to merge Sterling Savings Bank with North Valley Bank will be
approved. See "Announced Plan of Merger" in Item 2, on pages 15-16.
7
NOTE C - INVESTMENT SECURITIES
At September 30, 2007 and December 31, 2006, the amortized cost of
securities and their approximate fair value were as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Available for sale securities:
September 30, 2007
Obligations of U.S. government agencies $ 3,999 $ - $ (15) 3,984
Obligations of state and political
subdivisions 20,683 466 (27) 21,122
Mortgage-backed securities 73,242 13 (2,173) 71,082
Corporate debt securities 6,001 - (439) 5,562
Equity securities 8,000 - (1,134) 6,866
--------- ---------- ---------- ----------
$ 111,925 $ 479 $ (3,788) $ 108,616
========= ========== ========== ==========
December 31, 2006
Obligations of U.S. government agencies $ 7,605 $ - $ (105) 7,500
Obligations of state and political
subdivisions 21,957 643 (40) 22,560
Mortgage-backed securities 86,028 20 (2,824) 83,224
Corporate debt securities 5,998 7 (17) 5,988
Equity securities 15,040 26 (767) 14,299
--------- ---------- ---------- ----------
$ 136,628 $ 696 $ (3,753) $ 133,571
========= ========== ========== ==========
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Held to maturity securities:
September 30, 2007
Mortgage-backed securities $ 52 $ (1) $ 51
========= ========== ========== ==========
December 31, 2006
Mortgage-backed securities $ 82 $ - $ (1) $ 81
========= ========== ========== ==========
For the nine months ended September 30, 2007 and 2006, there were $17,000
and $16,000, respectively, in gross realized gains on sales or calls of
available for sale securities. For the nine months ended September 30, 2007 and
2006, there were $53,000 and $19,000, respectively, in gross realized losses on
sales or calls of available for sale securities. There were no sales or
transfers of held to maturity securities for the three and nine months ended
September 30, 2007 and 2006.
At September 30, 2007 and December 31, 2006, securities having fair value
amounts of approximately $67,555,000 and $81,258,000 were pledged to secure
public deposits, short-term borrowings, treasury, tax and loan balances and for
other purposes required by law or contract.
Investment securities are evaluated for other-than-temporary impairment on
at least a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation to determine whether a decline in their
value below amortized cost is other-than-temporary. Management utilizes criteria
such as the magnitude and duration of the decline and the intent and ability of
the Company to retain its investment in the issues for a period of time
sufficient to allow for an anticipated recovery in fair value, in addition to
the reasons underlying the decline, to determine whether the loss in value is
other-than-temporary. The term "other-than-temporary" is not intended to
indicate that the decline is permanent, but indicates that the prospects for a
near-term recovery of value is not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
carrying value of the investment. Once a decline in value is determined to be
other-than-temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized.
At September 30, 2007, the Company held $89,478,000 of available for sale
investment securities in an unrealized loss position of which $5,965,000 were in
an unrealized loss position for less than twelve months and $83,513,000 were in
an unrealized loss position and had been in an unrealized loss position for
twelve months or
8
more. Management periodically evaluates each investment security for
other-than-temporary impairment, relying primarily on industry analyst reports,
observation of market conditions and interest rate fluctuations. Management has
the ability and intent to hold securities with established maturity dates until
recovery of fair value, which may be at maturity, and believes it will be able
to collect all amounts due according to the contractual terms for all of the
underlying investment securities; therefore, management does not consider these
investments to be other-than-temporarily impaired.
Included in the above securities at September 30, 2007 are 100,000 shares
of FNMA, Series M perpetual preferred stock. The coupon rate is fixed at 4.75%
with a taxable-equivalent yield of 6.31%. The securities are owned at par, or
$50.00 per share, for a total investment of $5,000,000 and an unrealized loss of
$1,035,000 at September 30, 2007 as compared to $724,000 at December 31, 2006.
The securities are callable at par on June 10, 2008. The market value per share
as of September 30, 2007 was $39.65 compared to $42.76 per share at December 31,
2006. At September 30, 2007, these securities had been in a loss position for
approximately 51 months.
Management carefully evaluated the FNMA preferred stock to determine
whether the decline in fair value below book value of these securities is
other-than-temporary. Among other items, management reviewed relevant accounting
literature which included Statement of Financial Accounting Standards ("SFAS")
No. 115, Statement of Auditing Standard ("SAS") 92, and Staff Accounting
Bulletin ("SAB") No. 59. In conducting this assessment, management evaluated a
number of factors including, but not limited to:
o How far fair value has declined below book value
o How long the decline in fair value has existed
o The financial condition of the issuer
o Rating agency changes on the issuer
o Management's intent and ability to hold the security for a period of
time sufficient to allow for any anticipated recovery in fair value
Based on this evaluation, management concluded that these securities were
not deemed to be other-than-temporarily impaired. Management's assessment
weighed heavily on its intent and ability to hold the securities to recovery,
normal market fluctuations during this holding period, FNMA's response to its
weaker financial condition, and analysis of FNMA by rating agencies and
investment bankers.
NOTE D - STOCK-BASED COMPENSATION
Stock Option Plans
At September 30, 2007, the Company had three shareholder approved
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. The Plans do not provide for the settlement of awards in cash and
new shares are issued upon exercise of the options. The shares available for
grant may be granted to anyone eligible to participate in the plans. All options
granted under the Employee plan had an exercise price equal to the market value
of the underlying common stock on the date granted and the exercise price must
be paid in full at the time the option is exercised. The options under the plans
expire on dates determined by the Board of Directors, but not later than ten
years from the date of grant. The vesting period is generally four years;
however the vesting period can be modified at the discretion of the Company's
Board of Directors. Outstanding options under the plans are exercisable until
their expiration. Total options of 2,554,281 were authorized under all plans at
September 30, 2007. Under the terms of the Merger Agreement described in Note B
above, all outstanding options will become fully vested and exercisable upon
consummation of the proposed merger.
Stock Option Compensation
There were no options grants in the three month period ended September 30,
2007. For the three month period ended September 30, 2006, 13,000 options were
granted at a weighted average grant date fair value of $2.96. For the three
month periods ended September 30, 2007 and 2006, the compensation expense
recognized for stock option compensation was $43,000 and $41,000, respectively.
Director stock grant expense for the three month periods ended September 30,
2007 and 2006 was $(23,000) and $28,000, respectively. The recognized tax
benefit for stock option compensation expense was $6,000 for the three month
period ended September 30, 2007. No tax benefit was recognized for stock option
compensation expense for the three month period ended September 30, 2006. At
September 30, 2007, the total unrecognized compensation expense related to
stock-based awards
9
granted to employees under the Company's stock option plans was $424,000. This
expense will be amortized on a straight-line basis over a weighted average
period of approximately 1.5 years and will be adjusted for subsequent changes in
estimated forfeitures.
Stock Option Activity
Under the Company's stock option plans as of September 30, 2007, 1,158,149
shares of the Company's common stock are available for future grants to
directors and employees of the Company. Under the Director Plan, options may not
be granted at a price less than 85% of fair market value at the date of the
grant. Under the Employee Plan, options may not be granted at a price less than
the fair market value at the date of the grant. Under 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 outstanding stock options follows:
Weighted
Weighted Average
Average Remaining Exercise Aggregate
Exercise Contractual Price Intrinsic
Shares Price Term Range Value ($000)
-------------------------------------------------------------------
Outstanding at January 1, 2007 778,712 $ 9.77 3.8 years $5.36 - 19.86
Granted 63,613 20.41 N/A $20.03 - 24.75
Exercised (70,550) 8.83 N/A $5.36 - 20.62
Expired or Forfeited (9,231) 19.50 N/A $17.09 - 20.62
-------------------------------------------------------------------
Outstanding at September 30, 2007 762,544 $ 10.63 3.8 years $5.36 - 24.75 $ 9,283
-------------------------------------------------------------------
Fully vested and exercisable at September 30, 2007 658,181 $ 9.33 3.0 years $5.36 - 24.75 $ 8,866
===================================================================
Options expected to vest 104,363 $ 18.85 8.6 years $15.72 - 24.75 $ 417
===================================================================
The aggregate intrinsic value of outstanding, fully vested and exercisable
and expected to vest options are calculated as the difference between the
exercise price of the underlying awards and the quoted price of the Company's
common stock as of September 30, 2007. The intrinsic value of exercised options
is calculated as the difference between exercise price of the underlying awards
and the quoted price of the Company's common stock at the date of exercise. The
intrinsic value of options exercised during the three months ended September 30,
2007 and 2006 totaled $93,000 and $177,000, respectively.
NOTE E - COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income or
loss. The Company's only sources of other comprehensive income (loss) are
unrealized gains and losses on available for sale investment securities and
adjustments to the minimum pension liability. Reclassification adjustments
resulting from gains or losses on investment securities that were realized and
included in net income of the current period that also had been included in
other comprehensive income (loss) as unrealized holding gains or losses in the
period in which they arose are excluded from comprehensive income in the current
period. The Company's total comprehensive income was as follows:
(in thousands) Three months ended September 30, Nine months ended September 30,
2007 2006 2007 2006
------------- ------------ ------------- ------------
Net income $ 2,220 $ 2,919 $ 6,144 $ 7,342
Other comprehensive income (loss), net of tax:
Holding gain (loss) arising during period 292 1,885 (127) 451
Reclassification adjustment - 9 (21) (2)
------------- ------------ ------------- ------------
Total comprehensive income $ 2,512 $ 4,813 $ 5,996 $ 7,791
============= ============ ============= ============
10
NOTE F - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
There was no difference in the numerator, net income, 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 the three and nine month periods ended September 30, 2007
and 2006 is reconciled as follows (in thousands, except per share amounts):
Three months ended September 30, Nine months ended September 30,
2007 2006 2007 2006
--------- --------- ----------- -----------
Calculation of basic earnings per share:
Numerator - net income $ 2,220 $ 2,919 $ 6,144 $ 7,342
Denominator - weighted average common shares outstanding 7,366 7,277 7,355 7,411
--------- --------- ----------- ----------
Basic earnings per share $ 0.30 $ 0.40 $ 0.84 $ 0.99
========= ========= =========== ==========
Calculation of diluted earnings per share:
Numerator - net income $ 2,220 $ 2,919 $ 6,144 $ 7,342
Denominator:
Weighted average common shares outstanding 7,366 7,277 7,355 7,411
Dilutive effect of outstanding options 271 253 293 280
--------- --------- ----------- ----------
Weighted average common shares outstanding and
common stock equivalents 7,637 7,530 7,648 7,691
--------- --------- ----------- ----------
Diluted earnings per share $ 0.29 $ 0.39 $ 0.80 $ 0.95
========= ========= =========== ==========
NOTE G - PENSION PLAN BENEFITS
The Company has a supplemental retirement plan for key executives and a
supplemental retirement plan for certain retired key executives and directors.
These plans are nonqualified defined benefit plans and are unsecured. Total
contributions paid for the three months ended September 30, 2007 and 2006 are
$62,000 and $141,000, respectively. Components of net periodic benefit cost for
the Company's supplemental nonqualified defined benefit plans for the three and
nine months ended September 30, 2007 and 2006 are presented in the following
table (in thousands):
Three months ended September 30, Nine months ended September 30,
2007 2006 2007 2006
--------- --------- ----------- -----------
Components of net periodic benefits cost:
Service cost $ 118 $ 123 $ 351 $ 367
Interest cost 63 67 189 201
Amortization of net obligation at transition - - - -
Prior service amortization 7 8 23 24
Recognized net actuarial loss 8 14 24 44
--------- --------- ----------- ----------
Total components of net periodic cost $ 196 $ 212 $ 587 $ 636
========= ========= =========== ==========
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is involved in legal actions arising from normal business
activities. Management, based upon the advice of legal counsel, believes that
the ultimate resolution of all pending legal actions will not have a material
effect on the Company's financial position or results of its operations or its
cash flows.
The Company was contingently liable under standby letters of credit issued
on behalf of its customers in the amount of $9,992,000 and $13,067,000 at
September 30, 2007 and December 31, 2006. At September 30, 2007, commercial and
consumer lines of credit and real estate loans of approximately $76,953,000 and
$144,177,000 were undisbursed. At December 31, 2006, commercial and consumer
lines of credit and real estate loans of approximately $88,061,000 and
$145,034,000 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
11
represent future cash requirements. The Company evaluates each potential
borrower and the necessary collateral on an individual basis. Collateral varies,
but may include real property, bank deposits, debt securities, equity securities
or business or personal assets.
Standby letters of credit are conditional commitments written by the
Company to guarantee the performance of a customer to a third party. These
guarantees are issued primarily relating to inventory purchases by the Company's
commercial customers and such guarantees are typically short term. Credit risk
is similar to that involved in extending loan commitments to customers and the
Company, accordingly, uses evaluation and collateral requirements similar to
those for loan commitments. Virtually all of such commitments are
collateralized. The fair value of the liability related to these standby letters
of credit, which represents the fees received for issuing the guarantees, was
not significant at September 30, 2007 and December 31, 2006. The Company
recognizes these fees as revenues over the term of the commitment or when the
commitment is used.
Loan commitments and standby letters of credit involve, to varying
degrees, elements of credit and market risk in excess of the amounts recognized
in the balance sheet and do not necessarily represent the actual amount subject
to credit loss. However, at September 30, 2007, 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 77% at September 30, 2007 and 78% at
December 31, 2006 of the Company's loan portfolio. 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.
NOTE I - INCOME TAXES
In June 2006, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and
measurement standard for the financial statement recognition and measurement of
an income tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. The Company has
adopted FIN 48 as of January 1, 2007.
The Company previously recognized income tax positions based on
management's estimate of whether it is reasonably possible that a liability has
been incurred for unrecognized income tax benefits by applying FASB Statement
No. 5, Accounting for Contingencies.
The provisions of FIN 48 have been applied to all tax positions of the
Company as of January 1, 2007. There was no cumulative effect of applying the
provisions of FIN 48 and there was no significant effect on the Company's
provision for income taxes for the three and nine months ended September 30,
2007. The Company recognizes interest accrued related to unrecognized tax
benefits and accruals for penalties in income tax expense.
NOTE J - NEW ACCOUNTING PRONOUNCEMENTS
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
Amendment of FASB Statement No. 115. This standard permits an entity to choose
to measure many financial instruments and certain other items at fair value at
specified election dates. The entity will report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date. The fair value option: (a) may be applied instrument
by instrument, with a few exceptions, such as investments otherwise accounted
for by the equity method; (b) is irrevocable (unless a new election date
occurs); and (c) is applied only to entire instruments and not to portions of
instruments. The provisions of SFAS 159 are effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. Management did
not elect to early adopt SFAS 159 and has not yet completed its evaluation of
the impact that SFAS 159 will have.
12
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Collateral Assignment Split-Dollar Life Insurance Arrangements
In March 2007, the Emerging Issues Task Force (EITF) reached a final
consensus on Issue No. 06-10 (EITF 06-10), Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements. EITF 06-10 requires employers to
recognize a liability for the post-retirement benefit related to collateral
assignment split-dollar life insurance arrangements in accordance with SFAS No.
106 or APB Opinion No. 12. EITF 06-10 also requires employers to recognize and
measure an asset based on the nature and substance of the collateral assignment
split-dollar life insurance arrangement. The provisions of EITF 06-10 are
effective for the Company on January 1, 2008, with earlier application
permitted, and are to be applied as a change in accounting principle either
through a cumulative-effect adjustment to retained earnings or other components
of equity or net assets in the statement of financial position as of the
beginning of the year of adoption; or as a change in accounting principle
through retrospective application to all prior periods. The Company does not
expect adoption of EITF 06-10 to have a significant impact on its consolidated
financial statements, results of operations or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements in this Form 10-Q (excluding statements of fact or
historical financial information) involve forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in banking industry increases significantly; changes in the
interest rate environment reduce margins; general economic conditions, either
nationally or regionally, are less favorable than expected, resulting in, among
other things, a deterioration in credit quality and an increase in the provision
for possible loan losses; changes in the regulatory environment; changes in
business conditions, particularly in the Northern California region; volatility
of rate sensitive deposits; operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; the
California power crises; the U.S. "war on terrorism" and military action by the
U.S. in the Middle East, and changes in the securities markets.
Critical Accounting Policies
General
North Valley Bancorp's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within our financial statements is,
to a significant extent, financial information that is based on measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or relieving a
liability. We use historical loss factors as one factor in determining the
inherent loss that may be present in our loan and lease portfolio. Actual losses
could differ significantly from the historical factors that we use. Another
estimate that we use is related to the expected useful lives of our depreciable
assets. In addition, GAAP itself may change from one previously acceptable
method to another method. Although the economics of our transactions would be
the same, the timing of events that would impact our transactions could change.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is based on the probable estimated
losses in our loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting 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.
13
The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risks inherent
in the loan and lease portfolio. In determining levels of risk, management
considers a variety of factors, including, but not limited to, asset
classifications, economic trends, industry experience and trends, geographic
concentrations, estimated collateral values, historical loan and lease loss
experience, and the Company's underwriting policies. The allowance for loan and
lease losses is maintained at an amount management considers adequate to cover
losses in loans and leases receivable which are considered probable and
estimable. While management uses the best information available to make these
estimates, future adjustments to allowances may be necessary due to economic,
operating, regulatory, and other conditions that may be beyond the Company's
control. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize additions to
the allowance based on judgments different from those of management.
Share Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R). Under SFAS
No.123R, compensation expense is recognized for options granted prior to the
adoption date in an amount equal to the fair value of the unvested amounts over
their remaining vesting period, based on the grant date fair value estimated in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation" and
compensation expense for all share based payments granted after adoption based
on the grant date fair values estimated in accordance with SFAS No. 123R. The
estimates of the grant date fair values are based on an option pricing model
that uses assumptions based on the expected option life, the level of estimated
forfeitures, expected stock volatility and the risk-free interest rate. The
calculation of the fair value of share based payments is by nature inexact, and
represents management's best estimate of the grant date fair value of the share
based payments.
Goodwill
Business combinations involving the Company's acquisition of the equity
interests or net assets of another enterprise may give rise to goodwill.
Goodwill represents the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed in transactions
accounted for under the purchase method of accounting. Goodwill of $15,187,000
was recorded in the Company's acquisition of Yolo Community Bank. The value of
goodwill is ultimately derived from the Company's ability to generate net
earnings. A decline in net earnings could be indicative of a decline in the fair
value of goodwill and result in impairment. For that reason, goodwill will be
assessed for impairment at a reporting unit level at least annually. Management
will conduct its annual assessment of impairment during the fourth quarter of
2007.
Impairment of Investment Securities
Investment securities are evaluated for other-than-temporary impairment on
at least a quarterly basis and more frequently when economic or market
conditions warrant such an evaluation to determine whether a decline in their
value below amortized cost is other-than-temporary. Management utilizes criteria
such as the magnitude and duration of the decline, the financial condition of
the issuer, rating agency changes related to the issuer's securities and the
intent and ability of the Bank to retain its investment in the issues for a
period of time sufficient to allow for an anticipated recovery in fair value, in
addition to the reasons underlying the decline, to determine whether the loss in
value is other-than-temporary. The term "other-than-temporary" is not intended
to indicate that the decline is permanent, but indicates that the prospects for
a near-term recovery of value is not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
carrying value of the investment. Once a decline in value is determined to be
other-than-temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized. See Note C to Unaudited Condensed Consolidated
Financial Statements in Item 1 - Financial Statements.
14
Announced Plan of Merger
As reported on the Company's Current Report on Form 8-K, filed with the
Commission on April 11, 2007 (the "April Current Report"), the Company has
entered into an Agreement and Plan of Merger dated April 10, 2007 (the "Merger
Agreement") pursuant to which the Company would merge with and into Sterling
Financial Corporation, a Washington corporation ("Sterling"), with Sterling
being the surviving corporation. A copy of the Merger Agreement (together with
certain other information regarding the proposed merger) is provided in the
April Current Report. Consummation of the merger requires approval of the
Company's shareholders, and is subject to certain other conditions specified in
the Merger Agreement, including the receipt of all necessary regulatory
approvals and the satisfaction of other closing conditions that are customary
for such transactions.
A special meeting of the Company shareholders was held on July 31, 2007,
and the principal terms of the Merger Agreement, including the proposed merger
of the Company with and into Sterling, were approved by majority vote of the
outstanding shares of the common stock of the Company.
Even though the Company shareholders have approved the principal terms of
the Merger Agreement, the Company and Sterling can agree at any time, by mutual
consent, not to complete the proposed merger. Also, either the Company or
Sterling can decide, without the consent of the other, not to complete the
merger in a number of situations as described in the Merger Agreement. For
example, the Board of Directors of the Company can decide, at its discretion, to
terminate the Merger Agreement (without Sterling's consent) if the average
closing price of Sterling's common stock during the 20-day period just prior to
the closing date of the proposed merger is less than $28.23 per share and the
Sterling common stock price has also declined from a price of $33.21 per share
by 15 percent or more relative to a weighted average index of a certain group of
financial institution holding companies (the "Index Group"). A copy of Exhibit F
to the Merger Agreement, listing the financial institution holding companies
currently comprising the Index Group, was filed with the Company's Form 10-Q
Quarterly Report for the period ended June 30, 2007 as Exhibit 99.140 and is
incorporated here by this reference. In the example given above, Sterling would
have the option to avoid termination of the Merger Agreement by increasing the
consideration to be paid to the Company shareholders, as provided in Section
8.1(j). The Merger Agreement provides that each share of Company common stock
will be converted into 0.7364 shares of Sterling common stock and $2.80 in cash
(subject to certain conditions). An adjustment in such consideration could be
effected by an increase in the cash portion, the stock portion, or a combination
of cash and stock, at Sterling's discretion.
In short, a "Sterling Determination Price" of less than $28.23 on the
"Determination Date," combined with a "Sterling Change Ratio" which is less than
the "Index Change Ratio, as such terms are defined in Section 8.1(j) of the
Merger Agreement, would trigger the possibility of a decision by the Company
Board of Directors to give Sterling a notice of termination (as summarized in
the example given above). On the last trading date immediately preceding the
filing of this report, the closing price per share of Sterling common stock on
the Nasdaq Global Select Market was below $28.23. However, it should be noted
that the "Determination Date" will be the date that is ten (10) business days
before the "Closing Date" and the "Closing Date" is defined in Section 9.1 of
the Merger Agreement as the last day of the month following the receipt of all
regulatory approvals. Applications for the required regulatory approvals have
been submitted by Sterling and remain pending as of the date of this report. On
October 26, 2007, Sterling announced that it appears unlikely that the pending
merger between Sterling and the Company will be completed during the fourth
quarter of 2007. Sterling has revised its expectation for regulatory approval of
the merger based upon recent conversations between Sterling and the Federal
Deposit Insurance Corporation (the "FDIC"). Sterling has been asked by the FDIC
to strengthen its internal regulatory compliance program to ensure that
Sterling's infrastructure is keeping pace with its growth rate. The FDIC has
also informed Sterling that, at this time, it cannot advise Sterling when or if
the pending application to merge Sterling Savings Bank with North Valley Bank
will be approved. Sterling and the Company are currently in discussions
regarding an amendment to the Merger Agreement to extend the date after which
either party may terminate the Merger Agreement if the merger has not been
consummated, which is currently November 30, 2007; however, no agreement to
amend the Merger Agreement has yet been reached.
Any change in the market price of Sterling common stock prior to the
completion of the proposed merger will affect the value of the merger
consideration that Company shareholders will receive upon completion of the
merger. Stock price changes may result from a variety of factors, including
general market and economic conditions, changes in the businesses, operations
and prospects of Sterling or the Company, and regulatory considerations, and
many of these factors are beyond the control of Sterling or the Company.
Therefore, Company shareholders and investors in the common stock of the Company
are urged to review and carefully consider the provisions regarding merger
consideration set forth in the Merger Agreement, including Section 8.1(j) of the
15
Merger Agreement, and the potential consequences of the changes that may occur
in the stock trading prices for shares of Sterling common stock and the
financial institutions listed in the Index Group, after the date of this report
and prior to the "Closing Date."
Overview
North Valley Bancorp (the "Company") is a bank holding company
headquartered in Redding, California. The Company's wholly owned subsidiary,
North Valley Bank ("NVB"), a state-chartered bank, operates out of its main
office located at 300 Park Marina Circle, Redding, CA 96001, with twenty-six
commercial banking offices, including two supermarket branches, in Northern
California. The Company's principal business consists of attracting deposits
from the general public and using the funds to originate commercial, real estate
and installment loans to customers, who are predominately small and middle
market businesses and middle income individuals. The Company's primary source of
revenues is interest income from its loan and investment securities portfolios.
The Company is not dependent on any single customer for more than ten percent of
its revenues.
Earnings Summary
Earnings Summary
Three months ended September 30, Nine months ended September 30,
(in thousands except per share amounts) 2007 2006 2007 2006
-------------- --------------- ------------- ---------------
Net interest income $ 10,245 $ 10,510 $ 30,674 $ 31,598
Provision for loan and lease losses 850 555 850 925
Noninterest income 3,350 3,598 9,654 9,411
Noninterest expense 9,481 9,859 30,443 29,755
Provision for income taxes 1,044 775 2,891 2,987
-------------- --------------- ------------- ---------------
Net income $ 2,220 $ 2,919 $ 6,144 $ 7,342
============== =============== ============= ===============
Earnings Per Share
Basic $ 0.30 $ 0.40 $ 0.84 $ 0.99
Diluted $ 0.29 $ 0.39 $ 0.80 $ 0.95
Annualized Return on Average Assets 0.97% 1.28% 0.92% 1.09%
Annualized Return on Average Equity 11.15% 16.49% 10.55% 13.75%
Net income for the three and nine months ended September 30, 2007
decreased by $699,000, or 23.9%, and $1,198,000, or 16.3%, respectively,
compared to the same periods in 2006. Diluted earnings per share decreased
$0.10, or 25.6%, for the three months ended September 30, 2007 compared to the
same period in 2006. Diluted earnings per share decreased $0.15, or 15.8%, for
the nine months ended September 30, 2007 compared to the same period in 2006.
For the three and nine month periods ended September 30, 2007, the Company had
$26,000 and $1,086,000, respectively, of merger related expenses resulting from
the pending merger with and into Sterling Financial Corporation, announced on
April 11, 2007. Results for the three and nine month periods ended September 30,
2007, on a non-GAAP basis, excluding these non-core merger related expenses were
net income of $2,237,000, or $0.29 per diluted share and $6,882,000, or $0.90
per diluted share, respectively.
Net Interest Income
Net interest income is the principal source of the Company's operating
earnings and represents the difference between interest earned on loans and
leases and other investments and interest paid on deposits and other borrowings.
The amount of interest income and expense is affected by changes in the volume
and mix of earning assets and interest-bearing deposits and borrowings, along
with changes in interest rates.
16
The following table is a summary of the Company's net interest income,
presented on a fully taxable equivalent (FTE) basis for tax-exempt investments
included in earning assets, for the periods indicated:
Schedule of Average Daily Balance and Average Yields and Rates
(Dollars in thousands)
Three months ended September 30, 2007 Three months ended September 30, 2006
------------------------------------- --------------------------------------
Average Yield/ Interest Average Yield/ Interest
Balance Rate Amount Balance Rate Amount
------------- ------- ----------- ------------- ------ -------------
Assets
Earning assets:
Federal funds sold $ 977 4.87% $ 12 $ 1,517 5.23% $ 20
Investment securities:
Taxable 90,946 4.30% 986 111,624 4.04% 1,136
Non-taxable (1) 20,748 6.73% 352 22,504 6.77% 384
FNMA preferred stock (1) 5,000 6.19% 78 12,041 6.52% 198
------------- ------- ----------- ------------- ------ -------------
Total investments 116,694 4.81% 1,416 146,169 4.66% 1,718
Loans and leases (2)(3) 696,861 7.85% 13,790 651,367 7.86% 12,899
------------- ------- ----------- ------------- ------ -------------
Total earning assets 814,532 7.41% 15,218 799,053 7.27% 14,637
Non earning assets 99,286 111,818
Allowance for loan and lease losses (8,786) (8,498)
------------- -------------
Total non-earning assets 90,500 103,320
Total assets $ 905,032 $ 902,373
============= =============
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Transaction accounts $ 156,414 0.51% $ 200 $ 185,339 0.31% $ 144
Savings and money market 189,995 1.92% 918 180,273 1.84% 835
Time certificates 224,154 4.68% 2,642 183,363 3.90% 1,803
Other borrowed funds 71,269 6.00% 1,078 86,195 5.59% 1,214
------------- ------- ----------- ------------- ------ -------------
Total interest bearing liabilities 641,832 2.99% 4,838 635,170 2.50% 3,996
------- ----------- ------ -------------
Demand deposits 174,123 187,497
Other liabilities 10,098 9,496
------------- -------------
Total liabilities 826,053 832,163
------------- -------------
Shareholders' equity 78,979 70,210
------------- -------------
Total liabilities and
shareholders' equity $ 905,032 $ 902,373
============= =============
Net interest income $ 10,380 $ 10,641
=========== =============
Net interest spread 4.42% 4.77%
======= ======
Net interest margin 5.06% 5.28%
======= ======
- --------------------------------------------------------------------------------
(1) Tax-equivalent basis; non-taxable securities are exempt from federal
taxation.
(2) Loans on nonaccrual status have been included in the computations of
averages balances.
(3) Includes loan fees of $351 and $228 for the three months ended September 30,
2007 and 2006, respectively.
17
Schedule of Average Daily Balance and Average Yields and Rates
(Dollars in thousands)
Nine months ended September 30, 2007 Nine months ended September 30, 2006
------------------------------------- --------------------------------------
Average Yield/ Interest Average Yield/ Interest
Balance Rate Amount Balance Rate Amount
------------- ------- ----------- ------------- ------ -------------
Assets
Earning assets:
Federal funds sold $ 9,933 5.26% $ 391 $ 5,398 4.85% $ 196
Investment securities:
Taxable 96,972 4.38% 3,177 120,769 4.09% 3,697
Non-taxable (1) 21,007 6.82% 1,072 23,121 6.90% 1,194
FNMA preferred stock (1) 7,175 6.45% 346 12,061 6.57% 593
------------- ------- ----------- ------------- ------ -------------
Total investments 125,154 4.91% 4,595 155,951 4.70% 5,484
Loans and leases (2)(3) 670,469 7.90% 39,622 634,837 7.76% 36,862
------------- ------- ----------- ------------- ------ -------------
Total earning assets 805,556 7.40% 44,608 796,186 7.14% 42,542
Non earning assets 99,603 111,019
Allowance for loan and lease losses (8,809) (8,155)
------------- -------------
Total non-earning assets 90,794 102,864
Total assets $ 896,350 $ 899,050
============= =============
Liabilities and Shareholders' Equity
Interest bearing liabilities:
Transaction accounts $ 158,883 0.48% $ 574 $ 191,011 0.30% $ 435
Savings and money market 195,453 1.88% 2,746 179,297 1.38% 1,848
Time certificates 214,403 4.55% 7,304 175,399 3.53% 4,631
Other borrowed funds 63,551 6.06% 2,881 88,839 5.46% 3,631
------------- ------- ----------- ------------- ------ -------------
Total interest bearing liabilities 632,290 2.86% 13,505 634,546 2.22% 10,545
------- ----------- ------ -------------
Demand deposits 175,200 182,976
Other liabilities 10,970 10,131
------------- -------------
Total liabilities 818,460 827,653
------------- -------------
Shareholders' equity 77,890 71,397
------------- -------------
Total liabilities and
shareholders' equity $ 896,350 $ 899,050
============= =============
Net interest income $ 31,103 $ 31,997
=========== =============
Net interest spread 4.54% 4.92%
======= ======
Net interest margin 5.16% 5.37%
======= ======
- --------------------------------------------------------------------------------
(1) Tax-equivalent basis; non-taxable securities are exempt from federal
taxation.
(2) Loans on nonaccrual status have been included in the computations of
averages balances.
(3) Includes loan fees of $1,076 and $909 for the nine months ended September
30, 2007 and 2006, respectively.
Net interest income has been adjusted to a fully taxable equivalent basis
(FTE) for tax-exempt investments included in earning assets. The decrease in net
interest income (FTE) for the three and nine month periods ended September 30,
2007 resulted primarily from the change in the mix of interest bearing
liabilities with the most significant increase in time deposits and the increase
in average rate paid on all types of interest bearing liabilities somewhat
offset by a shift in earning asset composition to higher yielding loans.
Management is proactive in attempting to manage the Company's net interest
margin, that is, trying to maximize current net interest income without placing
an undue risk on future earnings. Currently the Company is retaining fixed-rate
15-and 30-year conforming residential mortgages to better diversify the
portfolio. The Company expects to continue to sell the fixed rate jumbo mortgage
loans it originates.
While the yield on average earning assets, for the three and nine months
ended September 30, 2007, increased by 14 and 26 basis points, respectively,
from the same period last year, the rates paid on average interest bearing
liabilities increased by 49 and 64 basis points, respectively. As a result, the
Company's net interest margin (FTE) contracted 22 basis points to 5.06% for the
three months ended September 30, 2007 from the 5.28% for the same period in
2006, and decreased 5 basis points from 5.11% for the linked quarter. The net
interest margin for the nine months ended September 30, 2007 contracted 21 basis
points to 5.16% from 5.37% for the same period in 2006.
18
Provision for Loan and Lease Losses
The Company recorded $850,000 in provision for loan and lease losses for
the three months ended September 30, 2007 to total $850,000 for the nine months
ended September 30, 2007. The Company recorded $555,000 for the three months
ended September 30, 2006 to total $925,000 for the nine months ended September
30, 2006. The process for determining allowance adequacy includes a
comprehensive analysis of the loan portfolio. Factors in the analysis include
size and mix of the loan portfolio, nonperforming loan levels,
charge-off/recovery activity and other qualitative factors including economic
activity. The decision to record additional provision reflects the growth in the
loan portfolio and management's assessment of the overall adequacy of the
allowance for loan and lease losses. Management believes that the current level
of allowance for loan and lease losses as of September 30, 2007 of $9,602,000,
or 1.34% of total loans and leases, is adequate at this time. The allowance for
loan and lease losses was $8,831,000, or 1.34% of total loans and leases, at
December 31, 2006. For further information regarding our allowance for loan and
lease losses, see "Allowance for Loan and Lease Losses" on page 22.
Noninterest Income
The following table is a summary of the Company's noninterest income for
the periods indicated:
Three months ended September 30, Nine months ended September 30,
(In thousands) 2007 2006 2007 2006
---------- -------- --------- --------
Service charges on deposit accounts $ 1,791 $ 1,723 $ 5,122 $ 4,806
Other fees and charges 939 902 2,797 2,334
Earnings on cash surrender value of life insurance
policies 333 309 942 889
Gain on sale of loans 34 171 131 336
Other 253 493 662 1,046
---------- -------- --------- --------
Total noninterest income $ 3,350 $ 3,598 $ 9,654 $ 9,411
========== ======== ========= ========
Noninterest income decreased from $3,598,000 for the three months ended
September 30, 2006 to $3,350,000 for the same period in 2007. Service charges on
deposits increased $68,000 from the three months ended September 30, 2006
compared to the same period in 2007, driven by growth in the number of demand
accounts. Other fees and charges increased $37,000 from $902,000 for the three
months ended September 30, 2006 to $939,000 for the same period in 2007. The
increase in fees is attributable to the increase in debit card activity,
specifically, point-of-sale and foreign ATM use. These increases in service
charges and fees were more than offset by a decrease in the gain on sales of
mortgages of $137,000 to $34,000 for the three months ended September 30, 2007
compared to $171,000 for the same period in 2006 and a decrease in other income
of $240,000 due primarily to a gain from a one-time sale of Company property in
the third quarter of 2006 of $198,000.
Noninterest income increased $243,000 to $9,654,000 for the nine months
ended September 30, 2007 from $9,411,000 for the same period in 2006. The
increase was primarily driven by the increase in service charges on deposit
accounts of $316,000 and the increase in other fees and charges of $463,000 as
discussed above, partially offset by the decrease in gain on sale of loans of
$205,000 and other noninterest income of $384,000.
19
Noninterest Expense
The following table is a summary of the Company's noninterest expense for
the periods indicated:
Three months ended September 30, Nine months ended September 30,
(In thousands) 2007 2006 2007 2006
------------ ------------ ----------- ------------
Salaries & employee benefits $ 5,306 $ 5,407 $ 16,340 $ 16,458
Occupancy expense 773 772 2,296 2,255
Data processing expenses 552 658 1,674 1,752
Equipment expense 499 533 1,552 1,610
Professional services 161 383 971 1,099
Marketing 266 270 794 826
ATM expense 237 229 742 656
Printing & supplies 143 151 531 509
Operations expense 215 244 651 655
Director 92 139 407 440
Amortization of intangibles 163 163 488 488
Postage 141 90 395 390
Merger expense 5 - 761 -
Other 928 820 2,841 2,617
------------ ------------ ----------- ------------
Total noninterest expense $ 9,481 $ 9,859 $ 30,443 $ 29,755
============ ============ =========== ============
Noninterest expense totaled $9,481,000 for the three months ended
September 30, 2007, compared to $9,859,000 for the same period in 2006. This
represents a decrease of $378,000, or 3.8%, for the three months ended September
30, 2007 from the comparable period in 2006 due primarily to decreases in
salaries and employee benefit expenses, data processing expenses as well as
professional services expense. Salaries and benefits decreased by $101,000, or
1.9%, to $5,306,000 for the three months ended September 30, 2007 compared to
$5,407,000 for the same period in 2006. Data processing expense decreased
$106,000 for the three months ended September 30, 2007 compared to the same
period in 2006, while professional services expenses decreased by $222,000
during the same period. The Company's ratio of noninterest expense to average
assets decreased to 4.19% for the three months ended September 30, 2007 compared
to 4.37% for the same period in 2006. The Company's efficiency ratio decreased
slightly to 69.74% for the three months ended September 30, 2007 from 69.88% for
the same period in 2006.
Noninterest expense totaled $30,443,000 for the nine months ended
September 30, 2007, compared to $29,755,000 for the same period in 2006. This
represents an increase of $688,000, or 2.3%, for the nine months ended September
30, 2007 from the comparable period in 2006 due primarily to expenses related to
the pending merger with Sterling Financial Corporation of $1,086,000, for the
nine months ended September 30, 2007, $761,000 of which is included in the
merger expense category and $325,000 of which is legal fees and auditing fees
for the merger included in the professional services category in the above
table. The merger related expenses were partially offset by decreases in
professional services expenses of $128,000, salaries and employee benefit
expenses of $118,000 and data processing expenses of $78,000. The Company's
ratio of noninterest expense to average assets increased slightly to 4.53% for
the nine months ended September 30, 2007 compared to 4.41% for the same period
in 2006. The Company's efficiency ratio increased slightly to 75.49% for the
nine months ended September 30, 2007 from 72.56% for the same period in 2006.
Income Taxes
The provision for income taxes for the three months ended September 30,
2007 was $1,044,000 compared to $775,000 for the same period in 2006. The
provision for income taxes for the nine months ended September 30, 2007 was
$2,891,000 compared to $2,987,000 for the same period in 2006. The effective
income tax rate for state and federal income taxes was 32.0% for both the three
and nine month periods ended September 30, 2007 compared to 21.0% and 28.9%,
respectively, for the same periods in 2006. The increase in the effective income
tax rate for 2007 compared to the same periods in 2006 is due to management,
following the filing of the Company's 2005 tax returns during the third quarter
of 2006, determined that the Company's estimated tax rate that had been applied
to previously reported net income was overstated as a result of an underestimate
of California job credits (which are determined subsequent to year-end through a
process employed by the State of California) and an overestimate of the federal
statutory tax rate (resulting from the Company's pre-tax income falling between
the federal statutory rates of 34% and 35%). As a result, the 2006 tax provision
was adjusted on a cumulative basis to reflect this change in accounting
estimate. The difference in the effective tax rate compared to the statutory tax
rate (approximately 42.05%) is primarily the result of the Company's investment
in municipal securities, FNMA Preferred Stock, and Bank-owned life insurance
policies whose income is exempt from Federal taxes. In addition, the Company
receives special tax benefits from the State of California Franchise Tax Board
for operating and providing loans, as well as jobs, in designated 'Enterprise
Zones'.
20
Financial Condition as of September 30, 2007 As Compared to December 31, 2006
Total assets at September 30, 2007 increased $19,231,000, or 2.2% to
$924,904,000, compared to $905,673,000 at December 31, 2006. Loans and leases
increased $57,643,000, or 8.7%, to $717,436,000 at September 30, 2007 from
$659,793,000 at December 31, 2006. Investment securities and federal funds sold
decreased $35,655,000, or 24.7%, to $108,668,000 at September 30, 2007, compared
to $144,323,000 at December 31, 2006. On the liability side, deposits decreased
$13,849,000, or 1.8%, from December 31, 2006 to $736,439,000 at September 30,
2007.
Loan and Lease Portfolio
Loans and leases, the Company's major component of earning assets,
increased during the first nine months of 2007 to $717,436,000 at September 30,
2007 from $659,793,000 at December 31, 2006. Commercial loans increased by
$3,977,000, commercial real estate loans increased by $20,165,000, real estate -
construction loans increased by $16,851,000, real estate - mortgage loans
increased by $3,556,000, installment loans increased by $10,439,000 and other
loans increased by $3,158,000. Direct financing leases decreased by $530,000
from December 31, 2006.
The Company's average loan to deposit ratio was 93.6% for the quarter
ended September 30, 2007 compared to 88.4% for the same period in 2006. The
increase in the Company's average loan to deposit ratio is driven by an increase
in total average loans of $45,494,000 while total average deposits increased by
$8,214,000.
(Dollars in thousands) September 30, December 31,
2007 2006
--------------- --------------
Commercial $ 82,099 $ 78,122
Real estate - commercial 283,488 263,323
Real estate - construction 230,050 213,199
Real estate - mortgage 44,043 40,487
Installment 38,390 27,951
Direct financing leases 1,455 1,985
Other 38,986 35,828
--------------- --------------
718,511 660,895
Deferred loan fees, net (1,075) (1,102)
Allowance for loan and lease losses (9,602) (8,831)
--------------- --------------
$ 707,834 $ 650,962
=============== ==============
Impaired, Nonaccrual, Past Due and Restructured Loans and Leases and Other
Nonperforming 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.
At September 30, 2007, the recorded investment in loans and leases for
which impairment had been recognized was approximately $3,359,000 compared to
$24,000 at September 30, 2006. The increase was primarily due to one credit,
which is a commercial building and a notice of default was filed. The loan is
well-secured and no loss is anticipated. Of the 2007 balance, there was a
related valuation allowance of $538,000. During the portion of the year that the
loans and leases were impaired, the Company recognized interest income of
approximately $5,000 for cash payments received in 2007.
At December 31, 2006, the recorded investment in loans and leases for
which impairment had been recognized was approximately $72,000. Of the 2006
balance, there was a related valuation allowance of $36,000.
21
For the year ended December 31, 2006, the average recorded investment in loans
and leases for which impairment had been recognized was approximately $63,000.
During the portion of the year that the loans and leases were impaired, the
Company recognized interest income of approximately $9,000 for cash payments
received in 2006.
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 September 30, 2007, and December 31, 2006, are
summarized as follows:
September 30, December 31,
2007 2006
------------- ------------
Nonaccrual loans and leases $ 3,359 $ 72
Loans and leases past due 90 days and accruing interest 8 403
Other real estate owned 902 902
------------- ------------
Total nonperforming assets $ 4,269 $ 1,377
============= ============
Nonaccrual loans and leases to total gross loans and leases 0.47% 0.01%
Nonperforming loans and leases to total gross loans and leases 0.47% 0.07%
Total nonperforming assets to total assets 0.46% 0.15%
Allowance for Loan and Lease Losses
A summary of the allowance for loan and lease losses at September 30, 2007
and September 30, 2006 is as follows:
Nine months ended September 30,
2007 2006
------------- ---------------
Balance beginning of period $ 8,831 $ 7,864
Provision for loan and lease losses 850 925
Net (charge-offs) recoveries (79) 64
------------- ---------------
Balance end of period $ 9,602 $ 8,853
============= ===============
Allowance for loan and lease losses to total loans and leases 1.34% 1.33%
The allowance for loan and lease losses is established through a provision
for loan and lease losses based on management's evaluation of the risks inherent
in the loan and lease portfolio. In determining levels of risk, management
considers a variety of factors, including, but not limited to, asset
classifications, economic trends, industry experience and trends, geographic
concentrations, estimated collateral values, historical loan and lease loss
experience, and the Company's underwriting policies. 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 adequacy of the Company's allowance for loan and lease
losses. Such agencies may require the Company to recognize additions to the
allowance based on judgments different from those of management.
22
The allowance for loan and lease losses is comprised of two primary types
of allowances:
1. Formula Allowance
Formula allowances are based upon loan and lease loss factors
that reflect management's estimate of the inherent loss in
various segments of pools within the loan and lease portfolio.
The loss factor is multiplied by the portfolio segment (e.g.
multifamily permanent mortgages) balance to derive the formula
allowance amount. The loss factors are updated periodically by
the Company to reflect current information that has an effect
on the amount of loss inherent in each segment.
The formula allowance is adjusted for qualitative factors that
are based upon management's evaluation of conditions that are
not directly measured in the determination of the formula and
specific allowance. 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 to determine the
adjustment to the formula allowance at September 30, 2007
included the following, which existed at the balance sheet
date:
o General business and economic conditions effecting
the Company's key lending areas
o Real estate values and market trends in Northern
California
o Loan volumes and concentrations
o Seasoning of the loan portfolio, including trends
in past due and nonperforming loans
o Status of the current business cycle
o Specific industry or market conditions within
portfolio segments
o Model imprecision
2. Specific Allowance
Specific allowances are established in cases where management
has identified significant conditions or circumstances related
to an individually impaired credit. In other words, these
allowances are specific to the loss inherent in a particular
loan. The amount for a specific allowance is calculated in
accordance with SFAS No. 114, "Accounting By Creditors For
Impairment Of A Loan."
The $9,602,000 in allowance at September 30, 2007 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
and changes in the mix of the portfolio.
Future provisions may be required and the ratio of the allowance for loan
and lease losses to loans outstanding may increase. Experience across the
financial services industry indicates that commercial business and income
property loans may present greater risks than residential real estate loans, and
therefore should be accompanied by suitably higher levels of reserves.
Deposits
Total deposits decreased $13,849,000, or 1.8%, to $736,439,000 at
September 30, 2007 compared to $750,288,000 at December 31, 2006.
Noninterest-bearing demand deposits decreased $24,385,000 or 12.5% from December
31, 2006, interest-bearing demand deposits decreased $8,977,000 or 5.6%, money
market accounts decreased $2,660,000 or 2.4%, and savings decreased $9,081,000
or 10.4%, while certificates of deposits increased $31,254,000 or 15.8% from
December 31, 2006. The Company experienced a shift in deposits to time
certificates as time deposit rates increased.
23
September 30, December 31,
2007 2006
------------- -------------
Noninterest-bearing demand $ 170,457 $ 194,842
Interest-bearing demand 151,962 160,939
Money market and savings 185,092 196,833
Time certificates 228,928 197,674
------------- -------------
Total deposits $ 736,439 $ 750,288
============= =============
Liquidity
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors and borrowers.
Collection of principal and interest on loans and leases, the liquidations and
maturities of investment securities, deposits with other banks, customer
deposits and short term borrowings, when needed, are primary sources of funds
that contribute to liquidity. Unused lines of credit from correspondent banks to
provide federal funds of $25,000,000 as of September 30, 2007 were also
available to provide liquidity. In addition, NVB is a member of the Federal Home
Loan Bank ("FHLB") providing additional unused borrowing capacity of $44,180,000
secured by certain loans and investment securities as of September 30, 2007. The
Company also has a line of credit with Federal Reserve Bank of San Francisco
("FRB") of $2,311,000 secured by first deeds of trust on eligible commercial
real estate loans and leases. As of September 30, 2007, borrowings consisted of
term borrowings of $25,000,000 and overnight borrowings of $40,590,000
outstanding with the FHLB, and $31,961,000 was outstanding in the form of
subordinated debt issued by the Company.
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 available for sale investment securities) totaled
$136,949,000 and $175,067,000 (or 14.8% and 19.3% of total assets) at September
30, 2007 and December 31, 2006, respectively.
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 $639,241,000 and $673,303,000 at September 30,
2007 and December 31, 2006, 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,
24
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, mismatch risk, arises from the fact that
when interest rates change, the changes do not occur equally in the rates of
interest earned and paid because of differences in the contractual terms of the
assets and liabilities held. A difference in the contractual terms, a mismatch,
can cause adverse impacts on net interest income.
The Company has a certain portion of its loan portfolio tied to the
national prime rate. If these rates are lowered because of general market
conditions, e.g., the prime rate decreases in response to a rate decrease by the
Federal Reserve Open Market Committee ("FOMC"), these loans will be repriced. If
the Company were at the same time to have a large proportion of its deposits in
long-term fixed-rate certificates, interest earned on loans would decline while
interest paid on the certificates would remain at higher levels for a period of
time until they mature. Therefore net interest income would decrease
immediately. A decrease in net interest income could also occur with rising
interest rates if the Company had a large portfolio of fixed-rate loans and
securities that was funded by deposit accounts on which the rate is steadily
rising.
This exposure to mismatch risk is managed by attempting to match the
maturities and repricing opportunities of assets and liabilities. This may be
done by varying the terms and conditions of the products that are offered to
depositors and borrowers. For example, if many depositors want shorter-term
certificates while most borrowers are requesting longer-term fixed rate loans,
the Company will adjust the interest rates on the certificates and loans to try
to match up demand for similar maturities. The Company can then partially fill
in mismatches by purchasing securities or borrowing funds from the FHLB with the
appropriate maturity or repricing characteristics.
Basis Risk
The third interest-related risk, basis risk, arises from the fact that
interest rates rarely change in a parallel or equal manner. The interest rates
associated with the various assets and liabilities differ in how often they
change, the extent to which they change, and whether they change sooner or later
than other interest rates. For example, while the repricing of a specific asset
and a specific liability may occur at roughly the same time, the interest rate
on the liability may rise one percent in response to rising market rates while
the asset increases only one-half percent. While the Company would appear to be
evenly matched with respect to mismatch risk, it would suffer a decrease in net
interest income. This exposure to basis risk is the type of interest risk least
able to be managed, but is also the least dramatic. Avoiding concentration in
only a few types of assets or liabilities is the best means of increasing the
chance that the average interest received and paid will move in tandem. The
wider diversification means that many different rates, each with their own
volatility characteristics, will come into play.
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.
25
This exercise is valuable in identifying risk exposures. The results for the
Company's most recent simulation analysis indicate that the Company's net
interest income at risk over a one-year period and net economic value at risk
from 2% shocks are within normal expectations for sudden changes and do not
materially differ from those of December 31, 2006.
For this simulation analysis, the Company has made certain assumptions
about the duration of its non-maturity deposits that are important to
determining net economic value at risk.
Capital Resources
The Company maintains capital to support future growth and dividend
payouts while trying to effectively manage the capital on hand. From the
depositor standpoint, a greater amount of capital on hand relative to total
assets is generally viewed as positive. At the same time, from the standpoint of
the shareholder, a greater amount of capital on hand may not be viewed as
positive because it limits the Company's ability to earn a high rate of return
on stockholders' equity (ROE). Stockholders' equity increased to $80,289,000 as
of September 30, 2007, as compared to $75,491,000 at December 31, 2006. The
increase was due to net income of $6,144,000, stock based compensation of
$240,000 and stock option exercises of $1,010,000, partially offset by the
increase in unrealized loss on available for sale securities of $148,000, and
the cash dividends paid out in the amount of $2,208,000. Under current
regulations, management believes that the Company meets all capital adequacy
requirements and North Valley Bank was considered well capitalized at September
30, 2007 and December 31, 2006.
The Company's and North Valley Bank's capital amounts and risk-based
capital ratios are presented below.
To be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------
Company
As of September 30, 2007
Total capital (to risk weighted assets) $ 106,049 11.95% $ 70,995 8.00% N/A N/A
Tier 1 capital (to risk weighted assets) $ 92,815 10.46% $ 35,493 4.00% N/A N/A
Tier 1 capital (to average assets) $ 92,815 10.45% $ 35,527 4.00% N/A N/A
As of December 31, 2006
Total capital (to risk weighted assets) $ 100,065 11.88% $ 67,384 8.00% N/A N/A
Tier 1 capital (to risk weighted assets) $ 86,032 10.21% $ 33,705 4.00% N/A N/A
Tier 1 capital (to average assets) $ 86,032 9.66% $ 35,624 4.00% N/A N/A
North Valley Bank
As of September 30, 2007
Total capital (to risk weighted assets) $ 103,928 11.75% $ 70,759 8.00% $ 88,449 10.00%
Tier 1 capital (to risk weighted assets) $ 94,326 10.66% $ 35,394 4.00% $ 53,092 6.00%
Tier 1 capital (to average assets) $ 94,326 10.63% $ 35,494 4.00% $ 44,368 5.00%
As of December 31, 2006
Total capital (to risk weighted assets) $ 97,642 11.61% $ 67,281 8.00% $ 84,102 10.00%
Tier 1 capital (to risk weighted assets) $ 88,811 10.56% $ 33,641 4.00% $ 50,461 6.00%
Tier 1 capital (to average assets) $ 88,811 9.97% $ 35,631 4.00% $ 44,539 5.00%
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In management's opinion there has not been a material change in the
Company's market risk profile for the nine months ended September 30, 2007
compared to December 31, 2006. Please see discussion under the caption "Interest
Rate Sensitivity" on page 24.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Disclosure controls and procedures are
designed with the objective of ensuring that information required to be
disclosed in reports filed by the Company under the Exchange Act, such as this
Quarterly Report, is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures are also designed with the
objective of ensuring that such information is accumulated and communicated to
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures and Internal Control over
Financial Reporting. The Company's management, including the Chief Executive
Officer and the Chief Financial Officer, evaluated the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of September 30, 2007. Based on this evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. An evaluation of any changes in the Company's internal
control over financial reporting that occurred during the Company's fiscal
quarter ended September 30, 2007 was carried out under the supervision and with
the participation of the Company's Chief Executive Officer, Chief Financial
Officer and other members of the Company's senior management group. The
Company's Chief Executive Officer and Chief Financial Officer concluded that no
change identified in connection with such evaluation has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1. 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 does not expect that the final outcome of threatened or filed suits will
have a materially adverse effect on its consolidated financial position.
Item 1A. Risk Factors
There have been no material changes from risk factors as previously
disclosed by the Company in its response to Item 1A of Part 1 of Form 10-K for
the fiscal year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
As previously reported under PART II- OTHER INFORMATION Item 4 of the Form
10-Q filed for the period ended June 30, 2007.
Item 5. Other Information
None
27
Item 6. Exhibits
31 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
99.143 Park Marina Lease Extension Agreement dated July 30, 2007,
between The McConnell Foundation and North Valley Bank
28
SIGNATURES
Pursuant to the requirements 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
- --------------------
(Registrant)
Date November 8, 2007
By:
/s/ Michael J. Cushman
- --------------------------------------------------
Michael J. Cushman
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Kevin R. Watson
- --------------------------------------------------
Kevin R. Watson
Executive Vice President & Chief Financial Officer
(Principal Financial Officer & Principal Accounting Officer)
29
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certifications
I, Michael J. Cushman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of North Valley
Bancorp;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f))for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 report is being
prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors:
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 8, 2007 /s/ Michael J. Cushman
-------------------------------------------------
Michael J. Cushman, President and Chief Executive
Officer (Principal Executive Officer)
30
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certifications
I, Kevin R. Watson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of North Valley
Bancorp;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f))for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 report is being
prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors:
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 8, 2007 /s/ Kevin R. Watson
-------------------------------------------------
Kevin R. Watson, Executive Vice President & Chief
Financial Officer (Principal Financial Officer
& Principal Accounting Officer)
31
Exhibit 32
Section 1350 Certifications
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
with Respect to the North Valley Bancorp Quarterly Report on Form 10-Q
for the Quarter ended September 30, 2007
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of North Valley Bancorp, a California corporation (the
"Company"), does hereby certify that:
1. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007 (the "Form 10-Q") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and
2. Information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 8, 2007 /s/ Michael J. Cushman
--------------------------------------------
Michael J. Cushman
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 8, 2007 /s/ Kevin R. Watson
--------------------------------------------
Kevin R. Watson
Executive Vice President & Chief Financial
Officer (Principal Financial Officer &
Principal Accounting Officer)
A signed original of this written statement required by Section 906 has
been provided to North Valley Bancorp and will be retained by North Valley
Bancorp and furnished to the Securities and Exchange Commission or its staff
upon request.
32
PROXY NORTH VALLEY BANCORP PROXY
Proxy Solicited on Behalf of the Board of Directors of North Valley Bancorp
for the Annual Meeting of Shareholders, December 20, 2007
The undersigned holder of Common Stock acknowledges receipt of the
Notice of Annual Meeting of Shareholders of North Valley Bancorp and the
accompanying Proxy Statement dated November 26, 2007, and revoking any proxy
heretofore given, hereby constitutes and appoints Michael J. Cushman and Kevin
R. Watson, and each of them, each with full power of substitution, as attorneys
and proxies to represent and vote, as designated on the reverse side, all shares
of Common Stock of North Valley Bancorp (the "Corporation"), which the
undersigned would be entitled to vote at the Annual Meeting of Shareholders of
the Corporation to be held in the Administrative Offices of North Valley
Bancorp, 300 Park Marina Circle, Redding, California, on Thursday, December 20,
2007 at 4:00 p.m., or at any postponement or adjournment thereof, upon the
matters set forth in the Notice of Annual Meeting and Proxy Statement and upon
such other business as may properly come before the meeting or any postponement
or adjournment thereof. All properly executed proxies will be voted as
indicated.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
DIRECTORS NOMINATED BY THE BOARD OF DIRECTORS AND "FOR" THE RATIFICATION OF THE
APPOINTMENT OF INDEPENDENT AUDITOR. WHEN THE PROXY IS PROPERLY EXECUTED, SHARES
REPRESENTED BY THE PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS GIVEN IN
THE PROXY, SHARES REPRESENTED BY THE PROXY WILL BE VOTED "FOR" THE ELECTION OF
THE DIRECTORS NOMINATED BY THE BOARD OF DIRECTORS AND "FOR" THE RATIFICATION OF
THE APPOINTMENT OF INDEPENDENT AUDITOR AND IN THE DISCRETION OF THE PROXY
HOLDERS, ON ALL OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING OR ANY
POSTPONEMENT OR ADJOURNMENT THEREOF.
THIS PROXY IS SOLICITED BY, AND ON BEHALF OF, THE BOARD OF DIRECTORS OF
THE CORPORATION AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
(Continued, and to be signed on the other side)
--------------------------------------------------------------------------
Address Change/Comments (Mark the corresponding box on the reverse side)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
<s>
Please [ ]
Mark Here
for Address
Change or
Comments
SEE REVERSE SIDE
1. To elect as Directors the nominees set forth below: 3. In their discretion the proxy holders are authorized
to vote upon such other business as may properly come
WITHHOLD before the meeting.
FOR AUTHORITY
01 Michael J. Cushman [ ] [ ] I PLAN TO ATTEND THE MEETING [ ]
02 Dante W. Ghidinelli
03 Kevin D. Hartwick
04 Roger B. Kohlmeier
05 William W. Cox
06 Dolores M. Vellutini
(Instruction: To withhold authority to vote for any nominee, strike a line through the
nominee's name on the list above.)
FOR AGAINST ABSTAIN Dated: _______________________________, 2007
2. To ratify the appointment of Perry-Smith LLP [ ] [ ] [ ]
as Independent Auditor for 2007. ____________________________________________
Signature
____________________________________________
Signature if held jointly
Please mark, date and sign exactly as your
name(s) appear(s) above. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title. If one
or more than one trustee, all should sign.
WHETHER OR NOT YOU PLAN TO ATTEND THIS
MEETING, PLEASE SIGN AND RETURN THIS PROXY
AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE PAID ENVELOPE.
- ------------------------------------------------------------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
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BOTH ARE AVAILABLE 24 HOURS A DAY, 7 DAYS A WEEK.
Internet and telephone voting is available through 11:59 PM Eastern Time
the day prior to annual meeting day.
Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.
---------------------------------------- --------------------------------------
INTERNET TELEPHONE
http://www.proxyvoting.com/novb 1-866-540-5760
Use the internet to vote your proxy. OR Use any touch-tone telephone to
Have your proxy card in hand vote your proxy. Have your proxy
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